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Recording Cash Discounts Schrand Corporation purchases materials from a supplier that offers credit terms of 2/15, n/60. It purchased $12,500 of merchandise inventory from that supplier on January 20, 2019. Required a. Assume that Schrand Corporation paid the invoice on February 15, 2019. Prepare journal entries to record the purchase of this inventory and the cash payment to the supplier using the net-of-discount method.

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Answer:

Schrand Corporation

Journal Entries:

January 20, 2019:

Debit Inventory $12,500

Credit Accounts Payable $12,250

Credit Purchase Discounts $250

To record the purchase of inventory on credit terms, 2/15, n/60.

February 15,. 2019:

Debit Discount Lost Expense $250

Credit Accounts Payable $250

To record the loss of discount following late payment.

Debit Accounts Payable $12,500

Credit Cash Account $12,500

To record the payment for purchase.

Explanation:

a) Data and Calculations:

Inventory purchase on January 20, 2019 = $12,500

Credit terms = 2/15, n/60

Net-of-discount purchase = $12,250 ($12,500 - 250)

Payment of invoice on February 15, 2019 = $12,500

b) The difference between the net and gross discount methods is that under the gross discount method, the purchases and Accounts Payable are  initially recorded at full value.  On the other hand, under the net discount method, the purchases and Accounts Payable are initially recorded at a reduced value.

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