Question

Problem 8-4

Mitchell and O’Brien, CPAs, PC, earned $135,000 in revenue from providing tax return preparation services to businesses and individuals. All services are provided on account. To encourage prompt payment, the firm uses credit terms of 3/10, n/30 when billing clients.

Required:

1.            Prepare the journal entry to record revenues under the gross method.

2.            Prepare the journal entry to record collection of the accounts receivable, assuming clients pay within the 10-day discount period.

3.            Prepare the journal entry to record collection of the accounts receivable, assuming clients pay after the 10-day discount period.

Answer 1

1) DEBIT TRADE RECEIVABLES $135000

CREDIT REVENUE FROM TAX RETURN PREPARATION SERVICES $135000

2) DISCOUNT ALLOWED = $135000*3%=$4050, CASH RECEIVED=$135000-$4050=$130950

DEBIT   CASH $130950

DEBIT DISCOUNT ALLOWED $4050

CREDIT TRADE RECEIVABLES $135000

3) IF ACCOUNTS RECEIVABLES PAYS AFTER 10 DAYS

  

DEBIT CASH $135000

CREDIT TRADE RECEIVABLES $135000

NOTE: NO DISCOUNT ALLOWED AS THEY PAID AFTER 10 DAYS.

3/10, n/30 MEANS CREDIT DUE DATE IS WITHIN 30 DAYS AND IF THEY PAY AMOUNT THEN THEY WOULD GET 3% DISCOUNT