Question

On June 3, Arnold Company sold to Chester Company merchandise having a sale price of \(3,000 with terms of 2/10, n/60, f.o.b. shipping point. An invoice totaling \)90, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Chester Company

Instructions

(a) Prepare journal entries on the Arnold Company books to record all the events noted above under each of the following bases.

(1) Sales and receivables are entered at gross selling price.

(2) Sales and receivables are entered at net of cash discounts.

(b) Prepare the journal entry under basis 2, assuming that Chester Company did not remit payment until July 29.

Short answer

1. Under gross method,sales are recorded at gross amount.

2. Under net method,sales are recorded at net discount.

Step-by-step solution

Definition of Discount Forfeited

If the customer makes payment after the specified period for a discount, the discount account is credited in the journal entry, known as discount forfeited.

Journal Entries Under Gross Method

Date	Accounts and Explanation	Debit $	Credit $
3 June	Accounts receivables	$3,000
	Sales		$3,000
	(To record the sales made on account)
12 June	Cash	$2,940
	Discount allowed	$60
	Accounts receivables		$3,000
	(To record the cash payment received for credit sales)

Journal Entries Under Net Method

Date	Accounts and Explanation	Debit $	Credit $
3 June	Accounts receivables	$2,940
	Sales		$2,940
	(To record the sales made on account)
12 June	Cash	$2,940
	Accounts receivables		$2,940
	(To record the cash payment received for credit sales)

Journal Entry When Payment is Not Remitted

Date	Accounts and Explanation	Debit $	Credit $
29 July	Cash	$3,000
	Accounts receivables		$2,940
	Sales discount forfeited		$60
	(To record the cash payment received for credit sales and discount forfeited)