Question

Multiple-Choice Exercise 5-5

When should the net method be used to record sales revenue?

a.When the customer is expected to pay within the discount period.

b.When the customer does not pay within the discount period.

c.When the discount terms are favorable to the customer.

d.Never—the gross method should always be used.

Answer 1

Correct Option A : When the customer is expected to pay within the discount period.

Reason: Net method is the method where at the time of sales to customer, accounts receivable is recorded with the amount net of discount. It is presumed that customer will take benefit of cash discount.

Such assumption is applied on the basis of past experience and trend of payment of such customer. It is forecasted on the basis of past trends that will such customer is taking benefit of cash discount.