(a)
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.
The following are the rules of debit and credit:
- 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and
stockholders’ equity accounts are debited. - 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.
To Record: The journal entries in books of Store WH using perpetual inventory system during May.
Explanation of Solution
Prepare the journal entries for Store WH during May:
Date | Account Title and Explanation |
Post Ref. | Debit ($) | Credit ($) |
May 1 | Inventory | 8,000 | ||
Accounts payable | 8,000 | |||
(To record purchase on account) | ||||
May 2 |
| 4,400 | ||
Sales revenue | 4,400 | |||
(To record sales on account) | ||||
Cost of goods sold | 3,300 | |||
Inventory | 3,300 | |||
(To record the cost of goods sold) | ||||
May 5 | Accounts payable | 200 | ||
Inventory | 200 | |||
(To record the purchase returns) | ||||
May 9 | Cash | 4,312 (2) | ||
Sales discounts | 88 (1) | |||
Accounts receivable | 4,400 | |||
(To record cash receipt net of discounts) | ||||
May10 | Accounts payable | 7,800 (3) | ||
Inventory | 78 (4) | |||
Cash | 7,722 (5) | |||
(To record cash payment net of discounts) | ||||
May11 | Supplies | 900 | ||
Cash | 900 | |||
(To record purchase of supplies) | ||||
May12 | Inventory | 3,100 | ||
Cash | 3,100 | |||
(To record merchandise purchase) | ||||
May15 | Cash | 230 | ||
Inventory | 230 | |||
(To record purchase returns) | ||||
May 17 | Inventory | 2,500 | ||
Accounts payable | 2,500 | |||
(To record purchase on account) | ||||
May 19 | Inventory | 250 | ||
Cash | 250 | |||
(To record payment of freight) | ||||
May 24 | Cash | 5,500 | ||
Sales revenue | 5,500 | |||
(To record cash sales) | ||||
Cost of goods sold | 4,100 | |||
Inventory | 4,100 | |||
(To record cost of goods sold) | ||||
May 25 | Inventory | 800 | ||
Accounts payable | 800 | |||
(To record purchase on account) | ||||
May 27 | Accounts payable | 2,500 | ||
Inventory | 50 (6) | |||
Cash | 2,450 (7) | |||
(To record payment net of discount) | ||||
Date | Account Title and Explanation |
Post Ref. | Debit ($) | Credit ($) |
May 29 | Sales returns and allowances | 124 | ||
Cash | 124 | |||
(To record sales returns on cash) | ||||
Inventory | 90 | |||
Cost of goods sold | 90 | |||
(To adjust cost of goods sold) | ||||
May 31 | Accounts receivable | 1,280 | ||
Sales revenue | 1,280 | |||
(To record sales on account) | ||||
May 31 | Cost of goods sold | 830 | ||
Inventory | 830 | |||
(To record cost of goods sold) |
Table (1)
Working notes:
Calculate the amount of sales discount.
Accounts receivable = $4,400
Discount percentage = 2%
Calculate the amount of cash received.
Net accounts receivable = $4,400
Sales discount = $88 (1)
Calculate the amount of net accounts payable.
Inventory = $8,000
Purchase returns = $200
Calculate the amount of purchase discount.
Net accounts payable = $7,800 (3)
Discount percentage = 1%
Calculate the amount of cash paid.
Net accounts payable = $7,800 (3)
Purchase discount = $78 (4)
Calculate the amount of purchase discount.
Accounts payable = $2,500
Discount percentage = 2%
Calculate the amount of cash paid.
Accounts payable = $2,500
Purchase discount = $50 (6)
(b)
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where, they are recorded and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
To
(b)
Explanation of Solution
The following is the T-account for cash.
