Multiple Choice
When entering inventory transactions under the perpetual inventory system, which account is debited when inventory is purchased for cash?
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2. Transaction Analysis
Journal Entries: Debits and Credits
Multiple Choice
Which of the following situations would require you to debit a contra asset account?
A
Recording the write-off of an uncollectible account receivable using the allowance method
B
Recognizing depreciation expense for the period
C
Purchasing new equipment for cash
D
Receiving payment from a customer on account
Verified step by step guidance1
Understand the concept of a contra asset account: A contra asset account is used to reduce the value of a related asset account. Common examples include Allowance for Doubtful Accounts (related to Accounts Receivable) and Accumulated Depreciation (related to fixed assets).
Analyze the first option: 'Recording the write-off of an uncollectible account receivable using the allowance method.' When using the allowance method, the write-off of an uncollectible account involves debiting the Allowance for Doubtful Accounts (a contra asset account) and crediting Accounts Receivable. This reduces both the allowance and the accounts receivable balance.
Analyze the second option: 'Recognizing depreciation expense for the period.' Depreciation expense is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation (a contra asset account). This does involve a contra asset account, but the account is credited, not debited.
Analyze the third option: 'Purchasing new equipment for cash.' This transaction involves debiting Equipment (an asset account) and crediting Cash (another asset account). No contra asset account is involved in this transaction.
Analyze the fourth option: 'Receiving payment from a customer on account.' This transaction involves debiting Cash and crediting Accounts Receivable. No contra asset account is involved in this transaction.
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