Kitty Clips acquired $2,800 worth of merchandise inventory on account.Upon inspection,the company discovered that $400 worth of the merchandise inventory was defective.Kitty Clips returned the defective merchandise inventory and received full credit.The effect of the return transaction on Kitty Clips would be to

Question

Quizplus · Accepted Answer

When Kitty Clips returns the defective merchandise inventory, it reduces the merchandise inventory account by $400 and also the accounts payable account (since it was purchased on account) by $400. This results in a decrease in both inventory and liabilities, which is reflected in option B, making it the correct choice. Option A is incorrect because accounts payable would decrease, not increase, with the return of merchandise. Option C is incorrect because accounts receivable would not be involved in this transaction as Kitty Clips is not receiving any money. Option D is incorrect because accounts receivable would not decrease in this transaction. Option E is incorrect because, while the merchandise inventory was not used, Kitty Clips still needs to record the return to accurately reflect its inventory levels and financial position.

Kitty Clips Acquired $2,800 Worth of Merchandise Inventory on Account