Problem 18 - Accounting

Question

Hushpuppy Company purchased merchandise on account from a supplier for \(\$ 6,750\), terms \(2 / 10, \mathrm{n} / 30\). Hushpuppy Company returned \(\$ 1,500\) of the merchandise and received full credit. a. If Hushpuppy Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Hushpuppy Company to record the return?

Step-by-Step Solution

Answer

a. \(\$5,145\) is needed for payment within the discount period. b. The 'Inventory' account is credited.

Step 1: Understanding Purchase and Return

Hushpuppy Company initially bought merchandise worth \(\\(6,750\) with terms \(2 / 10, \mathrm{n} / 30\). This means there's a 2% discount if paid within 10 days. Hushpuppy returned \(\\)1,500\) of the merchandise, which reduces the invoice amount to \(\\(6,750 - \\)1,500 = \$5,250\).

Step 2: Calculate Discount Amount

The discount is 2% of the remaining invoice amount (\\(5,250). Thus, the discount is computed as \(0.02 \times \\)5,250 = \$105\).

Step 3: Compute Cash Payment

Deduct the discount from the adjusted invoice amount to find the total cash payment: \(\\(5,250 - \\)105 = \$5,145\). This is the cash Hushpuppy pays if settling within the discount period.

Step 4: Identify Account Credited

In a perpetual inventory system, when merchandise is returned, the inventory account is adjusted. Hushpuppy records the return by crediting the 'Inventory' account as the returned merchandise reduces inventory.

Key Concepts

Merchandise Discount

When businesses purchase goods, they often have the opportunity to save money through merchandise discounts. In this example, the terms were \(2/10, \; \mathrm{n}/30\). This means Hushpuppy Company could avail a 2% discount if they paid the invoice within 10 days. Such discounts encourage prompt payment and benefit both the buyer and the seller.

A merchandise discount can significantly reduce purchase costs. For instance, after returning some merchandise, the payable amount was \(\\(5,250\). With the 2% discount for early payment, Hushpuppy Company reduced their payment by \(\\)105\), resulting in a final cash payment of \(\$5,145\).

These discounts are a savvy business move, especially for companies looking to manage cash flows efficiently while maintaining good relationships with suppliers.

Perpetual Inventory System

The perpetual inventory system is a method where inventory records are updated in real-time with every purchase or sale. This continuous update helps businesses maintain accurate inventory levels at any given time. For companies like Hushpuppy, this means that they always know exactly how much stock they have, improving their ability to manage stock effectively.

In the case of a return, the system requires quick adjustments. When Hushpuppy returned merchandise valued at \(\$1,500\), the inventory records were updated immediately to reflect the change. This is done by crediting the Inventory account to decrease the recorded inventory balance, ensuring that the books are up-to-date.

• Benefits of a Perpetual Inventory System:
• Accurate visibility of inventory levels.
• Real-time updates with each transaction.
• Reduced errors in stock management.

This system streamlines inventory management, making it especially useful for businesses with high-volume transactions.

Return of Merchandise

Returns of merchandise can occur for various reasons, such as defects, wrong shipments, or overstock. When goods are returned, it impacts both the buyer and seller financially and in accounting entries.

For Hushpuppy Company, returning merchandise worth \(\$1,500\) required an adjustment. In a perpetual inventory system, the company's Inventory account is credited. Credit entries lower the inventory value, representing the decrease in goods available.

Having a clear procedure for returns safeguards against inventory discrepancies. It also ensures financial records are accurate, as well-balanced books reflect the business's true financial position. Businesses should aim to handle merchandise returns efficiently to minimize disruptions and maintain a smooth operations flow.