On September 21 the purchasing department of Sherman Hardware Corporation purchased raw materials costing $7,500 on credit from Adams Supply Company. Adams offered Sherman purchases discount terms of 2/15, n/30. Sherman uses a perpetual inventory system and the gross method of recording purchases discounts.

Required: (1) Using T-accounts, show how Sherman records the credit purchase and its cash payment in its accounting system

(a) if Sherman’s accounting department waits 30 days from the date of the purchase before it pays Adams for this purchase, and instead

(b) if Sherman’s accounting department pays for the purchase within 15 days from the date of the purchase.

(2) If Sherman sells this inventory for $12,000, what is the gross profit from the sale under

(a) and (b)? Explain the difference between these two amounts.

(3) What would your answers to (2) be if Sherman had been using the net method of recording purchases discounts? What is the reason for any difference between your answers to (2) and (3)?

What is the approximate interest cost (percentage) assuming a 360-day year if Sherman chooses not to pay for its purchases within the purchases discount period?

 TYK-1