On February 3, Smart Company sold merchandise in the amount of $4,200 to Truman Company, with credit terms of 1/10, n/30. The cost of the items sold is $2,900. Smart uses the perpetual inventory system. Truman pays the invoice on February 8, and takes the appropriate discount.

The journal entry that Smart makes on February 8 is:

a.

Cash 2,900
Accounts receivable 2,900
b.

Cash 4,200
Accounts receivable
4,200

c.

Cash 4,120
Sales discounts 80
Accounts receivable 4,200
d.

Cash 2,820
Accounts receivable 2,820

Refer to Explanation.

Explanation:

There must be an error in the Multiple Choice options because the answer does not appear there.

Nevertheless here is the working.

The Journal entry that Smart makes on February 8 is as follows:

First, we will notice the presence of the credit term, 1/10, n/30. This means 1% discount if paid within 10days, otherwise, the total amount is due within 30 days.

Truman paid within the discount period and thus got the discount of 1%.

Calculating the adjusted figure to the discount would therefore be,

= 4,200 * ( 1 - 0.01)

= $4,158

The discount would be,

= $4,200 - $4,158

= $42

The Journal Entry will therefore look like,

Cash 4,158

Sales discounts 42

Accounts receivable 4,200

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