Kitchen Electrics uses a perpetual inventory system. The following are three recent merchandising transactions:
Apr. 10 Purchased 10 refrigerators from Polar Co. on account. Invoice price, $600 per unit, for a total of $6,000. The terms of purchase were 2/10, n/30.
Apr. 15 Sold one of these refrigerators for $900 cash.
Apr. 20 Paid the account payable to Polar Co. within the discount period.
Instructions
a. Prepare journal entries to record these transactions assuming that Kitchen Electrics records purchases of merchandise at:
1. Net cost
2. Gross invoice price
b. Assume that Kitchen Electrics did not pay Polar Co. within the discount period but instead paid the full invoice price on May 10. Prepare journal entries to record this payment assuming that the original liability had been recorded at:
1. Net cost
2. Gross invoice price
c. Assume that you are evaluating the efficiency of Kitchen Electric’s bill-paying procedures. Which accounting method—net cost or gross invoice price—provides you with the most useful information? Explain.