Problem 6.5A

Merchandising Transactions

The following is a series of related transactions between Leggy Pants and Viking, a chain of retail clothing stores:

Sept. 11 Leggy Pants sold Viking 200 pairs of pants on account, terms 1/10, n/30. The cost of these pants to Leggy Pants was $30 per pair, and the sales price was $70 per pair.

Sept. 14 United Express charged $60 for delivering this merchandise to Viking. These charges were split evenly between the buyer and the seller, and were paid immediately in cash.

Sept. 15 Viking returned 5 pairs of pants to Leggy Pants because they were the wrong size. Leggy Pants allowed Viking full credit for this return.

Sept. 21 Viking paid the remaining balance due to Leggy Pants within the discount period.

Both companies use a perpetual inventory system.

Instructions

a. Record this series of transactions in the general journal of Leggy Pants. (The company records sales at gross sales price.)

b. Record this series transactions in the general journal of Viking. (The company records purchases of merchandise at net cost and uses a Transportation-in account to record transportation charges on inbound shipments.)

c. Viking does not always have enough cash on hand to pay for purchases within the discount period. However, it has a line of credit with its bank, which enables Viking to easily borrow money for short periods of time at an annual interest rate of 11%. (The bank charges interest only for the number of days until Viking repays the loan.) As a matter of general policy, should Viking take advantage of 1/10, n/30 cash discounts even if it must borrow the money to do so at an annual rate of 12%? Explain fully