Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN: 9781337788281
Author: James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher: Cengage Learning
Question
Chapter 7, Problem 4P

1 (a)

To determine

Prepare the journal entries to record the purchase and payment using gross price method.

1 (a)

Expert Solution
Check Mark

Explanation of Solution

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 EC:

DateAccount title and ExplanationPost ref. Amount
DebitCredit
April 11 Purchases $30,000 
     Accounts payable  $30,000
 (To record the purchase of inventory of $30,000 on account, credit terms of 2/10,n/30 )   
     
April 21Accounts payable  $30,000 
 Purchases discounts (1)  $600
 Cash (2)  $29,400
 (To record the payment for  inventory  within the discount period)   

Table (1)

April 11: To record the purchase of inventory of $30,000 on account, credit terms of2/10,n/30:

Purchases account is an expense and it is decreased the equity value by $30,000. Therefore, debit purchase account with $30,000.

Accounts payable is a liability and it is increased by $30,000. Therefore, credit accounts payable account with $30,000.

April 21: To record the payment for inventory within the discount period:

Accounts Payable is a liability and it is decreased because the company has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $30,000.

Purchases discount is a contra expense account to Purchase account and will have a normal credit balance. Therefore, Purchase discount account is credited with $600.

Cash is an asset and it is decreased because cash is paid for credit purchases. Therefore, credit Cash account with $29,400.

Working Note 1: Compute the discount on purchases.

Credit terms: The credit terms are 2/15,n/60. Company N makes payment for the inventory purchased within the discount period. Hence, the Company N is entitled to discount of 2%.

Discount on purchases=Purchases×Discount rate=$30,000×2100=$30,000×2100=$600

Working Note 2: Compute the cash paid to accounts payable (suppliers).

Cash paid to accounts payable=PurchasesDiscount onpurchases=$30,000$600(1)=$29,400

1 (b)

To determine

Prepare the journal entries to record the purchase and payment using net price method.

1 (b)

Expert Solution
Check Mark

Explanation of Solution

Net price method: Under net price method, sales and purchases of inventory are recorded at the net invoice price which means the discounts are deducted from the gross invoice price.

Journalize the transactions of Company EC:

DateAccount title and ExplanationPost ref.Amount
DebitCredit
April 11Purchases  (3) $29,400 
     Accounts payable  $29,400
 (To record the purchase of inventory of $30,000 on account, credit terms of 2/10,n/30 )   
     
April 21Accounts payable  $29,400 
 Cash  $29,400
 (To record the payment for Inventory within the discount period)   

Table (2)

April 11: To record the purchase of inventory of $30,000 on account, credit terms of2/10,n/30:

Purchases account is an expense and it is decreased the equity value by $29,400. Therefore, debit purchase account with $29,400.

Accounts payable is a liability and it is increased by $29,400. Therefore, credit accounts payable account with $29,400.

April 21: To record the payment for inventory within the discount period:

Accounts Payable is a liability and is decreased because the company has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $29,400.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, credit Cash account with $29,400.

Working Note 3: Compute the net price of purchases.

Credit terms: The terms are 2/15,n/60. Company EC makes payment for the Inventory purchased within the discount period. Hence, the merchandising company is entitled to discount of 2%.

Net invoice price=Gross Invoice price(Invoice price×Discount rate)=$30,000($30,000×2100)=$30,000$600=$29,400

2.

To determine

Compute the income that would be recognized by Company EC if it sells half of the inventory for $20,000 during April.

2.

Expert Solution
Check Mark

Explanation of Solution

Income: This is the amount earned from operations of a business. The operating activities are sale of goods and services, and rent revenue.

Compute income.

Computation of income
ParticularsUnder gross price methodUnder net price method
Sales$20,000$20,000
Less: Cost of goods sold ($30,000$600)×50%($14,700)($14,700)
Income$5,300$5,300

Table (3)

Thus, the income of $5,300 would be recognized by Company EC during the month of April.

3.

To determine

Journalize the purchase and payment transaction under each method if the Company makes payment on April 30.

3.

Expert Solution
Check Mark

Explanation of Solution

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
April 11 Purchase $30,000 
     Accounts payable  $30,000
 (To record the purchase of inventory of $30,000 on account, credit terms of 2/10,n/30 )   
     
April 30Accounts payable  $30,000 
 Cash  $30,000
 (To record the payment for  inventory  after the discount period)   

Table (4)

April 11: To record the purchase of inventory of $30,000 on account, credit terms of2/10,n/30:

Purchases account is an expense and it is decreased the equity value by $30,000. Therefore, debit purchase account with $30,000.

