Marx Corp. purchases 135 fax machines on credit from a manufacturer on April 7 at a price of $250 per machine. Terms of the purchase are $4/10, n/20$ with an invoice date of April 7. Marx Corp pays in full for the fax machines on April 17. Create the journal entries for Marx Corp. to record:
1. the initial purchase
Journal entry for the purchase
| Date | Account
Answer (1)
On April 7, record the purchase of fax machines with a debit to Fax Machines for $33 , 750 and a credit to Accounts Payable for $33 , 750 .
On April 17, calculate the discount amount: 0.04 × $33 , 750 = $1 , 350 .
Calculate the cash payment: $33 , 750 − $1 , 350 = $32 , 400 .
On April 17, record the payment with a debit to Accounts Payable for $33 , 750 , a credit to Cash for $32 , 400 , and a credit to Purchase Discounts for $1 , 350 .
Explanation
Initial Purchase Analysis On April 7, Marx Corp. purchases 135 fax machines at a price of $250 each. We need to record this purchase on credit.
Calculating Total Purchase Amount To calculate the total purchase amount, we multiply the number of fax machines by the price per machine: 135 machines × $250 per machine = $33 , 750
Journal Entry for the Purchase The journal entry on April 7 will reflect an increase in assets (fax machines) and an increase in liabilities (accounts payable). We debit 'Fax Machines' (or a similar asset account like 'Inventory' or 'Equipment') to show the increase in assets and credit 'Accounts Payable' to show the increase in the amount owed to the manufacturer.
Payment Analysis and Discount Eligibility On April 17, Marx Corp. pays for the fax machines. The terms of the purchase are 4/10, n/20, which means Marx Corp. gets a 4% discount if they pay within 10 days, otherwise the full amount is due within 20 days. Since Marx Corp. paid on April 17, which is 10 days after April 7, they are eligible for the discount.
Calculating the Discount Amount First, calculate the discount amount: 4% × $33 , 750 = 0.04 × $33 , 750 = $1 , 350
Calculating the Cash Payment Next, calculate the cash payment amount by subtracting the discount from the total purchase amount: $33 , 750 − $1 , 350 = $32 , 400
Journal Entry for the Payment The journal entry on April 17 will reflect a decrease in liabilities (accounts payable), a decrease in assets (cash), and recognition of the purchase discount. We debit 'Accounts Payable' to reduce the amount owed, credit 'Cash' to show the cash outflow, and credit 'Purchase Discounts' to recognize the discount received.
Final Journal Entries Therefore, the journal entries are:
Journal entry for the purchase
Date
Account
Debit
Credit
Apr 7
Fax Machines
$33,750
Accounts Payable
$33,750
To recognize purchase of fax machines, terms 4/10, n/20.
Journal entry for the payment
Date
Account
Debit
Credit
Apr 17
Accounts Payable
$33,750
Cash
$32,400
Purchase Discounts
$1,350
To recognize payment.
Examples
Understanding and utilizing purchase discounts can significantly impact a company's profitability. For instance, if a business consistently takes advantage of early payment discounts, it can reduce its overall expenses and improve its cash flow. This practice is similar to using coupons while shopping; over time, the savings accumulate and can be reinvested in the business. By carefully managing accounts payable and taking advantage of favorable payment terms, companies can optimize their financial performance.
