Question

On January 1, 2014, Hillock Brewing Company sold 50,000 bottles of beer to various customers for $45,000 using credit terms of 3y10, ny30. These credit terms mean that customers receive a cash discount of 3% of invoice price for payments made within 10 days of the sale (this is what the 3y10 signifies). If payment is not made within 10 days, the entire invoice price is due no later than the 30th day (this is what the ny30 signifies). At the time of sale, Hillock expects sales returns of 5%. On January 9, 2014, customers made payment on one-half of the total receivables. They returned goods with a selling price of $2,000 on January 15, 2014. They paid the balance due on January 28, 2014.

Required:
1. Provide journal entries to record the preceding transactions in Hillock’s books; assume that Hillock records expected sales returns at the time of sales.
2. Redo requirement (1) assuming that customers returned goods with a selling price of $3,000 on January 15, 2014.
3. Provide journal entries to record the preceding transactions in Hillock’s books; assume that Hillock records sales returns when customers actually return the goods.
4. Because the net sales revenue is the same under both methods—requirements 1 and 3—what is the advantage of recording anticipated sales returns rather than waiting to record them when the customers actually return the goods?
5. Assuming that the incremental annualized borrowing rate for a customer is 18%, are customers better off paying within 10 days to receive the discount or should they wait to pay until the 30th day?





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  • CreatedSeptember 10, 2014
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