Accounts payable is a liability and it is increased by $30,000. Therefore, credit accounts payable account with $30,000.

April 30: To record the payment for inventory after the discount period:

Accounts Payable is a liability and is decreased because the company has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $30,000.

Cash is an asset and it is reduced because cash is paid for credit purchases. Therefore, credit Cash account with $30,000.

Net price method: Under net price method, sales and purchases of inventory are recorded at the net invoice price which means the discounts are deducted from the gross invoice price.

Journalize the transactions of Company N:

DateAccount title and ExplanationPost ref.Amount
DebitCredit
April 11Inventory  (3) $29,400 
     Accounts payable  $29,400
 (To record the purchase of inventory of $30,000 on account, credit terms of2/10,n/30)   
     
April 30 Accounts payable  $29,400 
 Purchase discount lost $600 
 Cash  $30,000
 (To record the payment for Inventory after the discount period)   

Table (5)

April 11: To record the purchase of inventory of $30,000 on account, credit terms of2/10,n/30:

Purchases account is an expense and it is decreased the equity value by $29,400. Therefore, debit purchase account with $29,400.

Accounts payable is a liability and it is increased by $29,400. Therefore, credit accounts payable account with $29,400.

April 30: To record the payment for Inventory after the discount period:

Accounts Payable is a liability and is decreased because the cash has paid the amount for the credit purchases. Therefore, debit Accounts Payable account with $29,400.

Purchases discount lost is a component of retained earnings and it decreases the retained earnings.  Therefore, Purchase discount lost account is debited with $600.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, credit Cash account with $30,000.

4.

To determine

Compute the net income that would be recognized by Company EC if it sells half of the inventory for $20,000 during April.

4.

Expert Solution
Check Mark

Explanation of Solution

Compute income.

Computation of income
Particulars

Under gross price method

(Value of inventory is $30,000)

Under net price method

(Value of inventory is $29,400)

Sales$20,000$20,000
Less: Cost of goods sold (Value of inventory)×50%($15,000)($14,700)
Less: Purchase discounts ($600)
Income$5,000$4,700

Table (6)

Thus, under gross price method income of $5,000 and in net price method, income of $4,700 would be recognized by Company EC during the month of April.

5.

To determine

Explain the differences in income computed in requirement 4 under two methods.

5.

Expert Solution
Check Mark

Explanation of Solution

The major reason for the difference is due to the treatment of discount under two methods. In net price method, the discount loss is treated as an expense and in gross method the discount is included in inventory and is not expensed till the inventories are sold.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Chapter 7 Solutions

