Parolin Limited purchased equipment for an invoice price of $40,000, terms 2/10, n/30 — 2/10 n/30 — Record the purchase and subsequent payment assuming was made within discount
Parolin Limited purchased equipment for an invoice price of $40,000, terms 2/10, n/30.
(a) Record the purchase of the equipment and the subsequent payment, assuming the payment was made within the discount period.
(b) Repeat (a), but assume the company’s payment missed the discount period.
(c) What would be a good policy or procedure to adopt for purchases of property, plant, and equipment where a discount is offered, and how would it work?
SOLUTION
(a) Purchase:
Equipment
40,000
Accounts Payable
40,000
Payment:
Accounts Payable
40,000
Equipment
800
Cash
39,200
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(b) Purchase:
Equipment
40,000
Accounts Payable
40,000
Payment:
Accounts Payable
40,000
Cash
40,000
Finance Expense
800
Equipment
800
(c) Management should strongly encourage the adoption of a policy or procedure that would require recoding purchases of PPE at the net amount, at date of purchase on account. This would avoid the error of misclassifying the discount forfeited to the asset account instead of Finance Expense as properly shown above.
The following illustrates the entries when the payment is made within the discount period:
Purchase:
Equipment
39,200
Accounts Payable
39,200
Payment:
Accounts Payable
39,200
Cash
39,200
The following illustrates the entries when the payment is not made within the discount period: