Question

A company purchased $3,800 of merchandise on July 5 with terms 3/10, n/30. On July 7, it returned $900 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

Multiple Choice

• Debit Merchandise Inventory $2,900; credit Cash $2,900.

• Debit Cash $2,900; credit Accounts Payable $2,900.

• Debit Accounts Payable $2,900; credit Merchandise Inventory $87; credit Cash $2,813.

• Debit Accounts Payable $3,800; credit Cash $3,800.

• Debit Accounts Payable $2,900; credit Cash $2,900.

Answer 1

The answer is option third - Debit Accounts Payable $ 2,900; credit Merchandise Inventory $ 87; credit Cash $ 2,813

Under gross method:

Inventory purchase would be recorded at gross amount (without discount) and if the payment is made within the discount period then the inventory would be credited to reduce the inventory balance to the extent of discount.

Debit Accounts Payable $ 2,900

Credit Merchandise Inventory for Discount = $ 2,900 * 3% = $ 87

Credit Cash $ 2,813 ($ 2,900 - $ 87)

Hence, option third is correct