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On November 4, 2021 Red Eye Limited purchased $600,000 of merchandise from Headache Limited on credit
On November 4, 2021 Red Eye Limited purchased $600,000 of merchandise from Headache Limited on credit. The credit terms were 4/10, n/60. On November 8, 2021 Red Eye Limited returned 25% of the purchased merchandise to Headache Limited. On November 10, 2021 Red Eye Limited paid the amount of accounts payables owed to Headache Limited in full. What is the total cost of merchandise inventory purchased by Red Eye Limited from Headache Limited? Select one: a. $600,000.00 b. $432,000.00 c. $0.00 d. $450,000.00
Expert Solution
The specified credit terms is 4/10, n/60. This means that the customer will get 4% discount on the amount owed if he makes the payment within 10 days of purchase. Otherwise, he should pay the full amount within 60 days and no discount will be allowed.
Since 25% of goods are returned, amount owed = 600000 * 75% = 450000.
Since payment is made within 10 days from Nov 4, discount will be allowed by Headache Ltd @ 4%.
Discount = 450000 * 4% = 18000
Amount of net payment = 450000 - 18000 = $432,000
Therefore, correct answer is option b. $432,000.
Hope this helps :)
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