Concept explainers
Recording purchases, sales, returns, and discounts; buyer and seller—perpetual and both net & gross methods
Piere Imports uses the perpetual system m accounting for merchandise inventory and had the following transactions during the month of October. Prepare entries to record these transactions assuming that Piere Imports records invoices (a) at gross amounts and (b) at net amounts
Oct. | 2 | Purchased merchandise at a $3,000 price ($2,940 net), invoice dated October 2. terms 2/10, n/30. |
10 | Received a credit memorandum toward the return of $500 ($490 net) of merchandise that it purchased on October 2. | |
17 | Purchased merchandise at a $5,400 price ($5,292 net), invoice dated October 17, terms 2/10, n/30. | |
27 | Paid for the merchandise purchased on October 17, less the discount. | |
31 | Paid for the merchandise purchased on October 2. (Payment was mistakenly delayed, which caused the discount to be lost.) |
a.
Prepare journal entries to record the transactions of the company during the month of October using perpetual inventory system.
Explanation of Solution
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the journal entry for inventory purchased:
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
October 2 | Merchandise Inventory | 3,000 | ||
Accounts Payable | 3,000 | |||
(To record purchases of inventory on account) |
Table (1)
Description:
- Merchandise inventory is an asset and it is increased by $3,000. Therefore, debit merchandise inventory account with $3,000.
- Accounts payable is a liability and it is increased by $3,000. Therefore, credit accounts payable account with $3,000.
Record the journal entry for purchase returned:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 10 | Accounts Payable | 500 | ||
Merchandise Inventory | 500 | |||
(To record the purchases return) |
Table (2)
Description:
- Accounts payable is a liability and it is decreased by $500. Therefore, debit accounts payable account with $500.
- Merchandise Inventory is an asset and it is decreased by $500. Therefore, credit merchandise inventory account with $500.
Record the journal entry for inventory purchased:
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
October 17 | Merchandise Inventory | 5,400 | ||
Accounts Payable | 5,400 | |||
(To record purchases of inventory on account) |
Table (3)
Description:
- Merchandise inventory is an asset and it is increased by $5,400. Therefore, debit merchandise inventory account with $5,400.
- Accounts payable is a liability and it is increased by $5,400. Therefore, credit accounts payable account with $5,400.
Record the journal entry for payment of due amount:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 27 | Accounts Payable | 5,400 | ||
Merchandise Inventory | 108 (1) | |||
Cash | 5,292 (2) | |||
(To record paying cash on purchases after discounts) |
Table (4)
Description:
- Accounts payable is a liability and it is decreased by $5,400. Therefore, debit accounts payable account with $5,400.
- Merchandise inventory is an asset and it is decreased by $108. Therefore, credit merchandise inventory account with $108.
- Cash is an asset and it is decreased by $5,292. Therefore, credit cash account with $5,292.
Working notes:
Calculate the amount of discount on inventory.
Net accounts payable = $5,400
Discount percentage = 2%
Calculate the amount of cash paid.
Net accounts payable = $5,400
Discount on inventory = $108 (1)
Record the journal entry for payment of due amount:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 31 | Accounts Payable | 2,500 | ||
Cash | 2,500 (3) | |||
(To record paying cash on purchases after returns) |
Table (5)
Description:
- Accounts payable is a liability and it is decreased by $2,500. Therefore, debit accounts payable account with $2,500.
- Cash is an asset and it is decreased by $2,500. Therefore, credit cash account with $2,500.
Working notes:
Calculate the amount of cash paid.
Net accounts payable = $3,000
Merchandise returned = $500
b.
Prepare journal entries to record the transactions of the company during the month of October using perpetual inventory system.
Explanation of Solution
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the journal entry for inventory purchased:
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
October 2 | Merchandise Inventory | 2,940 | ||
Accounts Payable | 2,940 (4) | |||
(To record purchases of inventory on account) |
Table (6)
Description:
- Merchandise inventory is an asset and it is increased by $2,940. Therefore, debit merchandise inventory account with $2,940.
- Accounts payable is a liability and it is increased by $2,940. Therefore, credit accounts payable account with $2,940.
Working Note:
Calculate the amount of accounts payable.
Merchandise purchased = $3,000
Discount percentage = 2%
Record the journal entry for purchase returned:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 10 | Accounts Payable | 490 | ||
Merchandise Inventory | 490 (5) | |||
(To record the purchases return) |
Table (7)
Description:
- Accounts payable is a liability and it is decreased by $490. Therefore, debit accounts payable account with $490.
- Merchandise Inventory is an asset and it is decreased by $490. Therefore, credit merchandise inventory account with $490.
Calculate the amount of merchandise inventory returned.
Merchandise returned = $500
Discount percentage = 2%
Record the journal entry for inventory purchased:
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
October 17 | Merchandise Inventory | 5,292 | ||
Accounts Payable | 5,292 (6) | |||
(To record purchases of inventory on account) |
Table (8)
Description:
- Merchandise inventory is an asset and it is increased by $5,292. Therefore, debit merchandise inventory account with $5,292.
- Accounts payable is a liability and it is increased by $5,292. Therefore, credit accounts payable account with $5,292.
Working Note:
Calculate the amount of accounts payable.
Merchandise purchased = $5,400
Discount percentage = 2%
Record the journal entry for payment of due amount:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 27 | Accounts Payable | 5,292 | ||
Cash | 5,292 | |||
(To record paying cash on purchases after discounts) |
Table (9)
Description:
- Accounts payable is a liability and it is decreased by $5,292. Therefore, debit accounts payable account with $5,292.
- Cash is an asset and it is decreased by $5,292. Therefore, credit cash account with $5,292.
Record the journal entry for payment of due amount:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
October 31 | Accounts Payable | 2,450 (9) | ||
Discount Lost | 50 (8) | |||
Cash | 2,500 (7) | |||
(To record paying cash on purchases after returns) |
Table (10)
Description:
- Accounts payable is a liability and it is decreased by $2,450. Therefore, debit accounts payable account with $2,450.
- Discount lost is an expense and it is decreased the equity value by $50. Therefore, debit discount lost account with $50.
- Cash is an asset and it is decreased by $2,500. Therefore, credit cash account with $2,500.
Working notes:
Calculate the amount of cash paid.
Net accounts payable = $3,000
Merchandise returned = $500
Calculate the amount of discount lost.
Net accounts payable = $3,000
Merchandise returned = $500
Discount percentage = 2%
Calculate the amount of net accounts payable.
Cash paid = $2,500
Discount lost = 50
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Chapter 5 Solutions
Principles of Financial Accounting.
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