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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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Stevens Company uses a perpetual inventory system. On July 10, Stevens purchases $50,000 of inventory on credit with payment terms of 2/10, net 30. Using the gross price method, prepare journal entries to record Stevens’s purchases on July 10 and the subsequent payment on July 18.

To determine

Prepare journal entry to record the purchases and payments of Company S using gross price method under perpetual inventory system.

Explanation

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual 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.

Prepare journal entries to record the purchases.

DateAccount title and ExplanationPost ref.Amount
DebitCredit
     
July 10Inventory  $50,000 
     Accounts payable  $50,000
 (To record the purchase of inventory on account, credit terms of 2/10, net 30 )   
     
July 18Accounts payable  $50,000 
 Inventory (1)  $1,000
 Cash (2)  $49,000
 (To record the payment for inventory within the discount period)   

Table (1)

July 10: To record the purchase of inventory on account, credit terms of  2/10, net 30 :

  • Inventory is an asset and the value is increased due to the credit purchases on account. Therefore, debit inventory account with $50,000.
  • Accounts Payable is a liability and it is increased due to the increase in the amount to be paid for purchases

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