On June 1, Atkinson Company purchased $7000 of inventory on account from Donnie Company. Donnie Company offers a 4% discount if payment is received within 15 days. Atkinson Company records the purchase using the gross method and the perpetual inventory system. Atkinson Company makes the payment for the inventory on June 10. The journal entry on June 10 by Atkinson Company includes ________.

Question

BlackTom AI · Accepted Answer

The scenario involves a purchase on account with a purchase discount available if paid within 15 days, recorded under the gross method in a perpetual inventory system.
Option 1: a credit to Cash for $6720. This corresponds to paying $7,000 less the 4% discount of $280, resulting in cash paid of $6,720. Under the gross method, the entry on payment within the discount period reduces cash by the discounted amount and also removes the accounts payable balance, often with a separate Purchase Discounts account.
Option 2: a debit to Inventory for $280. Under the gross method, the default entry is to record the purchase at the gross amount (Inventory debited $7,000) and Accounts Payable credited $7,000. The discount is recorded as a reduction via Purchase Discounts when payment occurs, not as an immediate debit to Inventory at the time of payment.
Option 3: a credit to Interest Expense for $280. There is no interest expense arising from this transaction; the 4% is a purchase discount, not a financing charge or interest. Therefore crediting Interest Expense would be incorrect.
Option 4: a debit to Cash for $7,000. Debiting cash for the full amount would be inappropriate because the company is entitled to a 4% discount if paid within 15 days, so the cash outlay is $6,720 rather than the full $7,000. The full cash outlay would imply no discount was taken, which contradicts the given terms.
In summary, the correct handling requires recognizing the discounted cash outlay, and the payment within the discount window reduces cash to $6,720, making a credit to Cash for $6,720 the appropriate cash-flow-related entry in the June 10 journal entry under the gross method in a perpetual system.

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