Chapter 4, Problem 1PSB

To determine

Journal Entry:

It means recording of financial data related to business transactions in a journal in a manner so that debit equals credit. They provide an audit trail to the auditor and a means to analyze the effects of transactions to an organization’s financial health.

Rules of Journal Entry:

To increase the balance of account one needs to debit assets, expenses, losses and credit all the liabilities, revenues and gains including capital. To decrease the balance of account credit all assets, expenses, losses and debit all liabilities, revenues and gains including capital.

Perpetual Inventory System:

It is a 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 I.

Explanation of Solution

Purchased merchandise inventory worth $6,000.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 2	Merchandise Inventory		10,000
	Account Payable			10,000
	(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 to 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 $11,000:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 4	Account Receivable		11,000
	Sales			11,000
	(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($)	Credit($)
May 2	Cost of Goods Sold		5,600
	Merchandise Inventory			5,600
	(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 credited.

Paid $250 cash for shipping charges:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 5	Merchandise Inventory		250
	Cash			250
	(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 $2,000 for $2,500:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 9	Cash		2,500
	Sales			2,500
	(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, 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($)	Credit($)
May 9	Cost of Goods Sold		2,000
	Merchandise Inventory			2,000
	(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 $3,650.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 10	Merchandise Inventory		3,650
	Account Payable			3,650
	(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 to be 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.

Credit memorandum received by Company I for $650:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 12	Account Payable		650
	Merchandise Inventory			650
	(To record return of merchandise worth $650)

• 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($)	Credit($)
May 14	Cash		10,780
	Sales discount		220
	Account receivable			11,000
	(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 sales discount:

  $\begin{array}{c}\text{Sales}\text{discount}=\text{Account}\text{recievable}\times \text{Rate}\text{of}\text{discount}\\ =\$11,000\times 2\%\\ =\$220\end{array}$

Computation of cash to be received:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{recievable}-\text{Sales}\text{discount}\\ =\$11,000-\$220\\ =\$10,780\end{array}$

Company I makes final payment to Company H:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 17	Account payable		10,000
	Merchandise inventory			100
	Cash			9,900
	(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.

Computation of Merchandise inventory:

  $\begin{array}{c}\text{Discount}\text{amount}=\text{Account}\text{payables}\times \text{Discount}\text{rate}\\ =\$10,000\times 1\%\\ =\$100\end{array}$

Computation of Cash to be paid:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{payable}-\text{Discount}\\ =\$10,000-\$100\\ =\$9,900\end{array}$

Sold Merchandise inventory on account for $2,800:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 20	Account Receivable		2,800
	Sales			2,800
	(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($)	Credit($)
May 20	Cost of Goods Sold		1,450
	Merchandise Inventory			1,450
	(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 I gave credit memorandum to Company T:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 22	Sales Return and Allowances		300
	Account Receivable			300
	(To record sales return)

• Sales Return and Allowances account is an contra-revenue 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.
• Account receivable is an asset account. Since account receivable has reduced because of sales return so asset is to be reduced. Therefore, Account Receivable account is to be credited.

Company I makes final payment to Company D:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 25	Account Payable		3,000
	Merchandise Inventory			60
	Cash			2,940
	(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 Account payables:

  $\begin{array}{c}\text{Net}\text{Account}\text{payables}=\text{Invoice}\text{amount-Purchase return}\\ \text{=}\$3,650-\$650\\ \text{=\$3,000}\end{array}$

Computation of Merchandise inventory:

  $\begin{array}{c}\text{Discount}\text{amount}=\text{Account}\text{payables}\times \text{Discount}\text{rate}\\ =\$3,000\times 2\%\\ =\$60\end{array}$

Computation of Cash to be paid:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{payable}-\text{Discount}\\ =\$3,000-\$60\\ =\$2,940\end{array}$

Received cash from customer:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 30	Cash		2,450
	Sales Discount		50
	Account Receivable			2,500
	(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:

  $\begin{array}{c}\text{Account}\text{receivable}=\text{Sales}-\text{Sales}\text{return}\\ =\$2,800-\$300\\ =\$2,500\end{array}$

Computation of sales discount:

  $\begin{array}{c}\text{Sales}\text{discount}=\text{Account}\text{recievable}\times \text{Rate}\text{of}\text{discount}\\ =\$2,500\times 2\%\\ =\$50\end{array}$

Computation of cash to be received:

  $\begin{array}{c}\text{Cash}=\text{Account}\text{recievable}-\text{Sales}\text{discount}\\ =\$2,500-\$50\\ =\$2,450\end{array}$

Sold Merchandise inventory on account for $7,200:

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 31	Account Receivable		7,200
	Sales			7,200
	(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.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 31	Cost of Goods Sold		3,600
	Merchandise Inventory			3,600
	(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.