D is corrent. Under the net method, sales are initially recorded net of discounts. Payments received after the discount period total $37,500 ($150,000 x 25%), and the amount of discounts forfeited is $750 ($37,500 x 2%). Under the net method, the entry to record these receipts is
| Cash | 37,500 | |
| AR | | 36,750 |
| Discounts not taken | | 750 |
A is incorrect because this response describes the gross method. Under the gross method, sales are initially recorded at the gross amount. Payments received within the discount period total $112,500 ($150,000 × 75%). Under the gross method, the entry to record these receipts is
| Cash | 110,250 | |
| Sales discounts | 2,250 | |
| AR | | 112,500 |
Alternatively, an allowance
account may be established, in which case the following entries would be
recorded.
| | Upon
sale | | | Receipts within discount period | |
| AR | | 150,000 | | Cash | | 110,250 | |
| Sales | | | 150,000 | Allowance for sales
discounts | 2,250 | |
| Sales discounts | | 2,250 | | AR | | | 112,500 |
| Allowance
for sales discounts | | 2,250 | | | | |
Note that under the allowance method,
sales discounts is debited at the time of sale instead of at the time of cash
receipt.
B is incorrect because such an allowance is used when sales are recorded gross to reduce the value of accounts receivable to estimated net realizable value.
C is incorrect because, in accordance with the revenue recognition principle, revenue should be recognized when it is both realized or realizable and earned. Sales to customers on account meet these requirements because claims to cash have been received and Alfisol has fulfilled its obligations so that it is entitled to these benefits. Therefore, Alfisol may not postpone the recognition of its sales.
