Chapter 4, Problem 1PSA

To determine

Journal Entries:

Journal entries are the transactions of quantitative nature that are made in the books of accounts to record every transaction that happens in the business in the chronological order.

Accounting rules for journal entries:

• To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Perpetual Inventory System:

It is an inventory system wherein the accounts related to inventory are updated on each purchase and sale happening. Quantities of inventory are updated on continuous basis. This can be done by integrating the inventory system to order entry and to the retail sale point of system.

Gross Method:

Under this method, all the purchases are recorded in the books of account without taking into account the trade discount, returns and allowances. T

he purchases are to be recorded at full cost.

To prepare: Journal entries in the books of Company C.

Explanation of Solution

Purchased merchandise inventory worth $6,000.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 1	Merchandise Inventory		6,000
	Account Payable			6,000
	(To record merchandise inventory purchased on credit)

• Merchandise Inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise Inventory account is debited.
• Account Payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore, Account Payable account is credited.

Sold Merchandise inventory on account for $900:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 2	Account Receivable		900
	Sales			900
	(To record sales made on account)

• Account receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, Account Receivable account is debited.
• Sales is a revenue account. Since sales is made it has to be increased. Therefore, Sales account is to be credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 2	Cost of Goods Sold		500
	Merchandise Inventory			500
	(To record cost of goods sold)

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.
• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Paid $125 cash for shipping charges:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 3	Merchandise Inventory		125
	Cash			125
	(To record shipping charges paid by buyer)

• Merchandise Inventory is an asset account. Since the amount of freight is added up in the Merchandise inventory value, the value of assets is increased. So, debit the Merchandise Inventory account.
• Cash is an asset account. Since the Cash is paid, the value of assets is decreased. So, credit the Cash account.

Sold merchandise costing $1,300 for $1,700:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 8	Cash		1,700
	Sales			1,700
	(To record shipping charges paid by buyer)

• Cash is an asset account. Since the Cash is received, the value of assets is increased. So, debit the Cash account.
• Sales is a revenue account. Since sales is made, it needs to be increased. Therefore, Sales account is to be credited.

Record cost of goods which are sold:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 8	Cost of Goods Sold		1,300
	Merchandise Inventory			1,300
	(To record cost of goods sold)

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense is to increased. Therefore, Cost of Goods Sold account is debited.
• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Purchased merchandise inventory worth $2,200.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 9	Merchandise Inventory		2,200
	Account Payable			2,200
	(To record merchandise inventory purchased on credit)

• Merchandise Inventory account is an asset account. Since there is purchase of merchandise inventory, so asset account is to be increased. Therefore, Merchandise Inventory account is debited.
• Account payable is a liability account. Since payment is to be made for purchases on account, so liability is to be increased. Therefore, Account payable account is credited.

Purchase return made by Company C for $200:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 11	Account Payable		200
	Merchandise Inventory			200
	(To record return of merchandise worth $500)

• Account payable is a liability account. Since the Inventory which was purchased on credit is returned, this reduces the liability to be paid. So, debit the Accounts Payable account.
• Merchandise Inventory is an asset account. Since it is returned to the seller, the value of asset is to be reduced. So credit the Merchandise Inventory account.

Received cash from customer:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 12	Cash		882
	Sales Discount		18
	Account Receivable			900
	(To record final payment received from Company A)

• Cash is an asset account. Since, payment is received in cash, so it is to be increased. Therefore Cash account is credited.
• Sales Discount is an expense account. Since, an expense has increased, so it requires a debit in the entry. Therefore Sales Discount is debited.
• Account Receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, Account Receivable is credited.

Working Note:

Computation of sales discount:

  $\begin{array}{c}\text{Sales}\text{discount}=\text{Account}\text{recievable}\times \text{Rate}\text{of}\text{discount}\\ =\$900\times 2\%\\ =\$18\end{array}$

Computation of cash to be received:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{recievable}-\text{Sales}\text{discount}\\ =\$900-\$18\\ =\$882\end{array}$

Company C makes final payment to Company B:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 16	Account Payable		6,000
	Merchandise Inventory			60
	Cash			5,940
	(To record cash payment made for merchandise inventory )

• Account Payable is a liability account. Since payment is to be made for account payable, this will result in reduction of liability. Therefore, Account payable account is debited.
• Merchandise Inventory account is an asset account. Since, discount is received in making final payment by company S from Company T, Merchandise Inventory is to be reduced. Therefore, Merchandise Inventory account is credited.
• Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, Cash account is credited.

