Chapter 8, Problem 4PB

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 ($)	Credit ($)
August 1, 2019	Purchases		2,500
	Cash			2,500
	(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 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 ($)	Credit ($)
August 2, 2019	Purchases		2,200
	Accounts payable/Company BD			2,200
	(to record the inventory purchased on account with terms1/10, 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.
• • Accounts payable is liability and balance of accounts payable 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 ($)	Credit ($)
August 5, 2019	Purchases		3,900
	Freight In		100
	Accounts payable/Company DC			4,000
	(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 is increasing. Therefore, it is credited.

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 10, 2019	Accounts payable/Company BD		2,200
	Purchases discounts			22
	Cash			1,978
	(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 ($)	Credit ($)
August 10, 2019	Accounts payable/Company DC		300
	Purchases returns and allowances			300
	(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 ($)	Credit ($)
August 11, 2019	Purchases		1,700
	Accounts payable/Company BC			1,700
	(to record the inventory purchased on account with terms1/10, n/30)

Table (6)

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

Recording the payment made:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 14, 2019	Accounts payable/Company DC		3,700
	Purchases discounts			36
	Cash			3,664
	(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 ($)	Credit ($)
August 15, 2019	Purchases		2,980
	Accounts payable/Company SS			2,980
	(to record the inventory purchased on account with terms n/30)

Table (8)

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

Recording the purchases on cash:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 20, 2019	Purchases		1,900
	Cash			1,900
	(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 an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases returned:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 24, 2019	Cash		175
	Purchases returns and allowances			175
	(to record the inventory returned and cash received)

Table (10)

• • The cash account is an asset account and the account balance is increasing. 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 including freight charges:

GENERAL JOURNAL				Page 1
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 30, 2019	Purchases		2,125
	Freight In		75
	Accounts payable/Company DC			2,200
	(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.
• • Freight-in is an expense and expenses are increases. Hence, freight-in account is debited.
• • Accounts payable is liability and balance of accounts payable is increasing. Therefore, it is credited.

The percentage of freight charges in the total due amount can be calculated as follows:

$\text{Percentage of Freight charges}=\frac{\text{Freight charges}}{\text{Total due payment}}\times 100$

Substitute $100 for freight charges and $4,000 for total due amount in the above formula.

$\begin{array}{c}\text{Percentage of Freight charges}=\frac{\$100}{\$4,000}\times 100\\ =2.5\%\end{array}$

The amount $100 as freight charges can be identified as two and half percent of total amount $4,00due to the company DC.

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 1/10, n/30. The terms 1/10, n/30 means the buyer is entitled to receive one 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.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\$2,200\times \frac{1}{100}\\ =\$2,200\end{array}$

The amount calculated as purchase discount would be $22.

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 DC was agreed as 1/10, n/30. The terms 1/10, n/30 means the buyer is entitled to receive one 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.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$4,000-\$300-\$100\right)\times \frac{1}{100}\\ =\$36\end{array}$

The amount calculated as purchase discount would be $36.

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.

$\begin{array}{c}\text{First trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}\\ =\$4,000\times \frac{20}{100}\\ =\$800\end{array}$

$\begin{array}{c}\text{Second trade discount}=\left(\text{List price}-\text{First trade discount}\right)\times \left(\frac{\text{Percentage}}{100}\right)\\ =\left(\$4,000-\$800\right)\times \frac{10}{100}\\ =\$320\end{array}$

$\begin{array}{c}\text{Total trade discount}=\text{First trade discount}+\text{Second trade discount}\\ =\$800+\$320\\ =\$1,120\end{array}$

$\begin{array}{c}\text{Invoice price}=\text{List price}-\text{Trade discount}\\ =\$4,000-\$1,020\\ =\$2,980\end{array}$

The purchases amount that would be calculated is $2,980.