Multiple Choice
Which of the following best describes the two stages of accounting for a purchase discount under the gross method in a perpetual inventory system?
4. Merchandising Operations
Perpetual Inventory - Purchase Discounts
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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:
A
A credit to Cash for $14,000
B
A credit to Inventory for $280
C
A credit to Accounts Payable for $14,000
D
A debit to Cash for $13,720
Verified step by step guidance1
Identify the purchase terms: The terms 2/15, net 30 mean that the company can take a 2% discount if the payment is made within 15 days; otherwise, the full amount is due in 30 days.
Calculate the discount: Since the payment is made on April 25, which is within the 15-day discount period, the company is eligible for a 2% discount on the $14,000 purchase. Calculate the discount as $14,000 * 0.02.
Determine the amount to be paid: Subtract the discount from the original amount to find the cash payment amount. This is $14,000 - discount.
Record the journal entry: In a perpetual inventory system, the discount is recorded as a reduction in the Inventory account. The journal entry will include a debit to Accounts Payable for $14,000, a credit to Cash for the amount after discount, and a credit to Inventory for the discount amount.
Verify the accounts: Ensure that the total debits equal the total credits in the journal entry to maintain the accounting equation balance.
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