A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

a) Debit Merchandise Inventory $1,600; credit Cash $1,600.

b) Debit Cash $1,600; credit Accounts Payable $1,600.

c) Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.

d) Debit Accounts Payable $1,800; credit Cash $1,800.

e) Debit Accounts Payable $1,600; credit Cash $1,600

C

Explanation:

The company would have recorded the inventory and a corresponding creditor immediately upon purchase as follows:

Debit Merchandise Inventory $ 1,800; Credit Accounts Payable $1,800

On July 7th when $200 worth of inventory was returned, the inventory and corresponding creditor would have been minimized with $200 as follows:

Debit Accounts Payable $200; Credit Merchandise inventory $200

There is now only $1600 worth of inventory and accountants payable left.

The company gets an early settlement discount of 2% if they pay within 10 days. 12 July is only 7 days after the 5th, thus the settlement discount applies. $1600 x 2% = $32 which they paid cheaper for the inventory and the inventory account will be credited with $32.

Only $1568 cash was paid from the bank but nothing is owed to creditor and it will thus be debited with $1600.