Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
Question
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Chapter 4, Problem 5E
To determine

Journal Entry:

It means record of financial data related to business transactions in a journal in a manner so that debit equals credit. It provides 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 and losses and credit all the liabilities, revenues and gains including capital.

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

Perpetual Inventory System:

The inventory system in which the inventory accounts are updated on every single purchase or sale in inventory. 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.

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

Expert Solution & Answer
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Answer to Problem 5E

Solution:

Journal entries in the books of Company A:

Purchased merchandise on account worth $20,000.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 3 Merchandise Inventory   20,000  
  Cash     20,000
  (To record purchase of merchandise inventory for cash)      

Explanation of Solution

▪ Inventory is an asset account. Since the Inventory is purchased, the value of assets is increased. So, debit the Inventory account.

▪ Cash is an asset account. Since cash is paid for purchase of inventory, it is to be reduced. Therefore, credit cash account.

Working note:

Calculation of purchase cost:

Purchasecost=Numberofunits×Unitcostperunit=2,000×$10=$20,000

Sold 1,500 units of inventory for $14 on account:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 5 Account Receivable   21,000  
  Sales     21,000
  (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 are a revenue account. Since sales are made, so it needs to be increased. Therefore, sales account is to be credited.

Working Note:

Calculation of amount of sales:

Sales=Numberofunitssold×Salespriceperunit=1,500×$14=$21,000

Record cost of sold goods on May 5.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 5 Cost of goods sold   15,000  
  Merchandise inventory     15,000
  (To record cost of goods sold)      

• Cost of goods sold account is an expense account. Since expense is to be increased, expense is 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.

Working note:

Calculation of cost of goods sold:

Costofgoodssold=Numberofunitssold×Costpriceperunit=1,500×$10=$15,000

Company B returns 200 units because they were unfit as per its needs:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 7 Sales return and allowances   2,800  
  Account receivable     2,800
  (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.

• Account receivable is an asset account. Since account receivable is getting reduced because of sales return so asset is to be reduced. Therefore account receivable is to be credited.

Working Note:

Calculation of sales return and allowances:

Salesreturnandallowances=Numberofunitsreturned×Salepriceperunit=200×$14=$2,800

Record cost of goods returned.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 7 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 expense is to be increased, expense is 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.

Working note:

Calculation of cost of goods sold:

Costofgoodssold=Numberofunitssold×Costpriceperunit=200×$10=$2,000

Company B discovered scuffed units and gave credit memorandum to Company A.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 8 Sales return and allowances   600  
  Account receivable     600
  (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.

• Account receivable is an asset account. Since account receivable is getting reduced because of sales return so asset is to be reduced. Therefore account receivable account is to be credited.

Company B found 100 units of wrong color. So, returns 40 units because they were unfit as per its needs:

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 15 Sales return and allowances   680  
  Account receivable     680
  (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.

• Account receivable is an asset account. Since account receivable is getting reduced because of sales return so asset is to be reduced. Therefore account receivable is to be credited.

Working Note:

Calculation of sales return and allowances:

Salesreturnandallowances=((Numberofunitsreturned×Salepriceperunit)+Compensation)=(40×$14)+$120=$560+$120=$680

Record cost of goods returned.

Date Account Title and Explanation Post ref Debit
($)
Credit
($)
May 15 Cost of goods sold   400  
  Merchandise inventory     400
  (To record cost of goods sold)      

• Cost of goods sold account is an expense account. Since expense is to be increased, expense is 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.

Working note:

Calculation of cost of goods sold:

Costofgoodssold=Numberofunitssold×Costpriceperunit=40×$10=$400

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Chapter 4 Solutions

Financial and Managerial Accounting (Looseleaf) (Custom Package)

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