Question

Elkins Corporation uses the perpetual inventory and the gross method. On March 1, it purchased $50,000 of inventory, terms 2/10, n/30. On March 3, Elkins returned goods that cost $5,000. On March 9, Elkins paid the supplier. On March 9, Elkins should credit

a. purchase discounts for $1,000.
b. inventory for $1,000.
c. purchase discounts for $900.
d. inventory for $900.

Answer 1

Elkins Corporation should credit purchase discounts for $900 on March 9, considering the 2% discount on the adjusted purchase amount after returning some goods.

Step-by-step explanation:

The question involves applying the terms of sale to a purchase transaction in the context of a perpetual inventory system using the gross method. Elkins Corporation made an initial purchase of $50,000 worth of inventory. With the terms being 2/10, n/30, this means they receive a 2% discount if they pay within 10 days. After returning $5,000 of the goods, the amount subject to the discount would be $45,000 ($50,000 - $5,000). Therefore, when Elkins pays on March 9, they are entitled to a discount of 2% on $45,000, which amounts to $900. Hence, on March 9, when recording the payment, Elkins Corporation should credit purchase discounts for $900.