Chapter 6, Problem 1CP

Purchase Transactions between Wholesale and Retail Merchandisers, Using Perpetual Inventory Systems

The transactions listed below are typical of those involving Amalgamated Textiles and American Fashions. Amalgamated is a wholesale merchandiser and American Fashions is a retail merchandiser. Assume all sales of merchandise from Amalgamated to American Fashions are made with terms n/60, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended December 31.

1. a. Amalgamated sold merchandise to American Fashions at a selling price of $230,000. The merchandise had cost Amalgamated $175,000.
2. b. Two days later, American Fashions returned goods that had been sold to the company at a price of $20,000 and complained to Amalgamated that some of the remaining merchandise differed from what American Fashions had ordered. Amalgamated agreed to give an allowance of $5,000 to American Fashions. The goods returned by American Fashions had cost Amalgamated $15,270.
3. c. Just three days later, American Fashions paid Amalgamated, which settled all amounts owed.

Required:

1. 1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of American Fashions.
2. 2. Prepare the journal entries American Fashions would record and show any computations.

   TIP: The selling price charged by the seller is the purchaser’s cost.