question archive A company begins operations in April, uses the perpetual method, and records merchandise purchases at net
A company begins operations in April, uses the perpetual method, and records merchandise purchases at net
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A company begins operations in April, uses the perpetual method, and records merchandise purchases at net. The company makes two purchases on account. Terms are 1/15, n/45. On April 4, the company purchases merchandise for $3,000, which it pays for on April 16. On April 11, it makes a $9,000 purchase that it pays for on April 29, but there are no sales in April. On April 30, what will be the balance in the company's Inventory ledger account?
a. $11,880
b. $11,910
c. $11,970
d. $12,000
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The correct answer is option a. $11,880.
To solve the following problem, let us record the each transaction through journal entries.
April 4 Transaction
| Account Title | Debit | Credit |
| Inventory ($3,000 x 99%) | $2,070 | |
| Accounts Payable | $2,970 |
April 11 Transaction
| Account Title | Debit | Credit |
| Inventory ($9,000 x 99%) | $8,910 | |
| Accounts Payable | $8,910 |
April 16 Transaction
| Account Title | Debit | Credit |
| Accounts Payable | $3,267 | |
| Cash | $3,267 |
April 29 Transaction
| Account Title | Debit | Credit |
| Accounts Payable | $8,910 | |
| Purchase Discount Lost ($9,000 x 1%) | $90 | |
| Cash | $9,000 |
Always remember that under net method of recording inventory, purchase discount lost taken is considered management fault that is why it is expensed and reported in the income statement as a deduction to gross profit.
Thus, the total inventory is equivalent to $2,970 + $8,910 = $11,880.
