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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
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. Prepare the journal entries to record the purchase and payment using (a) gross price and (b) net price.
- 2. If the company sold half the inventory during April for $20,000, how much income would it recognize under each method?
- 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. If the company sold half the inventory during April for $20,000, how much income would it recognize under each method?
- 5. Next Level Why was there a difference in income for the two methods as reported in Requirement 4?
1 (a)
Prepare the journal entries to record the purchase and payment using gross price method.
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:
| Date | Account title and Explanation | Post ref. | Amount | |
| Debit | Credit | |||
| April 11 | Â Purchases | Â | $30,000 | Â |
| Â | Â Â Â Â Accounts payable | Â | Â | $30,000 |
| Â | (To record the purchase of inventory of $30,000 on account, credit terms of | Â | Â | Â |
| Â | Â | Â | Â | Â |
| April 21 | Accounts payable | Â | $30,000 | Â |
| Â | Purchases discounts (1) | Â | Â | $600 |
| Â | Cash (2) | Â | Â | $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 of
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)
Prepare the journal entries to record the purchase and payment using net price method.
2.
Compute the income that would be recognized by Company EC if it sells half of the inventory for $20,000 during April.
3.
Journalize the purchase and payment transaction under each method if the Company makes payment on April 30.
4.
Compute the net income that would be recognized by Company EC if it sells half of the inventory for $20,000 during April.
5.
Explain the differences in income computed in requirement 4 under two methods.
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