Question

Bruce operates a successful hardware store. He received a bill from one of his suppliers in the amount of $1,000 with payment terms stated as follows: 2/15, n/30. The bill was dated January 15 and Bruce paid the bill on January 20, taking advantage of the terms. Which of the following set of journal entries is required to record the payment? Assume he uses the perpetual inventory system.

Select one:

a. Debit Accounts Payable $1,000, Credit Cash $980, Credit Purchase Discount $20

b. Debit Accounts Payable $1,000, Credit Cash $980, Credit Merchandise Inventory $20 

c. Credit Accounts Payable $980, Debit Cash $980

d. Credit Accounts Payable $1,000, Debit Cash $980, Debit Merchandise Inventory $20

Answer 1

The terms which were 2/15, n/30 which mean that if the firm pays the bill within 15 days they would get 2% discount and they have to pay the net amount within 30 days. Bruce took advantage of the terms and got the discount which was 20(1000*2%) 

Thus, the journal entry would be

Accounts payable                    1000  

           Cash (1000-20)                             980

           Merchandise Inventory                  20

 

b. Debit Accounts Payable $1,000, Credit Cash $980, Credit Merchandise Inventory $20