Question 3: Presented below are transactions related to Jennings, Inc. May 10 Pu
ID: 2570269 • Letter: Q
Question
Question 3: Presented below are transactions related to Jennings, Inc.
May 10 Purchased goods billed at $20,000 subject to cash discount terms of 2/10, n/60.
11 Purchased goods billed at $18,200 subject to terms of 1/15, n/30.
19 Paid invoice of May 10.
24 Purchased goods billed at $16,500 subject to cash discount terms of 2/10, n/30.
Instructions
(a) Calculate the interest rate implied by the cash discount term of 2/10, n/60.
(b) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense.
(c) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date.
Explanation / Answer
Answer
The term means that if the payment to the bill/invoice is made within 10 days from the date of invoice, the buyer will get a 2% discount on the invoice amount. He will have to pay net amount (full amount) if payment is made within 60 days from the date of invoice.
In the given case, Purchases are made on May 10 of $20000, and its payment is made within 10 days (on may 19). Hence, a 2% discount on $20000 will be given and Jennings Inc will pay for purchases net of that discount.
Amount payable = 20000 – (20000 x 2%) = $19600
Date
General Journal
Dr
Cr
Working (if any)
May 10
Purchases
$19600
20000 – 2%
Accounts payable
$19600
May 11
Purchases
$18018
$18200 – 1%
Accounts payable
$18018
May 19
Accounts payable
$19600
Amount paid
Cash
$19600
May 24
Purchases
$16170
$16500 – 2%
Accounts payable
$16170
Date
General Journal
Dr
Cr
Working (if any)
May 31
Discount lost
$182
$18200 x 1% = $182, discount lost as payment not yet made after 15 days
Accounts payable
$182
No Entry is required for adjustment of “Discount Lost” on May 24 purchases, because discount will be received if payment is made within 10 days, and 10 days have not yet passed till 31st may.
Date
General Journal
Dr
Cr
Working (if any)
May 10
Purchases
$19600
20000 – 2%
Accounts payable
$19600
May 11
Purchases
$18018
$18200 – 1%
Accounts payable
$18018
May 19
Accounts payable
$19600
Amount paid
Cash
$19600
May 24
Purchases
$16170
$16500 – 2%
Accounts payable
$16170
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