Question

On July​ 1, Corrao Company purchased

$2,000

of inventory on account with credit terms of

4​/10,

net 30. Corrao Company uses the perpetual inventory system. On July​ 5, Corrao Company paid the amount due. What journal entry did they prepare on July​ 5?

Answer 1

Answer: Debit Accounts Payable for $2,000​ credit Inventory for $80 and credit Cash for $1,920

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• 4/10 means: '4' indicates the discount percentage and '10' indicates the number of days from the date of the invoice within which the buyer has to pay the amount it owed to the seller to avail (or to qualify for) the discount of 1%.

• N/30 states that if the buyer is not able to pay the invoice amount within 10 days to avail 1% discount, then the entire invoice amount is due within 30 days from the date of the invoice.

The payment is done within 10 days from the date of the invoice (July 1). So, Corrao Company is eligible for a discount of 4%.

Discount amount = $2,000 x 4% = $80 -->Credited to inventory account as a result inventory value decreases by $80

Payment = Invoice amount – Discount

= $2,000 – $80

  = $1,920 -->Credited to cash account