Problem 17 - Accounting

Question

Merchandise is sold on account to a customer for \(\$ 9,200\), terms \(\mathrm{FOB}\) shipping point, \(2 / 10\), \(\mathrm{n} / 30\). The seller paid the transportation costs of \(\$ 638\). Determine the following: (a) amount of the sale, (b) amount debited to Accounts Receivable, (c) amount of the discount for early payment, and (d) amount due within the discount period.

Step-by-Step Solution

Answer

(a) \$9,200, (b) \$9,200, (c) \$184, (d) \$9,016.

Step 1: Calculate the Amount of the Sale

The sale amount is the price at which the goods are sold to the customer. Here, the merchandise is sold for \\(9,200. Therefore, the amount of the sale is \\)9,200.

Step 2: Calculate the Amount Debited to Accounts Receivable

Under the terms \(\mathrm{FOB}\) shipping point, the buyer is responsible for shipping costs, hence these shouldn't affect the Accounts Receivable. Therefore, the amount debited to Accounts Receivable remains the original sale amount, \$9,200.

Step 3: Determine the Amount of the Discount for Early Payment

The payment terms \(2/10, \mathrm{n}/30\) indicate a 2% discount if paid within 10 days. Compute the discount as \(0.02 \times 9,200 = \$184\).

Step 4: Calculate the Amount Due Within the Discount Period

If the customer pays within the discount period, they will deduct the discount from the original invoice amount. Thus, the amount due would be \(9,200 - 184 = \$9,016\).

Key Concepts

FOB Shipping Point

When goods are sold with FOB (Free On Board) shipping point terms, ownership is transferred from the seller to the buyer as soon as the goods have left the seller's shipping dock. This means the buyer is responsible for the goods during transit, and they bear any shipping costs. In the exercise, since the merchandise is sold FOB shipping point, once shipped, the risk transfers to the buyer. Even though the seller paid the transportation costs, under FOB shipping point, the buyer should ultimately cover these expenses, accounting for them separately and not influencing the Accounts Receivable.

This concept ensures clear delineation of responsibilities and financial obligations in a transaction, as it directly affects how companies account for shipping expenses and risks involved in transporting goods.

Discount Terms

Discount terms specify the conditions under which a buyer can reduce their payment amount. Commonly seen in formats like "2/10, n/30", these signify that a 2% discount is offered if payment is made within 10 days, and the net amount is due in 30 days.

In the given problem, these terms allow the buyer to pay less than the invoice if the prompt payment is done. These incentives encourage quicker payments, benefiting the seller with improved cash flow. Knowing how to read and interpret these terms is essential for both buyers and sellers in efficiently managing their finances.

Merchandise Sale

The concept of a merchandise sale involves transferring goods from a seller to a buyer in exchange for money. In the scenario provided, the seller sold the merchandise for $9,200. This amount is recorded at the point of sale as revenue.

In accounting terms, it is crucial that this amount correctly reflects on the financial statements. Here, it affects the seller's Accounts Receivable, indicating that this amount is to be received from the buyer. Different sales terms can influence this recording, such as the inclusion of discounts, shipping costs, or any return policies. Understanding these nuances is vital for precise financial reporting.

Early Payment Discount

An early payment discount serves as a financial incentive for buyers to pay their invoices before the due date. In our exercise, this discount is set at 2% if paid within the first 10 days.

The formula to calculate this discount is straightforward: Multiply the total invoice amount by the discount rate. For the $9,200 sale, the discount is $184, reducing the payment to $9,016 if paid within the discount period.

• Encourages faster invoice settlement.
• Improves seller cash flow.
• Offers financial benefits to both parties involved.

This mutually beneficial system is essential for efficient cash management and financial planning.