A company that uses the gross 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 purchase on July 5 is:
A)Debit Merchandise Inventory $1,600; credit Cash $1,600.
B)Debit Merchandise Inventory $1,800; credit Accounts Payable $1,800.
C)Debit Merchandise Inventory $1,800; credit Sales Returns $200; credit Cash $1,600.
D)Debit Accounts Payable $1,800; credit Merchandise Inventory $1,800.
E)Debit Accounts Payable $1,800; credit Purchase Returns $200; credit Merchandise Inventory $1,600.

Question

Quizplus · Accepted Answer

Under the gross method, the company records purchases at the full invoice amount, and then subtracts any applicable discounts and returns later. Therefore, on July 5, the company would debit Merchandise Inventory for the full amount of $1,800, and credit Accounts Payable for the same amount since it has not yet paid for the purchase. The return of $200 on July 7 would be recorded with a debit to Accounts Payable and a credit to Merchandise Inventory. Finally, on July 28, the company would pay the remaining balance of $1,600 (after deducting the $200 return and the 2% discount) with a debit to Accounts Payable and a credit to Cash.

A Company That Uses the Gross Method of Recording Purchases