On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms
2
10
/
2
10
,
n
30
/
n
30
. Cherokee uses the net method of accounting for sales discounts.

What entry would Cherokee make on December 10, assuming the correct payment was received on that date?

Question

On November 10 of the current year, Cherokee Industries sold materials to a customer for $8,000 with credit terms 
2
10
/
2
10
 , 
n
30
/
n
30
 . Cherokee uses the net method of accounting for sales discounts.

What entry would Cherokee make on December 10, assuming the correct payment was received on that date?

BlackTom AI · Accepted Answer

We begin by restating the problem to ensure clarity: On Nov 10, Cherokee Industries sold materials for 8,000 with credit terms 2/10, n/30, using the net method. On Dec 10, the correct payment was received. We must evaluate the proposed journal entries.

Option A:
Account Title	Debit	Credit
Cash	8,000	
Accounts receivable		8,000

This entry records a full cash receipt of 8,000 and removes 8,000 from Accounts Receivable with no effect on discounts. Under the net method, the initial entry would have recorded receivable net of the discount (7,840), and since payment arrived after the discount period, we would need to account for the discount not being taken. This option ignores the net-of-discount initial recognition and the subsequent non-take of the discount, so it misrepresents both the receivable and the discount impact. Therefore, this option is incorrect.

Option B:
Account Title	Debit	Credit
Cash	8,000	
Accounts receivable		7,840
Sales discounts forfeited		160

Analysis: This entry debits Cash for the amount received (8,000) and credits Accounts Receivable for the net amount originally recorded (7,840), with an additional credit to Sales discounts forfeited for 160. The balancing works (8,000 debits equals 7,840 + 160 credits = 8,000). The logic matches the net method where the expected discount is 2% of 8,000 (160), and because the payment occurred after the discount period, we recognize the forfeiture of the discount as a separate line. This is a plausible and balanced presentation under the net method when the discount is not taken. This option is a strong candidate for the correct treatment.

Option C:
Account Title	Debit	Credit
Cash	8,160	
Accounts receivable		8,000
Sales discounts forfeited		160

Here, Cash is recorded as 8,160, which implies receiving more cash than the billed amount. The original sale was 8,000; receiving 8,160 would indicate some extra consideration or an error. Under the given terms, the customer would not pay more than 8,000, and the net method would not produce a 8,160 cash receipt when the AR balance was 7,840. This option therefore misstates the cash receipt and the receivable balance, making it incorrect.

Option D:
Account Title	Debit	Credit
Cash	8,000	
Accounts receivable		7,840
Discounts revenue		160

In this approach, there is a debit to Cash for 8,000 and a credit to Accounts Receivable for 7,840, with a credit to Discounts Revenue for 160. The use of Discounts Revenue here is inconsistent with the net method’s accounting for discount forfeiture; typically, the forfeited portion would be recorded as a contra-revenue account (often titled Sales Discounts Forfeited). Additionally, the net method would not normally credit Discounts Revenue in this scenario. The presentation also leaves ambiguity about whether the 160 is being treated as a revenue adjustment or a forfeiture entry, making this option misaligned with standard net-method practice.

In summary:
- Option A ignores net-of-discount initial recognition and the later forfeiture handling, so it is incorrect.
- Option B correctly reflects the net method: cash received is 8,000, AR is removed at 7,840, and the 160 discount not taken is recorded (as a separate credit to a discount-forfeiture/revenue-related account) to balance the entry.
- Option C incorrectly inflates cash and misstates the AR interaction, inconsistent with the net method under these terms.
- Option D misclassifies the 160 as Discounts Revenue and presents an inconsistent entry with the net-method framework.

Thus, Option B is the entry that aligns with the net method accounting for the sale and the receipt on December 10 when the discount period has lapsed.

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