Taos Company purchased merchandise for resale from Tuscon Company with an invoic

Question

Taos Company purchased merchandise for resale from Tuscon Company with an invoice price of $22,000 and credit terms of 3/10, n/60. The merchandise had cost Tuscon $15,000. Taos paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.

1(a)
Prepare entries that the buyer should record for the purchase.

1(b)
Prepare entries that the buyer should record for the cash payment.
2(a)
Prepare entries that the seller should record for the sale.

2(b)
Prepare entries that the seller should record for the cash collection.

3.
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 11% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Use 365 days a year. Round your intermediate calculations and final answer to 2 decimal places.

Explanation / Answer

There are two ways this can be calculated. First of all, it states that the short term note was borrowed on the last day of the discount period. The terms were 3/10, net 60. Therefore, 60 days less 10 days leaves 50 days until the end of the credit period. The short term note would have been for 50 days. Lets calculate the discount on the purchase: (26,600.) (.03) = 798.00 discount So, 26,600. - 798.00 = 25,802.00 Taking advantage of the discount, 25,802.00 would be remitted in payment of the merchandise, saving the buyer 798.00. Now we would have to calculate the interest on the short term note. 25,802. would have been borrowed. So: (25,802.) (.08) (50/365) = 282.76 interest on short term note. So example #1: We saved 798.00 which cost us 282.76 Savings (798.00 - 282.76) = 514.24 rounded 514.00 answer Taking advantage of the discount, plus the interest on the note, the buyer paid: 25,802. + 282.76 = 26,084.76 If we had waited the full 60 days because of being short of funds, our cost of the merchandise would have been 26,600. So: 26,600.00 - 26,084.76 = 514.24 rounded 514.00 answer

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