Chapter 11, Problem 1MP

Michelle French owns and operates Books and More, a retail book store. Selected account balances on June 1 are as follows:

 The following purchases and cash payments transactions took place during the month of June:

June 1 Purchased books on account from Irving Publishing Company, $2,100. Invoice No. 101, terms 2/10, n/30, FOB destination.

2 Issued Cheek No. 300 to Northeastern Publishing Co. for goods purchased on May 23, terms 2/10, n/30, $1,960 (the $2,000 invoice amount less the 2% discount).

3 Purchased books on account from Broadway Publishing, Inc., $2,880. Invoice No. 711, less a 20% trade discount, and invoice terms of 3/10, n/30, FOB shipping point.

3 Issued Cheek No. 301 to Mayday Shipping for delivery from Broadway Publishing, Inc., $250.

4 Issued Cheek No. 302 for June rent, $625.

8 Purchased books on account from Northeastern Publishing Co., $5,825. Invoice No. 268, terms 2/com, n/60, FOB destination.

10 Received a credit memo from Irving Publishing Company, $550. Books had been returned because the covers were on upside down.

13 Issued Check No. 304 to Broadway Publishing, Inc., for the purchase made on June 3. (Check No. 303 was voided because an error was made in preparing it.)

28 Made the following purchases:

30 Issued Cheek No. 305 to Taylor County Utility Co. for June utilities, $325.

30 French withdrew cash for personal use, $4,500. Issued Check No. 306.

30 Issued Cheek No. 307 to Irving Publishing Company for purchase made on June 1 less returns made on June 10.

30 Issued Check No. 308 to Northeastern Publishing Co. for purchase made on June 8.

30 Issued Check No. 309 for books purchased at an auction, $1,328.

REQUIRED

1. 1. Enter the transactions in a general journal (start with page 16).
2. 2. Post from the journal to the general ledger accounts and the accounts payable ledger. Use general ledger account numbers as indicated in the chapter.
3. 3. Prepare a schedule of accounts payable.
4. 4. If merchandise inventory was $35,523 on January 1 and $42,100 as of June 30, prepare the cost of goods sold section of the income statement for the six months ended June 30,20--.

To determine

Journalize the purchases and cash payment transactions for the month of June.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• ■ Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• ■ Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the purchases and cash payment transactions for the month of June.

Transaction on June 1:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	1	Purchases		501	2,100
			Accounts Payable, Company IP	202/✓		2,100
		(Record purchases made on account)

Table (1)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Company IP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 2:

Page: 16
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	2	Accounts Payable, Corporation NP		202/✓	2,000
			Cash	101		1,960
			Purchases Discounts	501.2		40
		(Record cash paid for purchases on account)

Table (2)

Description:

• ■ Accounts Payable, Corporation NP is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
• ■ Purchases Discounts is a contra-purchases or contra-costs account, and contra-purchases accounts increase the equity value, and an increase in equity is credited.

Working Note 1:

Compute purchases discount value.

$\begin{array}{c}\text{Purchases discounts = }\left\{\begin{array}{l}\left(\text{Purchases–Purchase returns and allowances}\right)\text{ ×}\\ \text{ Discount percentage}\end{array}\right\}\\ \text{= }\left(\text{\$2,000–\$0}\right)\text{×2\%}\\ \text{= \$40}\end{array}$

Working Note 2:

Compute amount of cash paid (Refer to Working Note 2 for purchase discount value).

$\begin{array}{c}\text{Cash paid = }\left(\begin{array}{l}\text{Purchases on account value–}\\ \text{Purchases returns and allowances–}\\ \text{Purchases discount value}\end{array}\right)\\ \text{= \$2,000–\$0–\$40}\\ \text{= \$1,960}\end{array}$

Transaction on June 3:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	3	Purchases		501	2,304
			Accounts Payable, Incorporation BP	202/✓		2,304
		(Record purchases made on account)

Table (3)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Incorporation BP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Working Note 3:

Compute the purchase invoice value.

