A company that uses the gross method of recording purchases and a perpetual inventory system made a purchase of $400 with terms of 2/10, n/30. The entry to record the purchase would be:
A)Debit Merchandise Inventory $392; credit Accounts Payable $392.
B)Debit Merchandise Inventory $400; credit Accounts Payable $400.
C)Debit Merchandise Inventory $392; credit Cash for $392.
D)Debit Merchandise Inventory $392; debit Discounts Lost $8; credit Accounts Payable $400.
E)Debit Accounts Payable $400; credit Discounts Lost $8; credit Cash $392.

Question

Quizplus · Accepted Answer

The gross method of recording purchases involves recording the full amount of the purchase initially, without taking into account any discounts that may be earned for early payment. A perpetual inventory system means that inventory records are updated continuously, rather than only at the end of an accounting period. Since the purchase is made on credit with terms of 2/10, n/30, the company has the option to take advantage of a 2% discount if it pays within 10 days. However, since the gross method is used, the company initially records the full purchase amount of $400. The entry to record this purchase would be to debit Merchandise Inventory for $400 and credit Accounts Payable for $400. If the company chooses to take advantage of the discount and pays within 10 days, a subsequent entry would be necessary to record the payment and the discount taken.

A Company That Uses the Gross Method of Recording Purchases