Chapter 8, Problem 8.11E

1.

To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

To Record: The journal entries for purchase on account.

Explanation of Solution

The following is the accounting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 17, 2018	Purchases		35,000 (2)
	Accounts Payable			35,000
	(To record the purchase of inventories on account)

Table (1)

Working Notes:

Compute the cost of each unit.

$\begin{array}{c}\text{Cost of Each Unit}=\text{List Price}-\text{Trade Discount}\\ =\text{\$500}-30\%\text{ of \$500}\\ =\text{\$500}-\$150\\ =\$350\end{array}$ (1)

Compute the cost of purchase of inventory.

$\begin{array}{c}\text{Purchase Price of Inventory}=\left[\begin{array}{l}\text{Cost of Each Unit }\\ \times \text{ Number of Units Purchased}\end{array}\right]\\ =\text{\$350}\times \text{100}\\ =\text{\$35,000}\end{array}$ (2)

• Purchases account is an expense and it is decreased the equity value by $35,000. Therefore, debit purchase account with $35,000.
• Accounts payable is a liability and it is increased by $35,000. Therefore, credit accounts payable account with $35,000.

The following is the accounting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 26, 2018	Accounts Payable		35,000 (2)
	Purchase Discounts			700 (3)
	Cash			34,300 (4)
	(To record the payment made to the supplier)

Table (2)

Working Notes:

Calculate purchase discount.

Net accounts payable = $35,000 (2)

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$35,000 × }\frac{2}{\text{100}}\\ \text{= \$700}\end{array}$ (3)

Calculate cash paid.

Accounts payable = $35,000 (2)

Purchase discount = $700 (3)

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Purchase discount}\\ \text{= \$35,000 – \$700}\\ \text{= \$34,300}\end{array}$ (4)

• Accounts payable is a liability and it is decreased by $35,000. Therefore, debit accounts payable account with $35,000.
• Purchase discount is an income and it is increased the equity value by $700. Therefore, credit purchase discount account with $700.
• Cash is an asset and it is decreased by $34,300. Therefore, credit cash account with $34,300.

2.

To determine

To Record: The payment of accounts payable after the discount period.

Explanation of Solution

The following is the accounting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 15, 2018	Accounts Payable		35,000
	Cash			35,000
	(To record the payment made to the supplier)

Table (3)

• Accounts payable is a liability and it is decreased by $35,000. Therefore, debit accounts payable account with $35,000.
• Cash is an asset and it is decreased by $35,000. Therefore, credit cash account with $35,000.

3.

(a)

To determine

To Record: The purchase of inventory on account using net of purchase method.

Explanation of Solution

The following is the accounting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 17, 2018	Purchases		34,300
	Accounts Payable			34,300 (5)
	(To record the purchase of inventories on account)

Table (4)

Working Notes:

Calculate net accounts payable.

Accounts payable = $35,000 (2)

Purchase discount = $700 (3)

$\begin{array}{c}\text{Net Accounts Payable = Accounts payable – Purchase discount}\\ \text{= \$35,000 – \$700}\\ \text{= \$34,300}\end{array}$ (5)

• Purchases account is an expense and it is decreased the equity value by $34,300. Therefore, debit purchase account with $34,300.
• Accounts payable is a liability and it is increased by $34,300. Therefore, credit accounts payable account with $34,300.

Record the journal entry to make the due payment.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 26,2016	Accounts Payable		34,300
	Cash			34,300
	(To record the payment made to the supplier)

Table (5)

• Accounts payable is a liability and it is decreased by $34,300. Therefore, debit accounts payable account with $34,300.
• Cash is an asset and it is decreased by $34,300. Therefore, credit cash account with $34,300.

(b)

To determine

To Record: The payment of accounts payable after the discount period using net of purchase method.

Explanation of Solution

The following is the accounting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
December 15, 2016	Accounts Payable		34,300 (5)
	Interest Expense		700
	Cash			35,000
	(To record the payment made to the supplier)

Table (6)

• Accounts payable is a liability and it is decreased by $34,700. Therefore, debit accounts payable account with $34,700.
• Interest expense account is an expense and it is decreased the equity value by $700. Therefore, debit interest expense account with $700.
• Cash is an asset and it is decreased by $35,000. Therefore, credit cash account with $35,000.