Question

Roco Industries purchased $10,000 of merchandise on February 1, 2020 with credit terms of 2/10, n/60. It returned $2,500 worth of merchandise on February 4. Roco uses the periodic inventory system and net method for recording purchase discounts. Assume Roco paid its invoice on March 9. What is the effect of the entry to record the payment on March 9 on Roco’s assets, liabilities and equity, respectively?

Multiple Choice

• No effect; Increase; Decrease

• Decrease; Decrease; Decrease

• Decrease; No effect; Decrease

• Decrease; Decrease; No effect

Answer 1

• The payment is made on Mar 9, which is after the discount term of 10 days.
• Method used here is “net method” which means that discount has already been recorded as “Purchase discount” when merchandise was purchased.
• Now when the payment is made after the discount date, that discount earlier recorded will be reversed.
• The effect for the payment will be:
  .Decrease in Cash as payment has been made,
  Decrease in Accounts payable as liabilities are being paid off.
  Discount earlier recorded, now reversed will decrease net income and hence decrease Equity.
• Correct Answer = Option #2
  Decrease (Asset), Decrease (Liabilities), Decrease (Equity)