Chapter 5, Problem 2BP

To determine

Prepare journal entries to record the transactions of July month for Company W.

Explanation of Solution

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

Sales returns and allowances: Sometimes, customers either return goods due to manufacturing defects, or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price, is referred to as sales returns and allowances. These are recorded as contra-revenue accounts.

Purchase discounts: The sellers offer a reduction in purchase price on initial purchases, to accelerate the collection of on account purchases, by their customers, within the purchase terms promptly. Such a reduction in purchase price is referred to as purchase discount.

Purchase returns: Purchase returns are the goods returned by the buyer out of the goods purchased.

Sales discounts: The merchandisers offer a reduction in sales price on initial sales, to accelerate the sale on account payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as sales discount. This is recorded as contra-revenue account.

Prepare journal entries for Company W.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
July 01	Merchandise Inventory		$2,500
	Accounts payable – Incorporation D			$2,500
	(To record the inventory purchased on account)
July 02	Merchandise Inventory		$4,500
	Accounts payable – Company P			$4,500
	(To record the inventory purchased on account)
July 03	Merchandise Inventory		$300
	Cash			$300
	(To record the payment of freight expense for the merchandise purchased from Company D)
July 05	Accounts receivable - Incorporation W		$1,400
	Sales revenue			$1,400
	(To record the sale of merchandise on account )
July 05	Cost of goods sold		$1,100
	Merchandise Inventory			$1,100
	(To record the cost of merchandise sold)
July 05	Delivery expense		$90
	Cash			$90
	(To record the payment of freight expense for the merchandise sold)
July 08	Accounts payable – Incorporation D		$500
	Merchandise Inventory			$500
	(To record the return of inventories on account)
July 09	Sales return and allowances		$200
	Accounts receivable - Incorporation W			$200
	(To record the return of merchandise due to defect)
July 09	Merchandise Inventory		$150
	Cost of goods sold			$150
	(To record the cost of merchandise returned by customers)
July 10	Accounts payable – Incorporation D		$2,000
	Inventory (Refer Table (2))			$20
	Cash (Refer Table (2))			$1,980
	(To record the discount on purchases and  payment of merchandise purchased on account)
July 10	Merchandise Inventory		$2,600
	Accounts payable – Company D			$2,600
	(To record the inventory purchased on account)
July 11	Merchandise Inventory		$150
	Cash			$150
	(To record the payment of freight expense for the merchandise purchased from Company D)
July 15	Cash (Refer Table (3))		$1,176
	Sales discounts (Refer Table (3))		$24
	Accounts receivable - Incorporation W			$1,200
	(To record the sales discount and payment from customers for the goods sold)
July 15	Accounts receivable – Corporation C		$3,200
	Sales revenue			$3,200
	(To record the sale of merchandise on account )
July 15	Cost of goods sold		$2,400
	Merchandise Inventory			$2,400
	(To record the cost of merchandise sold)
July 16	Accounts payable – Company P		$4,500
	Cash			$4,500
	(To record the discount on purchases and  payment of merchandise purchased on account)
July 18	Accounts payable – Company D		$200
	Merchandise Inventory			$200
	(To record the return of inventories on account)
July 19	Accounts payable – Company D		$2,400
	Inventory (Refer Table (2))			$48
	Cash (Refer Table (2))			$2,352
	(To record the discount on purchases and  payment of merchandise purchased on account)
July 25	Cash (Refer Table (3))		$3,136
	Sales discounts (Refer Table (3))		$64
	Accounts receivable - Incorporation W			$3,200
	(To record the sales discount and payment from customers for the goods sold)

Table (1)

Working Note:

Compute the discount on purchases and the cash paid to suppliers.

Date (1)	Purchases (2)	Purchases return (3)	Net Accounts payable $\left(4\right)=\left(2\right)-\left(3\right)$	Discount rate (5)	Discount on Purchases $\left(6\right)=\left(2\right)\times \left(5\right)$	Amount paid to suppliers $\left(7\right)=\left(4\right)-\left(6\right)$
July 10	$2,500	$500	$2,000	1%	$20	$1,980
July 19	$2,600	$200	$2,400	2%	$48	$2,352

Table (2)

Note: Company W paid the due amount of Company P after the discount period of 10 days and hence, no discount would be allowed.

Compute the discount on sales and the cash collected from customers.

Date (1)	Sales (2)	Sales return (3)	Discount on Sales (4) $\left[\left(2\right)-\left(3\right)\right]\times 2\%$	Net Sales (5) $\left(2\right)-\left(3\right)-\left(4\right)$	Freight expense (6)	Amount collected from customers (7) $\left(5\right)+\left(6\right)$
July 15	$1,400	$200	$24	$1,176	$0	$1,176
July 25	$3,200	$0	$64	$3,136	$0	$3,136

Table (3)

Note: Company W sells on terms of $2/10,\text{n}/30$ which means 2% discount on sales.