Question

Your company purchases $10,000 of inventory, 2/10, n/30. At the time of purchase, your firm debits Purchases for $10,000 and credits Account Payable for $10,000. If your company pays for the merchandise before the discount period lapses, you will:

O debit Accounts Payable for $9,800.
O credit Purchase Discounts for $200.
O credit Inventory for $200.
O debit Purchase Discounts for $200.
O debit Purchase Discounts Lost for $200.

Answer 1

To record the payment of inventory with a discount, debit Accounts Payable for $9,800 and credit Purchase Discounts for $200, which reduces the cost of the inventory.

Step-by-step explanation:

When a company purchases inventory on terms 2/10, n/30, it means that the company can take a 2% discount if it pays within 10 days; otherwise, the net (full) amount is due within 30 days. If the company decides to pay for the merchandise before the discount period lapses, the correct accounting entries to record the payment with the discount will be:

• Debit Accounts Payable for $10,000 (the full amount of the invoice)
• Credit Cash for $9,800 (the amount paid after discount)
• Credit Purchase Discounts for $200 (the amount of the discount taken)

Therefore, the correct entries will include debiting Accounts Payable for $9,800 and crediting Purchase Discounts for $200, which directly reduces the cost of the inventory purchased.