Question

In December, a Global Grocer customer pays in time and receives a 2% discounts for prompt payment. The customer had purchased goods worth $500. Which of the possible answers below correctly states the journal entries to record the payment and the discount taken. Previously, Global Grocer had established an allowance for prompt payment discounts.a) Debit Accounts receivable ($500); Credit Cash ($490); credit allowance for discounts ($10)b) Debit Cash ($500); Credit Accounts receivable ($500)c) Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit Accounts receivable ($500)d) None of the above

Answer 1

Answer:

Option c) Debit Cash ($490); Debit Allowance for sales discounts ($10); Credit Accounts receivable ($500)

Explanation:

When the company anticipate the allowance for prompt payment discounts it makes the next entry in the accounting:

discounts for prompt payment (Debit) $10 -

                                             Allowance for sales discounts (Credit) $10

When the discount was executed the company doesn't need to entry the discounts for prompt payment because it was recognize before.

So, the company has to make the next entry in the accounting system:

Debit - Cash ($490)

Debit - Allowance for sales discounts ($10);

                                                        Credit - Accounts receivable ($500)

With this entry we recognize the total balance in the Accounts Receivable and compensate the Allowance for sales discounts registered before.