$\begin{array}{c}\text{Purchase invoice value = List price–Trade discount}\\ \text{= \$2,880–}\left(\text{\$2,880}\times 20\text{\%}\right)\\ =\$2,880\text{–}\$576\\ \text{= \$2,304}\end{array}$

Transaction on June 3:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	3	Freight-In		502	250
			Cash	101		250
		(Record payment of freight charges)

Table (4)

Description:

• ■ Freight-In is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 4:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	4	Rent Expense		521	625
			Cash	101		625
		(Record payment of rent expense)

Table (5)

Description:

• ■ Rent Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 8:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	8	Purchases		501	5,825
			Accounts Payable, Corporation NP	202/✓		5,825
		(Record purchases made on account)

Table (6)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Corporation NP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 10:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	10	Accounts Payable, Company IP		202/✓	550
			Purchases Returns and Allowances	501.1		550
		(Record merchandise returned)

Table (7)

Description:

• ■ Accounts Payable, Company IP is a liability account. Since inventory is returned, amount to be paid has decreased, liability account is decreased, and a decrease in liability is debited.
• ■ Purchases Returns and Allowances is a contra-cost account, and contra-cost accounts increase the equity value, and an increase in equity is credited.

Transaction on June 13:

Page: 16
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	13	Accounts Payable, Incorporation BP		202/✓	2,304.00
			Cash	101		2,234.88
			Purchases Discounts	501.2		69.12
		(Record cash paid for purchases on account)

Table (8)

Description:

• ■ Accounts Payable, Incorporation BP is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
• ■ Purchases Discounts is a contra-purchases or contra-costs account, and contra-purchases accounts increase the equity value, and an increase in equity is credited.

Working Note 4:

Compute purchases discount value (Refer to Working Note 3 for value of purchases).

$\begin{array}{c}\text{Purchases discounts = }\left\{\begin{array}{l}\left(\text{Purchases–Purchase returns and allowances}\right)\text{ ×}\\ \text{ Discount percentage}\end{array}\right\}\\ \text{= }\left(\text{\$2,304–\$0}\right)\text{×3\%}\\ \text{= \$69}\text{.12}\end{array}$

Working Note 5:

Compute amount of cash paid (Refer to Working Note 4 for purchase discount value).

$\begin{array}{c}\text{Cash paid = }\left(\begin{array}{l}\text{Purchases on account value–}\\ \text{Purchases returns and allowances–}\\ \text{Purchases discount value}\end{array}\right)\\ \text{= \$2,304–\$0–\$69}\text{.12}\\ \text{= \$2,234}\text{.88}\end{array}$

Transaction on June 28:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	28	Purchases		501	2,350
			Accounts Payable, Incorporation BP	202/✓		2,350
		(Record purchases made on account)

Table (9)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Incorporation BP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 28:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	28	Purchases		501	4,200
			Accounts Payable, Corporation NP	202/✓		4,200
		(Record purchases made on account)

Table (10)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Corporation NP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 28:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	28	Purchases		501	3,450
			Accounts Payable, Corporation RP	202/✓		3,450
		(Record purchases made on account)

Table (11)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Accounts Payable, Corporation RP is a liability account. Since the payable increased, the liability increased, and an increase in liability is credited.

Transaction on June 30:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	30	Utilities Expense		533	325
			Cash	101		325
		(Record payment of utilities expense)

Table (12)

Description:

• ■ Utilities Expense is an expense account. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 30:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	30	F, Drawing		533	4,500
			Cash	101		4,500
		(Record withdrawal for personal use)

Table (13)

Description:

• ■ F, Drawings is a contra-capital account. Contra-capital accounts have a normal debit balance, hence the account is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Transaction on June 30:

Page: 16
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Accounts Payable, Company IP		202/✓	1,550
			Cash	101		1,550
		(Record cash paid for purchases on account)

Table (14)

Description:

• ■ Accounts Payable, Company IP is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Note 6:

Compute amount of cash paid.

