Waterway Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. (a) On July 1, (1) Waterway purchased $33,000 of inventory, terms 1/10, n/30, FOB shipping point. (2) Waterway paid freight costs of $1,105. (b) On July 3, Waterway returned damaged goods and received credit of $3,300. (c) On July 10, Waterway paid for the goods.

The journal records to record the transactions are:

July 1, purchased merchandise on account, terms 1/10, n/30

Dr Merchandise inventory 34,105

    Cr Accounts payable 33,000

    Cr Cash 1,105 (freight costs paid in cash)

July 3, damaged goods are returned

Dr Accounts payable 3,300

    Cr Merchandise inventory 3,300

July 10, invoice is paid within discount period

Dr Accounts payable 29,700

    Cr Cash 29,403

    Cr Purchase discounts 297

The 1% discount is applied only to the merchandise invoice and it must be recorded as a contra expense account (purchase discounts) with a credit balance because it reduces COGS.

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