Accounting for purchase discounts.
Otto Corp. purchased merchandise during 2014 on credit for $500,000; terms 2/10, n/30. All of the gross liability except $80,000 was paid within the discount period. The remainder was paid within the 30-day term. At the end of the annual accounting period, December 31, 2014, 90% of the merchandise had been sold and 10% remained in inventory. The company uses a periodic system.

Instructions

(a) Assuming that the net method is used for recording purchases, prepare the entries for the purchase and two subsequent payments.
(b) What dollar amounts should be reported for the final inventory and cost of goods sold under the (1) net method; (2) gross method? Assume that there was no beginning inventory.

Question

Accounting for purchase discounts.
Otto Corp. purchased merchandise during 2014 on credit for $500,000; terms 2/10, n/30. All of the gross liability except $80,000 was paid within the discount period. The remainder was paid within the 30-day term. At the end of the annual accounting period, December 31, 2014, 90% of the merchandise had been sold and 10% remained in inventory. The company uses a periodic system.

Instructions

(a) Assuming that the net method is used for recording purchases, prepare the entries for the purchase and two subsequent payments.
(b) What dollar amounts should be reported for the final inventory and cost of goods sold under the (1) net method; (2) gross method? Assume that there was no beginning inventory.

Quizplus · Accepted Answer

The Answer of Accounting for purchase discounts.
Otto Corp. purchased merchandise during 2014 on credit for $500,000; terms 2/10, n/30. All of the gross liability except $80,000 was paid within the discount period. The remainder was paid within the 30-day term. At the end of the annual accounting period, December 31, 2014, 90% of the merchandise had been sold and 10% remained in inventory. The company uses a periodic system.

Instructions

(a) Assuming that the net method is used for recording purchases, prepare the entries for the purchase and two subsequent payments.
(b) What dollar amounts should be reported for the final inventory and cost of goods sold under the (1) net method; (2) gross method? Assume that there was no beginning inventory.

Accounting for Purchase Discounts