Principles of Financial Accounting.
Principles of Financial Accounting.
22nd Edition
ISBN: 9780077632892
Author: John J. Wild
Publisher: McGraw Hill
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Chapter 5, Problem 2BP
To determine

Record the purchase and sales transactions of Company M during July under perpetual inventory system.

Expert Solution & Answer
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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 purchase of merchandise inventory on account.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

July 3Merchandise Inventory 15,000 
 Accounts Payable - O  15,000
 (To record purchases of inventory on account)   

Table (1)

Description:

  • Merchandise inventory is an asset and it is increased by $15,000. Therefore, debit inventory account with $15,000.
  • Accounts payable is a liability and it is increased by $15,000. Therefore, credit accounts payable account with $15,000.

Record the journal entry for the sale of inventory on account.

DateAccounts and ExplanationDebit ($)Credit ($)
July 7Accounts Receivable - B11,500 
 Sales Revenue 11,500
 (To record the sale of inventory on account)  

Table (2)

Description

  • Accounts Receivable is an asset and it is increased by $11,500. Therefore, debit account receivable with $11,500.
  • Sales revenue is revenue and it increases the value of equity by $11,500. Therefore, credit sales revenue with $11,500.

Record the journal entry for cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
July 7Cost of Goods Sold7,750 
 Merchandise Inventory 7,750
 (To record the cost of goods sold)  

Table (3)

Description

  • Cost of goods sold is an expense account and it decreases the value of equity by $7,750. Therefore, debit cost of goods sold account with $7,750.
  • Merchandise Inventory is an asset and it is decreased by $7,750. Therefore, credit inventory account with $7,750.

Record the purchase of merchandise inventory on account.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

July 10Merchandise Inventory 14,700 (1) 
 Accounts Payable - R  14,700
 (To record purchases of inventory on account)   

Table (4)

Working Note:

Merchandise purchased = $14,200

Shipping charges = $500

Netmerchandise inventory} = {Merchandise purchased + Shipping charges}= $14,200 + $500= $14,700 (1)

Description:

  • Merchandise inventory is an asset and it is increased by $14,700. Therefore, debit inventory account with $14,700.
  • Accounts payable is a liability and it is increased by $14,700. Therefore, credit accounts payable account with $14,700.

Record the journal entry for delivery charges paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
July 11Delivery Expense 300 
 Cash  300
 (To record the payment of delivery charges)   

Table (5)

Description:

  • Delivery expense is an expense and it decreases the value of equity by $300. Therefore, debit delivery expense account with $300.
  • Cash is an asset and it is decreased by $300. Therefore, credit cash account with $300.

Record the journal entry for sales return:

DateAccount Title and Explanation

Debit

($)

Credit

($)

July 12Sales Returns and Allowance1,850 
 Accounts Receivable -  B 1,850
 (To record the sales return)  
    
 Merchandise Inventory1,450 
      Cost of goods sold 1,450
 (To record the reversal of cost of goods sold on sales return)  

Table (6)

Description:

  • Sales return and allowance is an expense account and it decreases the value of equity by $1,850. Therefore, debit sales returns and allowances account with $1,850.
  • Accounts Receivable is an asset and it is decreased by $1,850. Therefore, credit account receivable with $1,850.
  • Inventory is an asset and it is increased by $1,450. Therefore, debit inventory account with $1,450.
  • Cost of goods sold is an expense account and it increases the value of equity by $1,450. Therefore, credit cost of goods sold account with $1,450.

Record the journal entry for credit memo received.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

July 14Accounts Payable - R 2,000 
 Merchandise Inventory  2,000
 (To record the credit memo received)   

Table (7)

Description:

  • Accounts payable is a liability and it is decreased by $2,000. Therefore, debit accounts payable account with $2,000.
  • Inventory is an asset and it is decreased by $2,000. Therefore, credit inventory account with $2,000.

