(Comparision of Net Cost and Gross Price Methods) Mary\'s TV uses a perpetual in
ID: 2450525 • Letter: #
Question
(Comparision of Net Cost and Gross Price Methods)
Mary's TV uses a perpetual inventory system. The following are three recent merchandising transactions:
March 6: Purchased eight TVs from Whosa Industries on account. Invoice price $350 per unit, for a total of $2800. The terms of purchase were 2/10, n/30.
March 11: Sold two of these televisions for $600 cash.
March 16: Paid the account payable to Whosa Industries within the discount period.
Instructions:
Part A.
Prepare journal entries to record these transactions assuming that Mary's records purchases of merchandise at:
1. NET COST
2. Gross Invoice
Part B.
Assume that Mary's did not pay Whosa Industries within the discount period but instead paid the full invoice price on April 6. Prepare journal entries to record this paymnet assuming that the original liability had been recorded at:
1. Net Cost
2. Gross Invoice Price
Part C.
Assume that you are evaluating the efficiency of Mary's bill-paying procedures. Which accounting method-net cost or gross invoice price - provides you with the most usefule information? Explain?
Explanation / Answer
Prepare journal entries to record these transactions assuming that Mary's records purchases of merchandise at:
1. NET COST
2. Gross Invoice
Part B.
Assume that Mary's did not pay Whosa Industries within the discount period but instead paid the full invoice price on April 6. Prepare journal entries to record this paymnet assuming that the original liability had been recorded at:
1. Net Cost
2. Gross Invoice Price
Part C.
Assume that you are evaluating the efficiency of Mary's bill-paying procedures. Which accounting method-net cost or gross invoice price - provides you with the most usefule information? Explain?
The net cost method provides more useful information for evaluating the company’s efficiency in paying it’s bills. The method clearly indicates the lowest price that the company may pay, and separately records any additional costs incurred as purchase discounts lost. Under the gross method, the liability is not recorded at the lowest price at which it can be settled. Therefore, management is not made aware of available discounts that were not taken.
Date Account Title & Explaination Debit Credit March 6 Inventory ( 2800 - 2%*2800) 2744 Accounts Payable - Whosa 2744 March 11 Cash 1200 Sale 1200 Cost of Good Sold 686 Inventory ( 2800 - 2%*2800)*2/8 686 March 16 Accounts Payable - Whosa 2744 Cash 2744Related Questions
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