Chapter 5, Problem 2BP

To determine

Record the purchase and sales transactions of Company M during July under 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 purchase of merchandise inventory on account.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 3	Merchandise Inventory		15,000
	Accounts Payable - O			15,000
	(To record purchases of inventory on account)

Table (1)

Description:

• Merchandise inventory is an asset and it is increased by $15,000. Therefore, debit inventory account with $15,000.
• Accounts payable is a liability and it is increased by $15,000. Therefore, credit accounts payable account with $15,000.

Record the journal entry for the sale of inventory on account.

Date	Accounts and Explanation	Debit ($)	Credit ($)
July 7	Accounts Receivable - B	11,500
	Sales Revenue		11,500
	(To record the sale of inventory on account)

Table (2)

Description

• Accounts Receivable is an asset and it is increased by $11,500. Therefore, debit account receivable with $11,500.
• Sales revenue is revenue and it increases the value of equity by $11,500. Therefore, credit sales revenue with $11,500.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
July 7	Cost of Goods Sold	7,750
	Merchandise Inventory		7,750
	(To record the cost of goods sold)

Table (3)

Description

• Cost of goods sold is an expense account and it decreases the value of equity by $7,750. Therefore, debit cost of goods sold account with $7,750.
• Merchandise Inventory is an asset and it is decreased by $7,750. Therefore, credit inventory account with $7,750.

Record the purchase of merchandise inventory on account.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 10	Merchandise Inventory		14,700 (1)
	Accounts Payable - R			14,700
	(To record purchases of inventory on account)

Table (4)

Working Note:

Merchandise purchased = $14,200

Shipping charges = $500

$\begin{array}{c}\text{Net}\text{merchandise inventory}\}\text{ = }\left\{\begin{array}{l}\text{Merchandise purchased + }\\ \text{Shipping charges}\end{array}\right\}\\ \text{= \$14,200 + \$500}\\ \text{= \$14,700}\end{array}$ (1)

Description:

• Merchandise inventory is an asset and it is increased by $14,700. Therefore, debit inventory account with $14,700.
• Accounts payable is a liability and it is increased by $14,700. Therefore, credit accounts payable account with $14,700.

Record the journal entry for delivery charges paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 11	Delivery Expense		300
	Cash			300
	(To record the payment of delivery charges)

Table (5)

Description:

• Delivery expense is an expense and it decreases the value of equity by $300. Therefore, debit delivery expense account with $300.
• Cash is an asset and it is decreased by $300. Therefore, credit cash account with $300.

Record the journal entry for sales return:

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 12	Sales Returns and Allowance	1,850
	Accounts Receivable -  B		1,850
	(To record the sales return)
	Merchandise Inventory	1,450
	Cost of goods sold		1,450
	(To record the reversal of cost of goods sold on sales return)

Table (6)

Description:

• Sales return and allowance is an expense account and it decreases the value of equity by $1,850. Therefore, debit sales returns and allowances account with $1,850.
• Accounts Receivable is an asset and it is decreased by $1,850. Therefore, credit account receivable with $1,850.
• Inventory is an asset and it is increased by $1,450. Therefore, debit inventory account with $1,450.
• Cost of goods sold is an expense account and it increases the value of equity by $1,450. Therefore, credit cost of goods sold account with $1,450.

Record the journal entry for credit memo received.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 14	Accounts Payable - R		2,000
	Merchandise Inventory			2,000
	(To record the credit memo received)

Table (7)

Description:

• Accounts payable is a liability and it is decreased by $2,000. Therefore, debit accounts payable account with $2,000.
• Inventory is an asset and it is decreased by $2,000. Therefore, credit inventory account with $2,000.

Record the journal entry for freight charges paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 15	Accounts Payable - O		150
	Cash			150
	(To record the payment of freight charges for Corporation O)

Table (8)

Description:

• Accounts payable is a liability and it is decreased by $150. Therefore, debit accounts payable account with $150.
• Cash is an asset and it is decreased by $150. Therefore, credit cash account with $150.

Record the journal entry for receipt of payment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 17	Cash	9,457 (4)
	Sales Discounts	193 (3)
	Accounts Receivable		9,650 (2)
	(To record receiving cash on sales after discounts and returns)

Table (9)

Description:

• Cash is an asset and it is increased by $9,457. Therefore, debit cash account with $9,457.
• Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $193.
• Accounts Receivable is an asset and it is decreased by $9,650. Therefore, credit account receivable with $9,650.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $11,500

Sales returns = $1,850

$\begin{array}{c}\text{Net}\text{accounts receivable}\}\text{ = }\left\{\begin{array}{l}\text{Accounts receivable due to sales – }\\ \text{Sales return}\end{array}\right\}\\ \text{= \$11,500 – \$1,850}\\ \text{= \$9,650}\end{array}$ (2)

Calculate the amount of sales discount.

Net accounts receivable = $9,650 (2)

Discount percentage = 2%

$\begin{array}{c}\text{Sales discount = \$9,650 × }\frac{2}{\text{100}}\\ \text{= \$193}\end{array}$ (3)

Calculate the amount of cash received.

