Chapter 5, Problem 1PB

Purchase-related transactions using perpetual inventory system

The following selected transactions were completed by Niles Co. during March of the current year:

Instructions

Journalize the entries to record the transactions of Niles Co. for March.

To determine

Journal entry: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements.

The following are the rules of debit and credit:

1. 1. Increase in assets and expenses accounts are debited. Decrease in liabilities and stockholders’ equity accounts are debited.
2. 2. Increase in liabilities, revenues, and stockholders’ equity accounts are credited. Decreases in all asset accounts are credited.

  Prepare journal entries to record the transactions of Company N during the month of March 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 of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 1	Inventory		43,035
	Accounts payable			43,035 (1)
	(To record purchase on account)

Table (1)

Working Note:

Calculate the amount of accounts payable.

Purchases = $43,250

Discount percentage = 2%

Freight charges = $650

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left[\left(\text{Purchases}-\text{Discount}\right)+\text{Freight}\right]\\ \text{=}\left[\text{Purchases}-\left(\text{Purchases}\times 2\%\right)+\text{Freight}\right]\\ \text{= }\left[\text{\$43,250 – }\left(\$43,250\times 2\%\right)+\$650\right]\\ \text{= \$43,250}-\$865+\$650\\ =\$43,035\end{array}$ (1)

• Inventory is an asset and it is increased by $43,035. Therefore, debit Inventory account with $43,035.
• Accounts payable is a liability and it is increased by $43,035. Therefore, credit accounts payable account with $43,035.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 5	Inventory		19,175
	Accounts payable			19,175
	(To record purchase on account)

Table (2)

• Inventory is an asset and it is increased by $19,175. Therefore, debit Inventory account with $19,175.
• Accounts payable is a liability and it is increased by $19,175. Therefore, credit accounts payable account with $19,175.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 10	Accounts payable		43,035
	Cash			43,035
	(To record the payment against accounts payable)

Table (3)

• Accounts payable is a liability and it is decreased by $43,035. Therefore, debit accounts payable account with $43,035.
• Cash is an asset and it is decreased by $43,035. Therefore, credit cash account with $43,035.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 13	Inventory		15,239
	Accounts payable			15,239 (2)
	(To record purchase on account)

Table (4)

Working Note:

Calculate the amount of accounts payable.

Purchases = $15,550

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases}-\text{Discount}\right)\\ \text{=}\text{Purchases}-\left(\text{Purchases}\times 2\%\right)\\ \text{= \$15,550 – }\left(\$15,550\times 2\%\right)\\ \text{= \$15,550}-\$311\\ =\$15,239\end{array}$ (2)

• Inventory is an asset and it is increased by $15,239. Therefore, debit Inventory account with $15,239.
• Accounts payable is a liability and it is increased by $15,239. Therefore, credit accounts payable account with $15,239.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 14	Accounts payable		3,675 (3)
	Inventory			3,675
	(To record purchase return)

Table (5)

Working Note:

Calculate the amount of accounts payable.

Purchases return = $3,750

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases return}-\text{Discount}\right)\\ \text{=}\text{Purchases return}-\left(\text{Purchases return}\times 2\%\right)\\ \text{= \$3,750 – }\left(\$3,750\times 2\%\right)\\ \text{= \$3,750}-\$75\\ =\$3,675\end{array}$ (3)

• Accounts payable is a liability and it is decreased by $3,675. Therefore, debit accounts payable account with $3,675.
• Inventory is an asset and it is decreased by $3,675. Therefore, credit Inventory account with $3,675.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Inventory		13,560
	Accounts payable			13,560
	(To record purchase on account)

Table (6)

• Inventory is an asset and it is increased by $13,560. Therefore, debit Inventory account with $13,560.
• Accounts payable is a liability and it is increased by $13,560. Therefore, credit accounts payable account with $13,560.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Inventory		140
	Cash			140
	(To record freight charges paid)

Table (7)

• Inventory is an asset and it is increased by $140. Therefore, debit Inventory account with $140.
• Cash is an asset and it is decreased by $140. Therefore, credit cash account with $140.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 19	Inventory		6,370
	Accounts payable			6,370 (4)
	(To record purchase on account)

Table (8)

Working Note:

Calculate the amount of accounts payable.

Purchases = $6,500

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases}-\text{Discount}\right)\\ \text{=}\text{Purchases}-\left(\text{Purchases}\times 2\%\right)\\ \text{= \$6,500 – }\left(\$6,500\times 2\%\right)\\ \text{= \$6,500}-\$130\\ =\$6,370\end{array}$ (4)

• Inventory is an asset and it is increased by $6,370. Therefore, debit Inventory account with $6,370.
• Accounts payable is a liability and it is increased by $6,370. Therefore, credit accounts payable account with $6,370.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 23	Accounts payable		11,564 (5)
	Cash			11,564
	(To record payment made in full settlement less discounts)

Table (9)

Working Note:

Calculate the amount of net accounts payable.

 Inventory = $15,239 (2)

Purchase returns = $3,675 (3)

    $\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$15,239–\$3,675\\ =\$11,564\end{array}$ (5)

• Accounts payable is a liability and it is decreased by $11,564. Therefore, debit accounts payable account with $11,564.
• Cash is an asset and it is decreased by $11,564. Therefore, credit cash account with $11,564.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 29	Accounts payable		6,370
	Cash			6,370
	(To record payment made in full settlement less discounts)

Table (10)

• Accounts payable is a liability and it is decreased by $6,370. Therefore, debit accounts payable account with $6,370.
• Cash is an asset and it is decreased by $6,370. Therefore, credit cash account with $6,370.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts payable		13,560
	Cash			13,560
	(To record payment made in full settlement less discounts)

Table (11)

• Accounts payable is a liability and it is decreased by $13,560. Therefore, debit accounts payable account with $13,560.
• Cash is an asset and it is decreased by $13,560. Therefore, credit cash account with $13,560.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts payable		19,175
	Cash			19,175
	(To record payment made in full settlement less discounts)

Table (12)

• Accounts payable is a liability and it is decreased by $19,175. Therefore, debit accounts payable account with $19,175.
• Cash is an asset and it is decreased by $19,175. Therefore, credit cash account with $19,175.