Question

Crimson plc paid an invoice from a credit supplier and took advantage of the early settlement discount offered. When the invoice was received and recorded, Crimson plc did not expect to take the discount.

The journal entry to record the payment of the invoice is:
A Debit Payables, Credit Purchases, Credit Cash at bank account
B Debit Payables, Credit Cash at bank account
C Debit Cash at bank account, Debit Purchases, Credit Payables
D Debit Cash at bank account, Credit Purchases, Credit Payables

Answer 1

The correct journal entry for early payment with a discount is Debit Payables and Credit Cash at bank account. This reflects a decrease in both liabilities and assets due to the payment made. The journal entry wouldn't separately show the discount, as it reduces the total payable reflected.

Step-by-step explanation:

The correct journal entry to record the payment of the invoice, taking into account the unexpected early settlement discount, is: Debit Payables, Credit Cash at bank account. This is because when the payment is made, liabilities (Payables) decrease with a debit, and the asset account Cash at bank decreases with a credit, reflecting the outflow of cash. If the early settlement discount was not anticipated initially, then it would have been recorded in the purchases journal when it was available to be taken advantage of. The discount would effectively reduce the cost of purchases and would be applied at the time of payment, making the amount paid less than the original invoice amount. Therefore, the journal entry would not separately show the discount; it would simply show the reduced cash paid out.

This is because when the payment is made, liabilities (Payables) decrease with a debit, and the asset account Cash at bank decreases with a credit, reflecting the outflow of cash. If the early settlement discount was not anticipated initially, then it would have been recorded in the purchases journal when it was available to be taken advantage of.