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Purchase-related transactions Journalize entries for the following related transactions of Lilly Heating & Air Company: A. Purchased $36,000 of merchandise from Schell Co. on account, terms 1/10, n/30. B. Paid the amount owed on the invoice within the discount period. C. Discovered that $9,000 of the merchandise purchased in (A) was defective and returned items, receiving credit. D. Purchased $5,000 of merchandise from Schell Co. on account, terms n/30. E. Received a refund from Schell Co. for return in (C) less the purchase in (D).

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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207

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Section
BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337119207
Chapter 5, Problem 5.7EX
Textbook Problem
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Purchase-related transactions

Journalize entries for the following related transactions of Lilly Heating & Air Company:

  1. A. Purchased $36,000 of merchandise from Schell Co. on account, terms 1/10, n/30.
  2. B. Paid the amount owed on the invoice within the discount period.
  3. C. Discovered that $9,000 of the merchandise purchased in (A) was defective and returned items, receiving credit.
  4. D. Purchased $5,000 of merchandise from Schell Co. on account, terms n/30.
  5. E. Received a refund from Schell Co. for return in (C) less the purchase in (D).

To determine

Purchases is an activity of acquiring the merchandise inventory of a business.

To Record: The purchase of merchandise inventory on account under the terms of 1/10, n/30.

Explanation of Solution

Record the purchase of merchandise inventory on account.

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

A.Merchandise Inventory 35,640 
 Accounts Payable  35,640 (1)
 (To record purchases of inventory on account after discount)   

Table (1)

Working Note (1):

Calculate the amount of accounts payable.

Purchases = $36,000

Discount Percentage = 1%

  Amount of accounts payable} = PurchasesDiscount=Purchases(Purchases×1%)= $36,000 – ($36,000×1%)= $36,000$360=$35,640

  • Merchandise inventory is an asset and it is increased by $35,640. Therefore, debit inventory account with $35,640.
  • Accounts payable is a liability and it is increased by $35,640. Therefore, credit accounts payable account with $35,640.

Record the journal entry for the due amount paid.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

B.Accounts Payable 35,640 
        Cash  35,640
 (To record paying cash on purchases after discounts and returns)   

Table (2)

  • Accounts payable is a liability and it is decreased by $35,640. Therefore, debit accounts payable account with $35,640.
  • Cash is an asset and it is decreased by $35,640. Therefore, credit cash account with $35,640.

Record the journal entry for purchase returned for damaged goods.

Journal Entry
DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

C.Accounts Receivable 8,910 
 Merchandise Inventory  8,910 (2)
 (To record the purchases return)   

Table (3)

Working Note (2):

Calculate the amount of merchandise inventory returned

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Chapter 5 Solutions

Financial & Managerial Accounting
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