Question

Use for questions 1 and 2:

On April 1, 2020, merchandise subject to terms 2/10, n/30 was sold on account to a customer for $27,000. On April 4, the customer returned $8,500 of the goods and the seller issued a credit memorandum for that amount.  This return occurred prior to payment by the customer.

1. What is the amount of cash required to be paid by the customer if payment is made on April 8, 2020?

2. What is the amount of cash required to be paid by the customer if payment is made on April 21, 2020?

3. Which of the following items represents a product cost that is includable in the value of inventory on the balance sheet?

a. Transportation-in cost on merchandise purchased from suppliers.
b. Commission paid to a salesperson at the time of a sale of goods.
c. Transportation-out cost on goods delivered to customers.
d. None of the above.

4. When the costs of inventory purchases are falling but sales prices to customers remain constant,

a. LIFO will result in lower gross margin, lower net income and a lower ending
    inventory valuation than will FIFO.
b. LIFO will result in higher gross margin, higher net income and a lower ending
    inventory valuation than will FIFO.
c. LIFO will result in higher gross margin, higher net income and a higher ending
    inventory valuation than will FIFO.
d. LIFO will result in higher net income and a higher ending inventory valuation than
    will FIFO, but gross margin will be the same under both FIFO and LIFO.

Answer 1

Question 1 & 2

Net sales = $ 27,000 - $ 8,500 = $ 18,500

The terms 2/10 n/30 indicates that if payment is made in 10 days, cash discount of 10% can be availed. Else, the payment should be made in 30 days

Amount of cash paid if payment is made on April 8

= $ 18,500 * 98%

= $ 18,130

Amount of cash paid if payment is made on April 21

= $ 18,500

Question 3: Option A

Transportation-in cost on merchandise purchased from suppliers is cost incidental to bringing the asset its existence to use and hence capitalized.

Question 4: Option C

If LIFO is used in the situation stated:

(a) Closing Inventory value is higher when compared to FIFO

(b) Net income will be higher when compared to FIFO because of higher inventory value.

(c) Gross margin will also be higher due to increased income when compared to FIFO