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Difficulty: MediumThree-Column Cash Book and Trade/Cash Discounts

On 12 June, Babatunde purchased goods with a list price of ₦400,000\text{₦}400,000 from a supplier on credit, subject to a 15%15\% trade discount. On 26 June, he settled the account by issuing a cheque, taking advantage of a 5%5\% cash discount for prompt payment. What is the net amount, in Naira (₦\text{₦}), entered in the Bank column of Babatunde's three-column cash book?

Answer: 323000 Naira

Answer

The net amount entered in the Bank column of the cash book is 323,000 Naira.
The trade discount of 15% reduces the list price of ₦400,000 to an invoice amount of ₦340,000. When settling the account, a 5% cash discount on ₦340,000 (which is ₦17,000) is allowed for prompt payment. Deducting ₦17,000 from ₦340,000 leaves ₦323,000 as the actual cheque payment recorded in the Bank column on the credit side of the three-column cash book.

Step-by-Step Solution

1
Calculate the trade discount
₦60,000
Trade discount is calculated as a percentage of the catalog or list price (15%×₦400,000=₦60,00015\% \times \text{₦}400,000 = \text{₦}60,000).
2
Determine the net invoice value to be settled
₦340,000
Trade discount is deducted immediately and is not recorded in the accounting books (₦400,000−₦60,000=₦340,000\text{₦}400,000 - \text{₦}60,000 = \text{₦}340,000).
3
Calculate the cash discount received for prompt payment
₦17,000
Cash discount is calculated on the net invoice price after trade discount (5%×₦340,000=₦17,0005\% \times \text{₦}340,000 = \text{₦}17,000).
4
Calculate the actual cheque amount paid
₦323,000
The cash book Bank column records the actual net amount paid by cheque after deducting the cash discount (₦340,000−₦17,000=₦323,000\text{₦}340,000 - \text{₦}17,000 = \text{₦}323,000).

Key Concept

Distinction and sequential calculation of trade discount and cash discount in the cash book
Estimated Time:1m 30s
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Topics

Three-Column Cash Book and Trade/Cash Discounts

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