Chapter 5, Problem 5.2AP

To determine

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 determine:  Preparejournal entries to record the transactions of Company P during the month of June using perpetual inventory system.

Answer to Problem 5.2AP

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 table shows the journal entries of Company P during June.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 1	Inventory (A+)		1,040
	Accounts payable (L+)			1,040
	(To record purchase on account)
June 3	Accounts receivable (A+)		1,200
	Sales revenue (E+)			1,200
	(To record sales on account)
	Cost of goods sold (E–)		720
	Inventory (A–)			720
	(To record cost of goods sold)
June 6	Accounts payable (L+)		40
	Inventory (A+)			40
	(To record purchase return)
June 9	Accounts payable (L–)		1,000 (1)
	Inventory (A–)			20 (2)
	Cash (A–)			980 (3)
	(To record payment made in full settlement less discounts)
June 15	Cash (A+)		1,200
	Accounts receivable (A–)			1,200
	(To record payment received in full settlement)
June 17	Accounts receivable (A+)		1,200
	Sales revenue (E+)			1,200
	(To record sales on account)
	Cost of goods sold (E–)		730
	Inventory (A–)			730
	(To record cost of goods sold)
June 20	Inventory (A+)		720
	Accounts payable (L+)			720
	(To record purchase on account)
June 24	Cash (A+)		1,176 (5)
	Sales discount (E–)		24 (4)
	Accounts receivable (A–)			1,200
	(To record payment received in full settlement)
June 26	Accounts payable (L–)		720
	Inventory (A–)			7.20 (6)
	Cash (A–)			712.80 (7)
	(To record payment made in full settlement less discounts)
June 28	Accounts receivable (A+)		1,300
	Sales revenue (E+)			1,300
	(To record sales on account)
	Cost of goods sold (E–)		780
	Inventory (A–)			780
	(To record cost of goods sold)
June 30	Sales returns and allowances (E–)		130
	Accounts receivable (A–)			130
	(To record sales returns)
	Inventory (A+)		80
	Cost of goods sold (E+)			80
	(To adjust cost of goods sold on sales return)

Table (1)

Working notes:

Calculate the amount of net accounts payable.

Inventory = $1,040

Purchase returns = $40

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$1,040–\$40\\ =\$1,000\end{array}$ (1)

Calculate the amount of purchase discount.

Net accounts payable = $1,000 (1)

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$1,000 × }\frac{2}{\text{100}}\\ \text{= \$20}\end{array}$ (2)

Calculate the amount of cash paid.

Net accounts payable = $1,000 (1)

Purchase discount = $20 (2)

$\begin{array}{c}\text{Cash paid = Net accounts payable – Purchase discount}\\ \text{= \$1,000 – \$20}\\ \text{= \$980}\end{array}$ (3)

Calculate the amount of sales discount.

Accounts receivable = $1,200

Discount percentage = 2%

$\begin{array}{c}\text{Sales discount = \$1,200 × }\frac{2}{\text{100}}\\ \text{= \$24}\end{array}$ (4)

Calculate the amount of cash received.

Net accounts receivable = $1,200

Sales discount = $24 (4)

$\begin{array}{c}\text{Cash received = Accounts receivable – Sales discount}\\ \text{= \$1,200 – \$24}\\ \text{= \$1,176}\end{array}$ (5)

Calculate the amount of purchase discount.

Net accounts payable = $720

Discount percentage = 1%

$\begin{array}{c}\text{Purchase discount = \$720 × }\frac{1}{\text{100}}\\ \text{= \$7}\text{.20}\end{array}$ (6)

Calculate the amount of cash paid.

Accounts payable = $720

Purchase discount = $7.20 (6)

$\begin{array}{c}\text{Cash paid = Accounts payable – Purchase discount}\\ \text{= \$720 – \$7}\text{.20}\\ \text{= \$712}\text{.80}\end{array}$ (7)

Explanation of Solution

Accounting Equation represents the association between assets, liabilities and stockholders’ equity. It shows that assets balance the liabilities and stockholders’ equity. Hence, the abbreviations of assets, liabilities, and stockholders’ equity are shown in the journal entry to explain the above given statement.

