Question

During 2020, which was the first year of operations, Sunland Company had merchandise purchases of $977000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

Which of the following recording procedures would result in the highest net income for 2020?

1. Recording purchases at gross amounts
2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other expenses" in the income statement

1.

2.

Either 1 or 2 will result in the same net income.

Cannot be determined from the information provided.

Answer 1

When purchases are recorded at gross amounts, the amount of purchases and discounts are need to separately disclosed in income statement. That would mean $ 977000 and discount applicable as payment made within 10 days would be separately disclosed. Discount earned would be credited to income statement.

On the other hand, if purchases are shown as net purchases, discount would be deducted from gross purchases instead of crediting it to income statement. The result would be the same amount for purchases less discount earned.

Hence, Correct option would be Either 1 or 2 will result in the same net income