Question

The Purchaser is paying an account payable of $5,000 for previously purchased merchandise with cash and taking advantage of a 10% discount (10/10 – n/30) offered by the Seller for early payment.

Under the perpetual method of accounting for inventories, consider the journal entry for the transaction in Fact Pattern B, above, from the Purchaser's perspective, assuming the Purchaser is entitled to the discount for early payment. The Purchaser will:

a. Debit Account Receivable for $5000.

b. Debit Account Payable for $4500.

c. Credit cash for $5000.

d. Credit Inventory $500.

Under the periodic method of accounting for inventories, consider the journal entry for the transaction in Fact Pattern B, above, from the Purchaser's perspective, assuming the Purchaser is entitled to the discount for early payment. The Purchaser will:

a. Debit Account Receivable for $5000.

b. Debit Account Payable for $5000.

c. Credit cash for $5000.

d. Credit Purchase Discount $4500.

Under the periodic method of accounting for inventories, consider the journal entry for the transaction in Fact Pattern B, above, from the Seller's perspective, assuming the Purchaser is entitled to the discount for early payment. The Seller will:

a. Credit Account Receivable for $5000.

b. Debit Account Payable for $4500.

c. Debit cash for $5000.

d. Debit Sales Discount $5000.

Under the perpetual method of accounting for inventories, consider the journal entry for the transaction in Fact Pattern B, above, from the Seller's perspective, assuming the Purchaser is entitled to the discount for early payment. The Seller will:

a. Credit Account Payable for $5000.

b. Credit Account Receivable for $4500.

c. Debit cash for $5000.

d. Debit Sales Discount $500.

Answer 1

(1)

In perpetual inventory system the changes in inventory is recorded in real time. For the purchaser three accounts are of concern that is inventory account, cash account and accounts payavle account.

When accounts payable is settled within the discount period the inventory value is decreased by the discount amount while the journal entry will be :

PARTICULAR	DEBIT	CREDIT
Accounts payable (Dr.)	5000
Cash account (Cr.)		4500
Inventory account (Cr.)		500

Hence the right answer is d. Credit inventory 500.

(2)

When the periodic inventory method is followed incase if discount the purchase discount account is used incase the accounts payables is settled during the discount period. The journal entry will be :

PARTICULAR	DEBIT	CREDIT
Accounts payable account (Dr.)	5000
Purchase discount account (Cr.)		500
Cash account (Cr.)		4500

Hence the right answer is b. Debit accounts payable for 5000.

(3)

For sellers perspective under the periodic inventory system if the purchaser settles his accounts in the time frame of the discount then the sales discount is debited by the seller to record the discount. The journal entry for settelmenr of accounts by purchaser with discount is:

PARTICULAR	DEBIT	CREDIT
Cash account (Dr.)	4500
Sales discount account (Dr.)	500
Accounts receivable account (Cr.)		5000

Hence the right answer is a. Credit accounts receivable for 5000.

(4)

From the sellers perspective whether it's the periodic inventory system or the perpetual inventory system the treatement for the seller remains the same for recording sales discount.

The journal entry will remain the same as part 3.

Hence the correct answer is d. Debit sales discount for 500.

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