Chapter 5, Problem 1AP

a.

To determine

Prepare the journal entries to record the transactions for the month of March for Company D (seller).

Explanation of Solution

Perpetual Inventory System: 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.

Sales returns and allowances: Sometimes, customers either return goods due to manufacturing defects, or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price, is referred to as sales returns and allowances. These are recorded as contra-revenue accounts.

Prepare journal entries for Company D (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
March 08	Accounts receivable		$14,000
	Sales revenue			$14,000
	(To record the sale of merchandise on account )
March 08	Cost of goods sold		$9,600
	Inventory			$9,600
	(To record the cost of merchandise sold)
March 12	Sales return and allowances		$2,000
	Accounts receivable			$2,000
	(To record the merchandise returned by customers)
March 12	Inventory		$1,600
	Cost of goods sold			$1,600
	(To record the cost of merchandise returned by customers)
March 17	Cash (2)		$11,760
	Sales discounts (1)		$240
	Accounts receivable			$12,000
	(To record the sales discount and payment from customers for the goods sold)
March 20	Sales return and allowances		$800
	Accounts receivable			$800
	(To record the merchandise returned by customers)
March 20	Inventory		$600
	Cost of goods sold			$600
	(To record the cost of merchandise returned by customers)
March 20	Accounts Receivable		800
	Cash			784
	Sales Discount Received			16
	(To record the payment for returns)

Table (1)

March 08: To record the sale of merchandise on account:

Accounts receivable is an asset and the value is increased due to the credit sales made by Company. Thus, it is debited with $14,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $14,000.

March 08: To record the cost of merchandise sold:

Cost of goods sold is an expense and it decreases the total revenue (Stockholders’ equity). Thus, it is debited with $9,600.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $9,600.

March 12:  To record the merchandise returned by customers:

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $2,000.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $2,000.

March 12: To record the cost of merchandise returned from customers:

Inventory is an asset and is increased due to the return of inventory from customers. Thus, it is debited with $1,600.

Cost of goods sold is an expense. The cost of merchandise returned decreases the expense that results in the increase in stockholders’ equity. Thus, it is debited with $1,600.

March 17: To record the sales discount and payment from customers for the merchandise sold:

Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $11,760.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $240.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $12,000.

March 20:  To record the merchandise returned by customers:

Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $800.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $800.

March 20: To record the cost of merchandise returned from customers:

Inventory is an asset and is increased due to the return of inventory from customers. Thus, it is debited with $600.

Cost of goods sold is an expense. The cost of merchandise returned decreases the expense that results in the increase in stockholders’ equity. Thus, it is debited with $600.

March 20: To record the payment for returns:

Accounts receivable account is an asset and is increased by $800. Therefore, debit accounts receivable account with $800.

Sales discount received is revenue which increases the equity by $16. Thus, it is credited with $16.

Cash is an asset and it is decreased by $784. Hence, it is credited with $784.

Working Note:

Compute the discount on sales.

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$14,000-\$2,000\right)\times \frac{2}{100}\\ =\$12,000\times \frac{2}{100}\\ =\$240\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$14,000-\$2,000-\$240\left(1\right)\\ =\$11,760\end{array}$ (2)

b.

To determine

Prepare the journal entries to record the transactions for the month of March for Incorporation MS (buyer).

Explanation of Solution

Perpetual Inventory System: 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.

Prepare journal entries for Incorporation MS (buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
March 08	Inventory		$14,000
	Accounts payable			$14,000
	(To record the inventory purchased on account )
March 10	Inventory		$500
	Cash			$500
	(To record the payment of freight expense for the merchandise purchased)
March 12	Accounts payable		$2,000
	Inventory			$2,000
	(To record the return of inventories on account)
March 17	Accounts payable		$12,000
	Inventory (3)			$240
	Cash (4)			$11,760
	(To record the purchase discount and  payment of merchandise purchased on account)
March 20	Accounts payable		$800
	Inventory			$800
	(To record the return of inventories on account)
March 20	Cash		$784
	Inventory		$16
	Accounts Payable			$800
	(To record the payment of returns)

Table (2)

March 08: To record the inventory purchased on account:

Inventory is an asset. The value is increased due to the credit purchases made by Company. Therefore, inventory account is debited with $14,000.

Accounts Payable is a liability and it is increased due to the increase in the amount to be paid for purchases. Therefore, credit Accounts Payable account with $14,000.

March 10: To record the payment of freight expense for the merchandise purchased:

Inventory is an asset and the value is increased due to the purchase of merchandise. Hence, debit Inventory account with $500.

Cash is an asset and the value is decreased due to the payment. Thus, credit Cash account with $500.

March 12: To record the return of inventories on account:

Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $2,000.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $2,000.

March 17: To record the purchase discount and payment of merchandise purchased on account:

Accounts Payable is a liability and is decreased because the company has paid the amount due for credit purchases. Therefore, it is debited with $12,000.

Inventory is an asset account. The amount has decreased because the purchase discount is reduced from the cost of inventory. Hence, credit Inventory account with $240.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $11,760.

March 20: To record the return of inventories on account:

Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $800.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $800.

March 20: To record the payment for returns:

Cash is an asset account and it is increased by $784. Hence, it is debited with $784.

Sales discount received is revenue which increases the equity by $16. Thus, it is credited with $16.

Accounts payable is a liability and it is increased by $800. Hence, it is credited with $800.

Working Note:

Compute the discount on purchases.

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$14,000-\$2,000\right)\times \frac{2}{100}\\ =\$12,000\times \frac{2}{100}\\ =\$240\end{array}$ (3)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$14,000-\$2,000-\$240\left(3\right)\\ =\$11,760\end{array}$ (4)