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Chapter 7: Q5Q (page 362)

What are the reasons that a company gives trade discounts? Why are trade discounts not recorded in the accounts like cash discounts?

Short Answer

Expert verified

Trade discount helps to increase the level of sales for a company, providing the product at a lower price and customer loyalty. A seller does not record the trade discount the same as the cash discount because the price for the product calculated after deducting the trade discount is considered as the accurate, fair market price.

Step by step solution

01

Meaning of Trade Discount

The termtrade discountrefers to the amount of discount offered by the seller to his customer before proceeding to the final billing price, which provides the product at a reduced cost.

A seller offers a trade discount to differentiate the price of a similar product from its competitors.Reducing the billing amount helps the seller to increase the sales levelfor the business, which subsequently helps in higher net income for the business.

02

Reason why trade discounts are not recorded same as cash discounts

The reason why trade discounts are not included in accounts similar to cash discounts is that cash discounts affect the billing amount at which a customer is willing to sell his product to his customer. Therefore, the price calculated for the product is measured as the final selling price after deducting the trade discount.

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Most popular questions from this chapter

What are the general rules for measuring and recognizing gain or loss by both the debtor and the creditor in an impairment?

GROUPWORK (Income Effects of Receivables Transactions) Sandburg Company requires additional cash for its business. Sandburg has decided to use its accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following contemplated transactions.

1. On July 1, 2017, Sandburg assigned \(400,000 of accounts receivable to Keller Finance Company. Sandburg received an advance from Keller of 80% of the assigned accounts receivable less a commission of 3% on the advance. Prior to December 31, 2017, Sandburg collected \)220,000 on the assigned accounts receivable, and remitted \(232,720 to Keller, \)12,720 of which represented interest on the advance from Keller.

2. On December 1, 2017, Sandburg sold \(300,000 of net accounts receivable to Wunsch Company for \)270,000. The receivables were sold outright on a without recourse basis.

3. On December 31, 2017, an advance of \(120,000 was received from First Bank by pledging \)160,000 of Sandburg鈥檚 accounts receivable. Sandburg鈥檚 first payment to First Bank is due on January 30, 2018.

Instructions

Prepare a schedule showing the income statement effects for the year ended December 31, 2017, as a result of the above facts.

Restin Co. uses the gross method to record sales made on credit. On June 1, 2017, it made sales of $50,000 with terms 3/15, n/45. On June 12, 2017, Restin received full payment for the June 1 sale. Prepare the required journal entries for Restin Co.

Wilton, Inc. had net sales in 2017 of \(1,400,000. At December 31, 2017, before adjusting entries, the balances in selected accounts were Accounts Receivable \)250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 8% of its receivables will prove to be uncollectible, prepare the December 31, 2017, journal entry to record bad debt expense.

Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.
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