A business invoices a customer £2,000 and offers a 3% settlement discount for payment within 10 days. The customer pays within the period. What is the cash received and how is the discount treated?
Answer and explanation
Correct answer: C. £1,940 received, with £60 shown as discount allowed in profit or loss
- Step 1: Discount = £2,000 × 3% = £60, so the customer pays £1,940.
- Step 2: The business loses £60 of the receivable by allowing the discount early, which is an expense, discount allowed.
Answer
£1,940 received, with £60 shown as discount allowed in profit or loss.
Why not the others: Discount received arises from suppliers, and the cash would be reduced by the discount. A trade discount is deducted on the invoice at the time of sale, not for early payment. The allowance for receivables covers expected bad debts, not discounts for early payment.
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