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On September 12, Ryan Company sold merchandise in the amount of $7,000 to Johnson Company, with credit terms of 3/10,n/30
On September 12, Ryan Company sold merchandise in the amount of $7,000 to Johnson Company, with credit terms of 3/10,n/30. The cost of the items sold is $4,600. Ryan uses the periodic inventory system and the net method of accounting for sales. Johnson pays the invoice on September 18, and takes the appropriate discount The journal entry that Ryan makes on September 18 is: Multiple Choice 7,000 Cash Accounts receivable 7,000 4,600 Cash Accounts receivable 4,600
Cash Sales discounts Accounts receivable 4,462 138 4,600 6,790 Cash Accounts receivable 6,790 6,790 Cash Sales discounts Accounts receivable 210 7,000
Expert Solution
The correct answer is Debit cash with $6,790 and Debit Sales discounts with $210 and Credit Accounts receivable with $7,000.
Supporting calculations:
The journal entry when the payment is received by Ryan -
| Journal Entry under Periodic Inventory System - Net Method | |||
| Date | Account Titles and Explanation | Debit | Credit |
| Sep. 18 | Cash ($7,000 - $210) | $6,790 | |
| Sales Discounts ($7,000*3/100) | $210 | ||
| Accounts Receivable | $7,000 | ||
| (To record the collection of accounts receivable within discount period) | |||
The credit terms of 3/10 means if Ryan collects the credit sale amount within a period of 10 days, then Johnson Company is eligible to get a discount on total credit sales value at the rate of 3%.
The sale is made on Sept. 12 and the amount is collected on Sept. 18 so it is collected within 10 days, hence, the discount of $210 is deducted from the total amount of $7,000 and the balance amount of $6,790 is collected by Ryan.
When cash is received, it increases so it is debited and discount is an expense to Ryan so it is debited and accounts receivable decreases so it is credited.
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