Chapter 5, Problem 3PA

Sales and purchase-related transactions using perpetual inventory system

The following were selected from among the transactions completed by Babcock Company during November of the current year:

Instructions

Journalize the transactions.

To determine

Prepare journal entries to record the transactions of Company B during the month of November using perpetual inventory system.

Explanation of Solution

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.

Perpetual Inventory System refers to the Merchandise Inventory system that maintains the detailed records of every Merchandise Inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-merchandise inventory at any point of time.

Record the journal entry of Company B during November.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 3	Merchandise Inventory		62,475
	Accounts payable			62,475 (1)
	(To record purchase on account)

Table (1)

Working Note (1):

Calculate the amount of accounts payable.

Purchases = $85,000

Trade discount percentage = 25%

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left[\left(\text{Purchases}-\text{Trade}\text{Discount}\right)-\text{Discount}\right]\\ \text{=}\left[\text{Purchases}-\left(\text{Purchases}\times 25\%\right)-2\%\right]\\ \text{= }\left[\text{\$85,000 – }\left(\$85,000\times 25\%\right)-2\%\right]\\ \text{= \$85,000}-\$21,250-2\%\\ =\$63,750-2\%\\ =\$62,475\end{array}$

• • Merchandise Inventory is an asset and it is increased by $62,475. Therefore, debit Merchandise Inventory account with $62,475.
• • Accounts payable is a liability and it is increased by $62,475. Therefore, credit accounts payable account with $62,475.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 4	Cash	37,680
	Sales Revenue		37,680
	(To record the sale of inventory on cash)

Table (2)

• • Cash is an asset and it is increased by $37,680. Therefore, debit cash account with $37,680.
• • Sales revenue is revenue and it increases the value of equity by $37,680. Therefore, credit sales revenue with $37,680.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 4	Cost of Merchandise Sold	22,600
	Merchandise Inventory		22,600
	(To record the cost of goods sold)

Table (3)

• • Cost of merchandise sold is an expense account and it decreases the value of equity by $22,600. Therefore, debit cost of merchandise sold account with $22,600.
• • Merchandise Inventory is an asset and it is decreased by $22,600. Therefore, credit inventory account with $22,600.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 5	Merchandise Inventory		47,360
	Accounts payable			47,360 (2)
	(To record purchase on account)

Table (4)

Working Note (2):

Calculate the amount of accounts payable.

Purchases = $47,500

Discount percentage = 2%

Freight charges = $810

$\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left[\left(\text{Purchases}-\text{Discount}\right)+\text{Freight}\right]\\ \text{=}\left[\text{Purchases}-\left(\text{Purchases}\times 2\%\right)+\text{Freight}\right]\\ \text{= }\left[\text{\$47,500 – }\left(\$47,500\times 2\%\right)+\$810\right]\\ \text{= \$47,500}-\$950+\$810\\ =\$47,360\end{array}$

• • Merchandise Inventory is an asset and it is increased by $47,360. Therefore, debit Merchandise Inventory account with $47,360.
• • Accounts payable is a liability and it is increased by $47,360. Therefore, credit accounts payable account with $47,360.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 6	Accounts payable		13,230 (3)
	Merchandise Inventory			13,230
	(To record purchase return)

Table (5)

Working Note (3):

Calculate the amount of accounts payable.

Purchases return = $13,500

Discount percentage = 2%

$\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases return}-\text{Discount}\right)\\ \text{=}\text{Purchases return}-\left(\text{Purchases return}\times 2\%\right)\\ \text{= \$13,500 – }\left(\$13,500\times 2\%\right)\\ \text{= \$13,500}-\$270\\ =\$13,230\end{array}$

• • Accounts payable is a liability and it is decreased by $13,230. Therefore, debit accounts payable account with $13,230.
• • Merchandise Inventory is an asset and it is decreased by $13,230. Therefore, credit Merchandise Inventory account with $13,230.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 8	Accounts Receivable	15,600
	Sales Revenue		15,600
	(To record the sale of inventory on account)

Table (6)

• • Accounts Receivable is an asset and it is increased by $15,600. Therefore, debit accounts receivable with $15,600.
• • Sales revenue is revenue and it increases the value of equity by $15,600. Therefore, credit sales revenue with $15,600.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 8	Cost of Merchandise Sold	9,400
	Merchandise Inventory		9,400
	(To record the cost of goods sold)

Table (7)

• • Cost of merchandise sold is an expense account and it decreases the value of equity by $9,400. Therefore, debit cost of merchandise sold account with $9,400.
• • Merchandise Inventory is an asset and it is decreased by $9,400. Therefore, credit inventory account with $9,400.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 13	Accounts payable		49,245 (4)
	Cash			49,245
	(To record payment made in full settlement less discounts)

Table (8)

Working Note (4):

Calculate the amount of net accounts payable.

