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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Purchases discounts and accounts payable

Rustic Furniture Co. is owned and operated by Cam Pfeifer. The following is an excerpt from a conversation between Cam Pfeifer and Mitzi Wheeler, the chief accountant for Rustic Furniture Co.:

Cam: Mitzi, I’ve got a question about this recent balance sheet.

Mitzi: Sure, what’s your question?

Cam: Well, as you know, I’m applying for a bank loan to finance our new store In Garden Grove, and I noticed that the accounts payable are listed as $320,000.

Mitzi: That’s right. Approximately $275,030 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc.

Cam: That’s what I thought. But as you know, we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount.

Mitzi: That’s right. I can’t remember the last time we missed a discount.

Cam: Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let’s list the accounts payable due suppliers as $310,500 rather than $320,000. Every little bit helps. You never know. It might make the difference between getting and not getting the loan.

How would you respond to Cam Pfeifer’s request?

To determine

Purchase discount is the amount received as concession by the seller to the buyer for making early payments.

To Discuss: The response to Mr. C’s request.

Explanation

Mr. C is correct. The net value of accounts payable that reported on the balance sheet should be the deducted value after the 2% discount. The net value shows the exact obligation to the suppliers. However, the exact obligation is proper only when the company maintains all the purchase discounts in appropriate accounting system...

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