Chapter 5, Problem 4AE

a.

To determine

Prepare the journal entries to record the transactions for the month of June for Incorporation LA (seller).

Explanation of Solution

Perpetual Inventory System: 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.

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.

Cash discount: The merchandisers offer a reduction in sales price on initial sales, to accelerate the credit sales payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as cash discount.

Prepare journal entries for Incorporation LA (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
June 21	Accounts receivable		$3,000
	Sales revenue			$3,000
	(To record the sale of merchandise on account )
June 21	Cost of goods sold		$2,000
	Inventory			$2,000
	(To record the cost of merchandise sold)
June 28	Sales return and allowances		$300
	Accounts receivable			$300
	(To record the return of merchandise due to defect)
June 28	Inventory		$210
	Cost of goods sold			$210
	(To record the cost of merchandise returned by customers)
June 30	Cash (2)		$2,646
	Sales discounts (1)		$54
	Accounts receivable			$2,700
	(To record the sales discount and payment from customers for the goods sold)

Table (1)

June 21: To record the sale of merchandise on account:

Accounts receivable is an asset and the value is increased due to the credit sales made by Company. Thus, it is debited with $3,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $3,000.

June 21: To record the cost of merchandise sold:

Cost of goods sold is an expense and it decreases the total revenue (Stockholders’ equity). Thus, it is debited with $2,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $2,000.

June 28:  To record the return of merchandise due to defect

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $300.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $300.

June 28: To record the cost of merchandise returned from customers:

Inventory is an asset and is increased due to the return of inventory from customers. Thus, it is debited with $210.

Cost of goods sold is an expense. The cost of merchandise returned decreases the expense that results in the increase in stockholders’ equity. Thus, it is debited with $210.

June 30: To record the sales discount and payment from customers for the merchandise sold:

Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $2,646.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $54.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $2,700.

Working Note:

Compute the discount on sales.

Credit terms:$2/10,\text{n}/30$

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$3,000-\$300\right)\times \frac{2}{100}\\ =\$2,700\times \frac{2}{100}\\ =\$54\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$3,000-\$300-\$54\left(1\right)\\ =\$2,646\end{array}$ (2)

b.

To determine

Prepare the journal entries to record the transactions for the month of June for Company LO (buyer).

Explanation of Solution

Perpetual Inventory System: 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.

Cash discount: The merchandisers offer a reduction in sales price on initial sales, to accelerate the credit sales payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as cash discount.

Prepare journal entries for Company LO (buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
June 21	Inventory		$3,000
	Accounts payable			$3,000
	(To record the inventory purchased on account )
June 28	Accounts payable		$300
	Inventory			$300
	(To record the return of inventories on account)
June 30	Accounts payable (Balancing Figure)		$2,700
	Inventory (3)			$54
	Cash (4)			$2,646
	(To record the purchase discount and  payment of merchandise purchased on account)

Table (2)

June 21: To record the inventory purchased on account:

Inventory is an asset. The value is increased due to the credit purchases made by Company. Therefore, inventory account is debited with $3,000.

Accounts Payable is a liability and it is increased due to the increase in the amount to be paid for purchases. Therefore, credit Accounts Payable account with $3,000.

June 28: To record the return of inventories on account:

Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $300.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $300.

June 30: To record the purchase discount and payment of merchandise purchased on account:

Accounts Payable is a liability and is decreased because the company has paid the amount due for credit purchases. Therefore, it is debited with $2,700.

Inventory is an asset account. The amount has decreased because the purchase discount is reduced from the cost of inventory. Hence, credit Inventory account with $54.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $2,646.

Working Note:

Compute the discount on purchases.

Credit terms: $2/10,\text{n}/30$

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$3,000-\$300\right)\times \frac{2}{100}\\ =\$2,700\times \frac{2}{100}\\ =\$54\end{array}$ (3)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$3,000-\$300-\$54\left(3\right)\\ =\$2,646\end{array}$ (4)