Stear Corp. purchases goods on credit for $2,000. It records this transaction in the journal. It then returns a quarter of these goods to the vendor because they were defective. How will the

Question

accountant record the transaction of returning the defective goods in the journal?

A. 

Accounts Receivable Account (debit)   2,000    Purchase Return Account (credit)     2,000

B. 

Purchase Return Account (debit)      2,000   Accounts Receivable Account (credit) 2,000

C. 

Accounts Payable Account (debit)      2,000    Purchase Return Account (credit)     2,000

D. 

Purchase Return Account (debit)      2,000    Accounts Payable Account (credit)     2,000

Answer 1

Protege, I always recommend my regular students to read the last sentence of a multiple choice as their first action step. Often multiple choice’s descriptive paragraphs contain too much unrelated, even unrequired information. Take this question as an example. It is about a return, not a sale. Our initial thought after reading the last sentence tells us: everything not concerning a return by a buyer maybe ignored.

Below I have abbreviated all the pertinent notes – which is maybe necessary after you have read the actual question (the last sentence!) This abbreviated sentence allows me to concentrate only on the necessary facts.

S sold goods on credit. S returns ¼ of goods to vendor. What is JE? 

The question simply asks – what is the purchaser’s JE for inventory acquisition? The question is simpler than the sum of all the given facts.

Let’s go through each MC answer and eliminate the incorrect answers by way of accounting knowledge.

First, JE A is from the standpoint of the seller, because it involves Accounts Receivable. Thus, it is not a correct alternative for the solution. 

Second, JE B s again the JE is from the seller’s view – therefore automatically incorrect. 

Next, JE C is from the buyer’s view because it involves Accounts Payable. AP is debited when it is decreased and if the buyer is expecting a refund from a purchase on account, then debiting AP is correct. Purchase Return Account is a contra-asset & a reduction of purchases in the Cost of Goods Sold (COGS) statement. The crediting of Purchase Returns would evidentially decrease the COGS statement and thus, is correct as well. Therefore, JE C is correct – but let’s also review the final alternative, JE D.

Lastly, JE D is from the buyer’s standpoint – thus it is at the very least, possibly correct. However, it credits or increases the buyer’s liability to the seller by crediting Accounts Payable – thus not the correct solution.

The only remaining correct alternative is Answer C.

Protégé, I would enjoy mentoring you in Accounting and if you have any further questions, please iMessage me via Wzyant.  All the best!