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CMA Intermediate · Financial Accounting · Bills of Exchange

Gupta & Sons holds a Rs 50,000 bill accepted by Rao Ltd. Before maturity, Gupta & Sons discounts it with its bank at 12% p.a. for 3 months. What is the entry on discounting?

Discount is 50,000 x 12% x 3/12 = Rs 1,500, so the bank pays Rs 48,500. Gupta & Sons debits Bank 48,500 and Discount 1,500 and credits Bills Receivable 50,000, since the receivable is transferred to the bank.

  1. ABank Rs 48,500, Discount Rs 1,500, credit Bills Receivable Rs 50,000Correct
  2. BBank Rs 49,000, Discount Rs 1,000, credit Bills Receivable Rs 50,000
  3. CBank Rs 48,500, Discount Rs 1,500, credit Rao Ltd Rs 50,000
  4. DBank Rs 50,000, credit Bills Receivable Rs 50,000

Explanation

Discount = 50,000 x 12% x 3/12 = Rs 1,500. Bank receives 50,000 - 1,500 = Rs 48,500. Entry: Bank Dr 48,500, Discount Dr 1,500, Bills Receivable Cr 50,000. Crediting Rao Ltd is wrong because the bill was already accepted and Rao Ltd's account was credited when the bill was received.

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