A merchant's three-column cash book recorded the following transactions with a customer:
- Sold goods listed at subject to a trade discount.
- The customer settled half of the net invoice value by cheque within the prompt settlement period, receiving a cash discount.
- The remaining balance was settled later in cash, receiving a cash discount for early payment.
What is the total amount, in naira, recorded in the discount allowed column of the cash book for these transactions?
Answer: 3825 ₦
Answer
The total amount recorded in the discount allowed column is ₦3,825.
Trade discount of 15% (₦18,000) reduces the gross sales price from ₦120,000 to a net invoice amount of ₦102,000. Cash discounts apply only to cash payments made for prompt settlement and are calculated on the net invoice figure. The first settlement of half the account (₦51,000) earns a 5% discount equal to ₦2,550. The second settlement of the remaining ₦51,000 earns a 2.5% discount equal to ₦1,275. Adding both cash discounts yields a total of ₦3,825 entered in the discount allowed column.
Step-by-Step Solution
Key Concept
Calculation and recording of cash discounts versus trade discounts in a three-column cash book