A company purchased $1,800 of merchandise on July 5 with terms 2/10,n/30.On July 7,it returned $200 worth of merchandise.On July 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 purchase on July 5 is:
A)Debit Merchandise Inventory $1,600; credit Cash $1,600.
B)Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.
C)Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600.
D)Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.
E)Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory $1,600.

Question

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The journal entry to record the purchase on July 5 would be to debit Merchandise Inventory for the full amount of $1,800 and credit Accounts Payable for the same amount. This is because the company is using the gross method, which means they are recording the full purchase amount as the cost of the merchandise. The terms 2/10, n/30 indicate that the company can take a 2% discount if they pay within 10 days, but they have the full 30 days to make the payment. The return of $200 worth of merchandise would be recorded separately with a debit to Sales Returns and a credit to Merchandise Inventory. When the company pays the full amount due on July 28, they would debit Accounts Payable and credit Cash for $1,764 ($1,800 - $36 discount).

A Company Purchased $1,800 of Merchandise on July 5 with Terms