Question

Amarillo Company experienced the following events during its first accounting period.

A. Purchased $5,000 of inventory on account under terms 1/10/n30.
B. Returned $1,000 of the inventory purchased in Event 1.
C. Paid the remaining balance in Accounts Payable within the discount period for the inventory purchased in Event 1.
D. Based on this information, which one of the following shows how the recognition of the cash discount will affect the Company's financial statements? (Consider the affect of the recognition of the discount separately from the payment on account.)

Answer 1

The recognition of the cash discount will affect Amarillo Company's financial statements by decreasing the purchase price and increasing accounts payable.

Step-by-step explanation:

The recognition of the cash discount in this scenario will affect Amarillo Company's financial statements as follows:

1. Event A: Purchased $5,000 of inventory on account under terms 1/10/n30. This means that if the company pays within 10 days, it will receive a 1% discount on the purchase price. The reduction in the purchase price due to the cash discount will be recorded as a decrease in the inventory account and an increase in the accounts payable account.
2. Event B: Returned $1,000 of the inventory purchased in Event 1. The return of inventory will be recorded as a decrease in the accounts payable account and an increase in the inventory account.
3. Event C: Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. The payment will be recorded as a decrease in the accounts payable account and a decrease in the cash account.