Question

On May 11, 2014, Wilson Purchasing purchased $28,500 of merchandise from Hostel Sales; terms 1/10, n/90, FOB Hostel Sales. The cost of the goods to Hostel was $23,500. Wilson paid $1,850 to Express Shipping Service for the delivery charges on the merchandise on May 11. On May 12, Wilson returned $4,700 of goods to Hostel Sales, which restored them to inventory. The returned goods had cost Hostel $3,900. On May 20, Wilson mailed a cheque to Hostel for the amount owed on that date. Hostel received and recorded the cheque on May 21.

1.Present the journal entries that Wilson Purchasing should record for these transactions. Assume that Wilson uses a perpetual inventory system. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Present the journal entries that Hostel Sales should record for these transactions. Assume that Hostel uses a perpetual inventory system. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

3. Assume that the buyer, Wilson Purchasing, borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 3% 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. Round intermediate calculations and final answer to 2 decimal places.)

Answer 1

Note: The short term note was borrowed on the last day of discount period,the terms were 1/10,n/90,Therefore 90 days less 10 days leaves 80 days until the end of credit period. The short term note would have been availed for 80 days.