Question

Travis Company purchased merchandise on account from a supplier for $8,000, terms 2/10, net 30. Travis Company paid for the merchandise within the discount period. Under a perpetual inventory system, record the journal entries required for the above transactions.

Answer 1

Answer:

(A)

inventory 8,000 debit

  account payable 8,000 credit

to record purchase ofthe merchandise on account

(B)

account payable    8,000 debit

  inventory                                       80 credit

 cash                                            7,920 credit

to record payment within discount period

Explanation:

(A)

The company will increase his inventory by the nominal, and declare the account payable (liability) with his supplier.

(B)

We write-off the account payable.

We record the cash paid.

discount 2% x 8,000 = 80

8,000 - 80 = 7,920 cash disbursement

The difference decrease the inventory because, we are on perpetual inventory, we adjust directly to inventory, we don't use a discount account.

Answer 2

Answer:

• DR: PURCHASES ACCOUNT - $8,000

        CR: SUPPLIER ACCOUNT - $8,000

BEING PURCHASE OF $8,000 MERCHANDISE ON CREDIT BY TRAVIS COMPANY

• DR: SUPPLIER ACCOUNT - $160

        CR: DISCOUNT RECEIVED ACCOUNT - $160

BEING DISCOUNT RECEIVED FROM SUPPLIER OF 2% ON PURCHASE DUE TO PAYMENT WITHIN 10 DAYS BY TRAVIS COMPANY.

• DR: SUPPLIER ACCOUNT - $7,840

        CR: CASH/BANK ACCOUNT - $7,840

BEING PAYMENT TO SUPPLIER FOR MERCHANDISE WITHIN THE DISCOUNT PERIOD (10 DAYS) BY TRAVIS COMPANY.

Explanation:

THE SUPPLIER OFFERED TRAVIS COMPANY 2/10, NET 30 TERMS ON ITS PURCHASE. THIS MEANS THAT TRAVIS COMPANY WILL ENJOY A 2% (2%*$8,000=$160) DISCOUNT ON ITS PURCHASE IF IT PAYS WITHIN 10 DAYS OF THE DATE OF PURCHASE OR PAY THE FULL AMOUNT($8,000) IN 30 DAYS.

THE TRANSACTION INVOLVED 3 STAGES

1. CREDIT PURCHASE
2. TREATMENT OF DISCOUNT
3. PAYMENT

THEREFORE, THE JOURNAL ENTRIES GIVEN IN THE ANSWER ABOVE EXPLAINS THE ACCOUNTING TREATMENT OF THE 3 STAGES.