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On 1 October 20X5 Dearing acquired a machine under the following terms.
$
Manufacturer’s base price 1,050,000
Trade discount (applying to base price only) 20%
Early settlement discount taken (on the payable amount of the base cost
only) 5%Freight charges 30,000
Electrical installation cost 28,000
Staff training in use of machine 40,000
Pre-production testing 22,000
Purchase of a three-year maintenance contract 60,000I think that Early settlement discount taken must be minused from cost of machine. why in answer of Kit F7, Early settlement discount taken is not minused ? Can you explain it for me. Thanks in advance
Hi,
An early settlement discount is recognised as a dicount received through profit or loss. We are invoiced for the base price, less the 20%, at $840,000 and therefore capitalise this amount DR Cost $840,000 CR Payable $840,000.
If we pay early then we pay $798,000 (i.e. after deducting the 5% early payment discount) and the entries processed would be DR Payable (full amount) $840,000 CR Bank(95%) $798,000 CR Discount received (5%) $42,000.
Hope that clears it up for you.
Thanks
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