Chapter 5, Problem 88BPSB

To determine

(a)

Sales discounts:

The term $3/10,n/40$ means that if a customer is paying in $10$ days then the payment will be after a discount of $3\%$ on the total value but if the customer is paying in $40$ days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entries for Spartan Inc. for recording the sales at gross.

Answer to Problem 88BPSB

The journal entries for sales transactions at gross amount are recoded properly.

Explanation of Solution

The Spartan Inc. provided two services. One at the amount of $\$2,50,000$ and the other at the amount of $\$75,000$ that is the list price. This is given in the question.

The journal entry for Spartan Inc. at the gross amount is as follows:

Date	Particulars	Debit ($)	Credit ($)
	Accounts Receivable…………………… Sales…………………………………(Record the sales service    $\left(\text{a}\right)$ )Accounts Receivable…………………… Sales…………………………………(Record the sales service    $\left(\text{b}\right)$ )	$2,50,000$    $75,000$	$2,50,000$    $75,000$

To determine

(b)

Sales discounts:

The term $3/10,n/40$ means that if a customer is paying in $10$ days then the payment will be after a discount of $3\%$ on the total value but if the customer is paying in $40$ days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entry for the receiving payment within $10$ days.

Answer to Problem 88BPSB

The adjusting entry for recording the payment receivable of sales is recorded properly.

Explanation of Solution

The Spartan Inc. provided two services. One at the amount of $\$2,50,000$ and the other at the amount of $\$75,000$ that is the list price. The discount offered is $3\%$ which is claimed by the buyer on the $\$2,50,000$ payment. This is given in the question.

The journal entry for Spartan Inc. is as follows:

Date	Particulars	Debit ($)	Credit ($)
	Cash………………………………Sales discount……………………. Accounts Receivable………………(Record the receiving of revenue of service contact within the discount period of    $10$ days)	$2,42,500$    $7,500$	$2,50,000$

$\begin{array}{c}\text{Amount of service payment received is}=\left\{2,50,000-\left(2,50,000\times 1\%\right)\right\}\\ =2,42,500\end{array}$.

To determine

(c)

Sales discounts:

The term $3/10,n/40$ means that if a customer is paying in $10$ days then the payment will be after a discount of $3\%$ on the total value but if the customer is paying in $40$ days then the payment will be made in full which means no discount.

Gross method:

Under this method, the revenues are recorded at gross amount of sales i.e. without taking the effect of any discount at the time of sales.

The journal entry for the receiving payment after $10$ days.

Answer to Problem 88BPSB

The adjusting entry for recording the payment receivable of sales is recorded properly.

Explanation of Solution

The Spartan Inc. provided two services. One at the amount of $\$2,50,000$ and the other at the amount of $\$75,000$ that is the list price. The discount offered is $3\%$ which is not claimed by the buyer on the $\$75,000$ payment. This is given in the question.

The journal entry for Spartan Inc. is as follows:

Date	Particulars	Debit ($)	Credit ($)
	Cash……………………………… Accounts Receivable………………(Record the receiving of revenue of service contact within the discount period of    $10$ days)	$75,000$	$75,000$

To determine

(d)

Sales discounts:

The term $3/10,n/40$ means that if a customer is paying in $10$ days then the payment will be after a discount of $3\%$ on the total value but if the customer is paying in $40$ days then the payment will be made in full which means no discount.

To calculate:

The implied annual interest rate which the Grieder has to incur after failing to take benefit of sale discount.

Answer to Problem 88BPSB

The implied annual interest rate is $3.09\%$ .

Explanation of Solution

The Grieder did not pay the amount of $\$75,000$ within the period the sale discount i.e. paid after $40$ days. Due to this, the Spartan Inc. has to bear some interest expense for which Spartan Inc. charges the Grieder to compensate such interest charges.

$\begin{array}{c}\text{Interest Calculation}=\frac{\text{Discount provided for the payment within }10\text{ days}}{\text{Amount Paid}}\\ =\frac{3\%}{97\%}\\ =3.09\%\end{array}$.