Juniper Company, Inc. uses the gross method of recording purchases and a perpetual inventory system. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:
A)Debit Merchandise Inventory $9,750; credit Cash $9,750.
B)Debit Purchases $9,652.50; credit Accounts Payable $9,652.50.
C)Debit Merchandise Inventory $9,750; credit Sales Returns $1,500; credit Cash $8,250.
D)Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750.
E)Debit Accounts Payable $8,250; debit Purchase Returns $1,500; credit Merchandise Inventory $9,750.

Question

Quizplus · Accepted Answer

The gross method means that purchases are recorded at the full invoice amount (before any discounts are taken). Therefore, the journal entry to record the purchase on August 7 is to debit Merchandise Inventory for $9,750 and credit Accounts Payable for $9,750. The return on August 11 would be recorded separately with a debit to Accounts Payable for $1,500 and a credit to Merchandise Inventory for $1,500. Finally, the payment on August 16 would be recorded with a debit to Accounts Payable for $8,250 and a credit to Cash for $8,250 (reflecting the 1% discount taken).