Chapter 5, Problem 1BP

a.

To determine

Prepare the journal entries to record the transactions for the month of November for Company RD (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 RD (seller).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
November 10	Accounts receivable		$7,000
	Sales revenue			$7,000
	(To record the sale of merchandise on account )
November 10	Cost of goods sold		$4,500
	Inventory			$4,500
	(To record the cost of merchandise sold)
November 14	Sales return and allowances		$600
	Accounts receivable			$600
	(To record the merchandise returned by customers)
November 14	Inventory		$420
	Cost of goods sold			$420
	(To record the cost of merchandise returned by customers)
November 19	Cash (2)		$6,272
	Sales discounts (1)		$128
	Accounts receivable			$6,400
	(To record the sales discount and payment from customers for the goods sold)
November 24	Sales return and allowances		$400
	Accounts receivable			$400
	(To record the merchandise returned by customers)
November 24	Inventory		$280
	Cost of goods sold			$280
	(To record the cost of merchandise returned by customers)
November 24	Accounts Receivable		400
	Cash			392
	Sales Discount Received			8
	(To record the payment for returns)

Table (1)

November 10: 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 $7,000.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $7,000.

November 10: 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 $4,500.

Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $4,500.

November 14:  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 $600.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $600.

November 14: 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 $420.

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 $420.

November 19: 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 $6,272.

Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $128.

Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $6,400.

November 24:  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 $400.

Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $400.

November 24: 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 $280.

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 $280.

November 24: To record the payment for returns:

Accounts receivable account is an asset and is increased by $400. Therefore, debit accounts receivable account with $400.

Sales discount received is revenue which increases the equity by $8. Thus, it is credited with $8.

Cash is an asset and it is decreased by $392. Hence, it is credited with $392.

Working Note:

Compute the discount on sales.

$\begin{array}{c}\text{Discount on sales}=\left(\text{Sales}-\text{Sales Return}\right)\times \text{Discount rate}\\ =\left(\$7,000-\$600\right)\times \frac{2}{100}\\ =\$6,400\times \frac{2}{100}\\ =\$128\end{array}$ (1)

Compute the cash received from customers (accounts receivable).

$\begin{array}{c}\text{Cash receipts from customers}=\text{Sales}-\left(\begin{array}{l}\text{Sales}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ sales}\end{array}\right)\\ =\$7,000-\$600-\$128\left(1\right)\\ =\$6,272\end{array}$ (2)

b.

To determine

Prepare the journal entries to record the transactions for the month of November for Incorporation A (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 A(buyer).

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
November 10	Inventory		$7,000
	Accounts payable			$7,000
	(To record the inventory purchased on account )
November 12	Inventory		$450
	Cash			$450
	(To record the payment of freight expense for the merchandise purchased)
November 14	Accounts payable		$600
	Inventory			$600
	(To record the return of inventories on account)
November 19	Accounts payable		$6,400
	Inventory (3)			$128
	Cash (4)			$6,272
	(To record the purchase discount and  payment of merchandise purchased on account)
November 24	Accounts payable		$400
	Inventory			$400
	(To record the return of inventories on account)
November 24	Cash		$392
	Inventory		$8
	Accounts Payable			$400
	(To record the payment of returns)

Table (2)

November 10: To record the inventory purchased on account:

Inventory is an asset. The value is increased due to the credit purchases made by Company A. Therefore, inventory account is debited with $7,000.

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 $7,000.

November 12: 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 $450.

Cash is an asset and the value is decreased due to the payment. Thus, credit Cash account with $450.

November 14: 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 $600.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $600.

November 19: 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 $6,400.

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 $128.

Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $6,272.

November 24: 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 $400.

Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $400.

November 24: To record the payment for returns:

Cash is an asset account and it is increased by $392. Hence, it is debited with $392.

Sales discount received is revenue which increases the equity by $8. Thus, it is credited with $8.

Accounts payable is a liability and it is increased by $400. Hence, it is credited with $400.

Working Note:

Compute the discount on purchases.

$\begin{array}{c}\text{Discount on purchases}=\left(\text{Purchases}-\text{Purchases Return}\right)\times \text{Discount rate}\\ =\left(\$7,000-\$600\right)\times \frac{2}{100}\\ =\$6,400\times \frac{2}{100}\\ =\$128\end{array}$ (3)

Compute the cash paid to accounts payable (suppliers).

$\begin{array}{c}\text{Cash paid to accounts payable}=\text{Purchases}-\left(\begin{array}{l}\text{Purchases}\\ \text{ Return}\end{array}\right)-\left(\begin{array}{l}\text{Discount on}\\ \text{ purchases}\end{array}\right)\\ =\$7,000-\$600-\$128\left(3\right)\\ =\$6,272\end{array}$ (4)