Financial Accounting Fundamentals:
Financial Accounting Fundamentals:
5th Edition
ISBN: 9780078025754
Author: John Wild
Publisher: McGraw-Hill/Irwin
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Question
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Chapter 6, Problem 14E

(a)

To determine

Journalize the purchase transactions under gross method in the books of P Imports, using perpetual inventory system.

(a)

Expert Solution
Check Mark

Explanation of Solution

Gross method: The method of recording the inventory purchases without deducting any purchase discounts is referred to as gross method.

Purchase discounts: The sellers offer a reduction in purchase price on initial purchases, to accelerate the collection of on account purchases, by their customers, within the purchase terms promptly. Such a reduction in purchase price is referred to as purchase discount.

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the purchase transactions under gross method in the books of P Imports.

October 2:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October2Merchandise Inventory 3,000 
    Accounts Payable  3,000
  (Record purchase of merchandise on account)   

Table (1)

Description:

  • Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
  • Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

October 10:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October10Accounts Payable 500 
    Merchandise Inventory  500
  (Record merchandise purchased on account returned)   

Table (2)

Description:

  • Accounts Payable is a liability account. Since amount owed decreased, liability decreased, and a decrease in liability is debited.
  • Merchandise Inventory is an asset account. Since merchandise purchased is returned, asset value decreased, and a decrease in asset is credited.

October 17:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October17Merchandise Inventory 5,400 
    Accounts Payable  5,400
  (Record purchase of merchandise on account)   

Table (3)

Description:

  • Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
  • Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

October 27:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October27Accounts Payable 5,400 
    Merchandise Inventory  108
   Cash  5,292
  (Record cash paid for merchandise purchased on account)   

Table (4)

Description:

  • Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
  • Merchandise Inventory is an asset account. Since cost of merchandise purchased is reduced by receiving discount, asset value decreased, and a decrease in asset is credited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute purchase discount.

Purchase discount = {(Purchases–Purchase returns)×Purchase discount percentage}($5,400–$0)×2%= $5,400×2%= $108 (1)

Compute cash paid.

Cash paid = {Purchases–Purchase returns–Purchase discount}($5,400–$0–$108)= $5,292

Note: Refer to Equation (1) for computation of purchase discount.

October 31:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October31Accounts Payable 2,500 
    Cash  2,500
  (Record cash paid for merchandise purchased on account)   

Table (5)

Description:

  • Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute cash paid.

Cash paid = {Purchases–Purchase returns}($3,000–$500)= $2,500

(b)

To determine

Journalize the purchase transactions under net method in the books of P Imports, using perpetual inventory system.

(b)

Expert Solution
Check Mark

Explanation of Solution

Net method: The method of recording the inventory purchases at net of purchase discounts is referred to as net method.

Journalize the purchase transactions under net method in the books of P Imports.

October 2:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October2Merchandise Inventory 2,940 
    Accounts Payable  2,940
  (Record purchase of merchandise on account)   

Table (6)

Description:

  • Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
  • Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of merchandise purchased.

Step 1: Compute purchase discount.

Purchase discount = {Purchases×Purchase discount percentage}= $3,000×2%= $60 (2)

Step 2: Compute amount of merchandise purchased.

Merchandise purchased = Purchases – Purchase discount=$3,000–$60=$2,940

Note: Refer to Equation (2) for computation of purchase discount.

October 10:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October10Accounts Payable 490 
    Merchandise Inventory  490
  (Record merchandise purchased on account returned)   

Table (7)

Description:

  • Accounts Payable is a liability account. Since amount owed decreased, liability decreased, and a decrease in liability is debited.
  • Merchandise Inventory is an asset account. Since merchandise purchased is returned, asset value decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of merchandise returned.

Step 1: Compute purchase discount on purchase returns.

Purchase discount = {Purchase returns×Purchase discount percentage}= $500×2%= $10 (3)

Step 2: Compute amount of merchandise returned

Merchandise returned = Purchase returns – Purchase discount=$500–$10=$490

Note: Refer to Equation (3) for computation of purchase discount.

October 17:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October17Merchandise Inventory 5,400 
    Accounts Payable  5,400
  (Record purchase of merchandise on account)   

Table (8)

Description:

  • Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
  • Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of merchandise purchased.

Step 1: Compute purchase discount.

Purchase discount = {Purchases×Purchase discount percentage}= $5,400×2%= $108 (4)

Step 2: Compute amount of merchandise purchased.

Merchandise purchased = Purchases – Purchase discount=$5,400–$108=$5,292 (5)

Note: Refer to Equation (4) for computation of purchase discount.

October 27:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October27Accounts Payable 5,292 
   Cash  5,292
  (Record cash paid for merchandise purchased on account)   

Table (9)

Description:

  • Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Note: Refer to Equation (5) for computation of cash paid.

October 31:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October31Accounts Payable 2,500 
    Cash  2,500
  (Record cash paid for merchandise purchased on account)   

Table (10)

Description:

  • Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

October 31 (discounts lost):

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
October31Discounts Lost 50 
    Accounts Payable  50
  (Record cash paid for merchandise purchased on account)   

Table (11)

Description:

  • Discounts Lost is an expense account. Expenses decrease equity value, and a decrease in equity is debited, hence, Discounts Lost is debited.
  • Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.

Working Notes:

Compute purchase discount lost.

Purchase discount lost = {(Purchases–Purchase returns)×Purchase discount percentage}($3,000–$500)×2%= $2,500×2%= $50

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