A company that uses the gross method of accounting for purchases and a perpetual inventory system made a February 1 purchase of merchandise inventory on account for $7,300 with terms of 1/10, n/30. The February 1 journal entry to record this transaction would include a:
A)Debit to Merchandise Inventory of $7,300.
B)Debit to Merchandise Inventory of $7,227.
C)Credit to Cash of $7,300.
D)Credit to Merchandise Inventory of $73.
E)Credit to Accounts Payable of $7,227.

Question

Quizplus · Accepted Answer

The gross method of accounting for purchases records the full amount of the purchase as Merchandise Inventory. Therefore, the journal entry to record the February 1 purchase would include a debit to Merchandise Inventory for the full amount of the purchase, which is $7,300. The terms of 1/10, n/30 mean that the company can take a 1% discount if they pay within 10 days, or they can pay the full amount within 30 days. The discount of $73 ($7,300 x 1%) would be recorded separately when/if it is taken.

A Company That Uses the Gross Method of Accounting for Purchases