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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 On April 11, Edwards Construction Company purchased inventory for $30,000 on terms of 2/10, n/30. It pays the account balance on April 21. Edwards uses a periodic inventory system.

Required:

  1. 1. Prepare the journal entries to record the purchase and payment using (a) gross price and (b) net price.
  2. 2. If the company sold half the inventory during April for $20,000, how much income would it recognize under each method?
  3. 3. Assume that the invoice was misfiled and, as a result, the company did not pay until April 30. Prepare the journal entries to record the purchase and payment under each of the methods.
  4. 4. If the company sold half the inventory during April for $20,000, how much income would it recognize under each method?
  5. 5. Next Level Why was there a difference in income for the two methods as reported in Requirement 4?

1 (a)

To determine

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

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 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

1 (b)

To determine

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

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.

3.

To determine

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

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.

5.

To determine

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

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