Santa Fe Company purchased merchandise for resale from Mesa Company with an invo
ID: 2488201 • Letter: S
Question
Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $21,900 and credit terms of 3/10, n/60. The merchandise had cost Mesa $14,936. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.
Prepare the entries that Santa Fe should record for the above transactions.
3. Assume that the buyer borrowed enough cash topay the balance on the last day of the discount period at an annual interest rate of 8% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Use 365 days a year. Do not round intermediate calculations.)
Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $21,900 and credit terms of 3/10, n/60. The merchandise had cost Mesa $14,936. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.
1.Prepare the entries that Santa Fe should record for the above transactions.
3. Assume that the buyer borrowed enough cash topay the balance on the last day of the discount period at an annual interest rate of 8% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy. (Use 365 days a year. Do not round intermediate calculations.)
Explanation / Answer
1.
Merchandise inventory
$21,900
Accounts payable – Mesa Company
$21,900
Accounts payable – Mesa Company
$21,900
Cash
$21,243
Discount received ($21,900 * 3%)
$657
2.
Amount borrowed for 10 days = $21,243
Interest paid for borrowed funds = $21,243*8%*10/365 = $46.56
Discount received = $657
Net savings = $657 - $46.56 = $610.44
Merchandise inventory
$21,900
Accounts payable – Mesa Company
$21,900
Accounts payable – Mesa Company
$21,900
Cash
$21,243
Discount received ($21,900 * 3%)
$657
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