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Inventories: Measurement

Example: On September 15, 2001, Spencer Company purchases $100,000 of merchandise with terms of 2/10, n/30. The company pays the invoice on September 23, 2001 (within the discount) and takes the 2% discount. Using the gross method Spencer Company would record the purchase and payment as follows:

Date Account 9/15/01 Inventory Accounts payable

Debit $100,000

Credit

$100,000

To record purchase of merchandise inventory, terms 2/10, n/30

Date 9/23/01

Account Accounts payable Purchase discounts

Cash

Debit $100,000

Credit

$2,000 98,000

To record the payment net of the 2% cash discount on merchandise

(2) Net Method Under the net method a “purchase discounts lost” account is used. The purchase and related account payable are recorded at net of the discount. It is assumed that the purchaser will always take advantage of the cash discount. If the purchaser fails to make payment by the discount date the debit is charged to a “purchase discounts lost” account.

Special Sale Agreements There are special circumstances where the legal title to the goods might have changed hands but there is a high degree of uncertainty as to whether the sale has been completed.

  • Sales with Buyback Agreement ¾ Product Financing Agreement The buyer takes title to the merchandise but has the option to return the merchandise for a full refund including holding costs. Under these circumstances the seller should report the inventory and related liability on its books. ¾ Parking Transaction There are certain industries where it is common for the seller to ship merchandise to the buyer. The buyer holds the merchandise for a short period of time (through year-end) and then returns the merchandise. This is sometimes called window dressing with respect to the preparation of year-end financial statements. No matter what it is called, based on historical facts or agreements between the parties, the seller should continue to report the inventory on its year-end financial statements.

  • Sales with High Rates of Return

In some industries the buyer is allowed to return unsold merchandise for a partial or full refund. If the returns can be estimated then a provision (an allowance account) should be made and the goods should be treated as sold to the buyer. If it is not possible to determine

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3/12/2007

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