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Hello. Sorry for consuming your valuable time.
A transaction for $10,000 of sales offers 2% trade discount and 5% cash discount. If both discounts are claimed, how much is posted to discounts allowed?
A $490
B $500
C $690
D $700
This question is from BPP.
Could you please explain me why the answer is A? Trade discount allowed is 10000*0,01=200 and Cash discount allowed is 10000*0,98*0,01=490 , therefore total discount allowed is 200+490=690. Am i wrong?The trade discount reduces the selling price and therefore the sales revenue is recorded as 10,000 less 2% which is $9,800. This is the amount on the invoice, and there is no separate entry for the trade discount.
The cash discount is therefore 5% x $9,800 = $490. Under old rules, this is the amount that will be posted to the discount allowed account if the customer takes the discount.
However, I think that you might have an old book, because IFRS 15 has changed the rule about cash discounts, and if it is expected that the customer will take the discount then the sales revenue is recorded net of the cash discount – so sales will be recorded as 9,800 less 490, and there is no entry to a discount allowed account.
See Chapter 19 of our free lecture notes and the free lecture working through the chapter.
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