Question

On August 1, our company purchases $1,000 worth of merchandise inventory on credit with the terms 2/10, n/30. What is the amount we would credit to cash if we pay this invoice on August 12?
a. $1,000
b. $998
c. $990
d. $980

Answer 1

Answer:

a) $1,000

Explanation:

Early Settlement Discount

This form of quotation is common with suppliers offering their customers deferred payment arrangement in a sale contract. Usually, under this arrangement customers are allowed to purchase goods on credit and settle their acccount at a specified  later date.

However, to encourage customers to pay up their outstanding earlier than expected, suppliers do offer early settlement discount as incentives to induce prompt payment.

A quotation of 2/10, n/30

This implies that the customer is a given a 30-day period from the date of purchase within which he is expected to settle his account. However, if he does so within the next 10 days of purchase he will be given a 2% discount.

Applying this to the question, the purchase date is August 1, the the latest date for which account is settle to qualify for early settlement discount will be 11 days i.e (1+10) .

Since the payment will be made on August 12, no cash discount will received. Therefore, a payment of gross amount of $1,000 would be credited to the cash account.