Question

Exercise 5–5

Analyzing and recording merchandise transactions and discounts

Sandra’s Store purchased merchandise from a manufacturer with an invoice price of

$11,000 and credit terms of 3/10, n/60, and paid within the discount period.

Required

a. Prepare the journal entries that the purchaser should record for the purchase and payment.

b. Prepare the journal entries that the seller should record for the sale and collection.

c. 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. Calculate how much the buyer saved by following this strategy. (Use a 365-day year.)

Answer 1

a.	No	Account Titles and Explanation	Debit	Credit
	1	Merchandise Inventory	$11,000
		Accounts Payable		$11,000
		(To record purchase on account)
	2	Accounts Payable	$11,000
		Merchandise Inventory		$330	($11,000 x 3%)
		Cash		$10,670
b.	No	Account Titles and Explanation	Debit	Credit
	1	Accounts Receivable	$11,000
		Sales Revenue		$11,000
		(To record sales on account)
	2	Cash	$10,670
		Sales Discount	$330		($11,000 x 3%)
		Accounts Receivable		$11,000
c.		Savings from discount taken	$330
		Amount Borrowed	$10,670
		Number of days of interest	50	days
		Interest expense	$117	($10,670 x 8% x 50/365)
		Buyer's net savings	$213	($330 - $117)