Discount Expense Question...

[soldier_on16]

Situation: A business receives a deposit for 2000 from debtor. Sales price for each good=1000 cost price=500
A few days later business provides goods and an invoice to debtor: $5000 + $500 GST = $5500 MINUS deposit, Total amount owing on invoice =$3500

A few days later debtor pays amount owing and is entitled to a 2% discount.

QUESTION from me: Does the 2% discount apply to the $5500 OR $3500 amount?

[BoredSatan]

3500

[soldier_on16]

Interesting, that's what I thought. CPAP 2010 thinks otherwise, their answers say discount applies to whole 5500...

[BoredSatan]

Interesting, that's what I thought. CPAP 2010 thinks otherwise, their answers say discount applies to whole 5500...

they would be wrong then IMO

[soopertaco]

Could you explain why it would only apply to the 3500? I'm curious now

[soldier_on16]

Because the debtor has already paid the deposit, the amount that he is OWING on the invoice is only 3500... So I would think that the credit terms would only apply for the amount in which it is owed and when the invoice was issued.

But the answers say the WHOLE amount... maybe it's got to do with making the 'order' before the invoice was received? I dunno :S

[Hodgeyhodgey]

According to CPAP I got this question wrong because I applied the discount to the 3500. Hopefully we can get confirmation on this though..

[Ashchaos]

It seems more logical to apply the discount to the whole 5500 though... the total amount which the debtor owed was 5500 (the invoice total) and the 2000 early deposit can be considered as a partial payment. The rest of the 3500 was then paid within the credit terms so the 2% discount would be applied to the whole 5500.

[RossiJ]

The whole 5500 is correct, it just means a greater percentage of that 3500 will be discounted (if you get my drift).

[luffy]

It seems more logical to apply the discount to the whole 5500 though... the total amount which the debtor owed was 5500 (the invoice total) and the 2000 early deposit can be considered as a partial payment. The rest of the 3500 was then paid within the credit terms so the 2% discount would be applied to the whole 5500.

Discounts are applied to the total amount owed. The $2000 was never owed by the debtor - in fact, its quite the opposite in that the firm owes this value in stock to the debtor. Hence, the discount will only be applied to the $3500 (i.e. the credit sale).

Remember that prepaid sales and credit sales are different systems of selling stock. For the sake of understanding, just consider it as if the discount only applies to the credit sale portion of the transaction. Though, this is not in the definition.

Sorry if I am wrong. That is how my teacher has taught us to do it.

[soldier_on16]

I can see both sides of the argument, but the logical side of my head leans towards the discount only applying to 3500... Though it seems everybody seems divided on the issue. I've emailed Neville Box but he hasn't replied yet... Hopefully he does in case this Q comes up on the exam

[soldier_on16]

"I would apply it to 3500" from the man himself.

[Delca]

Um the 2% discount would be on the $5500 amount (so $110 of discount expense?)
Discount is for the whole sale for paying within the credit terms
You can also imagine it as paying off the $5500 in 2 allotments but both within the credit terms

However, what Neville Box probably meant is:
In the cash receipts journal on the date of payment: $110 discount and $3390 cash paid (bank column)

Edit: Doesn't make seem to make much logical sense (to me that is) that it's only to the $3500 figure, but I guess I'm wrong sorry

[MaddehZ]

always always to the invoice 'balance owing' figure

[soldier_on16]

Um the 2% discount would be on the $5500 amount (so $110 of discount expense)
Discount is for the whole sale for paying within the credit terms
You can also imagine it as paying off the $5500 in 2 allotments but both within the credit terms

However, what Neville Box probably meant is:
In the cash receipts journal on the date of payment: $110 discount and $3390 cash paid (bank column)

The question I asked him was "Does the 2% discount apply to the $5500 OR $3500 amount?" So I'm pretty sure he meant that the discount applied to the 3500. That's all he said though. It's up for debate, his answer wasn't very definitive anyway.