Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an e
ID: 2454237 • Letter: R
Question
Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a... CP 5-2 Purchases discounts and accounts payable Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a conversation between Cam Pfeifer and Mitzi Wheeler, the chief accountant for Rustic Furniture Co.
Cam: Mitzi, I’ve got a question about this recent balance sheet.
Mitzi: Sure, what’s your question?
Cam: Well, as you know, I’m applying for a bank loan to finance our new store in Garden Grove, and I noticed that the accounts payable are listed as $320,000.
Mitzi: That’s right. Approximately $275,000 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc.
Cam: That’s what I thought. But as you know, we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount.
Mitzi: That’s right. I can’t remember the last time we missed a discount.
Cam: Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let’s list the accounts payable due suppliers as $314,500, rather than $320,000. Every little bit helps. You never know. It might make the difference between getting the loan and not.
How would you respond to Cam Pfeifer’s request?
Explanation / Answer
Answer:
Here 'we' means Rustic Furniture Co.
1. Here, Cam Pfeifer is suggesting to opt the net method to record the accounts payable.
This can be done only if the purchases were recorded at same amount.
Assuming the same, we can record the Accounts payable at $314,500 [320,000 - (275,000 * 2%)].
Here, if payment is not made earlier then, $ 5,500 (275,000 * 2%) will be recorded as lost purchase discount .
2. If the purchases were not recorded at same amount then what we recorded is correct. (Gross Method)
The Accounts payable recorded at $320,000 and whenever discount is availed it will be treated as purchase discounts.
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