On December 1, 2019, Lynch Incorporated sold $19,000 of merchandise with terms 2/10, n/EOM. On December 11, 2019, collections were made on sales originally billed for $10,000, and on December 31, 2019, additional collections on sales originally billed for $8,000 were received.

Required:

1.

Prepare the journal entries to record the sale, collections, and any required year-end adjustments assuming that Lynch records accounts receivable and sales at (a) the gross price and (b) the net price.

2.

Next Level Assume that Lynchs customer does not have the available cash to pay Lynch within the discount period. How much interest should the customer be willing to pay for a loan to permit them to take advantage of the discount period (assume no additional costs to the loan)?

3.

Next Level Explain why Lynchs granting of cash (sales) discounts may improve cash flow.

CHART OF ACCOUNTS

Lynch Incorporated

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

1a. Prepare the journal entries to record the sale, collections and any required year-end adjustments assuming that Lynch records accounts receivable and sales at the gross price.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7

1b. Prepare the journal entries to record the sale, collections and any required year-end adjustments assuming that Lynch records accounts receivable and sales at the net price.

General Journal Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8		Adjusting Entries
9
10

2. Assume that Lynchs customer does not have the available cash to pay Lynch within the discount period. How much interest should the customer be willing to pay for a loan to permit them to take advantage of the discount period (assume no additional costs to the loan)?

Additional Instruction

The customer would have to pay Lynch days sooner to take advantage of the 2% discount. Assuming 365 days in a year, 2% interest for days is equivalent to an annual interest rate of . Therefore, with the assumption of no additional costs to the loan, any loan at a rate this rate would be advantageous for Lynchs customer.

3. Explain why Lynchs granting of cash (sales) discounts may improve cash flow.

The cash (sales) discount policy will encourage payment as well as additional sales. If customers pay more promptly, the length of time Lynchs money is tied up in receivables will