$\text{Assets}\left(\text{A}\right)=\text{ Liabilities}\left(\text{L}\right)+\text{ Stockholders’ Equity}\left(\text{E}\right)$

Transaction on June 1:

• Inventory is an asset and it is increased by $1040. Therefore, debit inventory account with $1,040.
• Accounts payable is a liability and it is increased by $1,040. Therefore, credit accounts payable account with $1,040.

Transaction on June 3:

• Accounts Receivable is an asset and it is increased by $1,200. Therefore, debit account receivable with $1,200.
• Sales revenue is revenue and it increases the value of equity by $1,200. Therefore, credit sales revenue with $1,200.
• Cost of goods sold is an expense account and it decreases the value of equity by $720. Therefore, debit cost of goods sold account with $720.
• Inventory is an asset and it is decreased by $720. Therefore, credit inventory account with $720.

Transaction on June 6:

• Accounts payable is a liability and it is decreased by $40. Therefore, debit accounts payable account with $40.
• Inventory is an asset and it is decreased by $40. Therefore, credit inventory account with $40.

Transaction on June 9:

• Accounts payable is a liability and it is decreased by $1,000. Therefore, debit accounts payable account with $1,000.
• Inventory is an asset and it is decreased by $20. Therefore, credit inventory account with $20.
• Cash is an asset and it is decreased by $980. Therefore, credit cash account with $980.

Transaction on June 15:

• Cash is an asset and it is increased by $1,200. Therefore, debit cash account with $1,200.
• Accounts Receivable is an asset and it is decreased by $1,200. Therefore, credit account receivable with $1,200.

Transaction on June 17:

• Accounts Receivable is an asset and it is increased by $1,200. Therefore, debit account receivable with $1,200.
• Sales revenue is revenue and it increases the value of equity by $1,200. Therefore, credit sales revenue with $1,200.
• Cost of goods sold is an expense account and it decreases the value of equity by $730. Therefore, debit cost of goods sold account with $730.
• Inventory is an asset and it is decreased by $730. Therefore, credit inventory account with $730.

Transaction on June 20:

• Inventory is an asset and it is increased by $720. Therefore, debit inventory account with $720.
• Accounts payable is a liability and it is increased by $720. Therefore, credit accounts payable account with $720.

Transaction on June 24:

• Cash is an asset and it is increased by $1,176. Therefore, debit cash account with $1,176.
• Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $24.
• Accounts Receivable is an asset and it is decreased by $1,200. Therefore, credit account receivable with $1,200.

Transaction on June 26:

• Accounts payable is a liability and it is decreased by $720. Therefore, debit accounts payable account with $720.
• Inventory is an asset and it is decreased by $7.20. Therefore, credit inventory account with $7.20.
• Cash is an asset and it is decreased by $712.80. Therefore, credit cash account with $712.80.

Transaction on June 28:

• Accounts Receivable is an asset and it is increased by $1,300. Therefore, debit account receivable with $1,300.
• Sales revenue is revenue and it increases the value of equity by $1,300. Therefore, credit sales revenue with $1,300.
• Cost of goods sold is an expense account and it decreases the value of equity by $780. Therefore, debit cost of goods sold account with $780.
• Inventory is an asset and it is decreased by $780. Therefore, credit inventory account with $780.

Transaction on June 30:

• Sales return and allowance is an expense account and it decreases the value of equity by $130. Therefore, debit sales returns and allowances account with $130.
• Accounts Receivable is an asset and it is decreased by $130. Therefore, credit account receivable with $130.
• Inventory is an asset and it is increased by $80. Therefore, debit inventory account with $80.
• Cost of goods sold is an expense account and it increases the value of equity by $80. Therefore, credit cost of goods sold account with $80