Multiple Choice
On April 12, a company purchased goods worth $14,000 on account with terms of 2/15 net 30. The company paid its supplier on April 25. In a perpetual system, the journal entry to record the payment on April 25 would include:
4. Merchandising Operations
Perpetual Inventory - Purchase Discounts
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Which of the following best describes the two stages of accounting for a purchase discount under the gross method in a perpetual inventory system?
A
Recording the purchase at gross amount and immediately recognizing the discount as a reduction in inventory.
B
Recording the purchase at net amount and recognizing the discount as interest income.
C
Recording the purchase at gross amount and then recognizing the discount only if payment is made within the discount period.
D
Recording the purchase at net amount and reversing the discount if payment is made after the discount period.
Verified step by step guidance1
Understand the gross method in a perpetual inventory system: Under the gross method, purchases are initially recorded at their full (gross) invoice amount without considering any potential discounts.
Identify the treatment of purchase discounts: Discounts are recognized only if payment is made within the discount period. This means the discount is not recorded upfront but rather accounted for later if applicable.
Analyze the timing of recognition: If payment is made within the discount period, the discount is recorded as a reduction in the cost of inventory. This aligns with the perpetual inventory system, where inventory accounts are updated continuously.
Compare the gross method to the net method: The net method records purchases at the net amount (invoice amount minus the discount) upfront, assuming the discount will be taken. If payment is made after the discount period, the discount is reversed and treated as an expense.
Conclude the correct description: The gross method involves recording the purchase at the gross amount initially and recognizing the discount only if payment is made within the discount period, as stated in the correct answer.
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