On June 1, Addison Company purchased $9000 of inventory on account from Garrison Company. Garrison offers a 5% discount if payment is received within 15 days. Addison records the purchase using the gross method and the perpetual inventory system. The journal entry on June 1 by Addison Company includes ________.Single choice
A
a credit to Accounts Payable for $8550
B
a credit to Cash for $9000
C
a debit to Inventory for $8550
D
a debit to Inventory for $9000

Question

On June 1, Addison Company purchased $9000 of inventory on account from Garrison Company. Garrison offers a 5% discount if payment is received within 15 days. Addison records the purchase using the gross method and the perpetual inventory system. The journal entry on June 1 by Addison Company includes ________.Single choice

A

a credit to Accounts Payable for $8550

B

a credit to Cash for $9000

C

a debit to Inventory for $8550

D

a debit to Inventory for $9000

BlackTom AI · Accepted Answer

Question restatement: On June 1, Addison Company buys $9,000 of inventory on account from Garrison. There is a 5% discount if paid within 15 days. Addison uses the gross method and perpetual inventory system. The journal entry on June 1 includes _______.

Option A: a credit to Accounts Payable for $8,550.
- Why it’s not: Under the gross method, the initial entry records the liability in Accounts Payable at the gross amount, not net of the discount. A credit to Accounts Payable for 8,550 would reflect net of discount, which is not the June 1 entry under the gross method.

Option B: a credit to Cash for $9,000.
- Why it’s not: There is no cash payment on June 1 in this scenario. The entry involves increasing Inventory and establishing Accounts Payable. Cash would be affected only when payment is actually made (or at the time of the discount capture), not at the date of purchase.

Option C: a debit to Inventory for $8,550.
- Why it’s not: This would reflect a net cost after discount, which is not recorded on the purchase date under the gross method. The gross method records the full invoice price initially, and the discount is accounted for later if utilized.

Option D: a debit to Inventory for $9,000.
- Why it’s correct: Under the gross method in a perpetual system, the company records the purchase at the gross amount as an increase to Inventory and a corresponding increase to Accounts Payable. Later, if payment is made within the discount period, the company would recognize the purchase discount (reducing Inventory) and cash payable accordingly. This aligns with recording Inventory at the gross cost on the purchase date.

Summary of reasoning: The key distinction is that the gross method captures the full, gross purchase price initially, increasing Inventory and establishing a liability in Accounts Payable. The other options incorrectly reflect net of discount or misstate which accounts are affected on the purchase date. By design, option D correctly represents the June 1 entry under the described method and system.