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Chapter 5: Problem 4

Accounting for Purchase Discounts Kurt Company purchased \(\$ 5,000\) of merchandise from Marilyn Company with terms of \(2 / 10 \mathrm{n} / 40\). What percent discount will Kurt Company get if it pays within the allowed discount period? If Kurt Company fails to pay within the discount period, how many days does Kurt Company have from the date of purchase before the payment is considered to be late?

Short Answer

Expert verified
A 2% discount is available. Payment is not late until after 40 days.

Step by step solution

01

Understand the Purchase Terms

The terms "2/10, n/40" indicate that a 2% discount is available if payment is made within 10 days. The full payment is due in 40 days, after which it is considered late.
02

Calculate the Discount Percent

The discount provided is described as "2/10", which signifies a 2% discount if the payment is made within 10 days. Therefore, Kurt Company will receive a 2% discount.
03

Calculate the Payment Period without Discount

The term "n/40" specifies that the full amount is due in 40 days. If the payment is not made within the 10-day discount period, Kurt Company has up to 40 days to pay without being considered late.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Discount Period
The discount period refers to the timeframe within which a buyer can make a payment to receive a discounted price. In our example, Kurt Company has the opportunity to pay less for the merchandise if they complete the transaction within 10 days. This period is crucial for businesses, as it encourages early payment and can improve cash flow. Businesses often offer a discount period as an incentive. This not only helps the buyer to save money but also ensures that the seller receives their payment faster. If Kurt Company pays within this 10-day window, they'll receive a 2% discount, minimizing their purchase cost from $5,000 to $4,900.
Payment Terms
Payment terms outline the conditions and schedule under which a buyer must pay a seller. These terms help manage expectations and provide clarity. In the example with Kurt Company, the terms are described as "2/10, n/40". This means:
  • A 2% discount is available if paid within 10 days.
  • If the discount is not taken, the net amount is due in 40 days.
Payment terms are essential for both parties to avoid misunderstandings and ensure fair play. They also help businesses plan their finances more efficiently, knowing exactly when payments are due.
Financial Accounting
Financial accounting involves tracking and summarizing financial transactions in a systematic manner. Understanding components like purchase discounts is a key part of this process. When a purchase discount is applied, it's recorded in the accounting books to reflect the reduced amount paid. This means that both the buyer and seller will show this discount on their records, affecting the company's financial statements. Effective financial accounting helps businesses gain insights into their cash flow and profitability, influencing strategic decision-making.
Merchandise Purchases
Merchandise purchases are a fundamental aspect of business operations for companies that deal in goods. These purchases refer to acquiring products for resale or use in production. For Kurt Company, purchasing merchandise from Marilyn Company is not just a transaction. It impacts their inventory levels and financial reporting. The terms of the purchase, including any discounts, play a significant role in determining the total cost and cash flow management. Understanding these transactions is vital for maintaining optimal inventory levels and ensuring that the business runs smoothly.

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Most popular questions from this chapter

Define gross profit percentage. How is this percentage used by analysts and investors?

Jefferson \& Sons purchased \(\$ 5,000\) of merchandise from the Claremont Company with terms of \(3 / 10, \mathbf{n} / 30\). How much discount is Jefferson \& Sons entitled to take if it pays within the allowed discount period of 10 days? a. \(\$ 50\) b. \(\$ 100\) c, \(\$ 150\) d. \(\$ 300\)

Revenue Recognition Standard-Adjusting Journal Entries During the year, Carrie Corporation sells merchandise on account totaling \(\$ 4,000,000\) with a cost of merchandise to Carrie of \(\$ 2,000,000\). Carrie offers its customers credit terms of \(1 / 15, n / 30\). Carrie recognizes that there are \(\$ 410,000\) of sales on account still eligible for the 1 percent discount at year-end and believes that all companies will pay within the discount period. Additionally, Carrie allows a 90 -day return privilege for the merchandise it sells. At year-end, Carrie estimates sales of \(\$ 1,200,000\) (with a cost to Carrie of \(\$ 600,000\) ) remain that are still within the 90 -day return period. From past experience, 6 percent of this merchandise is expected to be returned. Prepare the period-end adjusting journal entries needed for Carrie Corporation to comply with the revenue recognition standard. Carrie Corporation's fiscal year-end is December 31 .

Describe the three primary transactions in the operating cycle of a merchandising firm.

Daniel Co. uses the periodic inventory system. When goods are purchased, Daniel will: a. debit freight costs to Inventory. b. debit purchase returns and allowance for returned items. c. debit the Purchases account for purchases on account. d. debit the Inventory account for purchases on account.
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