Shankar Company Uses A Perpetual System To Record Inventory Transactions. The Company Purchases Inventory On Account On February 2 For $28,000, With Terms 2/10, 1/30. On February 10, The Company Pays For The Inventory That Was Purchased On Account Record The Inventory Purchase On February 2 And The Payment On February 10. (If No Entry Is Required For A
The Correct Answer and Explanation is:
Here’s how Shankar Company should record the inventory transactions under the perpetual inventory system:
Journal Entry on February 2 (Inventory Purchase):
Date: February 2
Debit: Inventory $28,000
Credit: Accounts Payable $28,000
To record purchase of inventory on account with terms 2/10, n/30.
Journal Entry on February 10 (Payment Made):
Since the payment is made after the discount period (which ends on February 12, as the terms are 2/10, meaning a 2% discount if paid within 10 days), the company qualifies for the discount.
- Date of Purchase: February 2
- Discount Period Ends: February 12
- Payment Date: February 10 → Within the discount period
Discount = 2% of $28,000 = $560
Amount Paid = $28,000 − $560 = $27,440
Date: February 10
Debit: Accounts Payable $28,000
Credit: Cash $27,440
Credit: Inventory $560
To record payment within discount period and reduction in inventory for discount taken.
Explanation (300+ words):
Shankar Company uses a perpetual inventory system, which means all inventory transactions (purchases and sales) are recorded directly in the Inventory account. This system allows for real-time updates to inventory levels and cost of goods sold.
On February 2, the company purchases inventory on account for $28,000 under credit terms 2/10, n/30. This term means Shankar can take a 2% discount on the purchase if payment is made within 10 days; otherwise, the full amount is due within 30 days. Since this is a perpetual system, the full amount of the inventory ($28,000) is debited to Inventory, and credited to Accounts Payable to show the amount owed to the supplier.
By February 10, Shankar pays the supplier. Since February 10 is within 10 days of February 2, the company qualifies for the 2% discount, which equates to $560. This discount reduces the actual cost of the inventory because under the perpetual system, inventory is always shown at its net cost. Therefore, instead of paying the full $28,000, Shankar pays $27,440 in cash. The company reduces the Inventory account by $560 to reflect the lower net cost.
The second journal entry debits Accounts Payable for the original amount ($28,000), credits Cash for the discounted amount paid ($27,440), and credits Inventory for the $560 discount.