Company B Purchased Merchandise Inventory With An Invoice Price Of $15,000 And Credit Terms Of 2/10, N/30. What Is The Net Cost Of The Goods If Company B Pays Within The Discount Period?

Net Cost of Goods Purchased: How to Calculate It and Record the Discount (With Journal Entries)

When a business purchases inventory on credit, suppliers often offer an early payment discount. Understanding how to calculate the Net Cost of Goods (NCOG) and record the correct journal entries is essential for accounting students, business owners, and anyone preparing for accounting exams.

Let's work through the example step by step.

Question

Invoice Price: $15,000

Credit Terms: 2/10, n/30

This means:

• The purchaser receives a 2% discount if payment is made within 10 days.

• Otherwise, the full invoice amount is due within 30 days.

The question asks:

What is the Net Cost of Goods (NCOG) if the purchaser pays within the discount period?

Step 1: Calculate the Purchase Discount

The purchase discount is calculated using the invoice price.

Formula:

Purchase Discount = Invoice Price × Discount Rate

Calculation:

• Invoice Price = $15,000

• Discount Rate = 2%

Purchase Discount = $15,000 × 2% = $300

Step 2: Calculate the Net Cost of Goods

Now subtract the discount from the invoice price.

Formula:

Net Cost of Goods = Invoice Price − Purchase Discount

Calculation:

$15,000 − $300 = $14,700

Answer: The Net Cost of Goods (NCOG) is $14,700.

Therefore, option (c) is the correct answer while the other options (a, b and d) are incorrect choices of this multiple choice question (mcq).

Journal Entries for the Purchaser (Company B)

From Company B's perspective, it is the purchaser buying merchandise inventory from the seller.

The accounting treatment depends on whether the business uses a periodic or perpetual inventory system.

1. Periodic Inventory System

When Company B pays within the discount period, the journal entry is:

Debit: Accounts Payable — $15,000

Credit: Cash — $14,700

Credit: Purchase Discount — $300

Explanation

• The Accounts Payable balance is cleared.

• Cash reflects the discounted payment.

• The Purchase Discount account records the savings earned by paying early.

2. Perpetual Inventory System

Under the perpetual inventory system, purchase discounts reduce the cost of inventory instead of being recorded in a separate Purchase Discount account.

Journal entry:

Debit: Accounts Payable — $15,000

Credit: Cash — $14,700

Credit: Inventory — $300

Explanation

Because inventory is continuously updated under the perpetual system, the inventory account is reduced by the amount of the discount. As a result, inventory is recorded at its actual acquisition cost.

Journal Entries for the Seller

The seller's accounting also depends on the inventory system used.

Seller Using the Periodic Inventory System

Journal entry when payment is received within the discount period:

Debit: Cash — $14,700

Debit: Sales Discount — $300

Credit: Accounts Receivable (Company B) — $15,000

Explanation

The seller records the cash received and recognizes the $300 discount as a Sales Discount expense, reducing net sales.

Seller Using the Perpetual Inventory System

Journal entry:

Debit: Cash — $14,700

Debit: Sales Discount (or the applicable contra-revenue account) — $300

Credit: Accounts Receivable (Company B) — $15,000

Note: Under generally accepted accounting practice, the discount granted to the customer is typically recorded in a Sales Discount (contra-revenue) account. The inventory account is not used to record a sales discount. Inventory is affected separately when the cost of goods sold is recorded at the time of sale.

Key Takeaways

• Invoice Price = $15,000

• Early Payment Discount (2%) = $300

• Net Cost of Goods = $14,700

• Correct Answer: Option (c)

• Under the periodic inventory system, purchasers record the discount in the Purchase Discount account.

• Under the perpetual inventory system, purchasers reduce the Inventory account instead.

• Sellers generally record the discount in a Sales Discount (contra-revenue) account when payment is received within the discount period.

Understanding these entries helps ensure inventory costs and financial statements are reported accurately while reinforcing how purchase discounts affect both buyers and sellers.