Question

True or False

1. A company makes a credit sale for $500. Future collection from the customer is probable. The company will not record revenue from the transaction until it collects cash from the customer.

2. Credit sales involve benefits and costs. A benefit of selling on credit is that the seller makes it more convenient for customers to purchase goods and services. A cost of selling on credit is that there is a delay in collecting cash from customers.

3. The balances in sales returns, allowances, and discounts are subtracted from total revenues when calculating net revenues.

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1. Trade discounts represent:

a. a reduction in the listed price of a good or service.

b. a reduction in the amount to be received from a credit customer if collection occurs within a specified period of time.

c. a reduction in the customer’s balance owed because of a deficiency in the company’s good or service.

d. a return of products by a customer.

2. How are trade discounts recognized?

a. By using contra revenue accounts

b. By recording the sale at a discounted price

c. By debiting the Trade Discounts account

d. By subtracting them from total revenues at the end of the period

3. Sales Returns is an example of a(n) ____________ account, which is used to keep a record of reductions from revenue due to sales returns separate from total revenue itself.

a. Asset

b. Revenue

c. Contra asset

d. Contra revenue

4. On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:

a. Debit to Sales Revenue

b. Debit to Sales Returns

c. Credit to Accounts Payable

d. Credit to Sale Revenue

5. A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:

a. Accounts Receivable for $776

b. Cash for $800

c. Sales Discounts for $24

d. Sales Revenue for $800

6. A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 6. The receipt of payment will include a:

a. Debit to Cash for $980

b. Debit to Sales Discounts for $980

c. Credit to Accounts Receivable for $980

d. Credit to Service Revenue for $980

7. A company performs $1,000 worth of services on account on March 1, with the terms 2/10, n/30. The customer makes payment on March 24. The receipt of payment will include a:

a. Debit to Cash for $980

b. Debit to Sales Discounts for $20

c. Credit to Accounts Receivable for $1,000

d. Credit to Sales Discounts for $20

Answer 1

First 4 questions are being answered here.

1. FALSE

Given statement is false.

Since the collection from the customer is probable, so the company can record the revenue on a credit sale of $500.

2. TRUE

Given statement is true.

Credit sales involve benefits and costs. Benefit for the seller is that the purchaser will have more convenience in making the payment. It will help in increasing the sales. Costs are also involved in credit sales because amount of funds equal to credit sales, are locked up in receivables. These funds have opportunity costs. There may be some collection costs also.

3. TRUE

Net revenues = Total revenues - Sales returns - Allowances - Discounts

4. Option (a) is correct

Trade discounts represent a reduction in the listed price of good or service.