A company purchased $10,000 of merchandise on January 5 with terms 2/10,n/30.On January 7,it returned $1,200 worth of merchandise.On January 28,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 January 28 is:
A)Debit Merchandise Inventory $8,800; credit Cash $8,800.
B)Debit Cash $1,600; credit Accounts Payable $1,600.
C)Debit Accounts Payable $10,000; credit Merchandise Inventory $200; credit Cash $9,800
D)Debit Accounts Payable $8,800; credit Cash $8,800.
E)Debit Accounts Payable $8,624; credit Cash $8,624.

Question

Quizplus · Accepted Answer

Using the perpetual inventory system, the company records purchases at their gross amount (i.e. without deducting any discounts). Therefore, the original cost of merchandise purchased is $10,000.

On January 7, the company returned $1,200 worth of merchandise. Since the company uses the perpetual inventory system, the return will result in a decrease in the Merchandise Inventory account and an increase in the Accounts Payable account. The journal entry for the return is:

Debit Accounts Payable $1,200
Credit Merchandise Inventory $1,200

The terms of the purchase allow the company to take a 2% discount if payment is made within 10 days. Since the company paid on January 28 (23 days after the purchase), it did not take the discount. Therefore, the company owes the full amount of the purchase, which is $10,000 - $1,200 (the returned merchandise) = $8,800. The journal entry to record the payment is:

Debit Accounts Payable $8,800
Credit Cash $8,800

A Company Purchased $10,000 of Merchandise on January 5 with Terms