Answered Essay: A $1,000 invoice from a medical supplier has terms of 1/10, net/30.

A $1,000 invoice from a medical supplier has terms of 1/10, net/30.

How much should be remitted to the supplier if the amount is paid within the discount period?

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On July 1, 2013, general liability insurance premium $12,000 was paid for one year period from July 2013 to June 2014.

Prepare journal entries on 07/01/13 and 07/31/13.

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A company purchased medical equipment for $77,000 on July 1, 2013. It estimated that the equipment will have a salvage value of $7,000 and its useful life will be 7 years.

Assuming that the company’s year ends on December 31, each year, what will be the depreciation expense for the years 2013, and 2014 assuming straight-line depreciation?

Expert Answer

 

Solution

  1. Invoice amount           $1,000

Terms 1/10, net/30

The amount to be remitted to the supplier when paid within the discount period is calculated as follows:

Cash discount of 1% can be availed if the invoice is paid within the discount period (10 days).

So, discount 1% on $1,000 = 1,000 x 1% =$10

The amount to be remitted to the supplier = invoice amount – cash discount

=$1,000 -$10 =$990

Hence, the amount to be remitted t o the supplier when invoice is paid within the discount period is $990.

Note: Net/30 indicates that if the invoice is not paid within the discount period, then the entire $1,000 has to be paid within a period of 30 days.

  1. General Liability Insurance premium paid for 1 year on July 1, 2013 is $12,000

Monthly premium =$12,000/12 =$1,000

Journal entry on 07/01/13 –

Date                Account Titles and Explanation                     Debit               Credit

07/01/13          Prepaid Insurance                                           $12,000

Cash                                                                            $12,000

(To record payment of general liability insurance premium for one year)

07/31/13          Insurance Expense                                          $1,000

Prepaid Insurance                                                       $1,000

(To record insurance expense for the month of July, 2013)

  1. Calculation of depreciation expense for the year 2013, and 2014 assuming straight-line depreciation is as follows:

Cost of medical equipment     $77,000

Salvage value                          $7,000

Useful life                               7 years

Date of purchase                     July 1, 2013

Depreciation under straight line method = depreciation base/ useful life

Depreciation base = cost – salvage value

=$77,000 -$7,000

=$70,000

Depreciation                =$70,000/7

Annual depreciation    =$10,000

Depreciation expense for the year ended December 31, 2013 = depreciation from the date of purchase to December 31, 2013

Since date of purchase is July1, 2013, depreciation expense for the year ended December 31, 2013 is to be provided for 6 months.

Annual deprecation =$10,000

Depreciation for 6 months =$10,000 x 6/12 =$5,000

Hence, depreciation for the year ended December 31, 2013 =$5,000

Depreciation expense for the year ended December 31, 2014 = $10,000

(full year depreciation for the period January 1, 2014 – December 31, 2014)

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