Question 1

Stan's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory

Accepted Answer

The company paid the invoice within the discount period, so they get to take the 2% discount. The discount is $20,000 * 0.02 = $400. So the company paid $20,000 - $400 = $19,600 for the merchandise. They also paid $100 for freight, so the total cost of the merchandise is $19,600 + $100 = $19,700. However, they returned $400 of the merchandise, so the final cost of the merchandise is $19,700 - $400 = $19,300.

Question 2

The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will include a credit to

Accepted Answer

The entry will include a credit to Accounts Receivable for the full amount of $750, as this is the original amount owed before the discount. The discount is recorded separately.

Question 3

Rasner Co. returned defective goods costing $3,000 to Markum Company on March 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Rasner Co. on April 19, in receiving full credit is:

Accepted Answer

The answer of Rasner Co. returned defective goods costing $3,000...

Question 4

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

Accepted Answer

Under FOB shipping point terms, the buyer is responsible for the freight costs, which are added to the Merchandise Inventory account in a perpetual inventory system.

Question 5

Geran Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period?

Accepted Answer

The discount offered is 2%, so the discount amount is 2% of $5,000 which is $100 (2% x $5,000 = $100). Therefore, the net cost of the goods if Geran Company pays within the discount period is $5,000 - $100 = $4,900.

Question 6

On July 9, Neal Company sells goods on credit to Al Dolan for $2,500, terms 1/10, n/60. Neal receives payment on July 18. The entry by Neal on July 18 is:

Accepted Answer

The answer of On July 9, Neal Company sells goods...

Question 7

Tony's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $50,000, terms 2/10, n/30.
Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory

Accepted Answer

The answer of Tony's Market recorded the following events involving...

Question 8

Company X sells $400 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check?

Accepted Answer

The discount offered is 2%, and it is offered if the payment is made within 10 days. 
Thus, the discounted amount = 400*(2/100) = $8
The amount to be paid after the discount = 400 - 8 = $392.

Question 9

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in

Accepted Answer

Under the perpetual inventory system, cash freight costs incurred by the buyer are added to the cost of the merchandise inventory.

Question 10

The collection of a $600 account within the 2 percent discount period will result in a

Accepted Answer

The answer of The collection of a $600 account within...

Question 11

A buyer would record a payment within the discount period under a perpetual inventory system by crediting

Accepted Answer

The answer of A buyer would record a payment within...

Question 12

Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point. The freight costs will be paid by the

Accepted Answer

With FOB shipping point, the buyer is responsible for paying the freight costs.

Question 13

If a company is given credit terms of 2/10, n/30, it should

Accepted Answer

The company should take advantage of the discount period and pay the bill within 10 days in order to save money. Paying at the end of the credit period without taking the discount would result in paying the full amount without any savings. Holding off payment for the full credit period and investing the money at 10% interest is not a guaranteed return and may not be worth the risk or effort. Withholding payment until the end of the credit period and negotiating a lower sales price is unethical and could damage the company's reputation and relationship with the supplier.

Question 14

Freight costs paid by a seller on merchandise sold to customers will cause an increase

Accepted Answer

Freight costs paid by a seller on merchandise sold to customers are considered part of the selling expenses, which are a component of the operating expenses for the seller. These costs are not directly related to the production (cost of goods sold) nor are they considered a contra-revenue account or an expense of the buyer.

Question 15

Mather Company made a purchase of merchandise on credit from Underwood Company on August 8, for $9,000, terms 3/10, n/30. On August 17, Mather makes the appropriate payment to Underwood. The entry on August 17 for Mather Company is:

Accepted Answer

The answer of Mather Company made a purchase of merchandise...

Question 16

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

Accepted Answer

In a perpetual inventory system, purchase discounts are recorded by reducing the Merchandise Inventory account, as the inventory is recorded at its net cost.

Question 17

Birk Company sells merchandise on account for $2,000 to Kiner Company with credit terms of 2/10, n/30. Kiner Company returns $400 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

Accepted Answer

The original sale was $2,000. After returning $400 of damaged merchandise, the balance is $1,600. Applying the 2% discount for early payment, the discount is $32 ($1,600 x 0.02). Therefore, the amount of the check is $1,568 ($1,600 - $32).

Question 18

A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is granted on April 28. What amount is received as payment in full on May 4?

Accepted Answer

The original sale is $800, with a $50 return, reducing the amount to $750. The terms 2/10, n/30 mean a 2% discount is available if paid within 10 days. Since payment is made on May 4, within the discount period, the discount is 2% of $750, which is $15. Therefore, the payment received is $750 - $15 = $735.

Question 19

Reese Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

Accepted Answer

The credit terms 2/10, n/30 mean that the buyer can take a 2% discount if they pay within 10 days, or pay the full amount within 30 days. If the buyer takes the discount, they would pay $2,000 * 0.98 = $1,960. The discount is $2,000 - $1,960 = $40.

To find the annual interest rate inherent in the credit terms, we can calculate the effective annual rate (EAR) using the following formula:

EAR = (1 + periodic rate)^m - 1

where periodic rate = discount % ÷ (100% - discount %) and m = 360 ÷ (payment period - discount period)

In this case, the payment period is 30 days and the discount period is 10 days, so m = 360 ÷ (30 - 10) = 18.

The periodic rate = 2% ÷ (100% - 2%) = 2.04%. Plugging these values into the formula, we get:

EAR = (1 + 0.0204)^18 - 1 = 0.3737 or 37.37%

Therefore, the implied annual interest rate is 37.37%, which is closest to choice C.

Question 20

On November 2, 2010, Griffey Company has cash sales of $4,200 from merchandise having a cost of $3,000. The entries to record the day's cash sales will include:

Accepted Answer

The cost of goods sold is recorded by debiting Cost of Goods Sold and crediting Merchandise Inventory for $3,000.

Quiz 5: Accounting for Merchandising Operations