Question

Rudy Company on December 15 sells merchandise on account to Glow Co. for $5,000, terms 3/10, n/30. On December 20, Glow Co. returns merchandise worth $2,100 to Rudy Company. On December 23, payment is received from Glow Co. for the balance due. What is the amount of cash received?

Answer 1

Before diving into the solution, you should know what "terms 3/10, n/30" means. It means that the customer is eligible for a 3% cash discount, if payment is made within 10 days from sale. Otherwise the amount is payable in 30 days. Please note that this 3% is calculated on net purchase, that is purchase less purchase returns and allowances.

Purchase on December 15 = $5,000

Purchase return on December 20 = $2,100

Thus, Net purchase = $5,000 - $2,100 = $2,900

Since payment is done within 10 days, Glow company is eligible for 3% cash discount

Cash Discount = Net purchase x 3% = $2,900 x 3% = $87

Cash received by Rudy Company = Net purchase - Cash Discount = $2,900 - $87 = $2,813