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Jones Manufacturing sent Janes Manufacturing an invoice for equipment with a list price of $10,000. Freight, which is FOB shipping point and not included in the invoice price, was $150. The invoice is dated July 27 with terms of 2/10, EOM. Janes is entitled to a 40% trade discount. If the invoice is paid on September 8, how much does Janes pay?

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Answer:

Jane Pays $ 6150

Invoice on equipment ($10,000×60%)    6000

Free on board Shipping Cost 150              150

Total                                                           6150

Explanation:

Trade discount

Is discount granted by supplier on bulk purchases or other promotions being held by supplier.Trade discounts is not accounted for in the Buyer`s and Seller`s books (Janes).

However the amount Jane pays must be net of Trade Discount.

Free On Board Shipping (FOB)

Free On Board Shipping (FOB) means Buyer pays for the Shipping Cost of Inventory and also assumes risk and benefits associated with the inventory as soon as the inventory leaves the suppliers premises.

Effect on Inventory

IAS 2 requires Inventory cost to include all cost associated with bringing the inventory in a salable manner and condition.Therefore Free On Board Costs are Included in Cost of Inventory

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