Discounts

Chapter-6

Chapter

DISCOUNTS

CHAPTER CONTENTS
Introduction Types of Discounts Calculation of Discounts Practice Questions Answer Bank

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INTRODUCTION A DISCOUNT is a reduction in the price of goods below the amount at which those goods would normally be sold to other customers of the supplier. Discounts are of two major types. They are normally offered to increase sales or to receive cash as early as possible. The two types are TRADE DISCOUNT and CASH/SETTLEMENT discount
Trade discount Definition Objective Treatment Price reduction given to customer at the time of selling goods. To sell in bulk. Sale or purchase is recorded in the books at net of discount figure. Therefore, no accounting entry is needed. Cash discount Definition Objective Treatment Offered if invoice is settled within a specified period of time. To receive prompt payment. Sale or purchase is recorded at full price (net of trade discount figure). If the discount is availed there will be a need to account for the adjustment. If business allows discount to its customers at the time of settlement of invoice it is known as discount allowed. If business receives it from its suppliers at the time of settling invoice it is known as discount received. Accounting entry No entry (as explained above) Accounting entry Discount allowed

To allow a discount is to forego cash receivable from customer, therefore it is an expense. Discount allowed Dr (E+) Receivable Cr (A -)

Discount received

To take a discount means paying less for a liability, therefore it is an income. Payable Dr (L -) Discount received Cr (I+)

Normally the TRADE DISCOUNTS are shown on the face of the invoice but the customer has to pay the net amount i.e. after the deduction of trade discount CASH/SETTLEMENT DISCOUNT is not deducted on the face of the invoice. It is just mentioned at the end of the invoice. It depends on the customer whether he wants to avail it or not. IF BOTH DISCOUNTS ARE GIVEN THEN THE NORMAL RULE IS TO DEDUCT TRADE DISCOUNT FIRST AND THEN CHARGE CASH DISCOUNT ON THE NET OF TRADE DISCOUNTS AMOUNT.

Activity No1 Four items costing $100 each with an agreed trade discount of 10% have been sent to the customers. What is the total amount of the invoice? An items costs $12,000.10% trade discount is given and further 20% cash discount if payment done within 30 days. What is the amount to be shown on the invoice? An items costs $15,000.Trade discount of 5% is given and also cash discount of 10% if payment done within 20 days. What is the amount paid by the customer if he avails the discount?

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An items costs $20,000.customer is offered discount of 15% if payment done within 10 days. What is the amount to be shown on the invoice? Mathew was invoiced for $100 less 5% trade discount and a settlement discount of 2.5%. Mathews supplier is not registered for sales tax. If Mathew pays the invoice late, how much will she pay? A. B. C. D. $92.50 $92.63 $95.00 $7.50

MULTIPLE CHOICE QUESTIONS

1.

2.

Premier Ltd makes a sale of goods on credit to Carling Ltd with the offer of a cash discount. Carling Ltd takes advantage of the cash discount when paying for the goods. How would the settlement of the invoice be recorded in Premier Ltds books? A. B. C. D. Debit Cash Discount received Cash Cash Discount allowed Cash Credit Carling Ltd Discount received Carling Ltd Carling Ltd Discount allowed Carling Ltd

3.

Pimlico & Co owe Vauxhall Ltd for some goods it recently bought. Pimlico & Co are settling the invoice early and are getting a cash discount. What is the correct entry for this in Pimlico & Cos books? A. B. C. D. Debit Vauxhall Ltd Vauxhall Ltd Bank Bank Credit Bank Discount allowed Discount received Bank Discount allowed Pimlico & Co Discount allowed Pimlico & Co

4.

A supplier of machinery allows its customers to deduct 3% from the invoice amount if they pay within 14 days of the invoice date. This is an example of: A. B. C. D. A bad debt A trade discount A cash transaction An early settlement discount

5.

X Ltd purchases goods with a list price of $100,000 subject to a 5% trade discount. X Ltd is allowed 2.5% cash discount for payment within 30 days from invoice date. How much will X pay if he avails the discount? A. $92,625

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B. C. D. 6.

$102,375 $97,500 $95,000

Giveaway Ltd sells goods with a list price of $12,000 to a credit customer. The customer is entitled to a 5% trade discount and also to a further 2.5% discount on list price if payment is made within ten days of the invoice date. What amount should be credited to the sales account in Giveaways books? A. B. C. D. $11,100 $11,400 $11,700 $12,000

7.

Dandy Ltd purchases goods with a list price of $22,000. The supplier offers a 10% trade discount. Dandy Ltd intends to pay within 20 days so as to earn a settlement discount of 2% on list price. What entries should be made in Dandy Ltds books to record the purchase? Debit A. B. C. D. Purchases Purchases Purchases Purchases $ 19,800 21,560 19,800 21,560 Creditors Creditors Discount received Creditors $19,360 Discount received Creditors Credit $ 19,800 21,560 440 2,200 19,360

8.

The accounting entry for discounts allowed by suppliers in the ledger accounts is: A. B. C. D. Debit cash, credit discounts received Debit cash, credit discounts allowed Debit creditors, credit discount received Debit discounts allowed, credit debtors

9.

A company receives a settlement discount of $35 from a supplier. The amount is debited to the discount received account. As a result, gross profit is: A. B. C. D. Understated by $35 Understated by $70 Overstated by $70 Unaffected

10.

A company received an invoice from ABC Co, for 40 units at $10 each, less 25% trade discount, these being items purchased on credit and for resale. It paid this invoice minus a settlement discount of 2%. Which of the following entries correctly records the effect of the whole transaction in the companys books? Debit A. ABC Co Cash Discount allowed Purchases ABC Co $ 300 292 8 300 300 Purchases ABC Co ABC Co Discount allowed Credit $ 300 300 300 8

B.

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Cash C. Purchases ABC Co ABC Co Cash Discount allowed 300 300 400 294 106 ABC Co Discount received Cash Purchases ABC Co

292 300 6 294 400 400

D.

11.

The total of the discount allowed column in the cashbook is $250. How should this item be posted in the ledger? A. B. C. D. Dr. Discount allowed Cr. Discount allowed Dr. Discount received Cr. Discount received

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ANSWERS TO MULTIPLE CHOICE QUESTIONS

Questions 1 2 3 4 5 6 Answers C C B D A B Questions 7 8 9 10 11 Answers A C D C A

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