Azure Company uses the perpetual inventory system. On May 3, it sold merchandise on account to Sigma Enterprises, invoice no. 672, $4,500. Cost of inventory sold is $3,850. Which of the following journal entries records the effect on merchandise inventory?
A) A debit to Accounts Receivable of $4,500, a credit to Merchandise Inventory of $4,500
B) A debit to Cost of Goods Sold of $4,500, a credit to Merchandise Inventory of $4,500
C) A debit to Cost of Goods Sold of $3,850, a credit to Merchandise Inventory of $3,850
D) A debit to Accounts Receivable of $3,850, a credit to Merchandise Inventory of $3,850

Question

Quizplus · Accepted Answer

The journal entry to record the effect on merchandise inventory would be a debit to Cost of Goods Sold for the cost of the inventory sold ($3,850) and a credit to Merchandise Inventory for the same amount. Option A is incorrect because it records the transaction as a sale, not a reduction in inventory. Option B is incorrect because it debits Cost of Goods Sold for the full invoice amount, not the cost of the inventory sold. Option D is incorrect because it records the transaction as a reduction in accounts receivable, not merchandise inventory.

Azure Company Uses the Perpetual Inventory System