Ferguson Bike Shop records inventory purchases as net of available cash discounts and follows a standard practice of taking all discounts for early payment offered by its suppliers. The company made a major inventory purchase on credit during the current year for $200,000. The supplier offered a 2 percent discount for early payment. However, a new employee responsible for managing accounts payable was not aware of the company’s policy to take all cash discounts offered.
a. Record the inventory purchase followed by Ferguson’s payment of the invoice amount without the discount taken.
b. Record the inventory purchase followed by Ferguson’s payment of the invoice amount with the discount taken.
c. Why is the recording of inventory purchases at the net-of-discount price preferable to recording purchases at the total invoice price?