Chapter 5, Problem 2AP

To determine

Prepare journal entries to record the transactions of August month for Corporation R.

Explanation of Solution

Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.

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.

Purchase discounts: The sellers offer a reduction in purchase price on initial purchases, to accelerate the collection of on account purchases, by their customers, within the purchase terms promptly. Such a reduction in purchase price is referred to as purchase discount.

Purchase returns: Purchase returns are the goods returned by the buyer out of the goods purchased.

Sales discounts: The merchandisers offer a reduction in sales price on initial sales, to accelerate the sale on account payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as sales discount. This is recorded as contra-revenue account.

Prepare journal entries for Corporation R.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
August 01	Merchandise Inventory		$4,000
	Accounts payable – Incorporation N			$4,000
	(To record the inventory purchased on account)
August 05	Merchandise Inventory		$220
	Cash			$220
	(To record the payment of freight expense for the merchandise purchased)
August 07	Accounts receivable - Corporation D		$5,500
	Sales revenue			$5,500
	(To record the sale of merchandise on account )
August 07	Cost of goods sold		$4,100
	Merchandise Inventory			$4,000
	(To record the cost of merchandise sold)
August 07	Accounts receivable - Corporation D		$300
	Cash			$300
	(To record the payment of freight expense for the merchandise sold)
August 09	Accounts payable – Incorporation N		$800
	Merchandise Inventory			$800
	(To record the return of inventories on account)
August 09	Sales return and allowances		$750
	Accounts receivable - Corporation D			$750
	(To record the return of merchandise due to defect)
August 09	Merchandise Inventory		$500
	Cost of goods sold			$500
	(To record the cost of merchandise returned by customers)
August 10	Accounts payable – Incorporation N		$3,200
	Inventory (Refer Table (2))			$64
	Cash (Refer Table (2))			$3,136
	(To record the discount on purchases and  payment of merchandise purchased on account)
August 14	Merchandise Inventory		$9,000
	Accounts payable – Incorporation C			$9,000
	(To record the inventory purchased on account)
August 15	Merchandise Inventory		$320
	Cash			$320
	(To record the payment of freight expense for the merchandise purchased)
August 17	Cash (Refer Table (3))		$4,955
	Sales discounts (Refer Table (3))		$95
	Accounts receivable - Corporation D			$5,050
	(To record the sales discount and payment from customers for the goods sold)
August 18	Accounts receivable - Incorporation W		$9,600
	Sales revenue			$9,600
	(To record the sale of merchandise on account )
August 18	Cost of goods sold		$6,600
	Merchandise Inventory			$6,600
	(To record the cost of merchandise sold)
August 20	Accounts receivable - Corporation D		$350
	Cash			$350
	(To record the payment of freight expense for the merchandise sold)
August 24	Accounts payable – Incorporation C		$9,000
	Inventory (Refer Table (2))			$90
	Cash (Refer Table (2))			$8,910
	(To record the discount on purchases and  payment of merchandise purchased on account)
August 28	Cash (Refer Table (3))		$9,758
	Sales discounts (Refer Table (3))		$192
	Accounts receivable - Incorporation W			$9,950
	(To record the sales discount and payment from customers for the goods sold)

Table (1)

Working Note:

Compute the discount on purchases and the cash paid to suppliers.

Date (1)	Purchases (2)	Purchases return (3)	Net Accounts payable $\left(4\right)=\left(2\right)-\left(3\right)$	Discount rate (5)	Discount on Purchases $\left(6\right)=\left(2\right)\times \left(5\right)$	Amount paid to suppliers $\left(7\right)=\left(4\right)-\left(6\right)$
August 10	$4,000	$800	$3,200	2%	$64	$3,136
August 24	$9,000	$0	$9,000	1%	$90	$8,910

Table (2)

Compute the discount on sales and the cash collected from customers.

Date (1)	Sales (2)	Sales return (3)	Discount on Sales (4) $\left[\left(2\right)-\left(3\right)\right]\times 2\%$	Net Sales (5) $\left(2\right)-\left(3\right)-\left(4\right)$	Freight paid (6)	Amount collected from customers (7) $\left(5\right)+\left(6\right)$
August 17	$5,500	$750	$95	$4,655	$300	$4,955
August 28	$9,600	$0	$192	$9,408	$350	$9,758

Table (3)

Note: Corporation R sells on terms of $2/10,\text{n}/30$ which means 2% discount on sales.