Fashion Jewelers uses the perpetual inventory system. On April 2, Fashion sold goods with a cost of $5,500 for $14,000 with terms of 4/15, n/30. On April 4, the customer reported damaged goods and Fashion granted a $2,000 sales allowance. On April 10, Fashion received the payment for the sale. Give the journal entry that will be recorded on April 10 by Fashion. A. Cash 11,520 Accounts Receivable 11,520
B. Cash 12,000 Accounts Receivable 12,000
C. Accounts Receivable 12,000 Sales 12,000
D. Cash 12,000 Sales Discount 480 Accounts Receivable 11,520

Cash 11,520 Sales Discount 480 Accounts Receivable 12,000

Explanation:

Fashion Jewellers sold goods for $14,000.

Out of this $14,000, damaged goods were returned which caused Fashion Jewellers to reduce the figure by $2,000 by way of a sales allowance.

The figure is now,

= 14,000 - 2,000

= $12,000

This $12,000 is subject to a trade term of 4/15, n30 which means that as long as the amount is paid in 15 days, a 4% discount is applicable. If the balance is not paid in 15 days however, it should be paid in 30 days.

Fashion house received the payment within the discount period so the good is liable to a 4% reduction.

= 12,000 * 4%

= $480

That means that only,

= 12,000 - 480

= $11,520 was paid as balance in cash

The proper entry on April 10 is therefore,

DR Cash $11,520

DR Sales Discount $480

CR Accounts Receivable $12,000

Sales discount is an expense and Expenses are debited when they increase.

The options do not have this answer but it is correct.

Cash 11,520 Dr. Sales Discount 480 Dr Accounts Receivable 12,000 Cr

Explanation:

Fashion Jewelers

Perpetual inventory system

Sales $ 14000

Sales Allowance  $ 2000

Sales Discounts  4% of $12000 ( 14000- 2000)  = $ 480

Net Sales = $ 12000- $ 480= $ 11520

The journal entry that will be recorded on April 10 by Fashion.

Cash $11520 Dr

Sales Discount $ 480 Dr

Accounts Receivable $12000 Cr

Sales discount is an expense account and is debited. Accounts Receivable will be credited with the full amount.

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