Question

A company purchased $10,000 of merchandise on January 5 with terms 2/10, n/30. On January 7, it returned $1,200 worth of merchandise. On January 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 payment on January 28 is:
A. Debit Accounts Payable $10,000; credit Merchandise Inventory $200; credit Cash $9,800.
B. Debit Merchandise Inventory $8,800; credit Cash $8,800.
C. Debit Accounts Payable $8,800; credit Merchandise Inventory, $176; credit Cash $8,624.
D. Debit Cash $1,600; credit Accounts Payable $1,600.
E. Debit Accounts Payable $8,624; credit Cash $8,624.

Answer 1

Answer:

C. Debit Accounts Payable $8,800; credit Merchandise Inventory, $176; credit Cash $8,624.

Step-by-step explanation:

Data given in the question is inconsistent with the options given.

Terms 2/10, n/30 means there is a discount of 2% is available on payment of due amount within discount period of 10 days after sale with net credit period of 30 days.

Purchases = $10,000

Returns = $1,200

Amount Due = $10,000 - $1,200 = $8,800

As the payment is made after discount period, so no discount will be availed. Full amount of $8,800 will be paid.

A similar and correct question is given below and answer is made accordingly.

A company purchased $10,000 of merchandise on January 5 with terms 2/10, n/30. On January 7, it returned $1,200 worth of merchandise. On January 12, 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 payment on January 12 is:

Debit Accounts Payable $10,000; credit Merchandise Inventory $200; credit Cash $9,800.

Debit Merchandise Inventory $8,800; credit Cash $8,800.

Debit Accounts Payable $8,800; credit Merchandise Inventory, $176; credit Cash $8,624.

Debit Cash $1,600; credit Accounts Payable $1,600.

Debit Accounts Payable $8,624; credit Cash $8,624.

Solution

Terms 2/10, n/30 means there is a discount of 2% is available on payment of due amount within discount period of 10 days after sale with net credit period of 30 days.

Purchases = $10,000

Returns = $1,200

Amount Due = $10,000 - $1,200 = $8,800

As the payment is made within discount period, so discount will be availed

Discount = $8,800 x 2% = $176

Cash Paid = $8,800 - $176 = $8,624