Question

A company using the perpetual inventory system purchased inventory worth $7,000 on account with credit terms of 3/15, n/30. Defective inventory was recelved, but instead of a return, an allowance of $900 is given. The allowance is before the invoice is paid. The journal entry to record the allowance would be A. $873 debilt to Acoounts Payabie and $873 credit to Merchandise inventory B. $873 debit to Merchandise Inventory and $873 credit to Acoounts Payable C. $900 debit to Merchandise inventory and $900 credt to Acoounts Payable D. $900 debit to Accounts Payable and $900 credit to Merchandise Itrventory

Answer 1

The correct journal entry in this case is to debit Merchandise Inventory and credit Accounts Payable by the amount of the allowance, which is $900.

Step-by-step explanation:

The correct journal entry to record the allowance would be $900 debit to Merchandise Inventory and $900 credit to Accounts Payable. When a company receives defective inventory and is given an allowance, this allowance reduces the amount owed to the supplier. Since the question indicates the perpetual inventory system is in use, the merchandise inventory account needs to be reduced by the amount of the allowance. Therefore, the correct entry is to debit Merchandise Inventory, which decreases the asset, and to credit Accounts Payable, which decreases the liability. This transaction reflects the reduction in cost of inventory due to the received allowance, prior to paying the invoice.

Answer 2

The correct journal entry to record a $900 inventory allowance is to debit Merchandise Inventory and credit Accounts Payable for the same amount, reflecting the decreased value of inventory and the reduced liability to the supplier.

Step-by-step explanation:

When a company using a perpetual inventory system receives defective goods and is granted an allowance, a journal entry is required to record this transaction. In this scenario, the company has received a $900 allowance before payment. The correct journal entry to record the allowance would be to debit Merchandise Inventory for the amount of $900 and credit Accounts Payable for the same amount. This reflects the reduction in the value of inventory due to the defective goods and the decrease in the amount owed to the supplier.

Therefore, the correct answer is C. $900 debit to Merchandise Inventory and $900 credit to Accounts Payable.