Working Note:

Computation of Merchandise inventory:

  $\begin{array}{c}\text{Discount}\text{amount}=\text{Account}\text{payables}\times \text{Discount}\text{rate}\\ =\$6,000\times 1\%\\ =\$60\end{array}$

Computation of Cash to be paid:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{payable}-\text{Discount}\\ =\$6,000-\$60\\ =\$5,940\end{array}$

Sold Merchandise inventory on account for $1,200:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 19	Account Receivable		1,200
	Sales			1,200
	(To record sales made on account)

• Account Receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, account receivable account is debited.
• Sales is a revenue account. Since sales is made, so it needs to be increased. Therefore, sales account is to be credited.

Record cost of goods which were sold:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 19	Cost of Goods sold		800
	Merchandise Inventory			800
	(To record cost of goods sold)

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.
• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.

Company C gave credit memorandum to Company A:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 21	Sales Return and Allowances		100
	Accounts Receivable			100
	(To record sales return)

• Sales Return and Allowances account is an expense account. Since Company A is receiving the sales return so it needs to be increased, so expense account is to be increased. Therefore, Sales Return and Allowances account is to be debited.
• Accounts receivable is an asset account. Since account receivable is has reduced because of sales return, asset has reduced. Therefore, Accounts Receivable account is to be credited.

Company C makes final payment to Company L:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 24	Account Payable		2,000
	Merchandise Inventory			40
	Cash			1,960
	(To record cash payment made for merchandise inventory )

• Account Payable is a liability account. Since payment is to be made for account payable, this will result in reduction of liability. Therefore, Account Payable account is debited.
• Merchandise Inventory account is an asset account. Since, discount is received in making final payment by company S from Company T, Merchandise Inventory is to be reduced. Therefore, Merchandise Inventory account is credited.
• Cash account is an asset account. Since, cash is paid so asset is reduced. Therefore, Cash account is credited.

Working Note:

Computation of Account payables:

  $\begin{array}{c}\text{Net}\text{Account}\text{payables}=\text{Invoice}\text{amount-Purchase return}\\ =\$2,200-\$200\\ =\$2,000\end{array}$

Computation of Merchandise inventory:

  $\begin{array}{c}\text{Discount}\text{amount}=\text{Account}\text{payables}\times \text{Discount}\text{rate}\\ =\$2,000\times 2\%\\ =\$40\end{array}$

Computation of Cash to be paid:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{payable}-\text{Discount}\\ =\$2,000-\$40\\ =\$1,960\end{array}$

Received cash from customer:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 30	Cash		882
	Sales Discount		18
	Account Receivable			1,100
	(To record final payment received from Company A)

• Cash is an asset account. Since, payment is received in cash, so it is to be increased. Therefore Cash account is credited.
• Sales Discount is an expense account. Since, an expense is getting increased, so it requires a debit in the entry. Therefore Sales discount is debited.
• Account Receivable is an asset account. Since account receivable is getting recovered for cash, so it is to be reduced. Therefore, Account Receivable is credited.

Working Note:

Computation of Account receivables:

  $\begin{array}{c}\text{Account}\text{Recievable}=\text{Sales}-Salesreturn\\ =\$1,200-\$100\\ =\$1,100\end{array}$

Computation of sales discount:

  $\begin{array}{c}\text{Sales}\text{Discount}=\text{Account}\text{recievable}\times \text{Rate}\text{of}\text{Discount}\\ =\$1,100\times 2\%\\ =\$22\end{array}$

Computation of cash to be received:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{recievable}-\text{Sales}\text{discount}\\ =\$1,100-\$22\\ =\$1,078\end{array}$

Sold Merchandise inventory on account for $7,000:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 31	Account Receivable		7,000
	Sales			7,000
	(To record sales made on account)

• Account Receivable is an asset account. Since payment is to be received, so asset is to be increased. Therefore, Account Receivable account is debited.
• Sales is a revenue account. Since sales is made, so it needs to be increased. Therefore, Sales account is to be credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 31	Cost of Goods Sold		4,800
	Merchandise Inventory			4,800
	(To record cost of goods sold)

• Cost of Goods Sold account is an expense account. Since goods are being sold, expense has increased. Therefore, Cost of Goods Sold account is debited.
• Merchandise Inventory account is an asset account. Since inventory is being sold, so it is to be reduced. Therefore, Merchandise Inventory account is to be credited.