Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Chapter 8, Problem 8.4E

Perpetual and periodic inventory systems compared

• LO8–1

The following information is available for the Johnson Corporation for 2018:

Beginning inventory $ 25,000
Merchandise purchases (on account) 155,000
Freight charges on purchases (paid in cash) 10,000
Merchandise returned to supplier (for credit) 12,000
Ending inventory 30,000
Sales (on account) 250,000
Cost of merchandise sold 148,000

Required:

Applying both a perpetual and a periodic inventory system, prepare the journal entries that summarize the transactions that created these balances. Include all end-of-period adjusting entries indicated.

Expert Solution & Answer
Check Mark
To determine

Periodic Inventory System: Under this system, the balance of the merchandise inventory is not adjusted when the purchases and sales takes place, rather it is adjusted at the end of a particular period on a periodic basis.

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.

To Prepare: the journal entries for the given transactions under perpetual and periodic inventory system.

Explanation of Solution

Prepare the journal entries for the given transactions under perpetual inventory system.

Purchase:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Inventory   155,000  
  Accounts Payable     155,000
  (To record the purchase of inventories on account)      

Table (1)

  • Inventory is an asset and increased by $155,000. Therefore; debit the inventory account with $155,000.
  • Accounts payable is a liability and increased by $155,000. Therefore, credit the accounts payable account with $155,000.

Freight:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Inventory   10,000  
  Cash     10,000
  (To record the freight cost)      

Table (2)

  • Inventory is an asset and increased by $10,000. Therefore; debit the inventory account with $10,000.
  • Cash is an asset and increased by $10,000. Therefore, credit the cash account with $10,000.

Purchase Returns:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Accounts Payable   12,000  
  Inventory     12,000
  (To record the return of inventories on account)      

Table (3)

  • Accounts payable is a liability and decreased by $12,000. Therefore, debit the accounts payable account with $12,000.
  • Inventory is an asset and increased by $12,000. Therefore, credit the inventory account with $12,000.

Sales:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Accounts Receivable   250,000  
  Sales Revenue     250,000
  (To record the sales on account)      

Table (4)

  • Accounts Receivable is an asset and increased by $250,000. Therefore, debit the accounts receivable account with $250,000.
  • Sales Revenue is a revenue that increases the equityby $250,000. Therefore, credit the sales revenue account with $250,000.
Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Cost of Goods Sold   148,000  
   Inventory     148,000
  (To record the cost of goods sold)      

Table (5)

  • Cost of Goods Sold is an expense that decreases the equity by $148,000. Therefore, credit the cost of goods sold account with $148,000.
  • Inventory is an asset and decreased by $148,000. Therefore, creditthe inventory account with $148,000.

Year-end Adjusting Entry:

NO ENTRY IS REQUIRED.

Prepare the journal entries for the given transactions under periodic inventory system.

Purchase:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Purchases   155,000  
  Accounts Payable     155,000
  (To record the purchase of inventories on account)      

Table (6)

  • Purchase is an expense and increased by $155,000which decreased the equity. Therefore, debit the purchase account with $155,000.
  • Accounts payable is a liability and increased by $155,000. Therefore, credit the accounts payable account with $155,000.

Freight:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Freight-in   10,000  
  Cash     10,000
  (To record the freight cost)      

Table (7)

  • Freight-in is an expense and increased by $10,000which decreased the equity. Therefore, debit the freight-in account with $10,000.
  • Cash is an asset and increased by $10,000. Therefore, credit the cash account with $10,000.

Purchase Returns:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Accounts Payable   12,000  
  Purchase Returns     12,000
  (To record the return of inventories on account)      

Table (8)

  • Accounts payable is a liability and decreased by $12,000. Therefore, debit the accounts payable account with $12,000.
  • Purchase returns is a contra-purchase account (with normal credit balance) and increased by $12,000. Therefore, credit the purchase returns account with $12,000.

Sales:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Accounts Receivable   250,000  
  Sales Revenue     250,000
  (To record the sales on account)      

Table (9)

  • Accounts Receivable is an asset and increased by $250,000. Therefore, debit the accounts receivable account with $250,000.
  • Sales Revenue is revenue that increases the equity by $250,000. Therefore, credit the sales revenue account with $250,000.

Cost of goods sold:

No entry is required for cost of goods sold under the periodic method.

Prepare the year-end Adjusting Entry.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

  Cost of Goods Sold   148,000  
  Ending Inventory   30,000  
  Purchase Returns   12,000  
  Beginning Inventory     25,000
  Purchases     155,000
  Freight-in     10,000
  (To record the cost of goods sold)      

Table (10)

  • Cost of Goods Sold is an expense that decreases the equity by $148,000. Therefore, credit the cost of goods sold account with $148,000.
  • Ending Inventory is an asset and increased by $30,000. Therefore, debit the inventory account with $30,000.
  • Purchase returns is a contra-purchase account (with normal credit balance) and decreased by $12,000. Therefore, debit the purchase returns account with $12,000.
  • Beginning Inventory is an asset and decreased by $25,000. Therefore, credit the inventory account with $25,000.
  • Purchase is an expense and decreased by $155,000 which increased the equity. Therefore, credit the purchase account with $155,000.
  • Freight-in is an expense and decreased by $10,000which increased the equity. Therefore, credit the freight-in account with $10,000.

Working note:

Calculate the cost of goods sold.

Particulars Amount ($) Amount ($)
Beginning Inventory   25,000
Add: Purchases 155,000  
Less: Purchase Returns (12,000)  
Net purchases   153,000
Goods available for sale   178,000
Less: Ending Inventory   (30,000)
Cost of goods sold   148,000

Table (11)

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Chapter 8 Solutions

Intermediate Accounting

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