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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Sales-related and purchase-related transactions using perpetual inventory system

The following were selected from among the transactions completed by Essex Company during July of the current year:

July 3.  Purchased merchandise on account from Hamling Co., list price $72,000, trade discount 15%, terms FOB shipping point, 2/10, n/30, with prepaid freight of $1,450 added to the invoice.
5. Purchased merchandise on account from Kester Co., $33,450, terms FOB destination, 2/10, n/30.
6. Sold merchandise on account to Parsley Co., $36,000, terms n/15. The cost of the merchandise sold was $25,000.
7. Returned $6,850 of merchandise purchased on July 5 from Kester Co.
13. Paid Hamling Co. on account for purchase of July 3-
15. Paid Kester Co. 011 account for purchase of July 5, less return of July 7.
21. Received cash on account from sale of July 6 to Parsley Co.
21. Sold merchandise on MasterCard, $108,000. The cost of the merchandise sold was $64,800.
22. Sold merchandise on account to Tabor Co., $16,650, terms 2/10, n/30. The cost of the merchandise sold was $10,000.
23. Sold merchandise for cash, $91,200. The cost of the merchandise sold was $55,000.
28. Paid Parsley Co. a cash refund of $7,150 for returned merchandise from sale of July 6. The cost of the returned merchandise was $4,250.
31. Paid MasterCard service fee of $1,650.

Instructions

Journalize the transactions.

To determine

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.

To Determine:  Preparejournal entries to record the transactions of Company E during the month of July using perpetual inventory system.

Explanation

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.

Record the journal entry of Company E during July.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

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

Table (1)

Working Note:

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 (1)

Explanation:

  • 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.

Record the journal entry of Company E.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

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

Table (2)

Working Note:

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 (2)

Explanation:

  • 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.

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

Date Accounts and Explanation Debit ($) Credit ($)
July 6 Accounts Receivable 36,000  
         Sales Revenue   36,000
  (To record the sale of inventory on cash)    

Table (3)

Explanation

  • 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.

Date Accounts and Explanation Debit ($) Credit ($)
July 6 Cost of Merchandise Sold 25,000  
  Merchandise Inventory   25,000
  (To record the cost of goods sold)    

Table (4)

Explanation

  • 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.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

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

Table (5)

Working Note:

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 (3)

Explanation:

  • 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.

Record the journal entry of Company E.

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

July 13 Accounts payable   61,426  
        Cash     61,426
  (To record payment made in full settlement less discounts)      

Table (6)

Explanation:

  • Accounts payable is a liability and it is decreased by $61,426

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