Chapter 8, Problem 4PA

NewTech Medical Devices is a medical devices wholesaler that commenced business on June 1, 2019. NewTech Medical Devices purchases merchandise for cash and on open account. In June 2019, NewTech Medical Devices engaged in the following purchasing and cash payment activities:

INSTRUCTIONS

Journalize the transactions in a general journal. Use 1 as the journal page number.

Analyze: What was the amount of trade discounts received on the June 15 purchase from Park Research?

To determine

Record the transaction into general journal.

Explanation of Solution

Journalizing:

Journalizing refers to that process in which the transactions of an organization are recorded in a sequence. Based on the recorded entries, the accounts are posted to the relevant ledger accounts.

The general journal recording the transactions is as follows:

Recording the purchases on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 1, 2019	Purchases		4,500
	Cash			4,500
	(to record the inventory purchased on cash)

Table (1)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The cash account is an asset account and account balance for cash is decreasing. Therefore, it is credited.

Recording the purchases on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 3, 2019	Purchases		1,700
	Accounts payable/Company BC			1,700
	(to record the inventory purchased on account with terms2/10, n/30)

Table (2)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • Since, the accounts payable is liability and account balance is increasing. Therefore, it is credited.

Recording the purchases on credit including freight charges:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 5, 2019	Purchases		5,850
	Freight In		110
	Accounts payable/Company NC			5,960
	(to record the inventory purchased on account with terms2/10, n/30)

Table (3)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The freight-in account is debited. This is because the freight-in account is an expense account and it has normal debit balance which is increasing.
• • Accounts payable is liability and balance for accounts payable is increasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 9, 2019	Accounts payable/Company BC		1,700
	Purchases discounts			34
	Cash			1,666
	(to record the payment made and receiving purchases discount)

Table (4)

• • The accounts payable is liability and the account balance is decreasing. Therefore, accounts payable account is debited.
• • The purchases discount account is a contra expense account. The account has the normal credit balance and its increasing. Therefore, it is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases returned and credit memorandum received:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 10, 2019	Accounts payable/Company NC		150
	Purchases returns and allowances			150
	(to record the inventory returned and credit memorandum received)

Table (5)

• • The accounts payable account is a liability account. The accounts payable account has the normal credit balance and it is decreasing. Therefore, it is debited.
• • The purchase returns and allowances account is contra expenses account. The account has the normal credit balance and increasing. Therefore, it is credited.

Recording the purchases on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 11, 2019	Purchases		1,680
	Accounts payable/Company BC			1,680
	(to record the inventory purchased on account with terms2/10, n/30)

Table (6)

• • The purchases account is debited. This is because the purchase account is an expense account and has normal debit balance which is increasing.
• • Since, the accounts payable is liability and account balance is increasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 14, 2019	Accounts payable/Company NC		5,810
	Purchases discounts			114
	Cash			5,696
	(to record the payment made and receiving purchases discount)

Table (7)

• • The accounts payable is liability and the account balance is decreasing. Therefore, accounts payable account is debited.
• • The purchases discount account is a contra expense account. The account has the normal credit balance and its increasing. Therefore, it is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases on credit:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 15, 2019	Purchases		6,256
	Accounts payable/Company PR			6,256
	(to record the inventory purchased on account with terms n/30)

Table (8)

• • The purchases account is debited. This is because the purchase account is an expense account and has normal debit balance which is increasing.
• • Since, the accounts payable is liability and account balance is increasing. Therefore, it is credited.

Recording the purchases on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 20, 2019	Purchases		3,000
	Cash			3,000
	(to record the inventory purchased on cash)

Table (9)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The cash account is credited. This is because the cash account is an asset account and account balance is decreasing.

Recording the purchases returned:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 25, 2019	Cash		280
	Purchases returns and allowances			280
	(to record the inventory returned and cash received)

Table (10)

• • The cash account is debited. This is because the cash account is asset account and the account balance is increasing.
• • The purchase returns and allowances account is contra expenses account. The account has the normal credit balance and increasing. Therefore, it is credited.

