On June 10, Arlington Company purchased $8,000 of merchandise from Burke Company, FOB shipping point, terms 3/10, n/30. The merchandise purchased by Arlington Company cost Burke Company $4,800. Arlington pays the freight costs of $400 on June 11. Damaged goods totaling $300 are returned to Burke Company for credit on June 12. The fair value of these goods is $70. On June 19, Arlington Company pays Burke Company in full, less the purchase discount. Both companies use a perpetual inventory system.

The journal entry that Burke Company prepares on June 19 includes which of the following?

Question

On June 10, Arlington Company purchased $8,000 of merchandise from Burke Company, FOB shipping point, terms 3/10, n/30. The merchandise purchased by Arlington Company cost Burke Company $4,800. Arlington pays the freight costs of $400 on June 11. Damaged goods totaling $300 are returned to Burke Company for credit on June 12. The fair value of these goods is $70. On June 19, Arlington Company pays  Burke Company in full, less the purchase discount. Both companies use a perpetual inventory system.

The journal entry that Burke Company prepares on June 19 includes which of the following?

BlackTom AI · Accepted Answer

Let's restate the scenario to ensure understanding: Arlington bought 8,000 of merchandise from Burke on June 10, with FOB shipping point and terms 3/10, n/30. Arlington pays the freight 400 on June 11. Damaged goods totaling 300 are returned for credit on June 12, with a fair value of 70. On June 19, Arlington pays Burke in full, taking the purchase discount. Burke uses a perpetual inventory system, and the concern is the journal entry Burke records on June 19.

Option A: Debit to Cash for $7,700. This would imply Burke received $7,700 in cash on June 19. However, the amount Burke actually receives is $7,469, calculated as the remaining receivable after the 300 return ($8,000 original AR minus $300 return = $7,700) times the 3% discount for payment within 10 days: $7,700 × 0.97 = $7,469. Therefore, a $7,700 cash debit is incorrect.

Option B: Debit to Sales Returns and Allowances for $300. The $300 Sales Returns and Allowances relates to the June 12 return, not the June 19 payment. On June 19 Burke records the receipt of cash and the remaining receivable, not the earlier return in that entry. So debiting Sales Returns and Allowances on June 19 is not appropriate.

Option C: Credit to Sales Discounts for $231. The discount is 3% of the net amount due after the return, i.e., 3% of $7,700 equals $231. However, in the journal entry Burke makes on June 19, the Sales Discounts account is debited, not credited, because discounts reduce revenue or reflect a reduction in receivables as a debit against cash collection. Therefore, crediting Sales Discounts for $231 is incorrect.

Option D: Debit to Sales Discounts for $231. This is correct in the context of Burke’s books. Burke reduces the amount receivable by applying the 3% discount to the remaining AR ($7,700 × 3% = $231). Since Burke is recognizing the discount as a reduction of cash received from the debtor and a reduction of the AR balance, the entry includes a debit to Sales Discounts for $231 and a debit to Cash for $7,469, with a credit to Accounts Receivable for $7,700. This aligns with the perpetual inventory and the discount terms.

Option E: Debit to Inventory $300. The $300 relates to the returned goods, but Burke already adjusted for the return by debiting Inventory for the cost of the goods returned (180) and debiting Sales Returns and Allowances for the sale value (300) in the June 12 entry, not in the June 19 cash receipt entry. On June 19, no additional inventory adjustment of $300 is appropriate.

Option F: Debit to Sales Discounts for $7,700. This would imply an enormous discount being recognized, which does not reflect the actual discount amount (3% of the net AR after returns). The correct discount amount is $231, not $7,700.

Option G: Credit to Accounts Receivable for $8,000. Burke’s receivable was reduced by the $300 return on June 12, so the June 19 entry should not credit AR for the full $8,000. The correct AR reduction is $7,700, the amount after the return, before discount.

Option H: Credit to Cash for $7,469. Burke does not credit Cash on June 19; Burke debits Cash for the cash received ($7,469) as part of the entry, not a credit. A credit to Cash would imply decreasing cash, which is incorrect for a cash receipt.

In summary, among the options provided, the one that accurately reflects Burke’s June 19 entry is the debit to Sales Discounts for $231, corresponding to the recognized discount on the remaining receivable after the June 12 return. The rest of the options either misstate the cash amount, misstate the direction of the discount entry, or misstate the proper AR balance after the return.

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