Chapter 5, Problem 6AP

a.

To determine

Prepare the journal entries to record the transactions for the month of March for Company S (seller).

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically is referred as periodic inventory system.

Prepare journal entries for Company S (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
March 08	Accounts receivable		$7,100
	Sales revenue			$7,100
	(To record the sale of merchandise on account )
March 12	Sales return and allowances		$700
	Accounts receivable			$700
	(To record the merchandise returned by customers)
March 17	Cash (2)		$6,272
	Sales discounts (1)		$128
	Accounts receivable			$6,400
	(To record the sales discount and payment from customers for the goods sold)
March 20	Sales return and allowances		$400
	Accounts receivable			$400
	(To record the merchandise returned by customers)
March 20	Accounts Receivable		400
	Cash			392
	Sales Discount Received			8
	(To record the payment for returns)

Table (1)

March 08: To record the sale of merchandise on account:

Accounts receivable is an asset and the value is increased due to the credit sales made. Thus, it is debited with $7,100.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $7,100.

March 12:  To record the merchandise returned by customers:

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $700.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $700.

March 17: 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 $6,272.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $128.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $6,400.

March 20:  To record the merchandise returned by customers:

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.

March 20: To record the payment for returns:

Accounts receivable account is an asset and is increased by $400. Therefore, debit accounts receivable account with $400.

Sales discount received is revenue which increases the equity by $8. Thus, it is credited with $8.

Cash is an asset and it is decreased by $392. Hence, it is credited with $392.

Working Note:

Compute the discount on sales.

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

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$7,100-\$700\right)\times \frac{2}{100}\\ =\$6,400\times \frac{2}{100}\\ =\$128\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$7,100-\$700-\$128\left(1\right)\\ =\$6,272\end{array}$ (2)

b.

To determine

Prepare the journal entries to record the transactions for the month of March for Incorporation MS (buyer).

Explanation of Solution

Periodic inventory system: The method or system of recording the transactions related to inventory occasionally or periodically is referred as periodic inventory system.

Prepare journal entries for Incorporation MS (buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
March 08	Purchases		$7,100
	Accounts payable			$7,100
	(To record the inventory purchased on account )
March 10	Freight-in		$200
	Cash			$200
	(To record the payment of freight expense for the merchandise purchased)
March 12	Accounts payable		$700
	Purchase returns and allowances			$700
	(To record the return of inventories on account)
March 17	Accounts payable		$6,400
	Purchase discounts (3)			$128
	Cash  (4)			$6,272
	(To record the purchase discount and  payment of merchandise purchased on account)
March 20	Accounts payable		$400
	Purchase returns and allowances			$400
	(To record the return of inventories on account)
March 20	Cash		$392
	Purchase discounts		$8
	Accounts Payable			$400
	(To record the payment of returns)

Table (2)

March 08: To record the inventory purchased on account:

Purchase is an expense and has increased due to the credit purchases made by Incorporation MS. Hence, debit purchases account with $7,100.

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 $7,100.

March 10: To record the payment of freight expense for the merchandise purchased:

Freight-in is an expense and the value is increased due to the purchase of merchandise. Therefore, it is debited with $200.

Cash is an asset and the value is decreased due to payment. Thus, Cash account is credited with $200.

March 12: To record the purchase return:

Accounts Payable is a liability and is decreased due to the return of inventory. Hence, it is debited with $700.

Purchase Returns and Allowances is a contra to Purchases account with a normal credit balance. Thus, Purchase Returns and Allowances account is credited with $700.

March 17: To record the purchase discount and payment made on account:

Accounts Payable is a liability and is decreased because the company has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $6,400.

Purchases discount is a contra expense account to Purchase account and will have a normal credit balance. Therefore, Purchase discount account is credited with $128.

Cash is an asset and it is reduced because amount is paid for credit purchases. Hence, credit cash account with $6,272.

March 20: 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.

Purchase Returns and Allowances is a contra to Purchases account with a normal credit balance. Thus, Purchase Returns and Allowances account is credited with $400.

March 20: To record the payment for returns:

Cash is an asset account and it is increased by $196. Hence, it is debited with $392.

Purchase discount is a contra expense account to Purchase account and it decreases the equity by $8. Thus, it is credited with $8.

Accounts payable is a liability and it is increased by $400. Hence, it is credited with $400.

Working Note:

Compute the discount on purchases.

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

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$7,100-\$700\right)\times \frac{2}{100}\\ =\$6,400\times \frac{2}{100}\\ =\$128\end{array}$ (3)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$7,100-\$700-\$128\left(3\right)\\ =\$6,272\end{array}$ (4)