Merchandise Inventory = $62,475 (1)

Purchase returns = $13,230 (3)

    $\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$62,475–\$13,230\\ =\$49,245\end{array}$

• • Accounts payable is a liability and it is decreased by $49,245. Therefore, debit accounts payable account with $49,245.
• • Cash is an asset and it is decreased by $49,245. Therefore, credit cash account with $49,245.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 14	Cash	236,000
	Sales Revenue		236,000
	(To record the sale of inventory on cash)

Table (9)

• • Cash is an asset and it is increased by $236,000. Therefore, debit cash account with $236,000.
• • Sales revenue is revenue and it increases the value of equity by $236,000. Therefore, credit sales revenue with $236,000.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 14	Cost of Merchandise Sold	140,000
	Merchandise Inventory		140,000
	(To record the cost of goods sold)

Table (10)

• • Cost of merchandise sold is an expense account and it decreases the value of equity by $140,000. Therefore, debit cost of merchandise sold account with $140,000.
• • Merchandise Inventory is an asset and it is decreased by $140,000. Therefore, credit inventory account with $140,000.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 15	Accounts payable		47,360
	Cash			47,360
	(To record payment made in full settlement less discounts)

Table (11)

• • Accounts payable is a liability and it is decreased by $47,360. Therefore, debit accounts payable account with $47,360.
• • Cash is an asset and it is decreased by $47,360. Therefore, credit cash account with $47,360.

Record the journal entry for the cash receipt against accounts receivable.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 23	Cash	15,600
	Accounts Receivable		15,600
	(To record the receipt of cash against accounts receivables)

Table (12)

• • Cash is an asset and it is increased by $15,600. Therefore, debit cash account with $15,600.
• • Accounts Receivable is an asset and it is increased by $15,600. Therefore, debit accounts receivable with $15,600.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 24	Accounts Receivable	56,331 (5)
	Sales Revenue		56,331
	(To record the sale of inventory on account)

Table (13)

Working Note (5):

Calculate the amount of accounts receivable.

Sales = $56,900

Discount percentage = 1%

$\begin{array}{c}\text{Amount of accounts receivable}\}\text{ = }\left(\text{Sales}-\text{Discount}\right)\\ \text{=}\text{Sales}-\left(\text{Sales}\times 1\%\right)\\ \text{= \$56,900 – }\left(\$56,900\times 1\%\right)\\ \text{= \$56,900}-\$569\\ =\$56,331\end{array}$

• • Accounts Receivable is an asset and it is increased by $56,331. Therefore, debit accounts receivable with $56,331.
• • Sales revenue is revenue and it increases the value of equity by $56,331. Therefore, credit sales revenue with $56,331.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 24	Cost of Merchandise Sold	34,000
	Merchandise Inventory		34,000
	(To record the cost of goods sold)

Table (14)

• • Cost of merchandise sold is an expense account and it decreases the value of equity by $34,000. Therefore, debit cost of merchandise sold account with $34,000.
• • Merchandise Inventory is an asset and it is decreased by $34,000. Therefore, credit inventory account with $34,000.

Record the journal entry for credit card expense.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 28	Credit card expense	3,540
	Cash		3,540
	(To record the payment of credit card expenses)

Table (15)

• • Credit card expense is an expense account and it decreases the value of equity by $3,540. Therefore, debit credit card expense account with $3,540.
• • Cash is an asset and it is decreased by $3,540. Therefore, credit cash account with $3,540.

Record the journal entry for sales return.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
November 30	Customer Refunds Payable		6,000
	Cash			6,000
	(To record sales returns)

Table (16)

• • Customer refunds payable is a liability account and it is decreased by $6,000. Therefore, debit customer refunds payable account with $6,000.
• • Accounts Receivable is an asset and it is decreased by $6,000. Therefore, credit account receivable with $6,000.

Record the journal entry for the return of the merchandise.

Date	Accounts and Explanation	Debit ($)	Credit ($)
November 30	Merchandise Inventory	3,300
	Estimated Returns Inventory		3,300
	(To record the return of the merchandise)

Table (17)

• • Merchandise Inventory is an asset and it is increased by $3,300. Therefore, debit inventory account with $3,300.
• • Estimated returns inventory is an expense account and it increases the value of equity by $3,300. Therefore, credit estimated returns inventory account with $3,300.