Journalize the following transactions for the buyer, Morgan Company, using the net method to account for purchase discounts. Assume a perpetual inventory system. January3 Purchased goods from Grieg Company on account, $15,000, terms 5/10, n/30. January9 Returned defective merchandise to Grieg Company that was previously purchased on account, $2,100. January13 Paid the amount due to Grieg Company.

Morgan Company

Journal Entries:

January 3:

Debit Inventory $15,000

Credit Purchase Discount $750

Credit Accounts Payable (Grieg Company) $14,250

To record the purchase of goods on account, terms 5/10, n/30.

January 9:

Debit Accounts Payable (Grieg Company) $1,995

Debit Purchase Discount (Lost) $105

Credit Inventory $2,100

To record the return of defective merchandise.

January 13:

Debit Accounts Payable (Grieg Company) $12,255

Credit Cash Account $12,255

To record the payment of amount due.

Explanation:

Using the perpetual inventory system, the purchase and return of merchandise are recorded in the Inventory account and not in the Purchases account (periodic inventory system).  The cost of goods sold is also credited to the Inventory account.  The perpetual inventory system operates on the use of technology which is able to record inventory transactions as they occur, instead of waiting till the end of a period.  This means that perpetual inventory is being taken every time a transaction occurs.

Using the net method to account for purchased cash discount, it is assumed that the retailer always takes advantage of the discounted cash price and records the purchased inventory at the discounted price. The net method is a way to record purchases of inventory with a cash discount.

Under the net method, the company will credit Accounts Payable for the invoice amount minus any early payment discount that is offered.  Under the gross method, purchases are recorded at the full invoice price without deduction of any cash discounts.

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