Santa Fe Company purchased merchandise for resale from Mesa Company with an invo

Question

Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $24,000 and credit terms of3/10, n/60. The merchandise had cost Mesa $16,000. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system. Prepare entries that the buyer should recorded for (a) the purchase and (b) the cash payment. Prepare entries that the seller should record for (a) the sale and (b) the cash collection. 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 8% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Assume a 365-day year and round dollar amounts to the nearest cent, including computation of interest per day.)

Explanation / Answer

In books of buyer

In books of seller:

3) Amount borrow = 24000 *.08 * 50 / 365

                                = 263.01

Saved amount = discount availed -interest [paid

                           = 720 - 263.01

                        = 456.99

Date Title Debit credit a Inventory 24000 Accounts payable 24000 [being purchase made on credit] b Accounts payable 24000 cash 23280 Discount received    [24000*.03] 720

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