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Martina sold 12 boxes of ink cartridges with a list price of $80 per box to Jorge. She gives Jorge a 12% trade Discount and a 5% settlement discount if Jorge pays within 30 days. Jorge always pays within 30 days.
What will be the total of the invoice that Martina issues to Jorge for this transaction?
A. $960.00
B. $912.00
C. $ 844.80
D. $ 802.56Correct Answer: D
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Albert sold 15 units of Inventory with a list price of $40 per unit to Michael. He gives Michael a 10% trade discount and a 5% settlement discount if Michael pays within 30 days. Michael always pays within 30 days.What will be the total of the invoice that Albert issues to Michael for this transaction?
A. $540
B. $600
C. $510
D. $513Correct Answer: A
Please solve and explain both questions.
I am thoroughly confused. I used one method for both questions, but my answer for first question was wrong, but for Second question it was right.How old is the book that you are using? The reason I ask is that IAS 15 changed the rules on discounts and the rule is that both the trade discount and the settlement discount should be subtracted if the customer is expected to pay within the required period.
The answer to both question is D.
For the first question it is 12 x $80 x 88% x 95% = $802.56
For the second question it is 15 x $40 x 90% x 95% = $513
Ok I see.
It is FA1 Revision Kit 1 Sep 2018 to 31 Aug 2019.
Mock Exam (specimen exam June 2014)
Both questions are from the same book,but in first question the book substraced settlement discount and in second question the settlement discount is not deducted.
What should I do if I face such question in exam? Should I deduct only trade discount or both to find out invoiced amount ?Under the new rules you should subtract both discounts.
I can only assume that because the questions were taken from a 2014 exam when the rules were different, that your book has updated one of the questions and forgotten to update the other.
What if we send the invoice and deduct the amount of settlement discount coz we know he takes advantage of the settlement discount but sadly, he doesn’t pay within the required time this time.
What shall be done cause the invoice is sent with lower amount?We debit cash with the amount received; credit receivables with the amount invoiced; and credit sales with the amount of the discount.
I do explain this, with an example, in my free lectures on Chapter 19 of our free lecture notes.
The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
? Confused
Suppose: credit sale $100 10% trade discount 10% settlement discount. We know he takes advantage of settlement discount. So, our first entry is:
Dr A/R 81
Dr Discount Allowed 9
Cr Sales 90And we send invoice with the amount of 81.
Later, he doesn’t pay within required time.In other words, he doesn’t take advantage of settlement discount. So, our second entry is:Dr Cash received 90
Cr A/R 81
Cr Discount Allowed 9But you said we :
Dr cash received 90
Cr A/R 81
Cr Sales 9Why do we credit sales with the amount of discount ? It will overstate sales. Don’t we we credit discount allowed to make it nil as we debited that the first time?
Why on earth would it overstate sales???
We will not have debited discount allowed the first time. We will have debited receivable and credited sale with the discounted amount. There was not debit to discount allowed.
It seems that you have not bothered to watch my free lectures on this 🙂
I love your free lectures. I watch them regularly,but I have not watched your video on trade discount and settlement discount. I will watch it now.
But Sir, if we debit receivables and credit sales the first time, Settlement discount that is given to the customer would not be recorded.
Settlement discount is recorded as (discount received or discount allowed) , but does not reduce the value of purchase or sale. Trade discount is not recorded, but reduce the value of purchase or sale.
As far as discounts allowed are concerned, when we sell the goods we record the sale as being the amount less the discount.
If the customer does not pay on time they have to pay more than was on the invoice and the extra (the discount they are not getting) is credited to sales.
Therefore the sales account then has the amount of the sale without the discount, which is correct.(Discounts received from suppliers are dealt with differently. IAS15 only applies to discounts allowed).
Ok sir I got You!
Our first entry for above example :Dr A/R 81
Cr Sales 81Then (no advantage of settlement discount) our second entry :
Dr Cash 90
Cr A/R 81
Cr Sales 9Am I right?
And what is the entry if he takes advantage of settlement discount?
And Can you tell me when do we record discount allowed?
You are correct.
If the customer does take the discount the we simply debit cash and credit receivables with 81.
There is then no need for any recording of the discount.
Thanks a million!
My last question
When do we record discount allowed in accounting?
Only if the customer does not take the discount, and then it is recorded as extra revenue as I have explained. Otherwise (as I wrote in my previous reply) there is nothing to record.
Thanks sir I got You!
This is how our teacher taught us.
Cash Purchase of book $10 ($1 Trade discount)
Entry by purchaser:
Dr purchase 9
Cr cash 9Entry by supplier:
Dr Cash 9
Cr Sales 9He said trade discount is not recorded but reduce the value of purchase and sale.
The same transaction but ($1 settlement discount)
Entry by purchaser :
Dr purchase 10
Cr Discount received 1
Cr cash 9Entry by supplier :
Dr Cash 9
Dr Discount Allowed 1
Cr Sales 10He said settlement discount does not reduce the value of purchase and sale but it is recorded in books of account.
Is he right or wrong?
Or the rules for recording trade discount and settlement discount are updated.
Thanks for the help!
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