On June 3, Arnold Limited sold to Chester Arthur merchandise having a sale price of $3,000 with terms 3/10, n/60, f.o.b. shipping point. A $90 invoice, terms n/30, was received by Chester on June 8 from John Booth Transport Service for the freight cost. When it received the goods on June 5, Chester notified Arnold that $500 of the merchandise contained flaws that rendered it worthless; the same day Arnold Limited issued a credit memo covering the worthless merchandise and asked that it be returned to them at their expense. The freight on the returned merchandise was $25, which Arnold paid on June 7. On June 12, the company received a cheque for the balance due from Chester Arthur.
Instructions
(a) Prepare journal entries on Arnold Limited's books assuming that:
1. Sales and receivables are entered at gross selling price.
2. Sales and receivables are entered net of cash discounts.
(b) Prepare the journal entry under assumption 2, if Chester Arthur did not pay until July 29.
(c) From Chester Arthur's perspective, calculate the implied annual interest rate on accounts receivable not paid to Arnold within the discount period. Chester Arthur has a line of credit facility with its bank at 10%.