Recording the purchases on credit including freight charges:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 30, 2019	Purchases		3,200
	Freight In		85
	Accounts payable/Company NC			3,285
	(to record the inventory purchased on account with terms2/10, n/30)

Table (11)

• • The purchases account is an expense account. The purchases account has normal debit balance and the balance is increasing. Therefore, it is debited.
• • The freight In account is debited. This is because the freight In account is an expense account and it has normal debit balance which is increasing.
• • Since, the accounts payable is liability and account balance is increasing. Therefore, it is credited.

Calculation of total trade discount:

The formula to calculate the first trade discount is given below,

$\text{First trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}$

Substitute $9,200 for list price and 20 for percentage in the above formula.

$\begin{array}{c}\text{First trade discount}=\$9,200\times \frac{20}{100}\\ =\$1,840\end{array}$

The formula to calculate the second trade discount is given below,

$\text{Second trade discount}=\left(\text{List price}-\text{First trade discount}\right)\times \left(\frac{\text{Percentage}}{100}\right)$

Substitute $9,200 for list price, $1,840 for first trade discount and 15 for percentage in the above formula.

$\begin{array}{c}\text{Second trade discount}=\left(\$9,200-\$1,840\right)\times \frac{15}{100}\\ =\$1,104\end{array}$

The formula to calculate the total trade discount is given below,

$\text{Total trade discount }=\text{ First trade discount}-\text{Second trade discount}$

Substitute $1,840 for first trade discount and $1,104 for second trade discount in the above formula.

$\begin{array}{c}\text{Total trade discount }=\$1,840+\$1,104\\ =\$2,944\end{array}$

The total trade discount should be of $2,944 amount.

Working Note:

Calculation of purchases discount:

The purchases discounts are received by the buyer from the seller. The purchases discounts are received by the buyer for fulfilling the terms of timely payment to seller for purchases. The terms related to paying on timely basis with the company BC were agreed as 2/10, n/30. The terms 2/10, n/30 means the buyer is entitled to receive two percent of purchase discount on the purchases amount. The buyer will be entitled to the discount only if the payment is paid within ten days after provided invoice.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\$1,700\times \frac{2}{100}\\ =\$34\end{array}$

The amount calculated as purchase discount would be $34.

Calculation of purchases discount:

The purchases discounts are received by the buyer from the seller. The purchases discounts are received by the buyer for fulfilling the terms of timely payment to seller for purchases. The terms related to paying on timely basis with the company BC were agreed as 2/10, n/30. The terms 2/10, n/30 means the buyer is entitled to receive two percent of purchase discount on the purchases amount. The buyer will be entitled to the discount only if the payment is paid within ten days after provided invoice.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$5,850-\$150\right)\times \frac{2}{100}\\ =\$114\end{array}$

The amount calculated as purchase discount would be $114.

Calculations for the purchases amount:

The seller provides the trade discount of twenty percent and the fifteen percent on the list price to the buyer. The purchases amount to be recorded by the buyer would be at the invoice price.

$\begin{array}{c}\text{First trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}\\ =\$9,200\times \frac{20}{100}\\ =\$1,840\end{array}$

$\begin{array}{c}\text{Second trade discount}=\left(\text{List price}-\text{First trade discount}\right)\times \left(\frac{\text{Percentage}}{100}\right)\\ =\left(\$9,200-\$1,840\right)\times \frac{15}{100}\\ =\$1,104\end{array}$

$\begin{array}{c}\text{Total trade discount }=\text{ First trade discount}-\text{Second trade discount}\\ =\$1,840+\$1,104\\ =\$2,944\end{array}$

$\begin{array}{c}\text{Invoice price}=\text{List price}-\text{Trade discount}\\ =\$9,200-\$2,944\\ =\$6,256\end{array}$

The purchases amount that would be calculated is $6,256.