On December 1, 2016, Lynch Incorporated sold $18,000 of merchandise with terms 2/10, n/EOM. On December 11, 2016, collections were made on sales originally billed for $12,000, and on December 31, 2016, additional collections on sales originally billed for $5,000 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 Lynch’s 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 Lynch’s granting of cash (sales) discounts may improve cash flow.

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.

NEXT LEVEL:

Assume that Lynch’s 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)?

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 below [Correct] this rate would be advantageous for Lynch’s customer.