XYZ Ltd owed a creditor $400, with a 3% discount applied. The payment was made within the discount period. The impact of this entry for XYZ Ltd is:

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Question restatement: XYZ Ltd owed a creditor $400, with a 3% discount applied. The payment was made within the discount period. The impact of this entry for XYZ Ltd is:

Option provided: d. Decrease Accounts Payable $400; Decrease Cash at Bank $388; Increase Discount Revenue $12.

Analysis of the scenario step by step:
- First, calculate the cash payment after the discount: 3% of $400 is $12, so the amount paid is $400 − $12 = $388. This means cash (Banks) will decrease by $388 when paying the creditor.
- Next, the Accounts Payable balance should be reduced by the gross amount owed to the creditor, which is $400, since the liability is settled in full albeit at the discounted price.
- Finally, the company recognizes the discount as a form of income in the books, typically labeled as Discount Received (or a contra-expense in some contexts). In the buyer’s books, this is often credited as a "Purchase Discounts" or "Discount Received" account to reflect the savings on the payable.

Breaking down the correctness of the option:
- Decrease Accounts Payable $400: Correct. The liability is settled, so the Accounts Payable should be reduced by the full invoice amount.
- Decrease Cash at Bank $388: Correct. The cash outflow is the discounted payment amount, which is $388.
- Increase Discount Revenue $12: Correct in terms of accounting treatment for the buyer. The $12 represents the discount gained on the payable and is typically recorded as a credit to a discount-related income account (often called Purchase Discounts or Discount Received). Some textbooks may label this differently (as Discount Received rather than Discount Revenue), but the concept is that a discount reduces the net cost and increases an income/contra-expense account.

Possible points of confusion and clarifications:
- If someone expected Cash to decrease by $400, that would ignore the benefit of the discount; the actual cash outflow must reflect the discounted amount ($388).
- If someone argued there should be no entry to a “Discount” account, they might be thinking of the seller’s perspective or treating the discount as a reduction of expense rather than income; in the buyer’s perspective, recognizing the discount as income (discount received) is appropriate.
- The term used for the discount account can vary by chart of accounts (Discount Received, Purchase Discounts, or similar). The key idea is that the discount amount ($12) increases an income/contra-expense account, reflecting the savings.

In summary, the entry described in option d correctly captures the effects of paying within the discount period: Accounts Payable decreases by the full amount, Cash decreases by the discounted payment, and the $12 discount is recognized as income (discount received).

MCD2160 - T2 - 2025 MCD2160 Trimester 2 2025 Mid Test Week 7 in Tutorial 7 Period 2

XYZ Ltd owed a creditor $400, with a 3% discount applied. The payment was made within the discount period. The impact of this entry for XYZ Ltd is:

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