Question

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 8, it paid the full amount due. Assuming the company uses the gross method to record purchases, the journal entry to record the cash paid on July 8 is? Also what is the gross method to record purchases?

Answer 1

Gross Method of recording the purchase is the recording of the purchase at the gross amount of purchase.
In this method, the discount which will be available at the time of payment need to be ignored at the tme of purchase.
However, when the payment is actually made within discount period and cash discount is available,
Then the discount so recived shall be credited to Inventory account to reduce the cost of inventory.
Therefore, Journal entries for purchase of inventory and payment made is as under:
S.no.	Accounts title and explanations				Debit $	Credit $
a.	Merchandise inventory account				1800
	Accounts payable					1800
	(for purchase of inventory made)
b.	Accounts payable				200
	Merchandise inventory account					200
	(for return on inventory)
c.	Accounts payable (1800-200)				1600
	Cash account (1600-2%)					1568
	Merchandise inventory (1600*2%)					32
	(for inventory payment made and availed discount)