CPA Exam - FAR (Financial Accounting and Reporting)Select TransactionsEasy
A company sells goods on credit for $100,000 with terms 2/10, net 30. The company expects customers to take advantage of the discount. Under the net method of accounting for sales discounts, what is the initial journal entry to record the sale?
- ADebit Accounts Receivable $98,000; Credit Sales Revenue $98,000
- BDebit Accounts Receivable $100,000; Credit Sales Revenue $100,000
- CDebit Accounts Receivable $98,000; Debit Sales Discount $2,000; Credit Sales Revenue $100,000
- DDebit Accounts Receivable $100,000; Credit Sales Revenue $98,000; Credit Sales Discount Forfeited $2,000
Show answer & explanationAnswer & explanation
Correct answer: A. Debit Accounts Receivable $98,000; Credit Sales Revenue $98,000
Under the net method, sales revenue and accounts receivable are recorded at the net amount expected to be received, assuming the customer will take the discount. If the customer does not take the discount, a 'Sales Discount Forfeited' account is credited.
Why the other options are wrong
- B. This is the gross method, where the discount is recorded only if taken.
- C. This entry incorrectly debits Sales Discount at the time of sale under the net method.
- D. This entry implies a discount was forfeited at the time of sale, which is incorrect for the initial recording.
Sales Discounts (Net Method)
A method of accounting for sales discounts where sales revenue and accounts receivable are initially recorded at the amount expected to be received after considering anticipated discounts.
- Assumes customer will take the discount.
- Accounts Receivable and Sales Revenue recorded net of discount.
- If discount is not taken, a 'Sales Discount Forfeited' revenue account is credited.
Memory trick: Net Sale, Net Receivable, Net Expectation.