Chapter 5, Problem 6E

Recording sales, purchases. and cash discounts—buyer and seller

Santa Fe Retailing purchased merchandise “as is” (with no returns) from Mesa Wholesalers with credit terms of 3/10, n/60 and an invoice price of $24,000. The merchandise had cost Mesa $16,000. Assume that both buyer and seller use a perpetual inventory system and the gross method.

1. 1. Prepare entries that the buyer records for the (a) purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period.
2. 2. Prepare entries that the seller records for the (a) sale, (b) cash collection within the discount period, and (c) cash collection after the discount period.

To determine

Prepare the journal entries to record the transactions for Company SFR  (buyer).

Explanation of Solution

Perpetual Inventory System: 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.

Gross method: Under gross method, sales and purchases of merchandises are recorded at the full invoice price (gross amount) without the deduction of discounts.

Prepare journal entries for Company SFR  (buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
(a)	Merchandise Inventory (+A)		$24,000
	Accounts payable – Company MW (+L)			$24,000
	(To record the inventory purchased on account with credit terms of $3/10,\text{n}/60$ )
(b)	Accounts payable (-L)		$24,000
	Merchandise Inventory (1) (-A)			$720
	Cash (2) (-A)			$23,280
	(To record the payment for merchandises within the discount period)
(c)	Accounts payable (-L)		$24,000
	Cash (-A)			$24,000
	(To record the payment for merchandises beyond the discount period)

Table (2)

(a). To record the inventory purchased on account with credit terms of $3/10,\text{n}/60$:

Inventory is an asset. The value is increased due to the credit purchases. Therefore, inventory account is debited with $24,000.

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 $24,000.

(b). To record the payment for merchandises within the discount period:

Accounts Payable is a liability and is decreased because the company has paid the amount due for credit purchases. Therefore, it is debited with $24,000.

Inventory is an asset account. The amount has decreased because the purchase discount is reduced from the cost of inventory. Hence, credit Inventory account with $720.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $23,280.

(c). To record the payment for merchandises beyond the discount period:

Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $24,000.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $24,000.

Working Note:

Compute the discount on purchases.

Credit terms: $3/10,\text{n}/60$. The buyer makes payment for the merchandises purchased within the discount period. Hence, the merchandising company is entitled to discount of 3%.

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$24,000-\$0\right)\times \frac{3}{100}\\ =\$24,000\times \frac{3}{100}\\ =\$720\end{array}$ (1)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$13,200-\$0-\$720\left(1\right)\\ =\$23,280\end{array}$ (2)

To determine

Prepare the journal entries to record the transactions for Company MW (seller).

Explanation of Solution

Perpetual Inventory System: 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.

Gross method: Under gross method, sales and purchases of merchandises are recorded at the full invoice price (gross amount) without the deduction of discounts.

Prepare journal entries for Company MW (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
(a)	Accounts receivable – Company SFR (+A)		$24,000
	Sales revenue (+SE)			$24,000
	(To record the sale of merchandise on account with credit terms of $3/10,\text{n}/60$)
(a)	Cost of goods sold (-SE)		$16,000
	Inventory (-A)			$16,000
	(To record the cost of merchandise sold)
(b)	Cash (4) (+A)		$23,280
	Sales discounts (3) (-SE)		$720
	Accounts receivable (-A)			$24,000
	(To record the receipt of cash within the discount period)
(c)	Cash (+A)		$24,000
	Accounts receivable (-A)			$24,000
	(To record the receipt of cash beyond the discount period)

Table (1)

(a). To record the sale of merchandise on account with credit terms of $3/10,\text{n}/60$:

Accounts receivable is an asset and the value is increased due to the sales made on account. Thus, it is debited with $24,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $24,000.

(a). To record the cost of merchandise returned from customers:

Cost of goods sold is an expense. The cost of merchandise returned decreases the expense that results in the increase in stockholders’ equity. Thus, it is debited with $16,000.

Inventory is an asset and is increased due to the return of inventory from customers. Thus, it is debited with $16,000.

(b). To record the receipt of cash within the discount period:

Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $23,280.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $720.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $24,000.

(c) . To record the receipt of cash beyond the discount period:

Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $24,000.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $24,000.

Working Note:

Compute the discount on sales.

Credit terms: $3/10,\text{n}/60$. The buyer makes payment for the merchandises purchased within the discount period. Hence, the seller allows discount of 3% to buyer.

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$24,000-\$0\right)\times \frac{3}{100}\\ =\$24,000\times \frac{3}{100}\\ =\$720\end{array}$ (3)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$24,000-\$0-\$720\left(3\right)\\ =\$23,280\end{array}$ (4)