
1.
Prepare journal entries to record the transactions of Company S during the month of May using perpetual inventory system.
1.

Explanation of Solution
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
May 11 | Merchandise Inventory | 40,000 | ||
Accounts Payable | 40,000 | |||
(To record purchases of inventory on account) |
Table (1)
Description:
- Merchandise inventory is an asset and it is increased by $40,000. Therefore, debit merchandise inventory account with $40,000.
- Accounts payable is a liability and it is increased by $40,000. Therefore, credit accounts payable account with $40,000.
Record the journal entry for payment of shipping charges:
Date | Account Title and Explanation | Post Ref. | Debit ($) | Credit ($) |
May 11 | Merchandise Inventory | 345 | ||
Cash | 345 | |||
(To record the shipping charges on purchases of inventories) |
Table (2)
Description:
- Merchandise inventory is an asset and it is increased by $345. Therefore, debit merchandise inventory account with $345.
- Cash is an asset and it is decreased by $345. Therefore, credit cash account with $345.
Record the journal entry for purchase returned:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
May 12 | Accounts Payable | 1,400 | ||
Merchandise Inventory | 1,400 | |||
(To record the purchases return) |
Table (3)
Description:
- Accounts payable is a liability and it is decreased by $1,400. Therefore, debit accounts payable account with $1,400.
- Merchandise inventory is an asset and it is decreased by $1,400. Therefore, credit inventory account with $1,400.
Record the journal entry for payment of due amount:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
May 20 | Accounts Payable | 38,600 (1) | ||
Merchandise Inventory | 1,158 (2) | |||
Cash | 37,442 (3) | |||
(To record paying cash on purchases after discounts and returns) |
Table (4)
Description:
- Accounts payable is a liability and it is decreased by $38,600. Therefore, debit accounts payable account with $38,600.
- Merchandise inventory is an asset and it is decreased by $1,158. Therefore, credit merchandise inventory account with $1,158.
- Cash is an asset and it is decreased by $37,442. Therefore, credit cash account with $37,442.
Working notes:
Calculate the amount of net accounts payable.
Inventory = $40,000
Purchase returns = $1,400
Calculate the amount of purchase discount.
Net accounts payable = $38,600 (1)
Discount percentage = 3%
Calculate the amount of cash paid.
Net accounts payable = $38,600 (1)
Purchase discount = $1,158 (2)
2.
Prepare journal entries to record the transactions of Company T during the month of May using perpetual inventory system.
2.

Explanation of Solution
Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.
Record the journal entry for merchandise sold:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
May 11 | 40,000 | ||
Sales Revenue | 40,000 | ||
(To record merchandise sales on account) | |||
Cost of goods sold | 30,000 | ||
Merchandise Inventory | 30,000 | ||
(To record cost of goods sold) |
Table (5)
Description:
- Accounts Receivable is an asset and it is increased by $40,000. Therefore, debit account receivable with $40,000.
- Sales revenue is revenue and it increases the value of equity by $40,000. Therefore, credit sales revenue with $40,000.
- Cost of goods sold is an expense account and it decreases the value of equity by $30,000. Therefore, debit cost of goods sold account with $30,000.
- Merchandise inventory is an asset and it is decreased by $30,000. Therefore, credit inventory account with $30,000.
Record the journal entry for sales return:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
May 12 | Sales Returns and Allowance | 1,400 | |
Accounts Receivable | 1,400 | ||
(To record the sales return) | |||
Merchandise Inventory | 800 | ||
Cost of goods sold | 800 | ||
(To record the reversal of cost of goods sold on sales return) |
Table (6)
Description:
- Sales return and allowance is an expense account and it decreases the value of equity by $1,400. Therefore, debit sales returns and allowances account with $1,400.
- Accounts Receivable is an asset and it is decreased by $1,400. Therefore, credit account receivable with $1,400.
- Inventory is an asset and it is increased by $800. Therefore, debit inventory account with $800.
- Cost of goods sold is an expense account and it increases the value of equity by $800. Therefore, credit cost of goods sold account with $800.
Record the journal entry for receipt of payment:
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
May 20 | Cash | 37,442 (6) | |
Sales Discounts | 1,158 (5) | ||
Accounts Receivable | 38,600 (4) | ||
(To record receiving cash on sales after discounts and returns) |
Table (7)
Description:
- Cash is an asset and it is increased by $37,442. Therefore, debit cash account with $37,442.
- Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $1,158.
- Accounts Receivable is an asset and it is decreased by $38,600. Therefore, credit account receivable with $38,600.
Working notes:
Calculate the amount of accounts receivable.
Accounts receivable = $40,000
Sales returns = $1,400
Calculate the amount of sales discount.
Net accounts receivable = $38,600 (4)
Discount percentage = 3%
Calculate the amount of cash received.
Net accounts receivable = $38,600 (4)
Sales discount = $1,158 (5)
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