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Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436

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BuyFindarrow_forward

Financial Accounting

14th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781305088436
Chapter 6, Problem 3PB
Textbook Problem
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The following were selected from among the transactions completed by Essex Company during July of the current year:

Chapter 6, Problem 3PB, The following were selected from among the transactions completed by Essex Company during July of

Instructions

Journalize the transactions.

To determine

Prepare journal entries to record the transactions of Company E during the month of July using perpetual inventory system.

Explanation of Solution

Perpetual Inventory System refers to the Merchandise Inventory system that maintains the detailed records of every Merchandise Inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-merchandise 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.

Record the journal entry of Company E during July.

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

July 3Merchandise Inventory 61,426 
 Accounts payable  61,426 (1)
 (To record purchase on account)   

Table (1)

  • Merchandise Inventory is an asset and it is increased by $61,426. Therefore, debit Merchandise Inventory account with $61,426.
  • Accounts payable is a liability and it is increased by $61,426. Therefore, credit accounts payable account with $61,426.

Working Note (1):

Calculate the amount of accounts payable.

Purchases = $72,000

Trade discount percentage = 15%

Discount percentage = 2%

Freight = $1,450

  Amount of accounts payable} = [(PurchasesTradeDiscount)Discount]+Freight=[Purchases(Purchases×15%)2%]+Freight[$72,000 – ($72,000×15%)2%]+$1,450[($72,000$10,800)2%]+$1,450=($61,2002%)+$1,450=$59,976+$1,450=$61,426

Record the journal entry of Company E.

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

July 5Merchandise Inventory 32,781 
 Accounts payable  32,781 (2)
 (To record purchase on account)   

Table (2)

  • Merchandise Inventory is an asset and it is increased by $32,781. Therefore, debit Merchandise Inventory account with $32,781.
  • Accounts payable is a liability and it is increased by $32,781. Therefore, credit accounts payable account with $32,781.

Working Note (2):

Calculate the amount of accounts payable.

Purchases = $33,450

Discount percentage = 2%

  Amount of accounts payable} = [(PurchasesDiscount)+Freight]=[Purchases(Purchases×2%)+Freight][$33,450 – ($33,450×2%)]= $33,450$669=$32,781

Record the journal entry for the sale of inventory on cash.

DateAccounts and ExplanationDebit ($)Credit ($)
July 6Accounts Receivable36,000 
        Sales Revenue 36,000
 (To record the sale of inventory on cash)  

Table (3)

  • Accounts receivable is an asset and it is increased by $36,000. Therefore, debit accounts receivable with $36,000.
  • Sales revenue is revenue and it increases the value of equity by $36,000. Therefore, credit sales revenue with $36,000.

Record the journal entry for cost of goods sold.

DateAccounts and ExplanationDebit ($)Credit ($)
July 6Cost of Merchandise Sold25,000 
 Merchandise Inventory 25,000
 (To record the cost of goods sold)  

Table (4)

  • Cost of merchandise sold is an expense account and it decreases the value of equity by $25,000. Therefore, debit cost of merchandise sold account with $25,000.
  • Merchandise Inventory is an asset and it is decreased by $25,000. Therefore, credit inventory account with $25,000.

Record the journal entry of Company E.

DateAccount Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

July 7Accounts payable 6,713 (3) 
       Merchandise Inventory  6,713
 (To record purchase return)   

Table (5)

  • Accounts payable is a liability and it is decreased by $6,713. Therefore, debit accounts payable account with $6,713.
  • Merchandise Inventory is an asset and it is decreased by $6,713. Therefore, credit Merchandise Inventory account with $6,713.

Working Note (3):

Calculate the amount of accounts payable.

Purchases return = $6,850

Discount percentage = 2%

  Amount of accounts payable} = (Purchases returnDiscount)=Purchases return(Purchases return×2%)= $6,850 – ($6,850×2%)= $6,850$137=$6,713

Record the journal entry of Company E.

DateAccount Title and Explanation

Post

Ref

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Chapter 6 Solutions

Financial Accounting
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