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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

Record the following transactions in a general journal:

May 4    Merchandise listed at $2,900, less a trade discount of 10%, is purchased on account, credit terms of 1/10, n/30, shipping terms FOB destination.

8    Merchandise purchased on May 4, listed at $520, is returned for credit.

14    Partial payment is made for the merchandise purchased on May 4, listed at $1,000, less 1% discount.

June 3    Payment is made of the balance due on the May 4 purchase.

To determine

Journalize the transactions related to purchases, purchases returns and allowances, and cash payments.

Explanation

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 transactions related to purchases, purchases returns and allowances, and cash payments.

Transaction on May 4:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
May4Purchases 2,610 
   Accounts Payable  2,10
  (Record purchases made on account)   

Table (1)

Description:

  • Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
  • Accounts Payable is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Working Note 1:

Compute the purchase invoice value.

Purchase invoice value = List price–Trade discount= $2,900–($2,900×10%)=$2,900$290= $2,610

Transaction on May 8:

DateAccount Titles and ExplanationPost Ref.Debit ($)Credit ($)
May8Accounts Payable 468 
   Purchases Returns and Allowances  468
  (Record merchandise returned)   

Table (2)

Description:

  • Accounts Payable is a liability account. Since inventory is returned, amount to be paid has decreased, liability account is decreased, and a decrease in liability is debited.
  • Purchases Returns and Allowances is a contra-cost account, and contra-cost accounts increase the equity value, and an increase in equity is credited.

Working Note 2:

Compute the purchase returns invoice value.

Purchase returns invoice value }= List price of purchase returns–Trade discount= $520–($520×10%)=$520$52= $468

Transaction on May 14:

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
May14Accounts Payable 900 
   Cash  891
   Purchases Discounts  9
  (Record cash paid for purchases on account)   

Table (3)

Description:

  • Accounts Payable is a liability account

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