Taos Company purchased merchandise for resale from Tuscon Company with an invoice price of $19,900 and credit terms of 2/10, n/60. The merchandise had cost Tuscon $13,572. Taos paid within the discount period. Assume that both buyer and seller use a perpetual inventory system. 1(a) Prepare entries that the buyer should record for the purchase.

Taos Company purchased merchandise for resale from Tuscon Company with an invoice price of $19,900 and credit terms of 2/10, n/60. The merchandise had cost Tuscon $13,572. Taos paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.

   
1(a)

Prepare entries that the buyer should record for the purchase.

1(b)

Prepare entries that the buyer should record for the cash payment.

 

2(a)

Prepare entries that the seller should record for the sale.

 

2(b)

Prepare entries that the seller should record for the cash collection.

 

3.

Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 11% 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. Round your answer to 2 decimal places.)

 

Explanation: 1b and 2b.

Paid account payable with 2% discount period.

Discount = 19,900 × 2% = 398

    
3.

Amount borrowed to pay with discount	$	19,502
Annual rate of interest		× 11%
Interest per year	$	2,145.22

     

Interest per day ($2,145.22 / 365 days) = $5.88

      

Savings from discount taken ($19,900 − $19,502)	$	398.00
Interest paid on 50-day loan (50 days × $5.88)		(294.00	)
Net savings from borrowing to pay in discount period	$	104.00