Looking at the below invoice terms:

1/15, n/60

Please state whether the below statement is true or false IN ITS ENTIRETY:

The above invoice terms mean that the purchasing company gets a 1% discount if they pay the invoice within 15 days of the invoice date, and the net balance (assuming no discount is taken) is due within 60 days of the invoice date. Additionally, the invoice terms would be read as: "one fifteen, net sixty". Lastly, if the company was using the GROSS method to account for this, it would record the full purchase price amount as a debit to Inventory, but under the NET method, it would only record 99% of the original purchase price to the inventory account.

Question

Looking at the below invoice terms:

1/15, n/60

Please state whether the below statement is true or false IN ITS ENTIRETY:

The above invoice terms mean that the purchasing company gets a 1% discount if they pay the invoice within 15 days of the invoice date, and the net balance (assuming no discount is taken) is due within 60 days of the invoice date. Additionally, the invoice terms would be read as: "one fifteen, net sixty". Lastly, if the company was using the GROSS method to account for this, it would record the full purchase price amount as a debit to Inventory, but under the NET method, it would only record 99% of the original purchase price to the inventory account.

BlackTom AI · Accepted Answer

First, restating the given terms helps ensure we interpret them correctly: the invoice terms are 1/15, n/60, which is commonly read as a 1% discount if paid within 15 days; otherwise the net (full) amount is due within 60 days. The phrase 'one fifteen, net sixty' is a standard verbalization of these terms. Now evaluate each part of the statement.

Option assessment:
- True statement component 1: 'The purchasing company gets a 1% discount if they pay the invoice within 15 days of the invoice date' — This aligns with the typical meaning of 1/15, indicating a 1% cash discount available if payment occurs within 15 days. This is accurate and consistent with standard accounting terms for trade discounts.

- True statement component 2: 'the net balance (assuming no discount is taken) is due within 60 days of the invoice date' — The 'net 60' portion implies that if the discount is not taken, the remaining balance is due by day 60. This interpretation is correct and matches the standard use of n/60 in terms.

- True statement component 3: 'Additionally, the invoice terms would be read as: "one fifteen, net sixty"' — Reading the terms aloud as "one fifteen, net sixty" is a conventional and correct verbal representation of 1/15, n/60. This portion is also accurate.

- True statement component 4: 'Lastly, if the company was using the GROSS method to account for this, it would record the full purchase price amount as a debit to Inventory, but under the NET method, it would only record 99% of the original purchase price to the inventory account.' — This reflects standard practice in inventory accounting:
  • Under the gross method, purchases are recorded at the full invoice price (debit Inventory for the gross amount). 
  • Under the net method, purchases are recorded at the net of the discount (debit Inventory for 99% of the price, assuming the company expects to take the discount and records at net). If the discount is later not taken, a separate adjustment (purchase discount lost) might be recognized. This description captures the core distinction between gross and net methods and is consistent with common accounting treatment.

Now consider potential pitfalls or misunderstandings that could render other options incorrect:
- If someone claimed the terms do not imply a discount, they would misunderstand 1/15; however, the term 1/15 explicitly conveys the discount opportunity, so that interpretation would be wrong.
- If someone argued that 'net 60' means due in 60 days from the statement date regardless of the discount period, that would be a misreading of the credit terms, since the discount period and the net period are linked to payment within 15 days; otherwise, the net amount is due by day 60.
- If someone suggested that the net method would always record the full price and only later adjust if the discount is not taken, that would describe the gross method behavior for the initial entry, not the net method; the net method uses the net amount in the initial entry, so that again would be inaccurate.

In summary, every component of the statement aligns with standard interpretations of 1/15, net 60 terms, their verbal reading, and the distinction between gross and net inventory accounting methods. The collective assertions are coherent with established accounting practice.

W25 ACCT D001A 01Y Finan Accountng I Midterm 2 - De Anza

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