$\begin{array}{c}\text{Cash paid = }\left(\begin{array}{l}\text{Purchases on account value–}\\ \text{Purchases returns and allowances–}\\ \text{Purchases discount value}\end{array}\right)\\ \text{= \$2,100–\$550–\$0}\\ \text{= \$1,550}\end{array}$

Transaction on June 30:

Page: 16
Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
June	30	Accounts Payable, Corporation NP		202/✓	5,825.00
			Cash	101		5,708.50
			Purchases Discounts	501.2		116.50
		(Record cash paid for purchases on account)

Table (15)

Description:

• ■ Accounts Payable, Corporation NP is a liability account. Since the payable decreased, the liability decreased, and a decrease in liability is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
• ■ Purchases Discounts is a contra-purchases or contra-costs account, and contra-purchases accounts increase the equity value, and an increase in equity is credited.

Working Note 7:

Compute purchases discount value.

$\begin{array}{c}\text{Purchases discounts = }\left\{\begin{array}{l}\left(\text{Purchases–Purchase returns and allowances}\right)\text{ ×}\\ \text{ Discount percentage}\end{array}\right\}\\ \text{= }\left(\text{\$5,825–\$0}\right)\text{×2\%}\\ \text{= \$116}\text{.50}\end{array}$

Working Note 8:

Compute amount of cash paid (Refer to Working Note 7 for purchase discount value).

$\begin{array}{c}\text{Cash paid = }\left(\begin{array}{l}\text{Purchases on account value–}\\ \text{Purchases returns and allowances–}\\ \text{Purchases discount value}\end{array}\right)\\ \text{= \$5,825}\text{.00–\$0–\$116}\text{.50}\\ \text{= \$5,708}\text{.50}\end{array}$

Transaction on June 30:

Page: 16
Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
June	30	Purchases		501	1,328
			Cash	101		1,328
		(Record purchase of inventory)

Table (16)

Description:

• ■ Purchases is an expense account which records the cost of inventory purchased. An increase in expense reduces the equity value, and a decrease in equity is debited.
• ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

To determine

Post the given transactions into the accounts of the general ledger, and the suppliers account in accounts payable ledger.

Explanation of Solution

Posting transactions: The process of transferring the journalized transactions into the accounts of the ledger is known as posting the transactions.

Post the given transactions into the accounts of the general ledger.

ACCOUNT    Cash                                                                    ACCOUNT NO. 101
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			32,200.00
	2		J16		1,960.00	30,240.00
	3		J16		250.00	29,990.00
	4		J16		625.00	29,365.00
	13		J16		2,234.88	27,130.12
	30		J16		325.00	26,805.12
	30		J16		4,500.00	22,305.12
	30		J16		1,550.00	20,755.12
	30		J16		5708.50	15,046.62
	30		J16		1,328.00	13,718.62

Table (17)

ACCOUNT    Accounts Payable                                              ACCOUNT NO. 202
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓				2,000
	1		J16		2,100		4,100
	2		J16	2,000			2,100
	3		J16		2,304		4,404
	8		J16		5,825		10,229
	10		J16	550			9,679
	13		J16	2,304			7,375
	28		J16		2,350		9,725
	28		J16		4,200		13,925
	28		J16		3,450		17,375
	30		J16	1,550			15,825
	30		J16	5,825			10,000

Table (18)

ACCOUNT   Purchases                                                             ACCOUNT NO. 501
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			67,021.66
	1		J16	2,100.00		69,121.66
	3		J16	2,304.00		71,425.66
	8		J16	5,825.00		77,250.66
	28		J16	2,350.00		79,600.66
	28		J16	4,200.00		83,800.66
	28		J16	3,450.00		87,250.66
	30		J16	1,328.00		88,578.66

Table (19)

