Question

Moreland Moldings purchased goods on credit costing $85,000 with terms of 3/10 n/30. Payment is made to the seller 7 days after the purchase. How would the payment be recorded?

Answer 1

Moreland Moldings made a payment of $82,450, taking advantage of the 3% discount for paying within 10 days. The accounting records would show a debit to Cash and a credit to Purchase Discounts for the discount amount, while Accounts Payable would be credited the original amount.

Step-by-step explanation:

Moreland Moldings purchased goods on credit for $85,000 with the terms of 3/10 n/30. This means that the company could take a 3% discount if the payment was made within 10 days; otherwise, the net amount is due in 30 days. Since the payment was made 7 days after the purchase, Moreland Moldings is entitled to the discount. Thus, they would pay 97% of the $85,000.

To calculate the payment with the discount:

3% of $85,000 = 0.03 × $85,000 = $2,550

Amount to pay after discount = $85,000 – $2,550 = $82,450

When recording the payment, two entries would be made in Moreland Moldings' accounting records:

1. Accounts Payable would be credited by the full amount owed of $85,000.
2. Cash would be debited by the amount paid, $82,450 and Purchase Discounts would be credited by the discount taken, $2,550.