Question

A company uses the perpetual inventory system and recorded the following entry:

Account Payable .............. 2,500
Merchandise Inventory ...........50
Cash......................................2,450

This entry reflects a:
a. Purchase
b. Sale
c. Return
d. Payment of the account payable and recognition of a cash discount taken
e. Purchase and recognition of a cash discount taken

Answer 1

The journal entry represents a purchase and the recognition of a cash discount taken by the company. The accounts payable are reduced, and a corresponding cash payment is made, with an inventory adjustment to reflect the discount received.

Step-by-step explanation:

The journal entry given reflects e. Purchase and recognition of a cash discount taken. The company is reducing its accounts payable (showing that a payment is made), decreasing the cash by $2,450 while also adjusting the merchandise inventory by $50. This indicates that the company has taken advantage of a cash discount offered by the supplier, paying less than the full amount due by the amount of the discount - in this case, $50.

A cash discount is typically offered as an incentive for early payment. Here, instead of paying the full $2,500 initially recorded as a payable, the company has paid $2,450, taking a discount of $50, which is recorded as a reduction in the merchandise inventory because it effectively lowers the cost of the inventory purchased.