Question

On May? 1, Santelle Company purchased $700

of inventory on account with credit terms of 33?/10,

net 30. Santelle uses the perpetual inventory system. On May? 2, the seller gave Santelle a $160

allowance due to a product defect. What journal entry did Santelle Company prepare on May? 2?

A.debit Accounts Payable for $160 and credit Purchase Discounts for $160.

B. debit Accounts Payable for $160 and credit Purchase Returns and Allowances for $160.

C.debit Accounts Payable for $160 and credit Inventory for $160.

D.debit Cash for $160 and credit Accounts Payable for

$160.

Answer 1

• When perpetual method is used, all purchase related transactions are recorded to “Inventory” account.
  This means that “Inventory” account is used, in place of “Purchase” account, “Purchase Discount” account, “Purchase Return & Allowance account”
• In the question, on May 2, $ 160 allowance is being given.
  Normally, such Allowance is credited to Purchase return & Allowances account, and Accounts Payable is debited.
  But since perpetual method is being followed,
  Correct Answer is Option ‘C’:
  “debit Accounts Payable for $160 and credit Inventory for $160.”