Financial Accounting
Financial Accounting
17th Edition
ISBN: 9781259692390
Author: Jan Williams, Susan Haka, Mark S Bettner, Joseph V Carcello
Publisher: McGraw-Hill Education
Question
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Chapter 6, Problem 4PB

a.

To determine

Prepare the journal entry to record the transaction that Industry W records the purchases of merchandise at (1) net cost and (2) gross invoice price.

a.

Expert Solution
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Explanation of Solution

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.

Net cost method: In net cost method, the companies will record the purchase of inventory at net cost which is calculated by deducting the available discount from the invoice price.

Gross invoice method: In gross invoice method, the companies will record the purchase of the inventory at total invoice price. 

1. Prepare the journal entry to record the purchase made at net cost method:

Date

Account titles and

Debit

($)

Credit

($)

March 6Inventory2,744 
Accounts payable (Industry W) (1) 2,744
(To record the purchase of 8 TVs at net cost)  
   
March 11Cash1,200 
Sales 1,200
(To record the cash sales)  
   
March 11Cost of goods sold ($343×2units)686 
Inventory 686
(To record the cost of goods sold for 2 TVs)  
   
March 16Accounts payable (Industry W)2,744 
Cash 2,744
(To record the payment made within the discount period)  

Table (1)

Working note:

Calculate the amount of accounts payable:

Accounts payable at March 6=Invoice priceDiscount on invoice price=$350($350×2%)=$343Per unit

Thus, the total amount of accounts payable would be $2,744($343×8Units).

(1)

March 10: To record the purchase of TVs at net cost.

  • Inventory is an asset account and it is increased. Therefore, debit inventory with $2,744.
  • Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $2,744.

March 11: To record the sales made.

  • Cash is an asset account and it is increased. Therefore, debit cash with $1,200.
  • Sales are a revenue account and it increases the stockholders’ equity. Therefore, credit sales with $1,200.

March 11: To record the cost of goods sold.

  • Cost of goods sold is an expense account and it decreases the stockholders’ equity account. Therefore, debit cost of goods sold with $686.
  • Inventory is an asset account and it is decreased. Therefore, credit inventory account with $686.

March 16: To record the payment made with in the discount period:

  • Accounts payable is a liability account and it is decreased. Therefore, credit accounts payable with $2,744.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $2,744.

2. Prepare the journal entry to record the purchase made at gross invoice method:

Date

Account titles and

Debit

($)

Credit

($)

March 6Inventory2,800 
Accounts payable (Industry W) 2,800
(To record the purchase of 8 TVs at gross invoice price)  
   
March 11Cash1,200 
Sales 1,200
(To record the cash sales)  
   
March 11Cost of goods sold ($350Per unit×2Unit)700 
Inventory 700
(To record the cost of goods sold for TVs)  
   
March 16Accounts payable (Industry W)2,800 
Cash 2,744
Purchase discount taken ($2,800×2%) 56
(To record the payment made within the discount period)  

Table (2)

March 6: To record the purchase of TVs at net cost.

  • Inventory is an asset account and it is increased. Therefore, debit inventory with $2,800.
  • Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $2,800.

March 11: To record the sales made.

  • Cash is an asset account and it is increased. Therefore, debit cash with $1,200.
  • Sales are a revenue account and it increases the stockholders’ equity. Therefore, credit sales with $1,200.

March 11: To record the cost of goods sold.

  • Cost of goods sold is an expense account and it decreases the stockholders’ equity account. Therefore, debit cost of goods sold with $700.
  • Inventory is an asset account and it is decreased. Therefore, credit inventory account with $700.

March 16: To record the payment made with in the discount period:

  • Accounts payable is a liability account and it is decreased. Therefore, credit accounts payable with $2,800.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $2,744.
  • Purchase discount taken reduces the cost of goods sold. Therefore, credit purchase discount taken with $56.

b.

To determine

Prepare the journal entry to record the payment assuming that M TV did not pay Industry W within the discount period.

b.

Expert Solution
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Explanation of Solution

1. Prepare the journal entry to record the payment made on April 6 under net cost method.

DateAccounts title and explanation

Debit

($)

Credit

($)

April 6Accounts payable (Industry W)2,744 
 Purchase discount lost56 
 Cash 2,800
 (To record the payment made after the discount period)  

Table (3)

  • Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $2,744.
  • Purchase discount lost is an expense account and it decreases the stockholders’ equity. Therefore, debit the purchase discount lost with $56.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $2,800.

2. Prepare the journal entry to record the payment made on April 6 under gross invoice price method.

DateAccounts title and explanation

Debit

($)

Credit

($)

April 6Accounts payable (Company P)2,800 
 Cash 2,800
 (To record the payment made after the discount period)  

Table (4)

  • Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $2,800.
  • Cash is an asset account and it is decreased. Therefore, credit cash account with $2,800.

c.

To determine

Explain whether net cost method or gross invoice price will provide the most useful information.

c.

Expert Solution
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Explanation of Solution

By evaluating the net cost method and gross invoice price method it is identified that net cost method will provide most useful information for estimating the efficiency of the company to pay its bills. This method clearly specifies the lowest price that the company may pay and it records the additional cost incurred as purchase discount lost. Whereas in gross invoice price method, the liability is not recorded at the lowest price in which the amount can be settled. Thus, the available discounts that were not taken are not aware by the company.

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