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During the months of January and February, Axe Corporation purchased goods from

ID: 2730229 • Letter: D

Question

During the months of January and February, Axe Corporation purchased goods from three suppliers. The sequence of events was as follows: Jan. 6 Purchased goods for $1,000 from Green with terms 2.5/10, n/30. 6 Purchased goods from Munoz for $1,100 with terms 3/10, n/30. 14 Paid Green in full. Feb. 2 Paid Munoz in full. 28 Purchased goods for $250 from Reynolds with terms 3/10, n/30. Required: Assume that Axe uses a perpetual inventory system, the company had no inventory on hand at the beginning of January, and no sales were made during January and February. Calculate the cost of inventory as of February 28.

Explanation / Answer

Jan 6 purchases from Green

Cost of purchase = 1000

Discount is applicable as payment is being made within 10 days.

Discount = 1000 x 2.50% = 25

Net cost of purchase = 1000-25 = 975

Jan 6 purchases from Munoz

Cost of purchase = 1100

Discount is not applicable as payment is made after the discount period. So net cost of purchase would be 1,100.

Feb 28 purchases from Reynolds

Cost of purchase = 250

Discount is not applicable as no information about payment is given.

No sale has been made during these two months. So all the purchases would be in stock inventory. Therefore, inventory balance would be:

Inventory = 975 +1100 +250

                    = 2,325

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