On April 1, a hardware manufacturing firm purchases inventory on account for $700. Which of the following correctly describes the effect of this transaction? Assume a perpetual inventory system is used.
A)Merchandise Inventory decreases by $700 and Accounts Receivable decreases by $700.
B)Merchandise Inventory decreases by $700 and Accounts Receivable increases by $700.
C)Merchandise Inventory increases by $700 and Accounts Payable decreases by $700.
D)Merchandise Inventory increases by $700 and Accounts Payable increases by $700.

Question

Quizplus · Accepted Answer

In a perpetual inventory system, when inventory is purchased on account, Merchandise Inventory increases by the cost of the inventory, in this case $700. The corresponding entry is to increase the Accounts Payable balance by the same amount, since it was purchased on credit. Therefore, the correct answer is D - Merchandise Inventory increases by $700 and Accounts Payable increases by $700.

On April 1, a Hardware Manufacturing Firm Purchases Inventory on Account