Question

Birmingham Corporation uses the perpetual inventory method. On May 1, it purchased $22,000 of inventory, terms 2/10, n/30. On May 3, Birmingham returned goods that cost $2,000. On May 9, Birmingham paid the supplier. On May 9, the company should credit

a. purchase discounts for $440.
b. inventory for $440.
c. inventory for $400.
d. purchase discounts for $400.

Answer 1

On May 9, Birmingham Corporation should credit inventory for $400, reflecting the 2% early payment discount allowed on the remaining purchase amount of $20,000 after returning goods worth $2,000.

Step-by-step explanation:

The question revolves around accounting for purchase discounts under the perpetual inventory system. Birmingham Corporation purchased inventory on credit with terms that offer a discount for early payment. The terms 2/10, n/30 mean that the buyer can take a 2% discount if payment is made within 10 days; otherwise, the net amount is due within 30 days. After returning goods worth $2,000, the adjusted cost of the inventory is $20,000 ($22,000 - $2,000).

When Birmingham pays the supplier on May 9, they are within the discount period and thus entitled to a 2% discount. The discount Birmingham Corporation is entitled to is 2% of $20,000, which is $400. Therefore, on May 9, Birmingham should credit inventory for $400, which reduces the cost of the inventory on hand by the discount amount received. The correct answer is option (c), inventory for $400.