On June 1, Addison Company purchased $9000 of inventory on account from Garrison Company. Garrison offers a 5% discount if payment is received within 15 days. Addison records the purchase using the gross method and the perpetual inventory system. The journal entry on June 1 by Addison Company includes ________.

Question

BlackTom AI · Accepted Answer

Question restatement: On June 1, Addison Company buys $9,000 of inventory on account from Garrison. There is a 5% discount if paid within 15 days. Addison uses the gross method and perpetual inventory system. The journal entry on June 1 includes _______.

Option A: a credit to Accounts Payable for $8,550.
- Why it’s not: Under the gross method, the initial entry records the liability in Accounts Payable at the gross amount, not net of the discount. A credit to Accounts Payable for 8,550 would reflect net of discount, which is not the June 1 entry under the gross method.

Option B: a credit to Cash for $9,000.
- Why it’s not: There is no cash payment on June 1 in this scenario. The entry involves increasing Inventory and establishing Accounts Payable. Cash would be affected only when payment is actually made (or at the time of the discount capture), not at the date of purchase.

Option C: a debit to Inventory for $8,550.
- Why it’s not: This would reflect a net cost after discount, which is not recorded on the purchase date under the gross method. The gross method records the full invoice price initially, and the discount is accounted for later if utilized.

Option D: a debit to Inventory for $9,000.
- Why it’s correct: Under the gross method in a perpetual system, the company records the purchase at the gross amount as an increase to Inventory and a corresponding increase to Accounts Payable. Later, if payment is made within the discount period, the company would recognize the purchase discount (reducing Inventory) and cash payable accordingly. This aligns with recording Inventory at the gross cost on the purchase date.

Summary of reasoning: The key distinction is that the gross method captures the full, gross purchase price initially, increasing Inventory and establishing a liability in Accounts Payable. The other options incorrectly reflect net of discount or misstate which accounts are affected on the purchase date. By design, option D correctly represents the June 1 entry under the described method and system.

View Explanation

Log in for full answers

Similar Questions

Merchandise is purchased for $6,200 on September 2 subject to terms of 2/10, n/30, FOB destination. Freight costs paid by the seller totaled $200. What is the required payment if paid on September 11?

XYZ Ltd owed a creditor $400, with a 3% discount applied. The payment was made within the discount period. The impact of this entry for XYZ Ltd is:

Using the gross method, purchase discounts lost are [ Select ] Included as a reduction to purchase returns. Included in inventory purchased. Deducted from discount income. Added to accounts payable. No discounts are allowed under the gross method

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler