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Reporting Purchase Transactions between Wholesale and Retail Merchandisers Using Perpetual Inventory Systems
The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Comer is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms 2/10, n/30, and that the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.
- a. New Books sold merchandise to Readers’ Comer at a selling price of 5550,000. The merchandise had cost New Books $415,000.
- b. Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Comer had ordered. New Books agreed to give an allowance of $10,000 to Readers’ Comer.
- c. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.
Required:
- 1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers’ Corner.
- 2. Prepare the
journal entries that Readers’ Comer would record and show any computations.
PA6-2 Reporting Sales Transactions between Wholesale and Retail Merchandisers Using Perpetual Inventory Systems
Use the information in PA6-I to complete the following requirements.
Required:
- 1. For each of the events (a) through (c), indicate the amount and direction of the effect (+ for increase, − for decrease, and NE for no effect) on New Books in terms of the following items.
- 2. Which of the above items are likely to be reported on New Books’ external financial statements and which items will be combined “behind the scenes”?
- 3. Prepare the journal entries that New Books would record, and show any computations.
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