Chapter 5, Problem 6BP

a.

To determine

Prepare the journal entries to record the transactions for the month of November for Company FD (seller).

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically is referred as periodic inventory system.

Prepare journal entries for Company FD (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
November 10	Accounts receivable (+A)		$6,000
	Sales revenue (+SE)			$6,000
	(To record the sale of merchandise on account )
November 14	Sales return and allowances (-SE)		$600
	Accounts receivable (-A)			$600
	(To record the merchandise returned by customers)
November 19	Cash (2) (+A)		$5,292
	Sales discounts (1) (-SE)		$108
	Accounts receivable (-A)			$6,000
	(To record the sales discount and payment from customers for the goods sold)
November 24	Sales return and allowances (-SE)		$500
	Accounts receivable (-A)			$500
	(To record the merchandise returned by customers)
November 24	Accounts Receivable (A+)		500
	Cash (A+) (3)			490
	Sales Discount Received (+SE)			10
	(To record the payment for returns)

Table (1)

November 10: To record the sale of merchandise on account:

Accounts receivable is an asset and the value is increased due to the credit sales made. Thus, it is debited with $6,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $6,000.

November 14:  To record the merchandise returned by customers:

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $600.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $600.

November 19: To record the sales discount and payment from customers for the merchandise sold:

Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $5,292.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $108.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $5,400.

November 20:  To record the merchandise returned by customers:

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $500.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $500.

November 20: To record the payment for returns:

Accounts receivable account is an asset and is increased by $500. Therefore, debit accounts receivable account with $500.

Sales discount received is revenue which increases the equity by $10. Thus, it is credited with $10.

Cash is an asset and it is decreased by $490. Hence, it is credited with $490.

Working Note:

Compute the discount on sales.

Credit terms: $2/10,\text{n}/30$

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$6,000-\$600\right)\times \frac{2}{100}\\ =\$5,400\times \frac{2}{100}\\ =\$108\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$6,000-\$600-\$108\left(1\right)\\ =\$5,292\end{array}$ (2)

Compute the cash received from customers on November 20.

$\begin{array}{c}\text{Cash receipts from customers}=\text{Amount of goods returned}-\text{Sales discount}\\ =\$500-\left(\$500\times \frac{2}{100}\right)\\ =\$500-\$10\\ =\$490\end{array}$ (3)

b.

To determine

Prepare the journal entries to record the transactions for the month of November for Incorporation A (buyer).

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically is referred as periodic inventory system.

Prepare journal entries for Incorporation A (buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
November 10	Purchases (-E)		$6,000
	Accounts payable (+L)			$6,000
	(To record the inventory purchased on account )
November 12	Freight-in (+E)		$360
	Cash (-A)			$360
	(To record the payment of freight expense for the merchandise purchased)
November 14	Accounts payable  (-L)		$600
	Purchase returns and allowances (+E)			$600
	(To record the return of inventories on account)
November 19	Accounts payable (-L)		$5,400
	Purchase discounts (+E) (4)			$108
	Cash (-A) (5)			$5,292
	(To record the purchase discount and  payment of merchandise purchased on account)
November 24	Accounts payable  (-L)		$500
	Purchase returns and allowances (+E)			$500
	(To record the return of inventories on account)
November 24	Cash (+A) (6)		$490
	Purchase discounts (-E)		$10
	Accounts Payable (+L)			$500
	(To record the payment of returns)

Table (2)

November 08: To record the inventory purchased on account:

Purchase is an expense and has increased due to the credit purchases made by Incorporation A. Hence, debit purchases account with $6,000.

Accounts Payable is a liability and it is increased due to the increase in the amount to be paid for purchases. Therefore, credit Accounts Payable account with $6,000.

November 10: To record the payment of freight expense for the merchandise purchased:

Freight-in is an expense and the value is increased due to the purchase of merchandise. Therefore, it is debited with $360.

Cash is an asset and the value is decreased due to payment. Thus, Cash account is credited with $360.

November 12: To record the purchase return:

Accounts Payable is a liability and is decreased due to the return of inventory. Hence, it is debited with $600.

Purchase Returns and Allowances is a contra to Purchases account with a normal credit balance. Thus, Purchase Returns and Allowances account is credited with $600.

November 17: To record the purchase discount and payment made on account:

Accounts Payable is a liability and is decreased because the company has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $5,400.

Purchases discount is a contra expense account to Purchase account and will have a normal credit balance. Therefore, Purchase discount account is credited with $108.

Cash is an asset and it is reduced because amount is paid for credit purchases. Hence, credit cash account with $5,292.

November 20: To record the return of inventories on account:

Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $500.

Purchase Returns and Allowances is a contra to Purchases account with a normal credit balance. Thus, Purchase Returns and Allowances account is credited with $500.

November 20: To record the payment for returns:

Cash is an asset account and it is increased by $490. Hence, it is debited with $490.

Purchase discount is a contra expense account to Purchase account and it decreases the equity by $10. Thus, it is credited with $10.

Accounts payable is a liability and it is increased by $500. Hence, it is credited with $500.

Working Note:

Compute the discount on purchases.

Credit terms: $2/10,\text{n}/30$

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$6,000-\$600\right)\times \frac{2}{100}\\ =\$5,400\times \frac{2}{100}\\ =\$108\end{array}$ (4)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$6,000-\$600-\$108\left(4\right)\\ =\$5,292\end{array}$ (5)

Compute the cash payment made to supplier on November 20.

$\begin{array}{c}\text{Cash paid to suppliers}=\text{Amount of goods returned}-\text{ Discount on purchases}\\ =\$500-\left(\$500\times \frac{2}{100}\right)\\ =\$500-\$10\\ =\$490\end{array}$ (6)