On February 7, 2008, Jilian Company sold 20,000 sweatshirts to customers for \($130,000\) using credit terms of 2/10, n/30. These credit terms mean that customers will receive a 2% cash discount of the invoice price for payments made within 10 days of the sale (this is what the 2/10 signifies). If payment is not made within 10 days, the entire invoice price is due no later than the 30th day (this is what the n/30 signifies). On February 16, 2008, various customers made payment on one-half oft he total receivables (discounts are recorded in a Cash discounts account that is reported as a contra-revenue item on the income statement). A customer returned goods with a \($5,000\) selling price on February 25, 2008. It paid the balance due (from the remaining receivables) on March 5, 2008.
Required:
1. Provide journal entries to record the preceding transactions in Jilian’s books; assume that Jilian records sales returns when customers actually return the goods.
2. Assume that the borrowing rate for Jilian’s customers is 18%. Demonstrate that the customers not paying within 10 days would be better off borrowing the money if necessary to make payment within the discount period.