Problem 18 - Accounting

Question

Newgen Company purchased merchandise on account from a supplier for \(\$ 9,000\), terms \(2 / 10, \mathrm{n} / 30\). Newgen Company returned \(\$ 1,200\) of the merchandise and received full credit. a. If Newgen 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 Newgen Company to record the return?

Step-by-Step Solution

Answer

a. $7,644 b. "Inventory" account

Step 1: Understand the Discount Terms

The invoice states that Newgen Company will receive a 2% discount if the invoice is paid within 10 days. This means for every $100, $2 is taken off if paid early. The net amount is due within 30 days with no discount.

Step 2: Calculate the Net Purchase Amount

Newgen initially purchased merchandise worth $9,000. However, they returned $1,200 worth of goods. So, the net purchase amount becomes $9,000 - $1,200 = $7,800.

Step 3: Apply the Discount

Having calculated the net amount at \(7,800, Newgen is eligible for a 2% discount if payment is made within 10 days. The discount is calculated by multiplying the net amount by 2%, i.e., \[ 0.02 imes 7,800 = 156 \]Thus, the discount is \)156.

Step 4: Calculate the Cash Payment Required

Subtract the discount from the net purchase amount to find the cash required. Thus, \[ 7,800 - 156 = 7,644 \]Therefore, Newgen Company needs to pay $7,644 if they pay within the discount period.

Step 5: Determine the Account Credited for the Return

Under a perpetual inventory system, merchandise returns are recorded as a reduction in inventory. Therefore, the "Inventory" account is credited when Newgen returns $1,200 worth of merchandise to the supplier.

Key Concepts

Merchandise Return

When a buyer returns merchandise to a seller, it's known as a merchandise return. This can happen for various reasons, such as defects, overstocking, or simply the wrong items being sent. The process of returning goods impacts both the buyer and seller's accounts, especially in a perpetual inventory system.

The perpetual inventory system continuously updates inventory records. When merchandise is returned, the buying company must "credit" their inventory account. This reflects the decrease in inventory due to the returned items. For instance, Newgen Company returned $1,200 worth of merchandise to their supplier. This means they updated their inventory records to show $1,200 less in stock.

In this way, every merchandise return under a perpetual inventory system directly affects the inventory figures. It ensures that the inventory records are always accurate and up-to-date.

Purchase Discounts

Purchase discounts are incentives for buyers to pay their invoices sooner. Terms might look like "2/10, n/30," where "2/10" means a 2% discount if paid within 10 days, while "n/30" implies the full (net) amount is due in 30 days without a discount. Such discounts encourage faster payments benefiting the seller's cash flow.

In Newgen's case, they could take a 2% discount on their adjusted net purchase amount of \(7,800. Calculating 2% of \)7,800, we have \( 0.02 \times 7,800 = 156 \). Thus, the discount is \(156.

By taking advantage of this purchase discount, Newgen reduces their payment from \)7,800 to $7,644. Leveraging such discounts can be an effective way for companies to save money and manage expenses efficiently.

Accounting for Inventory

Accounting for inventory involves keeping continual track of all inventory movements. In a perpetual inventory system, every purchase or return is updated instantly in the inventory records. This provides real-time visibility into stock levels, which is critical for businesses to ensure they know how much inventory they have

This is different from a periodic inventory system, where updates are only made at the end of an accounting period. The perpetual system captures every transaction, like purchases, sales, returns, and discounts, as they occur.

For Newgen, under this system, when they returned $1,200 worth of merchandise, inventory records immediately reflected this reduction. It ensures businesses can make strategic decisions based on accurate data. This real-time updating helps in maintaining optimal inventory levels and planning for future purchases efficiently.