On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10, n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

A. Debit Accounts Payable $1,000; credit Cash $1,000; credit Purchase Discounts $20.

B. Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

C. Debit Accounts Payable $1,000; credit Cash $1,000.

D. Debit Merchandise Inventory $20; debit Cash $980; credit Accounts Payable $1,000.

The correct answer is B

Explanation:

The journal entry to the record the goods purchase on December 7 as:

Inventory A/c ... Dr $1,000

Accounts Payable A/c ... Cr $1,000

The journal entry to record on December 16, when payment made is as:

Accounts Payable A/c ... Dr $ 1,000

Cash A/c ... Cr $ 980

Merchandise inventory A/c ... Cr $ 20

As payment is made within the period of discount, so the person will get discount of 2% on amount.

Working Note:

Discount Amount = Goods amount * Discount percentage

= $1,000 * 2%

= $20

Cash Amount = Goods amount - Discount amount

= $1,000 - $20

= $980