Record the journal entry for freight charges paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
July 15Accounts Payable - O 150 
 Cash  150
 (To record the payment of freight charges for Corporation O)   

Table (8)

Description:

  • Accounts payable is a liability and it is decreased by $150. Therefore, debit accounts payable account with $150.
  • Cash is an asset and it is decreased by $150. Therefore, credit cash account with $150.

Record the journal entry for receipt of payment:

DateAccount Title and Explanation

Debit

($)

Credit

($)

July 17Cash9,457 (4) 
 Sales Discounts193 (3) 
       Accounts Receivable 9,650 (2)
 (To record receiving cash on sales after discounts and returns)  

Table (9)

Description:

  • Cash is an asset and it is increased by $9,457. Therefore, debit cash account with $9,457.
  • Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $193.
  • Accounts Receivable is an asset and it is decreased by $9,650. Therefore, credit account receivable with $9,650.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $11,500

Sales returns = $1,850

Netaccounts receivable} = {Accounts receivable due to sales – Sales return}= $11,500 – $1,850= $9,650 (2)

Calculate the amount of sales discount.

Net accounts receivable = $9,650 (2)

Discount percentage = 2%

Sales discount = $9,650 × 2100 = $193 (3)

Calculate the amount of cash received.

Net accounts receivable = $9,650 (2)

Sales discount = $193 (3)

Cash received = Accounts receivable, net – Sales discount= $9,650 – $193= $9,457 (4)

Record the journal entry for the due amount paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

July 20Accounts Payable - R 12,700 (5) 
        Merchandise Inventory  127 (6)
        Cash  12,573 (7)
 (To record paying cash on purchases after discounts and returns)   

Table (10)

Working Notes:

Calculate accounts payable amount.

Inventory = $14,700 (1)

Inventory returns = $2,000

Accounts payable = Inventory – Inventory returns=$14,700$2,000=$12,700 (5)

Calculate purchase discount / inventory.

Net accounts payable = $12,700 (5)

Discount percentage = 1%

Purchase discount = $12,700 × 1100 = $127 (6)

Calculate cash paid.

Accounts payable = $12,700 (5)

Purchase discount / Inventory = $127 (6)

Cash paid = Accounts payable, net – Purchase discount= $12,700 – $127= $12,573 (7)

Description:

  • Accounts payable is a liability and it is decreased by $12,700. Therefore, debit accounts payable account with $12,700.
  • Merchandise Inventory is an asset and it is decreased by $127. Therefore, credit inventory account with $127.
  • Cash is an asset and it is decreased by $12,578. Therefore, credit cash account with $12,578.

Record the journal entry for the sale of inventory on account.

DateAccounts and ExplanationDebit ($)Credit ($)
July 21Accounts Receivable11,000 
 Sales Revenue 11,000
 (To record the sale of inventory on account)  

Table (11)

Description

  • Accounts Receivable is an asset and it is increased by $11,000. Therefore, debit account receivable with $11,000.
  • Sales revenue is revenue and it increases the value of equity by $11,000. Therefore, credit sales revenue with $11,000.

Record the journal entry for cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
July 21Cost of Goods Sold7,000 
 Merchandise Inventory 7,000
 (To record the cost of goods sold)  

Table (12)

Description

  • Cost of goods sold is an expense account and it decreases the value of equity by $7,000. Therefore, debit cost of goods sold account with $7,000.
  • Merchandise Inventory is an asset and it is decreased by $7,000. Therefore, credit inventory account with $7,000.

Record the journal entry for credit memo issued:

DateAccount Title and Explanation

Debit

($)

Credit

($)

July 24Sales Returns and Allowance1,300 
 Accounts Receivable 1,300
 (To record the credit memo issued)  

Table (13)

Description:

  • Sales return and allowance is an expense account and it decreases the value of equity by $1,300. Therefore, debit sales returns and allowances account with $1,300.
  • Accounts Receivable is an asset and it is decreased by $1,300. Therefore, credit account receivable with $1,300.

Record the journal entry for the balance amount received.

