Question

Recording Cash Discounts

Schrand Corporation purchases materials from a supplier that offers credit terms of 1/15, n/60. It purchased $15,000 of merchandise inventory from that supplier on January 20, 2016.

Required

a. Assume that Schrand Corporation paid the invoice of February 15, 2016. Prepare journal entries to record the purchase of this inventory and the cash payment to the supplier using the net-of-discount method.

General Journal

	Description	Debit	Credit
1/20	Inventory		0
	Accounts Payable	0
2/15	Accounts Payable		0
	Interest expense- discounts lost		0
	Cash	0

b. Set up the necessary T-accounts and post the journal entries from question "a' to the accounts.

c. Compute the cost of a lost discount as an annual percentage rate.

ANS.

Round your answer to one decimal place.

Answer 1

credit terms of 1/15, n/60.
discount of 1% will be provided if the payment is made within 15 days from the date of the invoice. If no, the due is to be cleared within 60 days from the date of invoice
Jan-20	purchases
Feb-15	paid
>15days	hence no discount availed
purchase	15000
discount at 1%	150
net purchase price	14850

General Journal

	Description	Debit	Credit
1/20	Inventory	14850	0
	Accounts Payable	0	14850
2/15	Accounts Payable	14850	0
	Interest expense- discounts lost	150	0
	Cash	0	15000

cash
	Feb-15	by accounts payable	14850
		by interest expense(disc. Lost)	150
15000			15000
account payable
Feb-15	to cash	14850	Jan-20	byinventory	14850
inventory
Jan-20	to account payable	14850			14850
interest expense
15-Feb	to cash	150			150

cost of lost discount as an annual %	=	discount%/(1-discount%)	*	360/(allowed time-discount time)
		1%/(1-1%)	*	360/(60-15)
		0.010101	*	8
	=	8%

HOPE THIS WAS HELPFUL. A LOT OF EFFORT HAS BEEN PUT INTO THIS TO MAKE IT EASILY UNDERSTANDABLE. INCASE OF DOUBTS, GET BACK TO ME. DO CONSIDER GIVING THIS A THUMBS UP.