A company sells a product for $200,000 on credit with terms 2/10, net 30. The company expects 70% of customers to take the discount. Using the net method, what is the initial journal entry to record the sale?
- ADebit Accounts Receivable $196,000; Credit Sales Revenue $196,000; Debit Sales Discount Forfeited $4,000
- BDebit Accounts Receivable $200,000; Credit Sales Revenue $196,000; Credit Allowance for Sales Discount $4,000
- CDebit Accounts Receivable $196,000; Credit Sales Revenue $196,000
- DDebit Accounts Receivable $200,000; Credit Sales Revenue $200,000
Show answer & explanationAnswer & explanation
Correct answer: C. Debit Accounts Receivable $196,000; Credit Sales Revenue $196,000
Under the net method, sales revenue and accounts receivable are recorded at the net amount, assuming the customer will take the discount. The discount is 2% of $200,000 = $4,000. So, the net amount is $200,000 - $4,000 = $196,000. The expectation of 70% of customers taking the discount is relevant for determining if the net method is appropriate or for an allowance, but for the initial entry under the net method, it's recorded as if all take the discount.
Why the other options are wrong
- A. Incorrect. Sales Discount Forfeited is recognized only if the discount is not taken.
- B. Incorrect. This entry combines elements of both gross and net methods with an allowance, which is not the standard net method initial entry.
- D. Incorrect. This is the gross method, not the net method.
Sales Discounts (Net Method)
Under the net method, sales revenue and accounts receivable are initially recorded at the amount of the sale less any cash discount available. If the customer does not take the discount, the foregone discount is recorded as 'Sales Discount Forfeited' revenue.
- Records A/R and Sales Revenue assuming customer takes the discount.
- Discount amount is subtracted from the gross sale price.
- If discount is not taken, additional revenue (Sales Discount Forfeited) is recognized.
- Considered more conservative as it records revenue at the lower expected collection amount.
Memory trick: NET means NO DISCOUNT on the books initially – you record what you expect to get.