Question

5. Gruber & Moore, Inc. properly recorded the purchase of $5,000 of inventory with terms 2/10, n/30 on June 1st. The company paid cash for the goods on June 7th and earned the offered discount. How would the company record the June 7th cash payment in their accounting records assuming use of the perpetual inventory method? a. Debit accounts payable for $5,000, credit cash for $4,900 and credit inventory $100. b. Credit accounts payable for $5,000 and debit cash for $5,000. c. Debit accounts payable for $5,000, credit cash for $4,950 and credit inventory $50. d. Credit accounts payable for $4,950 and debit cash for $4,950. e. Debit accounts payable for $4,900, credit cash for $5,000 and debit inventory $100. 6. What would be the annualized interest rate earned under purchase terms "1/10, net 60" (assuming a 360-day year)? In other words, what is the maximum annualized interest rate a company could borrow at and still be equal to or better off by taking the discount? Show your work.

Answer 1

SOLUTION : 5
	Purchase value of inventory	$                     5,000
	Discount value = $ 5,000 X 2% =	$                        100
	Net Crdit Payment	$                     4,900
	Journal entry of the above will be passed as below,
	Account Title and explanation	Debit	Credit
	Account Payable	$                     5,000
	Cash		$                       4,900
	Inventory		$                           100
	As per above explanation,
	Answer = Option A
SOLUTION : 6
	Buying Term =	1/10	Net 60
	It means if we can pay the amount within 10 Days than there is doscount of 1% is allowed
	otherwise normal credit limit if for 60 days or addittional 45 credit Days
	$ 100 - 1% Of $ 100 = $ 100 - $ 1 =	$                     99.00
	Cost of Trade Credit payment made for 15 Days    =	('$ 100 / $ 99) - 1 for 15 Days
	Cost of Trade Credit payment made for 15 Days    =	1.01	-1
	Cost of Trade Credit payment made for 15 Days    =	0.0101
	Cost of Trade Credit payment made for 15 Days in %	1.01%
	Annualized Interest rate =	1.01 % X 360 / 45 Days
	Annualized Interest rate =	8.08%
	Answer = 8.08%