Intermediate Accounting: Reporting And Analysis

Ch. 7 - Prob. 11GICh. 7 - Consider each of the following independent...Ch. 7 - Prob. 13GICh. 7 - Prob. 14GICh. 7 - Prob. 15GICh. 7 - Prob. 16GICh. 7 - Prob. 17GICh. 7 - Prob. 18GICh. 7 - Prob. 19GICh. 7 - Prob. 20GICh. 7 - Discuss the LIFO and FIFO cost flow assumptions...Ch. 7 - Prob. 22GICh. 7 - Prob. 23GICh. 7 - List the acceptable cost flow assumptions under...Ch. 7 - Prob. 25GICh. 7 - Explain the dollar-value LIFO method of inventory...Ch. 7 - Describe the double-extension and link-chain...Ch. 7 - Prob. 28GICh. 7 - Prob. 29GICh. 7 - What is the impact of LIFO inventory liquidation...Ch. 7 - Goods on consignment should be included in the...Ch. 7 - The following items were included in Venicio...Ch. 7 - During 2019, R Corp., a manufacturer of chocolate...Ch. 7 - Dixon Menswear Shop purchased shirts from Colt...Ch. 7 - The moving average inventory cost flow assumption...Ch. 7 - The cost of the inventory on January 31, 2019,...Ch. 7 - Questions M7-6 and M7-7 are based on the following...Ch. 7 - Assuming no beginning inventory, what can be said...Ch. 7 - On December 31, 2018, Kern Company adopted the...Ch. 7 - When the double-extension approach to the...Ch. 7 - On December 31, Pitts Manufacturing Company...Ch. 7 - On January 1, Pope Enterprises inventory was...Ch. 7 - Reid Company uses the periodic inventory system....Ch. 7 - Billings Company uses a periodic inventory system....Ch. 7 - Dani Corporation signed a binding commitment on...Ch. 7 - Stevens Company uses a perpetual inventory system....Ch. 7 - RE7-6 Stevens Company uses a perpetual inventory...Ch. 7 - Johnson Company uses a perpetual inventory system....Ch. 7 - RE7-8 Johnson Company uses a perpetual inventory...Ch. 7 - Jessie Stores uses the periodic system of...Ch. 7 - Jessie Stores uses the periodic system of...Ch. 7 - Carla Company uses the perpetual inventory system....Ch. 7 - Carla Company uses the perpetual inventory system....Ch. 7 - On January 1 of Year 1, Dorso Company adopted the...Ch. 7 - An evaluation of Bryces Bookstores inventory was...Ch. 7 - Inventory Accounts for a Manufacturing Company...Ch. 7 - Prob. 2ECh. 7 - Perpetual versus Periodic Inventory Systems Graham...Ch. 7 - Determining Net Purchases The following amounts...Ch. 7 - Perpetual versus Periodic Inventory Systems...Ch. 7 - Goods in Transit Gravais Company made two...Ch. 7 - Items Included in Inventory The following are...Ch. 7 - Prob. 8ECh. 7 - Prob. 9ECh. 7 - Discounts Nelson Company bought inventory for...Ch. 7 - Alternative Inventory Methods Nevens Company uses...Ch. 7 - Alternative Inventory Methods Park Companys...Ch. 7 - Alternative Inventory Methods Frate Company was...Ch. 7 - LIFO, Perpetual and Periodic Riedel Companys...Ch. 7 - Habicht Company was formed in 2018 to produce a...Ch. 7 - Dollar-Value LIFO A company adopted the LIFO...Ch. 7 - On January 1, 2018, Sato Company adopted the...Ch. 7 - Dollar-Value LIFO Beistock Company manufactures...Ch. 7 - Acute Company manufactures a single product. On...Ch. 7 - Inventory Pools Stone Shoe Company adopted...Ch. 7 - Grimstad Company uses FIFO for internal reporting...Ch. 7 - LIFO and Interim Financial Reports Assume prices...Ch. 7 - Applying the Cost of Goods Sold Model The...Ch. 7 - Items to Be Included in Inventory As the auditor...Ch. 7 - Valuation of Inventory The inventory on hand at...Ch. 7 - Prob. 4PCh. 7 - Cost of Goods Sold As an accountant for Lee...Ch. 7 - Alternative Inventory Methods Garrett Company has...Ch. 7 - Totman Company has the following transactions...Ch. 7 - Comprehensive The following information for 2019...Ch. 7 - LIFO Liquidation Profit Hammond Company adopted...Ch. 7 - LIFO and Inventory Pools On January 1, 2016,...Ch. 7 - Olson Company adopted the dollar-value LIFO method...Ch. 7 - Dollar-Value LIFO Kwestel Company adopted the...Ch. 7 - Webster Company adopted do liar-value LIFO on...Ch. 7 - Dollar-Value LIFOComprehensive Kelly Company...Ch. 7 - On January 1, 2019, Lucas Distributors Inc....Ch. 7 - Inventory Valuation You are engaged in an audit of...Ch. 7 - Allen Company is a wholesale distributor of...Ch. 7 - FIFO and LIFO A company may compute inventory...Ch. 7 - Prob. 2CCh. 7 - In January, Broome Inc. requested and secured...Ch. 7 - Prob. 4CCh. 7 - Prob. 5CCh. 7 - Interpretation of GAAP and Ethical Issues Robin...Ch. 7 - Selection of an Inventory Method and Ethical...Ch. 7 - Analyzing Starbuckss Inventory Disclosures Obtain...Ch. 7 - Fenimore Manufacturing Company uses the average...
Knowledge Booster
Similar questions
  • 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. 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. Next Level Which of the two methods yields a conceptually preferable valuation of inventory?
