Chapter 4, Problem 22E

1.

To determine

Prepare journal entries to record the transactions of Company S during the month of May using perpetual inventory system.

Explanation of Solution

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.

Net method: Under net method, sales and purchases of merchandises are recorded at the net invoice price which means the discounts are deducted from the gross invoice price.

Record the journal entries for Company S.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
May 11	Merchandise Inventory (1)		38,800
	Accounts Payable			38,800
	(To record purchases of inventory on account)
May 11	Merchandise Inventory		345
	Cash			345
	(To record the shipping charges on purchases of inventories)
May 12	Accounts Payable (2)		1,358
	Merchandise Inventory			1,358
	(To record the purchases return)
May 20	Accounts Payable (3)		37,442
	Cash			37,442
	(To record paying cash on purchases after discounts and returns)

Table (1)

May 11: To record the purchases of inventory on account:

• Merchandise inventory is an asset and it is increased by $40,000. Therefore, debit merchandise inventory account with $40,000.
• Accounts payable is a liability and it is increased by $40,000. Therefore, credit accounts payable account with $40,000.

May 11: To record the shipping charges on purchases of inventories:

• Merchandise inventory is an asset and it is increased by $345. Therefore, debit merchandise inventory account with $345.
• Cash is an asset and it is decreased by $345. Therefore, credit cash account with $345.

May 12: To record the purchases return:

• Accounts payable is a liability and it is decreased by $1,400. Therefore, debit accounts payable account with $1,400.
• Merchandise inventory is an asset and it is decreased by $1,400. Therefore, credit inventory account with $1,400.

May 20: To record paying cash on purchases after discounts and returns:

• Accounts payable is a liability and it is decreased by $37,442. Therefore, debit accounts payable account with $37,442.
• Cash is an asset and it is decreased by $37,442. Therefore, credit cash account with $37,442.

Working notes:

Calculate the net amount of net merchandise purchased on account.

Gross invoice of merchandise = $40,000

Discount percentage= 3%

$\begin{array}{c}\text{Net merchandise purchased= }\left(\begin{array}{l}\text{Gross invoice of }\\ \text{merchandise purchased }\end{array}\right)\text{ – }\left(\begin{array}{l}\text{Discount on merchandise}\\ \text{ purchased }\end{array}\right)\\ =\$40,000-\left(\$40,000\times \frac{3}{100}\right)\\ =\$40,000-\$1,200\\ =\$38,800\end{array}$ (1)

Calculate the amount of net purchases returns.

Gross Purchase returns = $1,400

Discount percentage = 3%

$\begin{array}{c}\text{Net purchase returns= }\left(\begin{array}{l}\text{Gross invoice of }\\ \text{merchandise retuned}\end{array}\right)\text{ – }\left(\begin{array}{l}\text{Discount on merchandise }\\ \text{returned }\end{array}\right)\\ =\$1,400-\left(\$1,400\times \frac{3}{100}\right)\\ =\$1,400-\$42\\ =\$1,358\end{array}$ (2)

Calculate the net amount of cash paid to suppliers.

Net merchandise purchased = $38,800(1)

Net purchase returns = $1,358 (2)

$\begin{array}{c}\text{Cash paid to suppliers = }\left(\begin{array}{l}\text{Net merchandise}\\ \text{ purchased }\end{array}\right)\text{– }\left(\begin{array}{l}\text{Net purchase}\\ \text{ returns}\end{array}\right)\\ \text{= \$38,800 – \$1,358}\\ \text{= \$37,442}\end{array}$ (3)

2.

To determine

Prepare journal entries to record the transactions of Company T during the month of May using perpetual inventory system.

Explanation of Solution

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.

Net method: Under net method, sales and purchases of merchandises are recorded at the net invoice price which means the discounts are deducted from the gross invoice price.

Record the journal entries for Company T.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 11	Accounts Receivable	38.800
	Sales Revenue		38,800
	(To record merchandise sales on account)
	Cost of goods sold	30,000
	Merchandise Inventory		30,000
	(To record cost of goods sold)
May 12	Sales Returns and Allowance	1,358
	Accounts Receivable		1,358
	(To record the sales return)
	Merchandise Inventory	1,050
	Cost of goods sold		1,050
	(To record the reversal of cost of goods sold on sales return)
May 20	Cash	37,442
	Accounts Receivable		37,442
	(To record the cash received after discounts and returns)

Table (2)

May 11: To record the merchandise sales on account and the cost of goods sold:

• Accounts Receivable is an asset and it is increased by $38,800. Therefore, debit account receivable with $38,800.
• Sales revenue is revenue and it increases the value of equity by $38,800. Therefore, credit sales revenue with $38,800.
• Cost of goods sold is an expense account and it decreases the value of equity by $30,000. Therefore, debit cost of goods sold account with $30,000.
• Merchandise inventory is an asset and it is decreased by $30,000. Therefore, credit inventory account with $30,000.

May 12: To record the merchandise returned from customers and the cost of goods returned:

• Sales return and allowance is an expense account and it decreases the value of equity by $1,358. Therefore, debit sales returns and allowances account with $1,358.
• Accounts Receivable is an asset and it is decreased by $1,358. Therefore, credit account receivable with $1,358.
• Inventory is an asset and it is increased by $1,050. Therefore, debit inventory account with $1,050.
• Cost of goods sold is an expense account and it increases the value of equity by $1,050. Therefore, credit cost of goods sold account with $1,050.

May 20: To record the merchandise returned from customers and the cost of goods returned:

• Cash is an asset and it is increased by $37,442. Therefore, debit cash account with $37,442.
• Accounts Receivable is an asset and it is decreased by $37,442. Therefore, credit account receivable with $37,442.

Working notes:

Calculate the amount of net merchandise sold.

Gross amount of merchandise sold = $40,000

Discount percentage= 3%

$\begin{array}{c}\text{Net merchandise sold= }\left(\begin{array}{l}\text{Gross amount of }\\ \text{merchandise sold}\end{array}\right)-\left(\begin{array}{l}\text{Discount on gross }\\ \text{merchandise sold}\end{array}\right)\\ \text{= \$40,000 – }\left(\$40,000\times \frac{3}{100}\right)\\ \text{= \$40,000}-\$1,200\\ =\$38,800\end{array}$ (4)

Calculate the amount of net sales returns.

Gross amount of sales returns = $1,400

Discount percentage = 3%

$\begin{array}{c}\text{Net sales returns = }\left(\begin{array}{l}\text{Gross amount of }\\ \text{sales returns}\end{array}\right)-\left(\begin{array}{l}\text{Discount on gross }\\ \text{merchandise returned}\end{array}\right)\\ \text{= \$1,400 – }\left(\$1,400\times \frac{3}{100}\right)\\ \text{= \$1,400}-\$42\\ =\$1,358\end{array}$ (5)

Calculate the amount of cash received from customers.

Net merchandise sold = $38,600 (4)

Net sales returns = $1,358 (5)

$\begin{array}{c}\text{Cash received from customers = }\left(\begin{array}{l}\text{Net merchandise}\\ \text{ sold }\end{array}\right)\text{– }\left(\begin{array}{l}\text{Net sales}\\ \text{ returns}\end{array}\right)\\ \text{= \$38,800 – \$1,358}\\ \text{= \$37,442}\end{array}$ (6)