Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781259726910
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 4, Problem 2AP
To determine

Record the purchase and sales transactions of Company L during August under perpetual inventory system.

Expert Solution & Answer
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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.

Record the purchase of merchandise inventory on account.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

August 1Merchandise Inventory 7,500 
 Accounts Payable  7,500
 (To record purchases of inventory on account)   

Table (1)

Description:

  • Merchandise inventory is an asset and it is increased by $7,500. Therefore, debit inventory account with $7,500.
  • Accounts payable is a liability and it is increased by $7,500. Therefore, credit accounts payable account with $7,500.

Record the journal entry for the sale of inventory on account.

DateAccounts and ExplanationDebit ($)Credit ($)
August 5Accounts Receivable5,200 
 Sales Revenue 5,200
 (To record the sale of inventory on account)  

Table (2)

Description

  • Accounts Receivable is an asset and it is increased by $5,200. Therefore, debit account receivable with $5,200.
  • Sales revenue is revenue and it increases the value of equity by $5,200. Therefore, credit sales revenue with $5,200.

Record the journal entry for cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
August 5Cost of Goods Sold4,000 
 Merchandise Inventory 4,000
 (To record the cost of goods sold)  

Table (3)

Description

  • Cost of goods sold is an expense account and it decreases the value of equity by $4,000. Therefore, debit cost of goods sold account with $4,000.
  • Merchandise Inventory is an asset and it is decreased by $4,000. Therefore, credit inventory account with $4,000.

Record the purchase of merchandise inventory on account.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

August 8Merchandise Inventory 5,400 
 Accounts Payable  5,400
 (To record purchases of inventory on account)   

Table (4)

Description:

  • Merchandise inventory is an asset and it is increased by $5,400. Therefore, debit inventory account with $5,400.
  • Accounts payable is a liability and it is increased by $5,400. Therefore, credit accounts payable account with $5,400.

Record the journal entry for delivery charges paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
August 9Delivery Expense 125 
 Cash  125
 (To record the payment of delivery charges)   

Table (5)

Description:

  • Delivery expense is an expense and it decreases the value of equity by $125. Therefore, debit delivery expense account with $125.
  • Cash is an asset and it is decreased by $125. Therefore, credit cash account with $125.

Record the journal entry for sales return:

DateAccount Title and Explanation

Debit

($)

Credit

($)

August 10Sales Returns and Allowance600 
 Accounts Receivable 600
 (To record the sales return)  
    
 Merchandise Inventory400 
      Cost of goods sold 400
 (To record the reversal of cost of goods sold on sales return)  

Table (6)

Description:

  • Sales return and allowance is an expense account and it decreases the value of equity by $600. Therefore, debit sales returns and allowances account with $600.
  • Accounts Receivable is an asset and it is decreased by $600. Therefore, credit account receivable with $600.
  • Inventory is an asset and it is increased by $400. Therefore, debit inventory account with $400.
  • Cost of goods sold is an expense account and it increases the value of equity by $400. Therefore, credit cost of goods sold account with $400.

Record the journal entry for credit memo received.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

August 12Accounts Payable 400 
 Merchandise Inventory  400
 (To record the credit memo received)   

Table (7)

Description:

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

Record the journal entry for freight charges paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.Debit ($)Credit ($)
August 14Accounts Payable 200 
 Cash  200
 (To record the payment of freight charges for Mr. A)   

Table (8)

Description:

  • Accounts payable is a liability and it is decreased by $200. Therefore, debit accounts payable account with $200.
  • Cash is an asset and it is decreased by $200. Therefore, credit cash account with $200.

Record the journal entry for receipt of payment:

DateAccount Title and Explanation

Debit

($)

Credit

($)

August 15Cash4,508 (3) 
 Sales Discounts92 (2) 
       Accounts Receivable 4,600 (1)
 (To record receiving cash on sales after discounts and returns)  

Table (9)

Description:

  • Cash is an asset and it is increased by $4,508. Therefore, debit cash account with $4,508.
  • Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $92.
  • Accounts Receivable is an asset and it is decreased by $4,600. Therefore, credit account receivable with $4,600.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $5,200

Sales returns = $600

Netaccounts receivable} = {Accounts receivable due to sales – Sales return}= $5,200 – $600= $4,600 (1)

Calculate the amount of sales discount.

