Question

Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $27,100 and credit terms of 3/10, n/60 the merchandise had cost Mesa $16,000. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.Required:a. Prepare entries that the buyer should record for (a) the purchase and (b) the cash paymentb. Prepare entries that the seller should record for (a) the sale and (b) the cash collectionc. Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 8% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Assume a 365-day year and round dollar amounts to the nearest cent, including computation of interest per day.)

Answer 1

Answer:

a. Prepare entries that the buyer should record for (a) the purchase and (b) the cash payment

a) date, month, year, merchandise purchased on account from Mesa Company, credit terms 3/10, n/60

Dr Merchandise inventory 27,100

    Cr Accounts payable 27,100

b) 10 days later, invoice paid within discount period to Mesa Company

Dr Accounts payable 27,100

    Cr Cash 26,287

    Cr Purchase discounts 813

b. Prepare entries that the seller should record for (a) the sale and (b) the cash collection

a) date, month, year, merchandise sold on account to Santa Fe Company, credit terms 3/10, n/60

Dr Accounts receivable 27,100

    Cr Sales revenue 27,100

Dr Cost of goods sold 16,000

    Cr Merchandise inventory 16,000

b) 10 days later, invoice collected from Santa Fe Company

Dr Cash 26,287

Dr Sales discount 813

    Cr Accounts receivable 27,100

c. Compute how much the buyer saved by following this strategy.

interest expense = $27,100 x 8% x 50/365 days = $296.99

purchase discount = $813

money saved through borrowing = $813 - $296.99 = $516.01