Chapter 5, Problem 5.1AP

To determine

(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.

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

The following are the rules of debit and credit:

1. 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.
2. 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	Accounts receivable		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%

$\begin{array}{c}\text{Sales discount = \$4,400 × }\frac{2}{\text{100}}\\ \text{= \$88}\end{array}$ (1)

Calculate the amount of cash received.

Net accounts receivable = $4,400

Sales discount = $88 (1)

$\begin{array}{c}\text{Cash received = Accounts receivable – Sales discount}\\ \text{= \$4,400 – \$88}\\ \text{= \$4,312}\end{array}$ (2)

Calculate the amount of net accounts payable.

Inventory = $8,000

Purchase returns = $200

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$8,000–\$200\\ =\$7,800\end{array}$ (3)

Calculate the amount of purchase discount.

Net accounts payable = $7,800 (3)

Discount percentage = 1%

$\begin{array}{c}\text{Purchase discount = \$7,800 × }\frac{1}{\text{100}}\\ \text{= \$78}\end{array}$ (4)

Calculate the amount of cash paid.

Net accounts payable = $7,800 (3)

Purchase discount = $78 (4)

$\begin{array}{c}\text{Cash paid = Net accounts payable – Purchase discount}\\ \text{= \$7,800 – \$78}\\ \text{= \$7,722}\end{array}$ (5)

Calculate the amount of purchase discount.

Accounts payable = $2,500

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$2,500 × }\frac{2}{\text{100}}\\ \text{= \$50}\end{array}$ (6)

Calculate the amount of cash paid.

Accounts payable = $2,500

Purchase discount = $50 (6)

$\begin{array}{c}\text{Cash paid = Accounts payable – Purchase discount}\\ \text{= \$2,500 – \$50}\\ \text{= \$2,450}\end{array}$ (7)

(b)

To determine

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 Post: The above transactions to T-accounts of Store WH.

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 determine

To Prepare: The income statement through gross profit of Store WH for the month ended May 2017.

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)

Conclusion

Therefore, the gross profit of Store WH for the month ended May 2017 is $2,828.

(d)

To determine

The gross profit rate and profit margin of Store WH for the month of May 2017.

Explanation of Solution

Calculate gross profit rate for Store WH.

Gross profit = $2,828 (Refer table 12)

Net sales = $10,968 (Refer table 12)

$\begin{array}{c}\text{Gross profit rate}=\frac{\text{Gross profit }}{\text{Net sales}}\times 100\\ =\frac{\$2,828}{\$10,968}\times 100\\ =25.78\%\end{array}$

Calculate the profit margin for Store WH.

Net income = $1,428 (a)

Net sales = $10,968 (Refer table 12)

$\begin{array}{c}\text{Profit margin}=\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\times 100\\ =\frac{\$1,428}{\$10,968}\times 100\\ =13.02\%\end{array}$

Working Note:

Calculate the net income for Store WH.

Gross profit = $2,828

Operating expenses = $1,400

$\begin{array}{c}\text{Net}\text{Income}\text{=}\text{Gross}\text{Profit}-\text{Operating expenses}\\ \text{=}\text{\$2,828}-\$1,400\\ =\$1,428\end{array}$ (a)

Conclusion

Therefore, the gross profit rate and profit margin of Store WH for the month May 2017 is 25.78% and 13.02% respectively.