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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Discounts Nelson Company bought inventory for $50,000 on terms of 2/15, n/60. It pays for the first $37,500 of inventory purchased within the discount period and pays for the remaining $12,500 two months later.

Required:

  1. 1. Prepare the journal entries to record the purchase and the payment under both the (a) gross price and (b) net price methods. Assume that Nelson uses the periodic inventory system.
  2. 2. Next Level Which of the two methods yields a conceptually preferable valuation of inventory?

1. (a)

To determine

Journalize the transactions of Company N under gross price method, assuming Company N uses periodic inventory system.

Explanation

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

Gross price method: Under gross price method, sales and purchases of inventory are recorded at the full invoice price (gross amount) without the deduction of discounts.

Journalize the transactions of Company N:

DateAccount title and ExplanationPost ref. Amount
DebitCredit
 Purchases  $50,000 
     Accounts payable  $50,000
 (To record the purchase of inventory of $50,000 on account, credit terms of 2/15,n/60)   
     
 Accounts payable  $37,500 
 Purchases discounts (1)  $750
 Cash (2)  $36,750
 (To record the payment for  inventory  within the discount period)   
     
 Accounts payable  $12,500 
 Cash  $12,500
 (To record the payment for  inventory  after the discount period)   

Table (1)

To record the purchase of inventory of $50,000 on account, credit terms of2/15,n/60:

Purchases account is an expense and it is decreased the equity value by $50,000. Therefore, debit purchase account with $50,000.

Accounts payable is a liability and it is increased by $50,000

1. (b)

To determine

Journalize the transactions of Company N under net price method, assuming Company N uses periodic inventory system.

2.

To determine

Identify among the two methods that yields a conceptually desirable valuation of inventory.

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