Your company completed the following merchandise transactions during year 6:1. On January 1, Year 6, your company had merchandise which cost $18,000 and had a netrealizable value of $17,900.2. Purchased $23,000 of merchandise for cash3. Sold $19,000 of the merchandise for $36,400 on account.4. Purchased $10,000 of merchandise on account, terms 2/10, n/30.5. Paid for the merchandise in #3 on the eighth day after the purchase.6. There were other purchases and sales throughout the year, but you do not need to recordthem, so no entry here.7. Ended the year with merchandise which cost $26,000 (according to your calculations) andhad a net realizable value of $25,400.INSTRUCTIONS:a. Prepare the entries for the transactions above assuming a Periodic inventory system, theallowance method for LCNRV, and the net method for purchase discounts.b. Prepare the entries for the transactions above assuming a Perpetual inventory system, thedirect inventory reduction method for LCNRV, and the grosS method for purchasediscounts.

Concepts covered in the solution:- Periodic inventory system:- Under periodic inventory system,…

Answered: Your company completed the following…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Your company completed the following merchandise transactions during year 6:
1. On January 1, Year 6, your company had merchandise which cost $18,000 and had a net
realizable value of $17,900.
2. Purchased $23,000 of merchandise for cash
3. Sold $19,000 of the merchandise for $36,400 on account.
4. Purchased $10,000 of merchandise on account, terms 2/10, n/30.
5. Paid for the merchandise in #3 on the eighth day after the purchase.
6. There were other purchases and sales throughout the year, but you do not need to record
them, so no entry here.
7. Ended the year with merchandise which cost $26,000 (according to your calculations) and
had a net realizable value of $25,400.
INSTRUCTIONS:
a. Prepare the entries for the transactions above assuming a Periodic inventory system, the
allowance method for LCNRV, and the net method for purchase discounts.
b. Prepare the entries for the transactions above assuming a Perpetual inventory system, the
direct inventory reduction method for LCNRV, and the grosS method for purchase
discounts.

Expert Solution

Step 1: Introduction

Concepts covered in the solution:-

Periodic inventory system:- Under periodic inventory system, updates to the inventory records are made on a periodic basis. Entries are recorded directly to the purchase, sales accounts.
Perpetual inventory system:- Under perpetual inventory system, transactions are recorded directly to the inventory account on a continuous basis (real time) as and when they occur.
Allowance method for LCNRV:- Here, inventory loss is shown as a separate contra asset account to merchandise inventory such that the actual cost of the inventory remains intact.
Direct inventory reduction method:- Here, Merchandise inventory account is directly credited to record for recording a reduction in inventory balance.
Net method for purchase discount:- Purchases are originally recorded at discounted price.
Gross method for purchase discount:- Discounts are recorded only at the time of making the payment.

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