Question

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

A trader settled a debt of 150,000\text{₦}150,000 owed to a supplier after receiving a trade discount of 10%10\% and a cash discount of 5%5\% for prompt payment by cheque. What amount will be entered in the bank column on the credit side of the trader's three-column cash book?

  1. 128,250\text{₦}128,250Answer
  2. B
    127,500\text{₦}127,500
  3. C
    135,000\text{₦}135,000
  4. D
    142,500\text{₦}142,500

Answer

The amount entered in the bank column on the credit side is 128,250\text{₦}128,250.
Trade discounts are deducted prior to accounting entry and do not appear in the cash book. The net invoice price is 135,000\text{₦}135,000. The 5%5\% cash discount earned is calculated on 135,000\text{₦}135,000, which gives 6,750\text{₦}6,750. The actual cheque paid and entered in the bank column on the credit side is 135,0006,750=128,250\text{₦}135,000 - \text{₦}6,750 = \text{₦}128,250.

Step-by-Step Solution

1
Calculate the net invoice price after deducting trade discount.
Trade discount = 10%×150,000=15,00010\% \times \text{₦}150,000 = \text{₦}15,000. Net invoice amount = 150,00015,000=135,000\text{₦}150,000 - \text{₦}15,000 = \text{₦}135,000.
Trade discount is deducted immediately on the invoice and is not recorded in the cash book.
2
Calculate the cash discount on the net invoice price.
Cash discount = 5%×135,000=6,7505\% \times \text{₦}135,000 = \text{₦}6,750.
Cash discount for prompt payment is calculated on the net amount billed.
3
Determine the net cash/cheque paid for entry in the bank column.
Net cheque payment = 135,0006,750=128,250\text{₦}135,000 - \text{₦}6,750 = \text{₦}128,250.
The net amount paid by cheque is entered in the bank column, while 6,750\text{₦}6,750 is entered in the discount received column.

Key Concept

Calculation and recording of cash discount versus trade discount in the three-column cash book.
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