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Financial & Managerial Accounting
Found in: Page 205
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Distinguish between cash discounts and trade discounts for purchases. Is the amount of a trade discount on purchased merchandise recorded in the accounts?

The following are the basis of difference:

  1. Time of discount.
  2. Purpose of discount.
  3. Recording in the books of accounts.

See the step by step solution

Step by Step Solution

Definition of Trade Discount

The reduced price negotiated between the buyer and seller is known as a trade discount. Such a discount is generally given to increase the market share by maintaining a relationship with the buyer.

Differences between cash discount and trade discount

  1. Cash discount is provided at the time of payment, while a trade discount is provided at order placement.
  2. Cash discount is provided to motivate buyers to make earlier payments, while a trade discount is provided for maintaining a relationship with the buyer.
  3. Cash discount is reported in the books of account while trade discount is not reported.

Most popular questions for Business-studies Textbooks

The following unadjusted trial balance is prepared at fiscal year-end for Nelson Company.

NELSON COMPANY
Unadjusted Trial Balance
January 31, 2017

Debit

Credit

Cash

$1,000

Merchandise inventory

12,500

Store supplies

5,800

Prepaid insurance

2,400

Store equipment

42,900

Accumulated depreciation – store equipment

$15,250

Account payable

10,000

Common stock

5,000

Retained earnings

27,000

Dividends

2,200

Sales

111,950

Sales discount

2,000

Sales return and allowance

2,200

Cost of goods sold

38,400

Depreciation expenses – store equipment

0

Salaries expenses

35,000

Insurance expense

0

Rent expense

15,000

Store supplies expense

0

Advertising expense

9,800

Total

$169,200

$169,200

Rent expense and salaries expense are equally divided between selling activities and general and administrative activities. Nelson Company uses a perpetual inventory system.

Required

1. Prepare adjusting journal entries to reflect each of the following:

a. Store supplies still available at fiscal year-end amount to $1,750.

b. Expired insurance, an administrative expense, for the fiscal year is $1,400.

c. Depreciation expense on store equipment, a selling expense, is $1,525 for the fiscal year.

d. To estimate shrinkage, a physical count of ending merchandise inventory is taken. It shows $10,900 of inventory is still available at fiscal year-end.

2. Prepare a multiple-step income statement for fiscal year 2017 that begins with gross sales and includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses.

3. Prepare a single-step income statement for fiscal year 2017.

4. Compute the current ratio, acid-test ratio, and gross margin ratio as of January 31, 2017. (Round ratios to two decimals.)

Prepare journal entries to record the following merchandising transactions of Cabela’s, which uses the perpetual inventory system and the gross method. (Hint: It will help to identify each receivable and payable; for example, record the purchase on July 1 in Accounts Payable—Boden.)

July 1 Purchased merchandise from Boden Company for $6,000 under credit terms of 1∕15, n∕30, FOB shipping point, invoice dated July 1.

2 Sold merchandise to Creek Co. for $900 under credit terms of 2∕10, n∕60, FOB shipping point, invoice dated July 2. The merchandise had cost $500.

3 Paid $125 cash for freight charges on the purchase of July 1.

8 Sold merchandise that had cost $1,300 for $1,700 cash.

9 Purchased merchandise from Leight Co. for $2,200 under credit terms of 2∕15, n∕60, FOB destination, invoice dated July 9.

11 Received a $200 credit memorandum from Leight Co. for the return of part of the merchandise purchased on July 9.

12 Received the balance due from Creek Co. for the invoice dated July 2, net of the discount.

16 Paid the balance due to Boden Company within the discount period.

19 Sold merchandise that cost $800 to Art Co. for $1,200 under credit terms of 2∕15, n∕60, FOB shipping point, invoice dated July 19.

21 Issued a $100 credit memorandum to Art Co. for an allowance on goods sold on July 19.

24 Paid Leight Co. the balance due, net of discount.

30 Received the balance due from Art Co. for the invoice dated July 19, net of discount.

31 Sold merchandise that cost $4,800 to Creek Co. for $7,000 under credit terms of 2∕10, n∕60, FOB shipping point, invoice dated July 31.

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