Cash Account:
Cash Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 1 | Beginning Balance | 8,000 | May 10 | Accounts payable | 7,722 | |
May 9 | Accounts receivable | 4,312 | May 11 | Supplies | 900 | |
May 15 | Inventory | 230 | May 12 | Inventory | 3,100 | |
May 24 | Sale revenue | 5,500 | May 19 | Inventory | 250 | |
May 27 | Accounts payable | 2,450 | ||||
May 29 | Sales returns and allowances | 124 | ||||
May 31 | Ending Balance | 3,496 | ||||
May 31 | Total | 18,042 | May 31 | Total | 18,042 |
Table (2)
Accounts Receivable Account:
Accounts Receivable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 2 | Sales revenue | 4,400 | May 9 | Cash | 4,312 | |
May 31 | Sales revenue | 1,280 | May 9 | Sales discount | 88 | |
May 31 | Ending Balance | 1,280 | ||||
May 31 | Total | 5,680 | May 31 | Total | 5,680 |
Table (3)
Inventory Account:
Inventory Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 1 | Accounts payable | 8,000 | May 2 | Cost of goods sold | 3,300 | |
May 12 | Cash | 3,100 | May 5 | Accounts payable | 200 | |
May 17 | Accounts payable | 2,500 | May 10 | Accounts payable | 78 | |
May 19 | Cash | 250 | May 15 | Cash | 230 | |
May 25 | Accounts payable | 800 | May 24 | Cost of goods sold | 4,100 | |
May 29 | Cost of goods sold | 90 | May 27 | Accounts payable | 50 | |
May 31 | Cost of goods sold | 830 | ||||
May 31 | Ending Balance | 5,952 | ||||
May 31 | Total | 14,740 | May 31 | Total | 14,740 |
Table (4)
Supplies Account:
Supplies Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 11 | Cash | 900 | May 31 | Ending Balance | 900 | |
May 31 | Total | 900 | May 31 | Total | 900 |
Table (5)
Common Stock Account:
Common Stock Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 31 | Ending Balance | 8,000 | May 1 | Beginning Balance | 8,000 | |
May 31 | Total | 8,000 | May 31 | Total | 8,000 |
Table (6)
Accounts Payable Account:
Accounts Payable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 5 | Inventory | 200 | May 1 | Inventory | 8,000 | |
May 10 | Inventory | 78 | May 17 | Inventory | 2,500 | |
May 10 | Cash | 7,722 | May 25 | Inventory | 800 | |
May 27 | Inventory | 50 | ||||
May 27 | Cash | 2.450 | ||||
May 31 | Ending Balance | 800 | ||||
May 31 | Total | 11,300 | May 31 | Total | 11,300 |
Table (7)
Sales Revenue Account:
Sales Revenue Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 31 | Ending Balance | 11,180 | May 2 | Accounts receivable | 4,400 | |
May 24 | Cash | 5,500 | ||||
May 31 | Accounts receivable | 1,280 | ||||
May 31 | Total | 11,180 | May 31 | Total | 11,180 |
Table (8)
Sales Return and Allowances Account:
Sales Return and Allowances Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 29 | Cash | 124 | May 31 | Ending Balance | 124 | |
May 31 | Total | 124 | May 31 | Total | 124 |
Table (9)
Sales Discounts Account:
Sales Discount Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 9 | Accounts receivable | 88 | May 31 | Ending Balance | 88 | |
May 31 | Total | 88 | May 31 | Total | 88 |
Table (10)
Cost of Goods Sold Account:
Cost of Goods Sold Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) | |
May 2 | Inventory | 3,300 | May 29 | Inventory | 90 | |
May 24 | Inventory | 4,100 | May 31 | Ending Balance | 8,140 | |
May 31 | Inventory | 830 | ||||
May 31 | Total | 8,230 | May 31 | Total | 8,230 |
Table (11)
(c)
To Prepare: The income statement through gross profit of Store WH for the month ended May 2017.
(c)
Explanation of Solution
Prepare the income statement of Store WH.
Store WH | ||
Income statement (Partial) | ||
For the Month Ended May, 2017 | ||
Particulars | Amount | Amount |
Sales Revenue | $11,180 | |
Less: Sales returns and allowances | $124 | |
Sales discounts | $88 | $212 |
Net sales | $10,968 | |
Less: Cost of goods sold | $8,140 | |
Gross profit | $2,828 |
Table (12)
Therefore, the gross profit of Store WH for the month ended May 2017 is $2,828.
(d)
The gross profit rate and profit margin of Store WH for the month of May 2017.
(d)
Explanation of Solution
Calculate gross profit rate for Store WH.
Gross profit = $2,828 (Refer table 12)
Net sales = $10,968 (Refer table 12)
Calculate the profit margin for Store WH.
Net income = $1,428 (a)
Net sales = $10,968 (Refer table 12)
Working Note:
Calculate the net income for Store WH.
Gross profit = $2,828
Operating expenses = $1,400
Therefore, the gross profit rate and profit margin of Store WH for the month May 2017 is 25.78% and 13.02% respectively.
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Chapter 5 Solutions
Financial Accounting: Tools For Business Decisionmaking, Eighth Edition Wileyplus Blackboard Card
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