Question

What does a company record when it purchases inventory under the net method, and it does not take the cash discount granted by the seller?

Where is it on a multiple step income statement?

Answer 1

Ans:

1) when company purchases inventory under the net method, it records purchases of inventory with a cash discount.

2) The net method assumes the purchaser always takes advantage of the discounted cash price and records the purchased inventory at the discounted price

3) If company' does not take the cash discount granted by the seller than , discount is lost and an entry is made to reverse the discounted take in the original purchase entry.

Example:

1) if x company buys inventory from Y company, for $ 1000; term'2/10, n/30.

2) Entry under Net Method:

Date	Account Name	Debit	Credit
1.	Merchandise Inventory	$980
	To Accounts Payable		$980

( $ 1000 × ( 100% - 2%)

2) As Net method assumes, discount would be taken by purchaser, purchase are recored at net of discounting.

3) If discount is not taken, than entry would be

Date	Account Name	Debit	Credit
1.	Discount Lost ( $ 10000× 2%)	$20
	To Accounts Payable		$20

Where is it on a multiple step income statement?

Ans:

1) Discount lost is shown in income statement only when net method is used.

2) It is shown under the heading of Non operating. income and expenses either as interest expense or a financing charge since the purchaser was apparently unable to remit the cash price of $980 within the discount period.