Chapter 5, Problem 4BE

a.

To determine

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

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
June 18	Accounts receivable (+A)		$4,000
	Sales revenue (+SE)			$4,000
	(To record the sale of merchandise on account )
June 18	Cost of goods sold (-SE)		$3,000
	Inventory (-A)			3,000
	(To record the cost of merchandise sold)
June 25	Sales return and allowances (-SE)		$400
	Accounts receivable (-A)			$400
	(To record the return of merchandise due to defect)
June 25	Inventory (+A)		$300
	Cost of goods sold (+SE)			$300
	(To record the cost of merchandise returned by customers)
June 27	Cash (2) (+A)		$3,528
	Sales discounts (1) (-SE)		$72
	Accounts receivable (-A)			$3,600
	(To record the sales discount and payment from customers for the goods sold)

Table (1)

June 18: 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 D. Thus, it is debited with $4,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $4,000.

June 18: 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 $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 25:  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 $400.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $400.

June 25: 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 $300.

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 $300.

June 27: 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 $3,528.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $72.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $3,600.

Working Note:

Compute the discount on sales.

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

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$4,000-\$400\right)\times \frac{2}{100}\\ =\$3,600\times \frac{2}{100}\\ =\$72\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$4,000-\$400-\$72\left(1\right)\\ =\$3,528\end{array}$ (2)

b.

To determine

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

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
June 18	Inventory (+A)		$4,000
	Accounts payable (+L)			$4,000
	(To record the inventory purchased on account )
June 25	Accounts payable  (-L)		$400
	Inventory (-A)			$400
	(To record the return of inventories on account)
June 30	Accounts payable (-L)		$3,600
	Inventory (3) (-A)			$72
	Cash (4) (-A)			$3,528
	(To record the purchase discount and  payment of merchandise purchased on account)

Table (2)

June 18: To record the inventory purchased on account:

Inventory is an asset. The value is increased due to the credit purchases made by Company D. Therefore, inventory account is debited with $4,000.

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 $4,000.

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 $400.

Inventory is an asset and is reduced due to credit purchase returns. Thus, it is credited with Inventory account with $400.

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 $3,600.

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 $72.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $3,528.

Working Note:

Compute the discount on purchases.

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

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$4,000-\$400\right)\times \frac{2}{100}\\ =\$3,600\times \frac{2}{100}\\ =\$72\end{array}$ (3)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$4,000-\$400-\$72\left(3\right)\\ =\$3,528\end{array}$ (4)