Merchandising Transactions
The following is a series of related transactions between Hip Pants and Sleek, a chain of retail clothing stores:
Oct. 12 | Hip Pants sold Sleek 300 pairs of pants on account, terms 1/10, n/30. The cost of these pants to Hip Pants was $20 per pair, and the sales price was $60 per pair. |
Oct. 15 | Wings Express charged $50 for delivering this merchandise to Sleek. These charges were split evenly between the buyer and the seller and were paid immediately in cash. |
Oct. 16 | Sleek returned four pairs of pants to Hip Pants because they were the wrong size. Hip Pants allowed Sleek full credit for this return. |
Oct. 22 | Sleek paid the remaining balance due to Hip Pants within the discount period. |
Both companies use a perpetual inventory system.
Instructions
a. Record this series of transactions in the general journal of Hip Pants. (The company records sales at gross sales price.)
b. Record this series of transactions in the general journal of Sleek. (The company records purchases of merchandise at net cost and uses a Transportation-in account to record transportation charges on inbound shipments.)
c. Sleek does not always have enough cash on hand to pay for purchases within the discount period. However, it has a line of credit with its bank, which enables Sleek to easily borrow money for short periods of time at an annual interest rate of 12 percent. (The bank charges interest only for the number of days until Sleek repays the loan.) As a matter of general policy, should Sleek take advantage of 1/10, n/30 cash discounts even if it must borrow the money to do so at an annual rate of 12 percent? Explain fully—and illustrate any supporting computations.
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