Final answer:
The question asks about the accounting treatment for a purchase with a payment term that includes a discount using the gross method in a perpetual inventory system. The purchase is initially recorded at the full amount and later adjusted if the discount is taken within the prescribed discount period.
Step-by-step explanation:
The question involves the application of purchases with a discount term under a perpetual inventory system using the gross method of accounting. On July 15, 2021, the Nixon Car Company purchased 2,200 tires at $45 each from the Harwell Company, with payment terms of 2/10, n/30. These terms imply that Nixon Car Company has the option to take a 2% discount on the total purchase price if payment is made within 10 days; otherwise, the net amount is due in 30 days.
Under the gross method, we initially record the purchase at the total cost without accounting for the potential discount. If the discount is taken, the accounting records will then be adjusted to reflect the discount on the date of payment within the discount period. If payment is not made within the discount period, no adjustments for purchases discounts will occur.
In this case, assuming Nixon pays within the discount period, the journal entry on the date of purchase (July 15, 2021) would be to debit Inventory for $99,000 (2,200 tires × $45 each) and to credit Accounts Payable for $99,000. If the payment is made within 10 days, then Nixon will debit Accounts Payable for $99,000 and credit Cash for $97,020 (which represents a 2% discount on $99,000) and an Inventory (Purchase Discount) for $1,980, reflecting the discount taken.