Question

Med Labs has the following December 31, 2017, year-end unadjusted balances: Allowance for Sales Discounts, \(0; and Accounts Receivable, \)5,000. Of the \(5,000 of receivables, \)1,000 are within a 2% discount period, meaning that it expects buyers to take \(20 in future-period discounts arising from this period’s sales.

a. Prepare the December 31, 2017, year-end adjusting journal entry for future sales discounts.

b. Assume the same facts above and that there is a \)5 year-end unadjusted credit balance in the Allowance for Sales Discounts. Prepare the December 31, 2017, year-end adjusting journal entry for future sales discounts.

c. Is Allowance for Sales Discounts a contra asset or a contra liability account?

Short answer

1. The journal entry will record anincrease in the sales discount and the allowance for the sales discount.
2. The credit balance will reduce the sales discount and allowance for sales discount by $5.
3. Allowance for sales discount iscontra-asset account.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of Sales Discount

The factor that reduces the selling price of a product is known as a sales discount. It reduces the selling price and revenue of the business entity and therefore, it is considered a contra-revenue account.

Adjusting entry for future sales discounts

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Sales discount	$20
	Allowance for sales discount		$20

Adjusting entry for future sales discount with the credit balance in the allowance account

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2017	Sales discount	$15
	Allowance for sales discount		$15

Classification of allowance for sales discount

Allowance for sales discount is considered a contra-asset account because it is credited in adjusting entry, which reflects future reductions in the accounts receivables.