Oswego Clay Pipe Company sold $45,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 4/15, n/60. Oswego uses the gross method of accounting for cash discounts.

What entry would Oswego make on April 23, assuming the customer made the correct payment on that date?

A. Cash 45,000

Accounts receivable 43,200

Sales 1,800

B. Cash 43,200

Sales 1,800

Accounts receivable 45,000

C. Cash 43,200

Sales discounts 1,800

Accounts receivable 45,000

D. Cash 45,000

Sales discounts 1,800

Accounts receivable 45,000

Interest revenue 1,800

Correct answer is C,

Debit Cash $43,200

Debit Sales discount $1,800

Credit Accounts receivable $45,000

Explanation:

Using gross method of accounting discounts, all discounts will be recognized upon payment within the discount period and will be debited on sales discount account. Thus, during the acquisition date, all purchases are recorded at gross amount.

Journal Entry on Date of Purchase

Debit Accounts receivable $45,000

Credit Sales $45,000

Journal entry on settlement (within the discount period of 15 days)

Debit Cash $43,200

Debit Sales discount $1,800

Credit Accounts receivable $45,000

Computation of discount:

45,000 x 4% = 1,800

Computation of cash received

45,000 - 1,800 = 43,200

*Sales discount is a contra account of sales.