Net accounts receivable = $4,600 (1)

Discount percentage = 2%

Sales discount = $4,600 × 2100 = $92 (2)

Calculate the amount of cash received.

Net accounts receivable = $4,600 (1)

Sales discount = $92 (2)

Cash received = Accounts receivable, net – Sales discount= $4,600 – $92= $4,508 (3)

Record the journal entry for the due amount paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

August 18Accounts Payable 5,000 (4) 
        Merchandise Inventory  50 (5)
        Cash  4,950 (6)
 (To record paying cash on purchases after discounts and returns)   

Table (10)

Working Notes:

Calculate accounts payable amount.

Inventory = $5,400

Inventory returns = $400

Accounts payable = Inventory – Inventory returns=$5,400$400=$5,000 (4)

Calculate purchase discount / inventory.

Net accounts payable = $5,000 (4)

Discount percentage = 1%

Purchase discount = $5,000 × 1100 = $50 (5)

Calculate cash paid.

Accounts payable = $5,000 (4)

Purchase discount / Inventory = $50 (5)

Cash paid = Accounts payable, net – Purchase discount= $5,000 – $50= $4,950 (6)

Description:

  • Accounts payable is a liability and it is decreased by $5,000. Therefore, debit accounts payable account with $5,000.
  • Merchandise Inventory is an asset and it is decreased by $50. Therefore, credit inventory account with $50.
  • Cash is an asset and it is decreased by $4,950. Therefore, credit cash account with $4,950.

Record the journal entry for the sale of inventory on account.

DateAccounts and ExplanationDebit ($)Credit ($)
August 19Accounts Receivable4,800 
 Sales Revenue 4,800
 (To record the sale of inventory on account)  

Table (11)

Description

  • Accounts Receivable is an asset and it is increased by $4,800. Therefore, debit account receivable with $4,800.
  • Sales revenue is revenue and it increases the value of equity by $4,800. Therefore, credit sales revenue with $4,800.

Record the journal entry for cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
August 19Cost of Goods Sold2,400 
 Merchandise Inventory 2,400
 (To record the cost of goods sold)  

Table (12)

Description

  • Cost of goods sold is an expense account and it decreases the value of equity by $2,400. Therefore, debit cost of goods sold account with $2,400.
  • Merchandise Inventory is an asset and it is decreased by $2,400. Therefore, credit inventory account with $2,400.

Record the journal entry for credit memo issued:

DateAccount Title and Explanation

Debit

($)

Credit

($)

August 22Sales Returns and Allowance500 
 Accounts Receivable 500
 (To record the credit memo issued)  

Table (13)

Description:

  • Sales return and allowance is an expense account and it decreases the value of equity by $500. Therefore, debit sales returns and allowances account with $500.
  • Accounts Receivable is an asset and it is decreased by $500. Therefore, credit account receivable with $500.

Record the journal entry for the balance amount received.

Journal Entry
DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

August 29Cash 4,300 
           Accounts Receivable  4,300
 (To record cash received and discounts allowed)   

Table (14)

Description:

  • Cash is an asset and it is increased by $4,300. Therefore, debit cash account with $4,300.
  • Accounts Receivable is an asset and it is decreased by $4,300. Therefore, credit account receivable with $4,300.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $4,800

Sales returns = $500

Netaccounts receivable} = {Accounts receivable due to sales – Sales return}= $4,800 – $500= $4,300 (7)

Record the journal entry for the due amount paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

August 30Accounts Payable 7,300 
        Cash  7,300 (8)
 (To record paying cash on purchases after deducting freight charges)   

Table (15)

Working Notes:

Calculate the net accounts payable.

Accounts payable = $7,500

Freight charges = 200

Net accounts payable = $7,500$200= $7,300 (8)

Description:

  • Accounts payable is a liability and it is decreased by $7,300. Therefore, debit accounts payable account with $7,300.
  • Cash is an asset and it is decreased by $7,300. Therefore, credit cash account with $7,300.

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Chapter 4 Solutions

Financial Accounting Fundamentals

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