Assume the perpetual inventory method is used.

1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.

2) The company returned $1,200 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 $18,800 cash.

What effect will the return of merchandise to the supplier have on the accounting equation?

Multiple Choice

a. Assets and liabilities are reduced by $1,200.

b. Assets and equity are reduced by $1,176.

c. Assets and liabilities are reduced by $1,176.

d. None. It is an asset exchange transaction.