Question

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.

1) The company purchased $12,500 of merchandise on account under terms 3/10, n/30.
2) The company returned $2000 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 $19,000 cash.
What effect will the return of merchandise to the supplier in event (2) have on Darlington's financial statements?

a. Assets and stockholders' equity decrease by $2000.
b. None.
c. It is an asset exchange transaction.
d. Assets and liabilities decrease by $1940.
e. Assets and liabilities decrease by $2000.

Answer 1

As a result of the transaction in event 2, what will happen to Darlington's financial statement is that e. Assets and liabilities decrease by $2000.

How will event two be recorded?

As a result of stock being returned to the supplier for $2,000, the stock account will be credited by this $2,000 which will reduce the asset account.

The Accounts Payable account which is a liability, will be reduced by $2,000 as well because the company will no longer owe the supplier for the returned goods.

In conclusion, option E is correct.

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