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a.
Prepare the
a.
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Explanation of Solution
Prepare the journal entry to record the sale of merchandise on account:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 9 | 10,000 | ||
Sales | 10,000 | ||
(To record the sale made to Company SM on account) |
Table (1)
- Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $10,000.
- Sale is a revenue account and it increases the
stockholders’ equity account. Therefore, credit sales account with $10,000.
Prepare the journal entry to record the cost of goods sold:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 9 | Cost of goods sold | 6,000 | |
Inventory | 6,000 | ||
(To record the cost of goods sold) |
Table (2)
- Cost of goods sold is an expense account and it decreases the stockholders’ equity. Therefore, debit cost of goods sold with $6,000.
- Inventory is an asset account and it is decreased. Therefore, credit inventory with $6,000.
Prepare the journal entry to record the delivery expenses:
ate | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 12 | Delivery expense | 40 | |
Cash | 40 | ||
(To record the cost of goods sold) |
Table (3)
- Delivery expense is an expense account and it decreases the stockholders’ equity. Therefore, debit delivery expense with $40.
- Cash is an asset account and it is decreased. Therefore, credit cash with $40.
Prepare the journal entry to record the sales return from Company SM:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 13 | Sales returns and allowances | 1,000 | |
Accounts receivable (Company SM) | 10,000 | ||
(To record the sales returns and allowances from Company SM) |
Table (4)
- Sales returns and allowance are the contra-revenue account which decreases the amount of revenue. Therefore, debit sales discounts with $1,000.
- Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivable account with $1,000.
Prepare the journal entry to record the cost of goods sold for the returned goods:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 13 | Inventory | 600 | |
Cost of goods sold | 600 | ||
(To record the reduction in the cost of goods sold for the returned goods) |
Table (5)
- Inventory is an asset account and it is increased. Therefore, debit inventory account with $600.
- Cost of goods sold is an expense account and it is decreased. Therefore, credit cost of goods sold with $600.
Prepare the journal entry to record the collection of accounts receivable within the discount period:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 19 | Cash | 8,910 | |
Sales discount | 90 | ||
Accounts receivable | 9,000 | ||
(To record the collection of accounts receivable from Company SM) |
Table (6)
- Cash is an asset account and it is increased. Therefore, debit inventory account with $8,910.
- Sales discount is an expense account and it decreases the stockholder’s equity. Therefore, debit sales discount with $90.
- Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivables with $9,000.
b.
Prepare the journal entries to record the transactions for Company SM using net cost method.
b.
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Explanation of Solution
Prepare the journal entry to record the purchase of inventory on account:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 9 | Inventory | 9,900 | |
Accounts payable (Company SS) (1) | 9,900 | ||
(To record the purchase made from Company GW) |
Table (7)
Working note:
Calculate the amount of accounts payable:
- Inventory is an asset account and it is increased. Therefore, debit inventory account with $9,900.
- Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $9,900.
Prepare the journal entry to record the transportation charge in in bound:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 12 | Transportation in | 40 | |
Cash | 40 | ||
(To record the transportation charge in bound) |
Table (8)
- Transportation charge is an expense account and it decreases the stockholders’ equity. Therefore, debit transportation charge with $40.
- Cash is an asset account and it is decreased. Therefore, credit cash with $40.
Prepare the journal entry to record the return of goods:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 13 | Accounts payable (Company SS) | 990 | |
Inventory | 990 | ||
(To record the returned goods) |
Table (5)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $99.
- Inventory is an asset account and it is decreased. Therefore, credit inventory account with $990.
Prepare the journal entry to record the payment made within the discount period.
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
February 19 | Accounts payable (Company SS) | 8,910 | |
Cash | 8,910 | ||
(To record the payment made with in discount period) |
Table (5)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $8,910.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $8,910.
c.
Explain whether Company SM should take the advantage of cash discount even if it borrow money at the annual rate of 11 percent.
c.
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Answer to Problem 5AP
Yes, Company SM must take the advantage of 1/1,n/30 purchase discount.
Explanation of Solution
Company SM is borrowing money from the bank at the rate of 11%. If the Company SM takes the advantage of cash discount, then the company saves 1% by making the payment within the 20days. The bank is charging 11% per year for the loan borrowed by Company SM. hence, the bank charges nearly 0.6%
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Chapter 6 Solutions
Financial & Managerial Accounting
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