Question

A company that uses the perpetual inventory system purchased inventory for $920,000 on account with terms of 3​/7, ​n/20. Which of the following correctly records the payment made 15 days after the date of​ invoice?"

a) Debit Inventory $920,000, Credit Accounts Payable $920,000
b) Debit Cash $920,000, Credit Inventory $920,000
c) Debit Accounts Payable $920,000, Credit Cash $920,000
d) Debit Cash $920,000, Credit Accounts Payable $920,000

Answer 1

The correct entry to record the payment made 15 days after the date of the invoice is option c) Debit Accounts Payable $920,000, Credit Cash $920,000. So c) Debit Accounts Payable $920,000, Credit Cash $920,000 is the right option.

Step-by-step explanation:

The terms "3/7, n/20" indicate a cash discount of 3% if paid within 7 days, with the net amount due within 20 days. Since the payment is made 15 days after the invoice date, the company is still within the discount period.

To calculate the discount, we take 3% of $920,000, which is $27,600 (3/100 * $920,000). Therefore, the amount paid to take advantage of the discount is $920,000 - $27,600 = $892,400. This is the amount debited to Accounts Payable. The remaining $27,600 is the discount, which is reflected in the credit to Cash.

The entry ensures accurate accounting for both the reduction in Accounts Payable and the corresponding decrease in Cash due to the discount taken. This approach aligns with proper financial management practices, optimizing cash flow by leveraging available discounts while maintaining accurate records of payable amounts.