Lane Sales was started in 2006. The company experienced the following accounting events during its first year of operation:

1. Started business when it acquired \($40,000\) cash from the issue of common stock.

2. Purchased merchandise with a list price of \($42,000\) on account, terms 2/10, n/30.

3. Paid off one-half of the accounts payable balance within the discount period.

4. Sold merchandise on account that had a list price of \($25,000\). Credit terms were 1/20, n/30. The merchandise had cost Lane \($18,000\).

5. Collected cash from the account receivable within the discount period.

6. Paid \($2,600\) cash for operating expenses.

7. Paid the balance due on accounts payable. The payment was not made within the discount period.

Required:

a. Record the events in a horizontal statements model like the following one.

b. What is the amount of gross margin for the period? What is the net income for the period?

c. Why would Lane sell merchandise with the terms 1/20, n/30?

d. What do the terms 2/TO, n/30 in event 2 mean to Lane?

Transcribed Image Text:

Assets Liab. Cash Accts. Rec. + Inv. = Accts. Pay. Equity + Com. Stk. + Ret. Earn. Rev. - Exp. = Net Inc. Cash Flow