ACCOUNT   Purchases Returns and Allowances                   ACCOUNT NO. 501.1
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓				2,315.23
	10		J16		550.00		2,865.23

Table (20)

ACCOUNT   Purchases Discounts                                          ACCOUNT NO. 501.2
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓				905.00
	2		J16		40.00		945.0
	13		J16		69.12		1,014.12
	30		J16		116.50		1,130.62

Table (21)

ACCOUNT   Freight-In                                                         ACCOUNT NO. 502
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			522.60
	3		J16	250.00		772.60

Table (22)

ACCOUNT   Rent Expense                                                    ACCOUNT NO. 521
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			3,125.00
	4		J16	625.00		3,750.00

Table (23)

ACCOUNT   Utilities Expense                                                  ACCOUNT NO. 533
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			1,522.87
			J16	325.00		1,847.87

Table (24)

ACCOUNT   F, Drawings                                                           ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
June	1	Balance	✓			18,000
			J16	4,500		22,500

Table (25)

Post the accounts payable balances of the suppliers to the supplier accounts in the accounts payable ledger.

NAME         Incorporation BP
ADDRESS
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance ($)
June	3		J16		2,304	2,304
	13		J16	2,304		0
	28		J16		2,350	2,350

Table (26)

NAME         Company IP
ADDRESS
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance ($)
June	1		J16		2,100	2,100
	10		J16	550		1,550
	30		J16	1,550		0

Table (27)

NAME         Corporation NP
ADDRESS
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance ($)
June	1	Balance	✓			2,000
	2		J16	2,000		0
	8		J16		5,825	5,825
	28		J16		4,200	10,025
	30		J16	5,825		4,200

Table (28)

NAME         Corporation RP
ADDRESS
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance ($)
June	28		J16		3,450	3,450

Table (29)

To determine

Prepare accounts payable schedule for Company BM as at June 30.

Explanation of Solution

Schedule of accounts payable: This is the schedule which is prepared to verify that the total balances of all the suppliers in the accounts payable ledger, equals the balance of Accounts Payable in the general ledger.

Prepare accounts payable schedule for Company BM as at June 30 (Refer to Requirement (2) for all the values and computations of the balances of the customers).

Company BM
Schedule of Accounts Payable
June 30
Incorporation BP	$2,350
Corporation NP	4,200
Corporation RP	3,450
Total	$10,000

Table (30)

Conclusion

Thus, the schedule of accounts payable of Company BM shows a balance of $10,000, as of June 30.

To determine

Prepare the cost of goods sold section of income statement for Company BM.

Explanation of Solution

Cost of goods sold: Cost of goods sold is the total of all the expenses incurred by a company to sell the goods during the given period.

Formula to compute cost of goods sold:

Details	Amount ($)	Amount ($)	Amount ($)
Merchandise inventory, January 1			$XXX
Purchases		$XXX
Less: Purchase returns and allowances	$XXX
Less: Purchases discounts	XXX	XXX
Net purchases		XXX
Add: Freight-in		XXX
Cost of goods purchased			XXX
Goods available for sale			XXX
Less: Merchandise inventory, December 31			XXX
Cost of goods sold			$XXX

Table (31)

Prepare the cost of goods sold section of income statement for Company BM (Refer to Requirement (2) for all the values and computations of the ledger balances).

Details	Amount ($)	Amount ($)	Amount ($)
Merchandise inventory, January 1			$35,523.00
Purchases		$88,578.66
Less: Purchase returns and allowances	$2,865.23
Less: Purchases discounts	1,130.62	3,995.85
Net purchases		84,582.81
Add: Freight-in		772.60
Cost of goods purchased			85,355.41
Goods available for sale			120,878.41
Less: Merchandise inventory, June 30			42,100.00
Cost of goods sold			$78,778.41

Table (32)

Conclusion

Thus, the cost of goods sold of income statement for Company BM is $78,778.41.