Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $21,200 and credit terms of 3/10, n/60. The merchandise had cost Mesa $14,458. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.

Santa Fe Company purchased merchandise for resale from Mesa Company with an invoice price of $21,200 and credit terms of 3/10, n/60. The merchandise had cost Mesa $14,458. Santa Fe paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.

 

Explanation:

1.

Cash payment:

Merchandise inventory = [$21,200 × 3%] = $636

 
3.

Amount borrowed to pay with discount	$	20,564
Annual rate of interest	×	8	%
Interest per year	$	1,645.12

 

Interest per day ($1,645.12 / 365 days) = $4.51

Savings from discount taken ($21,200 − $20,564)	$	636.00
Interest paid on 50-day loan (50 days × $4.51)		(225.50	)
Net savings from borrowing to pay in discount period	$	410.50