Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10, n/30. Liu Company's cost for the merchandise was $200,000. Vincent Company paid within the discount period. Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices.1. Prepare entries that Vincent should record for (a) the purchase and (b) the cash payment.2. Prepare entries that Liu 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 9% 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.)
What will be an ideal response?
| 1. a. | Merchandise Inventory…………………… | 300,000 | ? |
| ? | Accounts Payable…………………… | ? | 300,000 |
| ? | ? | ? | ? |
| 1. b. | Accounts Payable………………………… | 300,000 | ? |
| ? | Merchandise inventory……………… | ? | 6,000 |
| ? | Cash | ? | 294,000 |
| 2. a. | Accounts Receivable………………… | 300,000 | ? |
| ? | Sales | ? | 300,000 |
| ? | Cost of goods sold…………………………… | 200,000 | ? |
| ? | Merchandise inventory…………………. | ? | 200,000 |
| ? | ? | ? | ? |
| 2. b. | Cash………………………………………….. | 294,000 | ? |
| ? | Sales discounts…………………………… | 6,000 | ? |
| ? | Accounts receivable…………………. | ? | 300,000 |
| ? | Discount = $300,000 * .02 = $6,000 | ? | ? |
3. By borrowing the money on the last day of the discount period and repaying it on the last day of the credit period, the loan would be outstanding for 20 days (30-10). Interest on the loan is calculated at 9% for 20 days. The amount saved is the difference between the discount received for paying on time and the amount of interest expense that would be paid to the bank.
| Discount taken | $6,000.00 |
| Interest expense ($294,000 *.09 * 20/365) | 1,449.86 |
| Amount saved | $4,550.14 |
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What will be an ideal response?