Chapter 5, Problem 25E

To determine

Concept Introduction:

Journal entries:

The business runs with the transactions it makes. Every transaction results in some outcome like the creation of asset, liability, income, loss, gain or expense. The transactions are recorded on the basis of the resulted outcome. The debits and the credits are made on the basis of the rules of the accounting.

To prepare:

Journal entries to record the following transactions of Recycled Fashion retail store.

Answer to Problem 25E

Date	Accounts Titles and Descriptions	Debit	Credit
Mar-03	Merchandise Inventory	1150
	Accounts Payable − Green World		1150
	(To record purchase of inventory)
Mar-04	Merchandise Inventory	75
	Cash		75
	(To record payment of shipping charges)
Mar-05	Accounts Payable - Green World	150
	Merchandise Inventory		150
	(To record return of goods from Green World)
Mar-18	Accounts Payable - Green World	1000
	Merchandise Inventory		20
	Cash		980
	(To record payment of accounts payable net of discounts and merchandise return)
Mar-19	Merchandise Inventory	425
	Accounts Payable − PeopleFirst Corp.		425
	(To record purchase of inventory)
Mar-21	Accounts Payable− PeopleFirst Corp.	25
	Merchandise Inventory		25
	(To record receipt of purchase allowance)
Mar-29	Accounts Payable− PeopleFirst Corp.	400
	Merchandise Inventory		4
	Cash		396
	(To record payment of accounts payable net of discounts and merchandise return)

The above journal entries can be explained as under −

Mar 03 − The journal entry explains the purchase of merchandise inventory from Green World on accounts. Thus, merchandise inventory has been debited with $ 1150 and accounts payable are credited with $ 1150.

Mar 04 − The journal entry is related to the payment of shipping charges of merchandise inventory. Thus, merchandise inventory has been debited with $ 75 and cash is credited with $ 75.

Mar 05 − The journal entry is related to the return of merchandise inventory. Thus, merchandise inventory has been credited with $ 150 and accounts payable are debited with $ 150.

Mar 18 − The payment of accounts payable net of return and discount has been made. The net payment is calculated as under −

  $\begin{array}{l}NetPayment=AccountsPayable–GreenWorld–MerchandiseReturns-Discount\hfill \\ NetPayment=\$1,150-\$150–\left(\left(\$1150-\$150\right)X2\%\right)\hfill \\ NetPayment=\$1,000-\$20\hfill \\ NetPayment=\$980\hfill \end{array}$

Thus, cash is credited with $ 980. The merchandise inventory is debited with $ 80 (discounts) and accounts payable has been debited with $ 1,000.

Mar 19 − The journal entry explains the purchase of merchandise inventory from PeopleFirst Corp. on accounts. Thus, merchandise inventory has been debited with $ 425 and accounts payable are credited with $ 425.

Mar 21 − The journal entry is related to the allowance received on purchases. Thus, merchandise inventory has been credited and accounts payable for PeopleFirst Corp. has been debited.

Mar 29 − The payment of accounts payable net of return and discount has been made. The net payment is calculated as under −

  $\begin{array}{l}NetPayment=AccountsPayable–MerchandiseReturns–Purchaseallowances\hfill \\ NetPayment=\$425-\$25–\left(\left(\$425-\$25\right)X1\%\right)\hfill \\ NetPayment=\$400-\$4\hfill \\ NetPayment=\$396\hfill \end{array}$

Thus, cash is credited with $396. The merchandise inventory is debited with $ 4 (discounts) and accounts payable has been debited with $ 400.

Explanation of Solution

The above journal entries can be explained as under −

Mar 03 − The journal entry explains the purchase of merchandise inventory from Green World on accounts. Thus, merchandise inventory has been debited with $ 1150 and accounts payable are credited with $ 1150.

Mar 04 − The journal entry is related to the payment of shipping charges of merchandise inventory. Thus, merchandise inventory has been debited with $ 75 and cash is credited with $ 75.

Mar 05 − The journal entry is related to the return of merchandise inventory. Thus, merchandise inventory has been credited with $ 150 and accounts payable are debited with $ 150.

Mar 18 − The payment of accounts payable net of return and discount has been made. The net payment is calculated as under −

  $\begin{array}{l}NetPayment=AccountsPayable–GreenWorld–MerchandiseReturns-Discount\hfill \\ NetPayment=\$1,150-\$150–\left(\left(\$1150-\$150\right)X2\%\right)\hfill \\ NetPayment=\$1,000-\$20\hfill \\ NetPayment=\$980\hfill \end{array}$

Thus, cash is credited with $ 980. The merchandise inventory is debited with $ 80 (discounts) and accounts payable has been debited with $ 1,000.

Mar 19 − The journal entry explains the purchase of merchandise inventory from PeopleFirst Corp. on accounts. Thus, merchandise inventory has been debited with $ 425 and accounts payable are credited with $ 425.

Mar 21 − The journal entry is related to the allowance received on purchases. Thus, merchandise inventory has been credited and accounts payable for PeopleFirst Corp. has been debited.

Mar 29 − The payment of accounts payable net of return and discount has been made. The net payment is calculated as under −

  $\begin{array}{l}NetPayment=AccountsPayable–MerchandiseReturns–Purchaseallowances\hfill \\ NetPayment=\$425-\$25–\left(\left(\$425-\$25\right)X1\%\right)\hfill \\ NetPayment=\$400-\$4\hfill \\ NetPayment=\$396\hfill \end{array}$

Thus, cash is credited with $396. The merchandise inventory is debited with $ 4 (discounts) and accounts payable has been debited with $ 400.