A company uses the gross method to record sales of inventory on 1/8 for $1,000 with payment terms 2/10, net 30. The customer paid for the purchase on 1/17. How is the discount recorded in the journal entry posted on 1/17?

Rationale

Debited for $20.

When the customer pays within the discount period, the company records a sales discount based on the payment terms. In this case, the discount is 2% of the $1,000 sale, which equals $20. Therefore, the journal entry on 1/17 will reflect this discount.

A (Debited for $20) CORRECT

This option correctly represents the sales discount that the company recognizes when the customer pays within the discount period. The $20 discount is debited to the Sales Discounts account, reducing the total revenue recognized from the sale.

B (Debited for $980) YOUR ANSWER

This choice incorrectly suggests that the cash received is recorded as $980. While $980 is the amount the company receives after applying the discount, the discount itself must be recorded separately. Thus, the entry will show cash debited for $980 and the discount as a separate line item.

C (Credited for $980) YOUR ANSWER

This option is incorrect because it implies that the company is crediting the cash received. The cash account should be debited to reflect the actual cash inflow, while the discount should be recorded as a debit, not a credit.

D (Credited for $20) YOUR ANSWER

This choice inaccurately indicates that the sales discount is credited. Instead, the discount should be debited to reflect a reduction in revenue. Crediting the discount would imply an increase in revenue, which is not the case.

Conclusion

In this scenario, the correct journal entry on 1/17 recognizes a $20 sales discount due to early payment by the customer, thus debiting the Sales Discounts account for $20. This reflects the company's reduction in revenue from the initial sale. The remaining amount received is $980, which is recorded separately as cash received, ensuring all aspects of the transaction are accurately represented in the accounting records.

A company uses the gross method to record sales of inventory on 1/8 for $1,000 with payment terms 2/10, net 30. The customer paid for the purchase on 1/17. How is the discount recorded in the journal entry posted on 1/17?

Debited for $20.

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