Direct materials were purchased, on account, FOB destination, from Yomoto Steel,

Question

Direct materials were purchased, on account, FOB destination, from Yomoto Steel, Incorporated. The credit terms are 2/10, n/30. The invoice prices are net of discount. Invoice Number: Y2588. Job Number: Job 32. Vendor Number: 28500.

To calculate the gross price, divide the net amount by 1 minus the discount rate (1 - .02): Gross price = $2,346.00 / 0.98 = $2,393.88. If the discount of $47.88 ($2,393.88 - $2,346.00) is lost due to missing payment by the end of the credit period, it will be recognized as a Discount Lost when the invoice is paid.

Summerset Manufacturing uses the NET method to record all purchases of direct materials. All direct materials will be purchased on account and credited to Accounts Payable. All purchases from vendors who extend cash discounts are recorded at the NET cost (the list price less the discount). Example: An inventory item with a $1,200 list price and extended terms of 2/10, n/30 will be recorded as a debit to Raw and In-Process Inventory for $1,176 ($1,200 x .98). As each purchase invoice is paid on time, Accounts Payable will be debited and Cash credited. On the rare occasion when a vendor offers a cash discount is, through error, not paid within the discount period, the discount lost will require a debit to the Discounts Lost account and a credit to the Accounts Payable account. This credit to Accounts Payable will adjust the balance ow ed to the vendor to the full balance due (at list prices).

How would I journal this?

Explanation / Answer

Account Title Debit Credit $ $ Raw and In-process inventory 2,346 Accounts payable 2,346 To record purchase net of discount Accounts payable 2,346 Cash 2,346 To record payment of account payable within due date Accounts payable 2,346 Purchase discount lost 47.88 Cash 2,393.88 To record payment of accounts payable beyond due date and to recognize discount lost

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