Taos Company purchase merchandise for resale from Tucson Company with an invoice

Question

Taos Company purchase merchandise for resale from Tucson Company with an invoice price of $22,000 and credit terms of 3/10, n/60. The merchandise had cost Tuscon $15,000. Taos paid within discount period. Assume that both buyer and seller use a perpetual inventory system. 1. Prepare entries that the buyer should record for (a) the purchase and (b) the cash payment. 2. Prepare entries that the seller should record for (a) the sale and (b) the cash collection 3. 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 11% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy.

Explanation / Answer

For the purchase; Debit Merchandise Inventory for 22,00 credit Accounts Payable for 22,000 For the payment; Debit Accounts Payable for 22,000 Credit Cash for the amount actually paid Credit Purchase Discount for the amount of the discount Taos (the buyer) purchased the merchandise for $24,700. They paid within the discount period The cash discount was 2% 2% X $24,700 = $494 The buyer's net savings are $494 The saving rate they "earn" by taking advantage of the discount is: 60 - 10 = 50 365 / 50 = 7.3 7.3 X 2% = 14.6% per annum put your values in solved example for correct answer

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