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8 December, 11:18

Assume the perpetual inventory method is used. 1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30. 2) The company returned $1,200 of merchandise to the supplier before payment was made. 3) The liability was paid within the discount period. 4) All of the merchandise purchased was sold for $18,800 cash. What effect will the return of merchandise to the supplier have on the accounting equation?

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  1. 8 December, 11:24
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    Answer: Both assets and liability sides decreases by $1,200.

    Explanation:

    Given that,

    Purchased merchandise on account = $12,500

    Merchandise return to supplier = $1,200

    All merchandise sold = $18,800 cash

    This will results in the:

    Decrease in inventory by $1,200 which means that assets decreases by $1,200.

    Accounts payable also reduces by $1,200 which means that liability decreases by $1,200.

    Hence, both sides of the balance sheet i. e. assets and liability decreases by $1,200.
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