Chapter 4, Problem 8E

1.

To determine

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

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 inventory purchased:

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

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$40,000–\$1,400\\ =\$38,600\end{array}$ (1)

Calculate the amount of purchase discount.

Net accounts payable = $38,600 (1)

Discount percentage = 3%

$\begin{array}{c}\text{Purchase discount = \$38,600 × }\frac{3}{\text{100}}\\ \text{= \$1,158}\end{array}$ (2)

Calculate the amount of cash paid.

Net accounts payable = $38,600 (1)

Purchase discount = $1,158 (2)

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Purchase discount}\\ \text{= \$38,600 – \$1,158}\\ \text{= \$37,442}\end{array}$ (3)

2.

To determine

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

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	Accounts Receivable	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

$\begin{array}{c}\text{Net}\text{accounts receivable}\}\text{ = }\left\{\begin{array}{l}\text{Accounts receivable due to sales – }\\ \text{Sales return}\end{array}\right\}\\ \text{= \$40,000 – \$1,400}\\ \text{= \$38,600}\end{array}$ (4)

Calculate the amount of sales discount.

Net accounts receivable = $38,600 (4)

Discount percentage = 3%

$\begin{array}{c}\text{Sales discount = \$38,600 × }\frac{3}{\text{100}}\\ \text{= \$1,158}\end{array}$ (5)

Calculate the amount of cash received.

Net accounts receivable = $38,600 (4)

Sales discount = $1,158 (5)

$\begin{array}{c}\text{Cash received = Accounts receivable, net – Sales discount}\\ \text{= \$38,600 – \$1,158}\\ \text{= \$37,442}\end{array}$ (6)