Question

Stella, Inc. purchased 75 telescopes for $25 each from Luna Co. When they unpacked the telescopes, Stella found

that 20 of the telescopes were damaged in shipping. Luna offers to take them back, or provide an allowance of $300.

How would the journal entries differ if Stella chose to take the allowance instead of return the telescopes?

O A. The company would debit the Allowance account instead of Purchase Returns,

B. The company would debit and credit the same accounts, but for a greater amount.

C. There would be no difference in journal entries.

D. The company would debit and credit the same accounts, but for a lesser amount.

Answer 1

Answer:

A. The company would debit the Allowance account instead of Purchase Returns.

Explanation:

In the management of purchases transactions,  a company will maintain several other accounts such as purchase returns and purchases allowance.

Purchases allowance will include allowances such as discount received and other compensations from suppliers.  The allowances reduce the net value of the purchases. i.e., when calculating the net purchases, one has to deduct the purchases allowed amount. When the business receives a purchase allowance, the amount will increase the purchases allowance account. The accountant will, therefore, debit that account.

Purchases returns are goods that the company had purchased from suppliers but have returned them for some reason. They could be defective or inappropriate.