Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 4, Problem 1PSA
To determine

Journal Entries:

Journal entries are the transactions of quantitative nature that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.

To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Perpetual Inventory System:

It is an inventory system wherein the accounts related to inventory are updated on each purchase and sale happening. Quantities of inventory are updated on continuous basis. This can be done by integrating the inventory system to order entry and to the retail sale point of system.

To prepare: Journal entries in the books of Company B.

Expert Solution & Answer
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Explanation of Solution

Purchased merchandise inventory worth $6,000.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 1 Merchandise Inventory   6,000  
  Account Payable     6,000
  (To record merchandise inventory purchased on credit)      

• Merchandise Inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise Inventory account is debited.

• Account Payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore, Account Payable account is credited.

Sold Merchandise inventory on account for $900.

g
Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 2 Account Receivable   900  
  Sales     900
  (To record sales made on account)     

• Account receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, Account Receivable account is debited.

• Sales is a revenue account. Since sales is made it has to be increased. Therefore, Sales account is to be credited.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 2 Cost of Goods Sold   500  
  Merchandise Inventory     500
  (To record cost of goods sold)      

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.

• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Paid $125 cash for shipping charges:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 3 Merchandise Inventory   125  
  Cash     125
  (To record shipping charges paid by buyer)      

• Merchandise Inventory is an asset account. Since the amount of freight is added up in the Merchandise inventory value, the value of assets is increased. So, debit the Merchandise Inventory account.

• Cash is an asset account. Since the Cash is paid, the value of assets is decreased. So, credit the Cash account.

Sold merchandise costing $1,300 for $1,700.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 8 Cash   1,700  
  Sales     1,700
  (To record shipping charges paid by buyer)      

• Cash is an asset account. Since the Cash is received, the value of assets is increased. So, debit the Cash account.

• Sales is a revenue account. Since sales is made, it needs to be increased. Therefore, Sales account is to be credited.

Record cost of goods which are sold:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 8 Cost of Goods Sold   1,300  
  Merchandise Inventory     1,300
  (To record cost of goods sold)      

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense is increased. Thereforge, Cost of Goods Sold account is debited.

• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Purchased merchandise inventory worth $2,200.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 9 Merchandise Inventory   2,200  
  Account Payable     2,200
  (To record merchandise inventory purchased on credit)      

• Merchandise Inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise Inventory account is debited.

• Account payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore, Account payable account is credited.

Purchase return made by Company C for $200.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 11 Account Payable   200  
  Merchandise Inventory     200
  (To record return of merchandise worth $500)      

• Account payable is a liability account. Since the Inventory which was purchased on credit is returned, this reduces the liability to be paid. So, debit the Accounts Payable account.

• Merchandise Inventory is an asset account. Since it is returned to the seller, the value of asset is to be reduced. So credit the Merchandise Inventory account.

Received cash from customer:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 12 Cash   882  
  Sales Discount   18  
  Account Receivable     900
  (To record final payment received from Company A)      

• Cash is an asset account. Since, payment is received in cash, so it is to be increased. Therefore Cash account is credited.

• Sales Discount is an expense account. Since, an expense has increased, so it requires a debit in the entry. Therefore Sales Discount is debited.

• Account Receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, Account Receivable is credited.

Working Note:

Computation of sales discount:

Salesdiscount=Accountrecievable×Rateofdiscount=$900×2%=$18

Computation of cash to be received:

Cash=AccountrecievableSalesdiscount=$900$18=$882

Final payment made to Company B.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 16 Account Payable   6,000  
  Merchandise Inventory     60
  Cash     5,940
  (To record cash payment made for merchandise inventory )      

• Account Payable is a liability account. Since payment is to be made for account payable, this will result in reduction of liability. Therefore, Account payable account is debited.

• Merchandise Inventory account is an asset account. Since, discount is received in making final payment by company S from Company T, Merchandise Inventory is to be reduced. Therefore, Merchandise Inventory account is credited.

• Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, Cash account is credited.

Working Note:

Computation of Merchandise inventory:

Discountamount=Accountpayables×Discountrate=$6,000×1%=$60

Computation of Cash to be paid:

Cash=AccountpayableDiscount=$6,000$60=$5,940

Sold Merchandise inventory on account for $1,200.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 19 Account Receivable   1,200  
  Sales     1,200
  (To record sales made on account)      

• Account Receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, account receivable account is debited.

• Sales is a revenue account. Since sales is made, so it needs to be increased. Therefore, sales account is to be credited.

Record cost of goods which were sold.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 19 Cost of Goods sold   800  
  Merchandise Inventory     800
  (To record cost of goods sold)      

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.

• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Company B gave credit memorandum to Company A:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 21 Sales Return and Allowances   200  
  Accounts Receivable     200
  (To record sales return)      

• Sales Return and Allowances account is an expense account. Since Company A is receiving the sales return so it needs to be increased, so expense account is to be increased. Therefore, Sales Return and Allowances account is to be debited.

• Accounts receivable is an asset account. Since account receivable is has reduced because of sales return, asset has reduced. Therefore, Accounts Receivable account is to be credited.

Company B makes final payment to Company L.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 24 Account Payable   2,000  
  Merchandise Inventory     40
  Cash     1,960
  (To record cash payment made for merchandise inventory )      

▪ Account Payable is a liability account. Since payment is to be made for account payable, this will result in reduction of liability. Therefore, Account Payable account is debited.

▪ Merchandise Inventory account is an asset account. Since, discount is received in making final payment by company S from Company T, Merchandise Inventory is to be reduced. Therefore, Merchandise Inventory account is credited.

▪ Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, Cash account is credited.

Working Note:

Computation of account payables:

Netaccountpayables=InvoiceamountPurchase return=$2,200$200=$2,000

Computation of discount:

Discountamount=Accountpayables×Discountrate=$2,000×2%=$40

Computation of cash to be paid:

Cash=AccountpayableDiscount=$2,000$40=$1,960

Received cash from customer:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 30 Cash   980  
  Sales Discount   20  
  Account Receivable     1,000
  (To record final payment received from Company A)      

▪ Cash is an asset account. Since, payment is received in cash, so it is to be increased. Therefore Cash account is credited.

▪ Sales Discount is an expense account. Since, an expense is getting increased, so it requires a debit in the entry. Therefore Sales discount is debited.

▪ Account Receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, Account Receivable is credited.

Working Note:

Computation of Account receivables:

Accountrecievable=SalesSalesreturn=$1,200$200=$1,000

Computation of sales discount:

SalesDiscount=Accountrecievable×RateofDiscount=$1,000×2%=$20

Computation of cash to be received:

Cash=AccountrecievableSalesdiscount=$1,000$20=$980

Sold Merchandise inventory on account for $7,000.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 31 Account Receivable   7,000  
  Sales     7,000
  (To record sales made on account)      

• Account Receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, Account Receivable account is debited.

• Sales is a revenue account. Since sales is made, so it needs to be increased. Therefore, Sales account is to be credited.

Record cost of goods sold on July 31.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 31 Cost of Goods Sold   4,800  
  Merchandise Inventory     4,800
  (To record cost of goods sold)      

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.

• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

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Chapter 4 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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