A company that uses the net method of recording purchases and a perpetual inventory system 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 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:
A) Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
B) Debit Cash $1,600; credit Accounts Payable $1,600.
C) Debit Merchandise Inventory $1,600; credit Cash $1,600.
D) Debit Accounts Payable $1,568; debit Discounts Lost $32; credit Cash $1,600.
E) Debit Accounts Payable $1,800; credit Cash $1,800.

Question

Quizplus · Accepted Answer

Under the net method, the company records the purchase at the net amount to be paid (i.e. after deducting the discount). Therefore, the original purchase of $1,800 is recorded as follows: Debit Merchandise Inventory $1,764; credit Accounts Payable $1,764 [$1,800 - ($1,800 x 2%)]. 
When the company returns $200 worth of merchandise, it reduces the amount owed to the vendor by $200 x 98% (since the discount is no longer applicable). Therefore, the entry for the return is: Debit Accounts Payable $196; credit Merchandise Inventory $196. 
On July 28, when the company pays the full amount due, it has to pay the net amount of $1,568 [$1,764 - $196]. This is recorded as follows: Debit Accounts Payable $1,568; debit Discounts Lost $32 (since the company did not take advantage of the discount); credit Cash $1,600 (i.e. net amount paid).

A Company That Uses the Net Method of Recording Purchases