Lynch incorporated sold $18,000 of merchandise with terms of 2/10, nEOM. On December 11th, Lynch collected $12,000 of originally billed sales. On December 31st, an additional $5,000 of originally billed sales was collected. The question asks to prepare journal entries to record the sale, collections, and adjustments assuming accounts receivable and sales are recorded at gross and net price. It also asks how much interest a customer should pay for a loan to take advantage of the 2% discount period, and explains how cash discounts can improve cash flow.

1. On December 1, 2016, Lynch incorporated sold $18,000 of merchandise with terms 2/10,
nEOM. On December 11, 2016, collections wore made on saies aniginalf Eilied for 512.000 ,
and on Deoembet 31,2016 , additional collections on sales originally billed for $5,000 were
received. Requiredi 1. Prepare the joumal entries to record the sale, collections, and any required
year-end adjuntmants assuming that Lynch reconds accounts riceivable and saies at (a) the gross
price and (b) the net price. 2. Next Level Assume that Lynch's customer does not have the
available cash to pay Lynch within the discount period How much intereat ahould the customer
be wiling to pay for a loan fo permet them to take advantage of the discount period (assume no
addidional cosis to the loan)? 3. Next Level Explain wfy Lynch s granting of cash (sabes)
discounts may improve cash foum.
Propare the joumal entries to rocord the sale, oolloctions and any required year-end adjustments
assuming that Lynch rocords acoounts rocelvabie and saibes at the gross price.
GENERAL JOURNAL
Assume that Lynch's customer does not have the avallable cash fo pay Lynch within the discount
pariod. How much interest should the customer be willig to pay far a kas fo permit then to take
advantage of the discount poriod (assume no additional costs to the loan)? The customer would
have to pay Lynch days socner to take acvartage of the 2% discount. Assuming 385 days in a
yoar. 2%s intarest for days is equivalent to an annual interest raie of Therefore, with the
assumption of no additional costs to the loan, any loan at a rate this rate would be advantageous
for Lynchis customer. Explain why Lynch granting of cash (aales) disoounts may improve caah
Aow. The cash isalesi discount polcy will enoourage payment as wel as addrional sales. If
customers pay more promply. the length of time Lynch a money ia sed ue in receivabies wit