Please help me do a general jounrnal for this scenario: Master Flow purchased 500 Units @ $100 / Unit in plumbing fixtures from Kohler, Inc. to establish the Company’s initial merchandise inventory. The Company opened a trade account with Kohler with a $60,000 Credit Limit. The terms of all purchases with this vendor are 2/10, N60. You talk to Scott about the Inventory accounting and valuation methods to use. You agree to use the Perpetual Inventory Method with LIFO.
Please help me do a general jounrnal for this scenario:
Master Flow purchased 500 Units @ $100 / Unit in plumbing fixtures from Kohler, Inc. to
establish the Company’s initial merchandise inventory. The Company opened a trade
account with Kohler with a $60,000 Credit Limit. The terms of all purchases with this
vendor are 2/10, N60. You talk to Scott about the Inventory accounting and valuation
methods to use. You agree to use the Perpetual Inventory Method with LIFO.
Master flow is purchasing merchandise from the vendor Kohler Inc. with a credit limit of $60,000. It means that the vendor has set the limit to grant upto a maximum of $60,000 credit in terms of merchandise purchase.
The terms of the purchase states 2/10, N/60. It means that Master flow can avail a cash discount of 2% if it makes the full payment within 10 days from the date of invoice or the goods arrival as the case may be. Or else, it has to make the full payment within 60 days from the invoice date or the goods arrival date. In that case, no discount facility is given.
Since, the company is using perpetual inventory method, every time inventory is purchased and sold is accounted for and the balance of inventory is adjusted after each transaction in inventory. LIFO method stands for Last-in, First-out which assumes that inventories that are purchased latest should go first into the cost of goods sold. Inventories that are purchased at the earliest should constitute the ending inventory.
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