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Periodic Inventory - Purchase Discounts quiz

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  • What does the term '2/10, net 30' mean in purchase discounts?
    It means a 2% discount is available if payment is made within 10 days; otherwise, the full amount is due in 30 days.
  • In a periodic inventory system, which account is used to record purchase discounts?
    Purchase discounts are recorded in a contra inventory account called 'purchase discounts.'
  • How does the purchase discounts account affect inventory value?
    It reduces the value of inventory because it is a contra asset account.
  • When are purchase discounts recorded in the periodic system?
    They are recorded when payment is made and the discount is taken.
  • What is the journal entry when goods are purchased on account under periodic inventory?
    Debit the purchases account and credit accounts payable for the purchase “on account.”
  • How do you determine if a company qualifies for a purchase discount?
    Check if payment is made within the discount period specified in the terms (e.g., within 10 days for '3/10, net 45').
  • How is the amount of a purchase discount calculated?
    Multiply the purchase amount by the discount percentage (e.g., \(1800 × 3% = \)54).
  • What is the journal entry when payment is made within the discount period?
    Debit accounts payable for the full amount, credit cash for the amount paid, and credit purchase discounts for the discount received.
  • If ABC Company buys \$1800 of goods with terms 3/10, net 45 and pays within 10 days, how much cash do they pay?
    They pay \$1746 in cash after taking a \$54 discount.
  • What happens to accounts payable when payment is made for a purchase with a discount?
    Accounts payable is debited for the full purchase amount, reducing the liability to zero.
  • Why is the purchase discounts account credited when a discount is taken?
    Because it is a contra asset account, and credits increase its balance, reducing inventory value.
  • What is the impact of a purchase discount on the cash account?
    Cash decreases by the amount actually paid, which is the purchase price minus the discount.
  • How does the periodic system differ from the perpetual system in recording purchase discounts?
    In the periodic system, discounts are recorded in a separate purchase discounts account, while in the perpetual system, they directly reduce inventory.
  • What is the effect of purchase discounts on the financial statements?
    They reduce the cost of inventory and, ultimately, cost of goods sold, increasing net income.
  • What is the total payment period in the terms '3/10, net 45' and why is it less important in discount calculations?
    The total payment period is 45 days, but it is less important because the main concern is whether payment is made within the discount period to qualify for the discount.