Chapter 5, Problem 24E

Recording purchases, sales, returns, and discounts; buyer and seller—perpetual and both net & gross methods

Piere Imports uses the perpetual system m accounting for merchandise inventory and had the following transactions during the month of October. Prepare entries to record these transactions assuming that Piere Imports records invoices (a) at gross amounts and (b) at net amounts

Oct.	2	Purchased merchandise at a $3,000 price ($2,940 net), invoice dated October 2. terms 2/10, n/30.
	10	Received a credit memorandum toward the return of $500 ($490 net) of merchandise that it purchased on October 2.
	17	Purchased merchandise at a $5,400 price ($5,292 net), invoice dated October 17, terms 2/10, n/30.
	27	Paid for the merchandise purchased on October 17, less the discount.
	31	Paid for the merchandise purchased on October 2. (Payment was mistakenly delayed, which caused the discount to be lost.)

To determine

Prepare journal entries to record the transactions of the company during the month of October 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 ($)	Credit ($)
October 2	Merchandise Inventory		3,000
	Accounts Payable			3,000
	(To record purchases of inventory on account)

Table (1)

Description:

• Merchandise inventory is an asset and it is increased by $3,000. Therefore, debit merchandise inventory account with $3,000.
• Accounts payable is a liability and it is increased by $3,000. Therefore, credit accounts payable account with $3,000.

Record the journal entry for purchase returned:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 10	Accounts Payable		500
	Merchandise Inventory			500
	(To record the purchases return)

Table (2)

Description:

• Accounts payable is a liability and it is decreased by $500. Therefore, debit accounts payable account with $500.
• Merchandise Inventory is an asset and it is decreased by $500. Therefore, credit merchandise inventory account with $500.

Record the journal entry for inventory purchased:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 17	Merchandise Inventory		5,400
	Accounts Payable			5,400
	(To record purchases of inventory on account)

Table (3)

Description:

• Merchandise inventory is an asset and it is increased by $5,400. Therefore, debit merchandise inventory account with $5,400.
• Accounts payable is a liability and it is increased by $5,400. Therefore, credit accounts payable account with $5,400.

Record the journal entry for payment of due amount:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 27	Accounts Payable		5,400
	Merchandise Inventory			108 (1)
	Cash			5,292 (2)
	(To record paying cash on purchases after discounts)

Table (4)

Description:

• Accounts payable is a liability and it is decreased by $5,400. Therefore, debit accounts payable account with $5,400.
• Merchandise inventory is an asset and it is decreased by $108. Therefore, credit merchandise inventory account with $108.
• Cash is an asset and it is decreased by $5,292. Therefore, credit cash account with $5,292.

Working notes:

Calculate the amount of discount on inventory.

Net accounts payable = $5,400

Discount percentage = 2%

$\begin{array}{c}\text{Discount}\text{on inventory = \$5,400 × }\frac{2}{\text{100}}\\ \text{= \$108}\end{array}$ (1)

Calculate the amount of cash paid.

Net accounts payable = $5,400

Discount on inventory = $108 (1)

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Discount}\text{on inventory}\\ \text{= \$5,400 – \$108}\\ \text{= \$5,292}\end{array}$ (2)

Record the journal entry for payment of due amount:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Accounts Payable		2,500
	Cash			2,500 (3)
	(To record paying cash on purchases after returns)

Table (5)

Description:

• Accounts payable is a liability and it is decreased by $2,500. Therefore, debit accounts payable account with $2,500.
• Cash is an asset and it is decreased by $2,500. Therefore, credit cash account with $2,500.

Working notes:

Calculate the amount of cash paid.

Net accounts payable = $3,000

Merchandise returned = $500

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Merchandise returned}\\ \text{= \$3,000 – \$500}\\ \text{= \$2,500}\end{array}$ (3)

To determine

Prepare journal entries to record the transactions of the company during the month of October 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 ($)	Credit ($)
October 2	Merchandise Inventory		2,940
	Accounts Payable			2,940 (4)
	(To record purchases of inventory on account)

Table (6)

Description:

• Merchandise inventory is an asset and it is increased by $2,940. Therefore, debit merchandise inventory account with $2,940.
• Accounts payable is a liability and it is increased by $2,940. Therefore, credit accounts payable account with $2,940.

Working Note:

Calculate the amount of accounts payable.

Merchandise purchased = $3,000

Discount percentage = 2%

$\begin{array}{c}\text{Net, accounts payable = \$3,000 }-\text{ 2\%}\\ \text{= \$2,940}\end{array}$ (4)

Record the journal entry for purchase returned:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 10	Accounts Payable		490
	Merchandise Inventory			490 (5)
	(To record the purchases return)

Table (7)

Description:

• Accounts payable is a liability and it is decreased by $490. Therefore, debit accounts payable account with $490.
• Merchandise Inventory is an asset and it is decreased by $490. Therefore, credit merchandise inventory account with $490.

Calculate the amount of merchandise inventory returned.

Merchandise returned = $500

Discount percentage = 2%

$\begin{array}{c}\text{Net, merchandise returned = \$500 }-\text{ 2\%}\\ \text{= \$490}\end{array}$ (5)

Record the journal entry for inventory purchased:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 17	Merchandise Inventory		5,292
	Accounts Payable			5,292 (6)
	(To record purchases of inventory on account)

Table (8)

Description:

• Merchandise inventory is an asset and it is increased by $5,292. Therefore, debit merchandise inventory account with $5,292.
• Accounts payable is a liability and it is increased by $5,292. Therefore, credit accounts payable account with $5,292.

Working Note:

Calculate the amount of accounts payable.

Merchandise purchased = $5,400

Discount percentage = 2%

$\begin{array}{c}\text{Net, accounts payable = \$5,400 }-\text{ 2\%}\\ \text{= \$5,292}\end{array}$ (6)

Record the journal entry for payment of due amount:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 27	Accounts Payable		5,292
	Cash			5,292
	(To record paying cash on purchases after discounts)

Table (9)

Description:

• Accounts payable is a liability and it is decreased by $5,292. Therefore, debit accounts payable account with $5,292.
• Cash is an asset and it is decreased by $5,292. Therefore, credit cash account with $5,292.

Record the journal entry for payment of due amount:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 31	Accounts Payable		2,450 (9)
	Discount Lost		50 (8)
	Cash			2,500 (7)
	(To record paying cash on purchases after returns)

Table (10)

Description:

• Accounts payable is a liability and it is decreased by $2,450. Therefore, debit accounts payable account with $2,450.
• Discount lost is an expense and it is decreased the equity value by $50. Therefore, debit discount lost account with $50.
• Cash is an asset and it is decreased by $2,500. Therefore, credit cash account with $2,500.

Working notes:

Calculate the amount of cash paid.

Net accounts payable = $3,000

Merchandise returned = $500

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Merchandise returned}\\ \text{= \$3,000 – \$500}\\ \text{= \$2,500}\end{array}$ (7)

Calculate the amount of discount lost.

Net accounts payable = $3,000

Merchandise returned = $500

Discount percentage = 2%

$\begin{array}{c}\text{Discount lost = }\left[\begin{array}{l}\left(\text{Accounts payable, net – Merchandise returned}\right)\\ \times \text{Discount percentage}\end{array}\right]\\ \text{= }\left(\text{\$3,000 – \$500}\right)\times 2\%\\ \text{= \$50}\end{array}$ (8)

Calculate the amount of net accounts payable.

Cash paid = $2,500

Discount lost = 50

$\begin{array}{c}\text{Net, accounts payable = \$2,500 }-\text{ \$50}\\ \text{= \$2,450}\end{array}$ (9)