Abbey Co. sold merchandise to Gomez Co. on account, $35,200, terms 2/15, net 45. The cost of the merchandise sold was $14,200. Abbey Co. issued a credit memo for $3,600 for merchandise returned that originally cost $1,200. Gomez Co. paid the invoice within the discount period. What is the amount of gross profit earned by Abbey Co. on the above transactions?

What we need to do here is to list all the amounts with the proper sign (positive if is a cash inflow or negative if is a cash outflow). It might be worth to clarify a little more the terms of the discount provided.

terms 2/15 net 45:

It means that Abbey Co. will grant Gomez Co. a 2% discount if Gomez Co. pays Abbey Co. within 15 days. If not, Gomez Co. can pay without that discount after day 16 to day 45, after the invoice has been issued.

Therefore, this is what our calculations should look like.

Amount (sold) $35,200

(-)Cost -$14,200

(-)Merchandise Returned -$3,600

(+)Cost of returned merc $1,200

(-)Discount -$632

Gross profit $17,968

We need to subtract from the amount of the invoice (+$35,200) the cost of the merchandise ( - $14,200), then since we have some returned items, they have to be subtracted too ( - $3,600) and for the same reason, the cost of the returned merchandise has to be added back ( +$1,200). Now the discount needs to be subtracted too, that is, the amount of merchandise that Gomez Co. kept multiplied by 2% ( (35,200-3,600)x2% = -$632)). Therefore, the money that Gomez Co. paid to Abbey Co. is $30,968 and the gross profit earned by Abbey Co. was $17,968.

Please take a look at the excel spreadsheet attached to this document.

Best of luck.