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Perpetual Inventory - Purchase Discounts quiz #1

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  • How does a company record purchase discounts under the perpetual inventory system when it pays a supplier within the discount period?
    Under the perpetual inventory system, when a company pays a supplier within the discount period, it records the purchase at the full invoice amount by debiting Inventory and crediting Accounts Payable. Upon payment, it debits Accounts Payable for the full amount, credits Cash for the discounted payment, and credits Inventory for the amount of the discount. This reduces the inventory value to reflect the actual cost paid.
  • What does the term '2 10 net 30' mean in purchase discount terms?
    '2 10 net 30' means a 2% discount is available if payment is made within 10 days, and the full invoice amount is due in 30 days.
  • How does a company initially record a purchase of inventory under the perpetual inventory system?
    The company debits Inventory and credits Accounts Payable for the full invoice amount at the time of purchase.
  • If a company pays within the discount period, how is the payment recorded under the perpetual inventory system?
    The company debits Accounts Payable for the full amount, credits Cash for the discounted payment, and credits Inventory for the amount of the discount.
  • In the example given, what is the amount of the purchase discount if ABC Company buys \$1800 of inventory with terms 3 10 net 45 and pays within 5 days?
    The purchase discount is \$54, calculated as \$1800 times 3%.
  • What is the actual cash paid by ABC Company after taking the 3% discount on an \$1800 purchase?
    The actual cash paid is \$1746, which is \$1800 minus the \$54 discount.
  • How does the purchase discount affect the value of inventory on the books under the perpetual system?
    The value of inventory is reduced by the amount of the discount, reflecting the actual cost paid.
  • Why is it important to pay attention to the payment date when considering purchase discounts?
    The payment date determines whether the company qualifies for the discount based on the terms provided.
  • What accounts are affected in the journal entry when the company pays the supplier within the discount period?
    Accounts Payable is debited for the full amount, Cash is credited for the discounted payment, and Inventory is credited for the discount amount.
  • How does the perpetual inventory system ensure the accounting equation remains balanced when recording purchase discounts?
    By reducing both Inventory and Cash by the appropriate amounts, the system ensures assets and liabilities remain balanced after the transaction.
  • How are the credit terms '2/10, n/30' interpreted in the context of purchase discounts?
    '2/10, n/30' means the buyer can take a 2% discount on the invoice amount if payment is made within 10 days; otherwise, the net (full) amount is due within 30 days.
  • What does '2/10, n/60' mean when stated as credit terms for a purchase?
    '2/10, n/60' means the buyer can take a 2% discount if payment is made within 10 days; otherwise, the full invoice amount is due within 60 days.
  • In the credit terms '3/15, n/45', what does the '3' represent?
    The '3' represents a 3% discount available to the buyer if payment is made within 15 days.
  • Explain the meaning of the credit terms '2/10, n/30' in a purchase transaction.
    The terms '2/10, n/30' indicate that a 2% discount is offered if payment is made within 10 days; otherwise, the net amount is due within 30 days.
  • What is meant by the credit terms '2/10, n/60' in a perpetual inventory system?
    '2/10, n/60' means a 2% discount is available if payment is made within 10 days, and the net amount is due within 60 days.
  • Describe what '2/10, n/30' credit terms mean for a buyer in a purchase transaction.
    '2/10, n/30' means the buyer can deduct 2% from the invoice amount if payment is made within 10 days; otherwise, the full amount is due within 30 days.