Waterway Company uses a perpetual inventory system and made a purchase of merchandise on credit from Carla Vista Corporation on August 3, for $9200, terms 2/10, n/45. On August 10, Waterway makes the appropriate payment to Carla Vista. The entry on August 10 for Waterway Company is

Dr Accounts Payable 9200 Cr Cash 9016 Cr Inventory 184

Explanation:

The payment terms of 2/10, n/45 mean that if paid within 10 days the company is entitled to a 2% discount. Otherwise full payment is required within 45 days.

Since we're settling the account within 10 days ( 7 days after purchase ) we are entitled to a 2% discount.

Originally the inventory was recorded at 9200 Dr and a Cr to Accounts payable of 9200.

The day the invetory is paid we will record the following (August 10)

Dr Accounts Payable $9200

Cr Cash/Bank                           $9016

Cr Inventory                              $184  

Since we're using the perpetual inventory system the actual cost of inventory is 9016 and not 9200. Thus inventory is now recorded at 9016. The cast amount is the actual amount used to settle the account after the 2% discount was applied.

the journal entries to record this transaction should be:

August 3, purchase merchandise on account terms 2/10, n/45

Dr Merchandise inventory 9,200

    Cr Accounts payable 9,200

August 10, invoice is paid within discount period:

Dr Accounts payable 9,200

    Cr Cash 9,016

    Cr Purchase discounts 184

I recorded the transactions using the gross method, if you use the net method then the transaction should have been originally recorded with the sales discount (Dr Merchandise inventory 9,016, Cr Accounts payable 9,016).

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