On December 1, 2016, Lynch Incorporated sold $18,000 of merchandise with terms 2
ID: 2542043 • Letter: O
Question
On December 1, 2016, Lynch Incorporated sold $18,000 of merchandise with terms 2/10, n/EOM. On December 11, 2016, collections were made on sales originally billed for $12,000, and on December 31, 2016, additional collections on sales originally billed for $5,000 were received.
Required:
1. Prepare the journal entries to record the sale, collections, and any required year-end adjustments assuming that Lynch records accounts receivable and sales at (a) the gross price and (b) the net price.
2. Next Level Assume that Lynch’s customer does not have the available cash to pay Lynch within the discount period. How much interest should the customer be willing to pay for a loan to permit them to take advantage of the discount period (assume no additional costs to the loan)?
3. Next Level Explain why Lynch’s granting of cash (sales) discounts may improve cash flow.
Prepare the journal entries to record the sale, collections and any required year-end adjustments assuming that Lynch records accounts receivable and sales at the net price.
NEXT LEVEL:
Assume that Lynch’s customer does not have the available cash to pay Lynch within the discount period. How much interest should the customer be willing to pay for a loan to permit them to take advantage of the discount period (assume no additional costs to the loan)?
The customer would have to pay Lynch _______days sooner to take advantage of the 2% discount. Assuming 365 days in a year, 2% interest for days is equivalent to an annual interest rate of ________________. Therefore, with the assumption of no additional costs to the loan, any loan at a rate below [Correct] this rate would be advantageous for Lynch’s customer.
Explanation / Answer
a) Journal Entries under Gross Method
b) Journal Entries under Net Method
2. The customer would have to pay Lynch 20 (31.12.2016-11.12.2016) days sooner to take advantage of the 2% discount. Assuming 365 days in a year, 2% interest for days is equivalent to an annual interest rate of 37.24% p.a. Therefore, with the assumption of no additional costs to the loan, any loan at a rate below 37.24% p.a. would be advantageous for Lynch’s customer.
Discount amount if paid within 10 days = 18,000*2%= 360
Cash to be paid within 10 days/ Loan to be availed =18,000-360= 17,640
Rate of interest =360*365/17,640/20= 37.24% p.a.
3. With cash discount policy, company will have more working capital which it can utilise for
1.12.2016 Recording of Sales 1. Accounts Receivable 18,000 To Sales 18,000 11.12.2016 Payment received within 10 days 2. Cash 11,760 Discount allowed (12000*2%) 240 To Accounts Receivable 12,000 31.12.2016 Additional payment received 3. Cash 5,000 To Accounts receivable 5,000Related Questions
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