Net accounts receivable = $9,650 (2)

Sales discount = $193 (3)

$\begin{array}{c}\text{Cash received = Accounts receivable, net – Sales discount}\\ \text{= \$9,650 – \$193}\\ \text{= \$9,457}\end{array}$ (4)

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 20	Accounts Payable - R		12,700 (5)
	Merchandise Inventory			127 (6)
	Cash			12,573 (7)
	(To record paying cash on purchases after discounts and returns)

Table (10)

Working Notes:

Calculate accounts payable amount.

Inventory = $14,700 (1)

Inventory returns = $2,000

$\begin{array}{c}\text{Accounts payable = Inventory – Inventory returns}\\ =\$14,700–\$2,000\\ =\$12,700\end{array}$ (5)

Calculate purchase discount / inventory.

Net accounts payable = $12,700 (5)

Discount percentage = 1%

$\begin{array}{c}\text{Purchase discount = \$12,700 × }\frac{1}{\text{100}}\\ \text{= \$127}\end{array}$ (6)

Calculate cash paid.

Accounts payable = $12,700 (5)

Purchase discount / Inventory = $127 (6)

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Purchase discount}\\ \text{= \$12,700 – \$127}\\ \text{= \$12,573}\end{array}$ (7)

Description:

• Accounts payable is a liability and it is decreased by $12,700. Therefore, debit accounts payable account with $12,700.
• Merchandise Inventory is an asset and it is decreased by $127. Therefore, credit inventory account with $127.
• Cash is an asset and it is decreased by $12,578. Therefore, credit cash account with $12,578.

Record the journal entry for the sale of inventory on account.

Date	Accounts and Explanation	Debit ($)	Credit ($)
July 21	Accounts Receivable	11,000
	Sales Revenue		11,000
	(To record the sale of inventory on account)

Table (11)

Description

• Accounts Receivable is an asset and it is increased by $11,000. Therefore, debit account receivable with $11,000.
• Sales revenue is revenue and it increases the value of equity by $11,000. Therefore, credit sales revenue with $11,000.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
July 21	Cost of Goods Sold	7,000
	Merchandise Inventory		7,000
	(To record the cost of goods sold)

Table (12)

Description

• Cost of goods sold is an expense account and it decreases the value of equity by $7,000. Therefore, debit cost of goods sold account with $7,000.
• Merchandise Inventory is an asset and it is decreased by $7,000. Therefore, credit inventory account with $7,000.

Record the journal entry for credit memo issued:

Date	Account Title and Explanation	Debit ($)	Credit ($)
July 24	Sales Returns and Allowance	1,300
	Accounts Receivable		1,300
	(To record the credit memo issued)

Table (13)

Description:

• Sales return and allowance is an expense account and it decreases the value of equity by $1,300. Therefore, debit sales returns and allowances account with $1,300.
• Accounts Receivable is an asset and it is decreased by $1,300. Therefore, credit account receivable with $1,300.

Record the journal entry for the balance amount received.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 30	Cash		9,603 (10)
	Sales Discounts		97 (9)
	Accounts Receivable			9,700 (8)
	(To record cash received and discounts allowed)

Table (14)

Description:

• Cash is an asset and it is increased by $9,603. Therefore, debit cash account with $9,603.
• Sales Discounts is a contra revenue account and would have a debit balance. Therefore, debit sales discounts account with $97.
• Accounts Receivable is an asset and it is decreased by $9,700. Therefore, credit account receivable with $9,700.

Working notes:

Calculate the amount of accounts receivable.

Accounts receivable = $11,000

Sales returns = $1,300

$\begin{array}{c}\text{Net}\text{accounts receivable}\}\text{ = }\left\{\begin{array}{l}\text{Accounts receivable due to sales – }\\ \text{Sales return}\end{array}\right\}\\ \text{= \$11,000 – \$1,300}\\ \text{= \$9,700}\end{array}$ (8)

Calculate the amount of sales discount.

Net accounts receivable = $9,700 (8)

Discount percentage = 1%

$\begin{array}{c}\text{Sales discount = \$9,700 × }\frac{1}{\text{100}}\\ \text{= \$97}\end{array}$ (9)

Calculate the amount of cash received.

Net accounts receivable = $9,700 (8)

Sales discount = $97 (9)

$\begin{array}{c}\text{Cash received = Accounts receivable, net – Sales discount}\\ \text{= \$9,700 – \$97}\\ \text{= \$9,603}\end{array}$ (10)

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 30	Accounts Payable - O		14,850
	Cash			14,850 (11)
	(To record paying cash on purchases after deducting freight charges)

Table (15)

Working Notes:

Calculate the net accounts payable.

Accounts payable = $15,000

Freight charges = 150

$\begin{array}{c}\text{Net accounts payable = \$15,000}-\$150\\ \text{= \$14,850}\end{array}$ (11)

Description:

• Accounts payable is a liability and it is decreased by $14,850. Therefore, debit accounts payable account with $14,850.
• Cash is an asset and it is decreased by $14,850. Therefore, credit cash account with $14,850.