Question

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

Purchased $5,000 of inventory on account under terms 1/10/n30.
Returned $1,000 of the inventory purchased in Event 1.
Paid the remaining balance in Accounts Payable within the discount period for the inventory purchased in Event 1.
Based on this information the journal entry necessary to record the purchase discount is: (A separate subsequent journal entry will be used to record the payment of the balance due on the account.)

Answer 1

Amarillo Company recorded a purchase discount by reducing its Accounts Payable by $40 and recognizing Purchase Discounts of $40, due to payment within the discount period after returning part of the inventory.

Step-by-step explanation:

The student's question pertains to the recording of a purchase discount in accounting. Amarillo Company initially purchased inventory on account with terms allowing for a discount if payment is made within a certain time period. After returning a portion of that inventory, the company must adjust its liabilities accordingly and calculate the discount available on the remaining balance of the payable. Given the terms 1/10/n30, Amarillo Company is entitled to a 1% discount if the payment is made within 10 days. With an initial purchase of $5,000 and returns worth $1,000, the adjusted payable is $4,000. If the payment is made within the discount period, the company can record a purchase discount of 1% of $4,000, which is $40.

Accounts Payable $40
Purchase Discounts $40

This entry records the reduction in the liability (Accounts Payable) and acknowledges the company's savings (Purchase Discounts) from the timely payment of its invoice.