Taos Company purchased merchandise for resale from Tuscon Company with an invoice price of $22,000 and credit terms of 3y10, ny60. The merchandise had cost Tuscon $15,000. Taos paid within the discount period. Assume that both buyer and seller use a perpetual inventory system.
1. Prepare entries that the buyer should record for
(a) The purchase and
(b) The cash payment.
2. Prepare entries that the seller should record for
(a) The sale and
(b) The cash collection.
3. Assume that the buyer borrowed enough cash to pay the balance on the last day of the discount period at an annual interest rate of 11% and paid it back on the last day of the credit period. Compute how much the buyer saved by following this strategy.