Question

On October 5, your company buys and receives inventory costing $5,000, on terms 2/30, n/60. On October 20, your company pays the amount owed relating to the October 5 purchase. Prepare the journal entries needed on October 5 and 20, assuming the company uses a perpetual system and records purchase discounts using the gross method

Answer 1

Answer:

October 5

                              Debit        Credit

Inventory                 5000

Accounts Payable                     5000

October 20

Accounts Payable 5000

Cash                                      4900

Discount                                   100

Explanation:

The terms 2/30, n/60 mean that the company has to pay the $5000 within 60 days and if they pay the money within 30 days they will get a 2 percent discount. As we are using the gross method we will assume that the company will pay in full and if the company avails the discount we will adjust later.

On October 5 our company buys inventory worth $5000 on credit therefore we record this transaction by debiting inventory by 5000 and crediting accounts payable by 5000.

On October 20 the company makes eh payment which means that they will get a 2 percent discount. So we will debit accounts payable by 5000 as it is the total amount owed. We will debit cash by 4900 because a 2 percent discount on 5000 is 100. (5000-(5000*0.02))= 4900. After that we will credit discount by 100 to record the fact that we got a 100 dollar discount on this transaction.