Question

Santa Fe Retailing purchased merchandise "as is" (with no returns) from Mess Wholesalers with credit terms of 3/10, n/60 and an invoice price of $24,000. The merchandise had cost Mesa $16,368. Assume that both buyer and seller use a perpetual inventory system and the gross method.

1. Prepare entries that the buyer records for the (a) purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period.
2. Prepare entries that the seller records for the (a) sale, (b) cash collection within the discount period, and (c) cash collection after the discount period.

Answer 1

When buying merchandise on credit, Santa Fe Retailing would record the purchase by debiting Merchandise Inventory and crediting Accounts Payable. If Santa Fe Retailing pays within the discount period, they would debit Accounts Payable, Purchase Discounts, and credit Cash. If Santa Fe Retailing pays after the discount period, they would debit Accounts Payable and credit Cash. On the seller's side, when selling merchandise on credit, they would debit Accounts Receivable and credit Sales Revenue. If the buyer pays within the discount period, they would debit Cash, Sales Discounts Forfeited, and credit Accounts Receivable. If the buyer pays after the discount period, they would debit Cash and credit Accounts Receivable.

Step-by-step explanation:

Buyer's Entries:

1. (a) Purchase: Debit Merchandise Inventory $24,000 and Credit Accounts Payable $24,000. This records the purchase of merchandise on credit.
2. (b) Cash Payment within Discount Period: Debit Accounts Payable $23,280, Debit Purchase Discounts $720, and Credit Cash $24,000. This records the payment made by the buyer within the discount period.
3. (c) Cash Payment after Discount Period: Debit Accounts Payable $24,000 and Credit Cash $24,000. This records the payment made by the buyer after the discount period.

Seller's Entries:

1. (a) Sale: Debit Accounts Receivable $24,000 and Credit Sales Revenue $24,000. This records the sale of merchandise on credit.
2. (b) Cash Collection within Discount Period: Debit Cash $23,280, Debit Sales Discounts Forfeited $720, and Credit Accounts Receivable $24,000. This records the cash collection made by the seller within the discount period.
3. (c) Cash Collection after Discount Period: Debit Cash $24,000 and Credit Accounts Receivable $24,000. This records the cash collection made by the seller after the discount period.