Purchase discount for items previously purchased?

Sep 27, 2008 1 Replies
T

Cooley company recorded a purchase discount of $200 on merchandise the company had purchased a few days ago. Cooley uses the perpetual inventory system. Which of the answers reflects the effects of this event on the financial statements? a) assets=NA Liab=(200) equity 0 Rev 0 Exp=NA NetInc=NA Cash 0OA b) assets=NA Liab=(200) equity 0 Rev 0 Exp=NA NetInc 0 Cash=NA c) assets=(200) Liab=(200) equity=NA Rev=NA Exp=NA NetInc=NA Cash=(200)OA d) assets=(200) Liab=(200) equity=NA Rev=NA Exp=NA NetInc=NA Cash=NA



I am thinking the answer is d)


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R

Yes, I believe that is correct. You have to look at the big picture to see what is debited and credited. A liability for the undiscounted cost of the merchandise was created when it was purchased. At this point, it must be removed (debited) since the discount was taken when cash was paid. In other words, let x stand for the discounted cost of the inventory:

Accounts Payable ($x + $200.00) Cash $x Inventory $200.00

x is unknown, so we are only concerned with the effects of the $200 discount as stated in the problem. As such, the liability and asset accounts are reduced by $200 (for this event only).

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