A company purchased inventory for $4,000 from a vendor on account, FOB shipping

Question

A company purchased inventory for $4,000 from a vendor on account, FOB shipping point, with terms of 2/10, n/30. The company paid $100 cash for freight in. The entry to record the payment of the invoice within 10 days of the invoice date by the purchaser would include , (Assume a perpetual inventory system.) O A. O B. O C. O D. a debit to Accounts Payable for $3,920 and a credit to Cash for $3.920 a debit to Accounts Payable for $3.920, a debit to Merchandise Inventory for $80, and a credit to Cash for $4,000 a debit to Accounts Payable for $4,000, a credit to Merchandise Inventory for $80, and a credit to Cash for $3,920 a debit to Accounts Payable for $4,000, a credit to Merchandise Inventory for $100, and a credit to Cash for $3,900

Explanation / Answer

As per the terms of the invoice,if the invoice is paid in 10 days, 2% discount would be applicable.

1.Company is making the payment in 10 days, cash Outflow to vendor would be 4000*(1-0.02)= 3,920. CashAccount would be credited by $3920.

2. Accounts payable booked is $4,000 at the time of booking. It will be negated completely while making the payment in full. Accounts Payable will be debited by $4,000.

Option C is correct.

Note: Please note the difference of $80 directly reduces the cost of inventory since it is in form of discount.

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