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 2PSB
To determine

Journal Entry:

It means recording of financial data related to business transactions in a journal in a manner so that debit equals credit. They provide an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

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 activity. 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 M.

Expert Solution & Answer
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Explanation of Solution

Purchased merchandise inventory worth $7,500.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 3 Merchandise Inventory   15,000  
  Account Payable     15,000
  (To record merchandise inventory purchased on credit)      

Table (1)

• 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 to be 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 $11,500:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 7 Account Receivable   11,500  
  Sales     11,500
  (To record sales made on account)      

Table (2)

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

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 7 Cost of goods sold   7,750  
  Merchandise inventory     7,750
  (To record cost of goods sold)      

Table (3)

• Cost of goods sold account is an expense account. Since goods are being sold, expense is to be 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.

Purchased merchandise inventory worth $14,200.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 10 Merchandise Inventory   14,200  
  Account Payable     14,200
  (To record merchandise inventory purchased on credit)      

Table (4)

• 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 to be debited.

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

Paid $300 cash for shipping charges:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 11 Merchandise inventory   300  
  Cash     300
  (To record shipping charges paid) by buyer)      

Table (5)

• 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.

Company M received the goods worth $1,850 back and restores them:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 12 Sales Return and Allowances   1,850  
  Account Receivable     1,850
  (To record sales return)      

Table (6)

• Sales return and allowances account is an expense account. Since, Company B 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.

• Account receivable is an asset account. Since, account receivable is getting reduced because of sales return so asset is to be reduced. Therefore, accounts receivable is to be credited.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 12 Merchandise Inventory   1,450  
  Cost of Goods Sold     1,450
  (To record cost of goods sold)      

Table (7)

• Merchandise inventory account is an asset account. Since, inventory is being received, so asset is to be increased. Therefore, merchandise inventory account is to be debited.

• Cost of goods sold account is an expense account. Since, goods are being returned, expense is to be reduced. Therefore, cost of goods sold account is credited.

Company M received price reduction for purchase of goods from Company R $1,200:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 14 Account Payable   2,000  
  Merchandise Inventory     2,000
  (To record price reduction worth $1,200)      

Table (8)

• 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.

Paid $150 cash for shipping charges reducing the amount owed to Company O.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 15 Account payable   150  
  Cash     150
  (To record shipping charges paid by buyer)      

Table (9)

• Account payable is a liability account. Since, the amount of freight is paid and value of liability is to be decreased. So, debit the account payable account.

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

Received cash from customer.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 17 Cash   9,310  
  Sales discount   190  
  Account receivable     9,500
  (To record final payment received from Company A)      

Table (10)

• 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 notes:

Computation of account receivables:

Accountreceivables=SalesSalesreturn=$11,500$1,850=$9,650

Computation of sales discount:

Salesdiscount=Accountrecievable×Rateofdiscount=$9,650×2%=$193

Computation of cash to be received:

Cash=AccountrecievableSalesdiscount=$9,650$193=$9,457

Company M makes final payment to Company R:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 20 Account payable   12,200  
  Merchandise inventory     122
  Cash     12,078
  (To record cash payment made for merchandise inventory )      

Table (11)

• 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 on final payment, 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 notes:

Computation of accounts payable:

Accountpayables=PurchaseCreditmemorandum=$14,200$2,000=$12,200

Computation of discount:

Discountamount=Accountpayables×Discountrate=$12,200×1%=$122

Computation of cash to be paid:

Cash=AccountpayableDiscount=$12,200$122=$12,078

Sold Merchandise inventory on account for $11,000:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 21 Account receivable   11,000  
  Sales     11,000
  (To record sales made on account)      

Table (12)

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

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 21 Cost of goods sold   7,000  
  Merchandise inventory     7,000
  (To record cost of goods sold)      

Table (13)

• Cost of goods sold account is an expense account. Since, goods are being sold, expense is to be 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 M gave price reduction for purchase of goods from Company B $1,000:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 24 Merchandise inventory   1,300  
  Account receivable     1,300
  (To record price reduction worth $1,300)      

Table (14)

• Merchandise inventory is an asset account. Since, it is returned to the seller, the value of asset is to be increased. So, debit the merchandise inventory account.

• Account receivable is an asset account. Since, price reduction is given so asset is to be decreased. Therefore, account receivable account is credited.

Received cash from customer:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 30 Cash   9,900  
  Sales Discount   100  
  Account Receivable     10,000
  (To record final payment received from Company A)      

Table (15)

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

• 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 notes:

Computation of account receivables:

Accountreceivables=SalesPricereduction=$11,000$1,300=$9,700

Computation of sales discount:

Salesdiscount=Accountrecievable×Rateofdiscount=$9,700×1%=$97

Computation of cash to be received:

Cash=AccountrecievableSalesdiscount=$9,700$97=$9,603

Company M paid to Company O:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
July 31 Account payable   14,850  
  Cash     14,850
  (To record cash payment made for merchandise inventory )      

Table (16)

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

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

Working note:

Computation of accounts payable:

Accountspayable=PurchaseFreight=$15,000$150=$14,850

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Chapter 4 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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