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This is the questions from Kaplan.
1) ABC Co sold goods with a list price of $2500 to Jones which was subject to trade discount of 5% and early settlement of 4% if the invoice was paid within 7 days. The normal credit period available to credit customers is 30 days from invoice date. At the point of sale, Jones was expected to take advantage of the early settlement terms.
If Jones subsequently paid within 7 days and was eligible for the settlement discount, what accounting entries should be made by ABC Co to record settlement of the amount outstanding?
A. Debit Cash $2280, Debit Revenue $95 & Credit Trade receivables $2375
B. Debit Cash $2280 and Credit Trade receivables $2280
C. Debit Cash $2375, Debit Revenue $125 and Credit Trade receivables $2500
D. Debit Cash $2500 and Credit Trade receivables $2500My answer is A but the correct answer is B. Why is the answer B?
After the trade discount of 5%, the price quoted will have been 95% x $2,500 = $2,375.
There is also an early settlement discount of 4%, and because at the point of sale Jones was expected to take advantage of the early settlement terms, the invoice will be recorded in receivables (and sales) as 96% x $2,375 = $2,280.
Therefore when the cash of $2,280 is received, the entry is simply to Debit cash and Credit receivables with the $2,280.
Your confusion may have arisen because perhaps you have been studying from older books. The rule about this used to be as you thought, but changed with IFRS 15. You can find details of this in Chapter 20 of our free lecture notes, and the free lectures that go with it.
My lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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