Question

On November 15, 2015, Shields Company purchased inventory costing $12,400 on credit. The credit terms were 1/10, n//30.

a. Assume that Shields Company paid the invoice on November 23, 2015. Prepare journal entries to record the purchase of this inventory and the cash payment to the supplier using the net-of-discount method.

General Journal
Date	Description	Debit	Credit
11/15	Inventory	Answer 12,276	Answer 0
	Accounts Payable	Answer 0	Answer 12,276
11/23	Accounts Payable	Answer 12,276	Answer 0
	Cash	Answer 0	Answer 12,276

b. Set up the necessary T-accounts and post the journal entries from question a. to the accounts.

Cash
	Answer 0	Answer 12,276

Inventory
	Answer 12,276	Answer 0

Accounts Payable
	Answer 12,276	Answer 12,276

c. Compute the cost of a lost discount as an annual percentage rate. Round answer to one decimal place (i.e., 34.6%).

Answer

%

Answer 1

c. Cost of a lost discount = [D/(1 – D)] x [365/(F – L)]

Where, D = 0.01; F = 30 days; L = 10 days

Cost of a lost discount = [0.01/(1 – 0.01)] x [365/(30 - 10)] = [0.01/0.99] x [365/20] = [0.01/0.99] x 18.25 = 18.4%