Journal Entry
DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

July 30Cash 9,603 (10) 
 Sales Discounts 97 (9) 
           Accounts Receivable  9,700 (8)
 (To record cash received and discounts allowed)   

Table (14)

Description:

  • Cash is an asset and it is increased by $9,603. Therefore, debit cash account with $9,603.
  • Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $97.
  • Accounts Receivable is an asset and it is decreased by $9,700. Therefore, credit account receivable with $9,700.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $11,000

Sales returns = $1,300

Netaccounts receivable} = {Accounts receivable due to sales – Sales return}= $11,000 – $1,300= $9,700 (8)

Calculate the amount of sales discount.

Net accounts receivable = $9,700 (8)

Discount percentage = 1%

Sales discount = $9,700 × 1100 = $97 (9)

Calculate the amount of cash received.

Net accounts receivable = $9,700 (8)

Sales discount = $97 (9)

Cash received = Accounts receivable, net – Sales discount= $9,700 – $97= $9,603 (10)

Record the journal entry for the due amount paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

July 30Accounts Payable - O 14,850 
        Cash  14,850 (11)
 (To record paying cash on purchases after deducting freight charges)   

Table (15)

Working Notes:

Calculate the net accounts payable.

Accounts payable = $15,000

Freight charges = 150

Net accounts payable = $15,000$150= $14,850 (11)

Description:

  • Accounts payable is a liability and it is decreased by $14,850. Therefore, debit accounts payable account with $14,850.
  • Cash is an asset and it is decreased by $14,850. Therefore, credit cash account with $14,850.

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Chapter 5 Solutions

Principles of Financial Accounting.

Ch. 5 - Distinguish between cash discounts and trade...Ch. 5 - Prob. 7DQCh. 5 - Prob. 8DQCh. 5 - Prob. 9DQCh. 5 - What is the difference between the single-step and...Ch. 5 - APPLE Refer to the balance sheet and income...Ch. 5 - Prob. 12DQCh. 5 - Prob. 13DQCh. 5 - Prob. 14DQCh. 5 - Prob. 15DQCh. 5 - Prob. 1QSCh. 5 - Prob. 2QSCh. 5 - Prob. 3QSCh. 5 - Prob. 4QSCh. 5 - Prob. 5QSCh. 5 - Prob. 6QSCh. 5 - Prob. 7QSCh. 5 - Accounting for shrinkageperpetual system P3 Nix'It...Ch. 5 - Closing entries P3 Refer to QS 4-9 and prepare...Ch. 5 - Prob. 10QSCh. 5 - Prob. 11QSCh. 5 - Prob. 12QSCh. 5 - Prob. 13QSCh. 5 - Prob. 14QSCh. 5 - Contrasting periodic and perpetual systems...Ch. 5 - Prob. 16QSCh. 5 - Prob. 17QSCh. 5 - Prob. 18QSCh. 5 - Prob. 1ECh. 5 - Prob. 2ECh. 5 - Prob. 3ECh. 5 - Prob. 4ECh. 5 - Prob. 5ECh. 5 - Prob. 6ECh. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Prob. 12ECh. 5 - Prob. 13ECh. 5 - Exercise 5-13 A retail company recently completed...Ch. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 19ECh. 5 - Prob. 20ECh. 5 - Preparing journal entries for merchandising...Ch. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 5APCh. 5 - Prob. 6APCh. 5 - Preparing journal entries for merchandising...Ch. 5 - Prob. 2BPCh. 5 - Prob. 3BPCh. 5 - Prob. 4BPCh. 5 - Prob. 5BPCh. 5 - Prob. 6BPCh. 5 - Prob. 5SPCh. 5 - Prob. 1BTNCh. 5 - Prob. 2BTNCh. 5 - Prob. 3BTNCh. 5 - You are the financial officer for Music Plus, a...Ch. 5 - Prob. 5BTNCh. 5 - Prob. 7BTNCh. 5 - Prob. 9BTN
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