Question: Concept for Analysis
Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers.
On August 1, 2017, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge.
Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2017, and mature on September 30, 2019. Kimmel's operating cycle is less than one year.
1. Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method?
2. Using the net method, what is the effect on Kimmel's sales revenues and net income when customers do not take the sales discounts?
3. What is the effect of trade discounts on sales revenues and accounts receivable? Why?
4. How should Kimmel account for the accounts receivable factored on August 1, 2017? Why?
5. How should Kimmel account for the note receivable and the related interest on December 31, 2017? Why?