A company that uses the perpetual inventory system purchased inventory for $ 1 comma 190 comma 000 on account with terms of 4​/7, ​n/20. Which of the following correctly records the payment made 15 days after the date of​ invoice?

Question

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Part 1
A.
Accounts Payable
1 comma 190 comma 000
     Merchandise Inventory
47 comma 600
     Cash
1 comma 142 comma 400
B.
Accounts Payable
1 comma 190 comma 000
     Cash
1 comma 190 comma 000
C.
Accounts Payable
1 comma 190 comma 000
     Merchandise Inventory
1 comma 190 comma 000
D.
Cash
1 comma 190 comma 000
     Accounts Payable
1 comma 190 comma 000

Answer 1

To determine the correct journal entry for the payment made 15 days after the invoice date under the terms of 4/7, n/20, we need to understand the terms:

• 4/7 means that a 4% discount is available if the invoice is paid within 7 days.
• n/20 means that the full amount is due within 20 days with no discount available.

Since the payment is made after 15 days, the company does not qualify for the discount, and thus must pay the full amount of $1,190,000.

The journal entry to record the payment would be:

Debit Accounts Payable for $1,190,000 (to eliminate the liability)
Credit Cash for $1,190,000 (to show the outflow of cash)

Given the options:

A. Accounts Payable 1,190,000
       Merchandise Inventory 47,600
       Cash 1,142,400

B. Accounts Payable 1,190,000
       Cash 1,190,000

C. Accounts Payable 1,190,000
       Merchandise Inventory 1,190,000

D. Cash 1,190,000
       Accounts Payable 1,190,000

The correct answer is B:

Accounts Payable 1,190,000
       Cash 1,190,000