A company that uses the perpetual inventory method purchases inventory for $2,000 from a vendor on account,FOB shipping point,with terms of 2/10,n/30.The company paid the shipper $100 cash for freight in.
-Which of the following entries would be made to record payment to the vendor if the payment is made within 10 days?
A) $1,960 debit to Accounts payable and a $1,960 credit to Cash
B) $2,000 debit to Accounts payable, a $100 debit to Inventory and a $1,960 credit to Cash
C) $2,000 debit to Accounts payable, a $40 credit to Inventory and a $1,960 credit to Cash
D) $1,960 debit to Accounts payable, a $40 debit to Inventory and a $2,000 credit to Cash

Question

Quizplus · Accepted Answer

Under the perpetual inventory method, inventory and accounts payable are recorded separately. When the company purchases inventory on account, it records a debit to the inventory account and a credit to accounts payable account. 
In this case, the cost of the inventory is $2,000 and the company also incurs $100 of freight charges which are added to the cost of the inventory. Since the terms of the sale are 2/10, n/30, the company can avail a discount of 2% if it pays within 10 days. 
Therefore, the amount to be paid if the payment is made within 10 days would be:
$2,000 + $100 - (2% of $2,100) = $1,960 
So, the entry to record payment to the vendor if it is made within 10 days would be:
Debit Accounts Payable $2,000
Credit Cash $1,960
Credit Inventory $40 ($2,000 + $100 - $1,960)

A Company That Uses the Perpetual Inventory Method Purchases Inventory