    Rescue Sequences LLC purchased inventory by issuing a 30,000, 10%, 60-day note on October 1. Prepare the journal entries for Rescue Sequences to record the purchase and payment assuming it uses a perpetual inventory system and a 360-day calendar fiscal year. Rescue Sequences LLC uses a perpetual inventory system.
    Inventory Costing Methods On June 1, Welding Products Company had a beginning inventory of 210 cases of welding rods that had been purchased for S88 per case. Welding Products purchased 1,150 cases at a cost of $95 per case on June 3. On June 19, the company purchased another 950 cases at a cost of $112 per case. Sales data for the welding rods are: Welding Products uses a perpetual inventory system, and the sales price of the welding rods was $130 per case. Required: 1. Compute the cost of ending inventory and cost of goods sold using the FIFO method. 2. Compute the cost of ending inventory and cost of goods sold using the LIFO method. 3. Compute the cost of ending inventory and cost of goods sold using the average cost method. ( Note: Use four decimal places for per-unit calculations and round all other numbers to the nearest dollar.) 4. CONCEPTUAL CONNECTION Assume that operating expenses are $21,600 and Welding Products has a 30% tax rate. How much will the cash paid for income taxes differ among the three inventory methods? 5. CONCEPTUAL CONNECTION Compute Welding Products' gross profit ratio (rounded to two decimal places) and inventory turnover ratio (rounded to three decimal places) under each of the three inventory costing methods. How would the choice of inventory costing method affect these ratios?
  • FIFO perpetual inventory The beginning inventory at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows: Instructions 1. Record the inventory, purchases, and cost of goods sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. 2. Determine the total sales and the total cost of goods sold for the period. Journalize the entries in the sales and cost of goods sold accounts. Assume that all sales were on account. 3. Determine the gross profit from sales for the period. 4. Determine the ending inventory cost on June 30. 5. Based upon the preceding data, would you expect the ending inventory using the last-in, first-out method to be higher or lower?
    ADJUSTMENT FOR MERCHANDISE INVENTORY USING T ACCOUNTS: PERIODIC INVENTORY SYSTEM Sandra Owens owns a business called Sandras Sporting Goods. Her beginning inventory as of January 1, 20--, was 33,000, and her ending inventory as of December 31, 20--, was S36,000. Set up T accounts for Merchandise Inventory and Income Summary and perform the year-end adjustment for Merchandise Inventory.
    Inventory by three cost flow methods Details regarding the inventory of appliances on January 1, 20Y7, purchases invoices during the year, and the inventory count on December 31. 2O’7. of Amsterdam Appliances are summarized as follows: Instructions Discuss which method (FIFO or LIFO) would be preferred for income tax purposes in periods of (a) rising prices and (b) declining prices.
    Recommended textbooks for you
  • Intermediate Accounting: Reporting And Analysis
    Accounting
    ISBN:9781337788281
    Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
    Publisher:Cengage Learning
    College Accounting, Chapters 1-27 (New in Account...
    Accounting
    ISBN:9781305666160
    Author:James A. Heintz, Robert W. Parry
    Publisher:Cengage Learning
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
  • Financial Accounting: The Impact on Decision Make...
    Accounting
    ISBN:9781305654174
    Author:Gary A. Porter, Curtis L. Norton
    Publisher:Cengage Learning
    Survey of Accounting (Accounting I)
    Accounting
    ISBN:9781305961883
    Author:Carl Warren
    Publisher:Cengage Learning
    Financial And Managerial Accounting
    Accounting
    ISBN:9781337902663
    Author:WARREN, Carl S.
    Publisher:Cengage Learning,
  • Intermediate Accounting: Reporting And Analysis
    Accounting
    ISBN:9781337788281
    Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
    Publisher:Cengage Learning
    College Accounting, Chapters 1-27 (New in Account...
    Accounting
    ISBN:9781305666160
    Author:James A. Heintz, Robert W. Parry
    Publisher:Cengage Learning
    Cornerstones of Financial Accounting
    Accounting
    ISBN:9781337690881
    Author:Jay Rich, Jeff Jones
    Publisher:Cengage Learning
    Financial Accounting: The Impact on Decision Make...
    Accounting
    ISBN:9781305654174
    Author:Gary A. Porter, Curtis L. Norton
    Publisher:Cengage Learning
    Survey of Accounting (Accounting I)
    Accounting
    ISBN:9781305961883
    Author:Carl Warren
    Publisher:Cengage Learning
    Financial And Managerial Accounting
    Accounting
    ISBN:9781337902663
    Author:WARREN, Carl S.
    Publisher:Cengage Learning,