
a.
Prepare the
a.

Explanation of Solution
Perpetual Inventory System: 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.
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.
Cash discount: The merchandisers offer a reduction in sales price on initial sales, to accelerate the credit sales payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as cash discount.
Prepare journal entries for Incorporation L (seller).
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
June 21 | $2,880 | |||
Sales revenue (+SE) | $2,880 | |||
(To record the sale of merchandise on account ) | ||||
June 21 | Cost of goods sold (-SE) | $2,000 | ||
Inventory (-A) | $2,000 | |||
(To record the cost of merchandise sold) | ||||
June 28 | Sales return and allowances (-SE) | $280 | ||
Accounts receivable (-A) | $280 | |||
(To record the return of merchandise due to defect) | ||||
June 28 | Inventory (+A) | $210 | ||
Cost of goods sold (+SE) | $210 | |||
(To record the cost of merchandise returned by customers) | ||||
June 30 | Cash (2) (+A) | $2,548 | ||
Sales discounts (1) (-SE) | $52 | |||
Accounts receivable (-A) | $2,600 | |||
(To record the sales discount and payment from customers for the goods sold) |
Table (1)
June 21: To record the sale of merchandise on account:
Accounts receivable is an asset and the value is increased due to the credit sales made by Company D. Thus, it is debited with $2,880.
Sales revenue is a component of
June 21: To record the cost of merchandise sold:
Cost of goods sold is an expense and it decreases the total revenue (Stockholders’ equity). Thus, it is debited with $2,000.
Sales revenue is a component of stockholders’ equity and it increases the total revenue (Stockholders’ equity). Thus, it is credited with $2,000.
June 28: To record the return of merchandise due to defect
Sales returns and allowances is a contra revenue account. Sales return from customers decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $280.
Accounts receivable is an asset. Sales return from customers reduces the accounts receivable balance. Thus, it is credited with $280.
June 28: To record the cost of merchandise returned from customers:
Inventory is an asset and is increased due to the return of inventory from customers. Thus, it is debited with $210.
Cost of goods sold is an expense. The cost of merchandise returned decreases the expense that results in the increase in stockholders’ equity. Thus, it is debited with $210.
June 30: To record the sales discount and payment from customers for the merchandise sold:
Cash is an asset account. Collections from customers increase the cash balance. Hence, it is debited with $2,548.
Sales discount is a contra revenue account. Sales discount decreases the total revenue (Stockholders’ equity). Therefore, it is debited with $52.
Accounts receivable is an asset. Cash received from customers decreases the accounts receivables account. Thus, it is credited with $2,600.
Working Note:
Compute the discount on sales.
Credit terms:
Compute the cash received from customers (accounts receivable).
b.
Prepare the journal entries to record the transactions for the month of June for Company L (buyer).
b.

Explanation of Solution
Perpetual Inventory System: 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.
Cash discount: The merchandisers offer a reduction in sales price on initial sales, to accelerate the credit sales payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as cash discount.
Prepare journal entries for Company L (buyer).
Date | Account title and Explanation | Post ref. | Amount | |
Debit | Credit | |||
June 21 | Inventory (+A) | $2,880 | ||
Accounts payable (+L) | $2,880 | |||
(To record the inventory purchased on account ) | ||||
June 28 | Accounts payable (-L) | $280 | ||
Inventory (-A) | $280 | |||
(To record the return of inventories on account) | ||||
June 30 | Accounts payable (-L) | $2,600 | ||
Inventory (3) (-A) | $52 | |||
Cash (4) (-A) | $2,548 | |||
(To record the purchase discount and payment of merchandise purchased on account) |
Table (2)
June 21: To record the inventory purchased on account:
Inventory is an asset. The value is increased due to the credit purchases made by Company D. Therefore, inventory account is debited with $2,880.
Accounts Payable is a liability and it is increased due to the increase in the amount to be paid for purchases. Therefore, credit Accounts Payable account with $2,880.
June 28: To record the return of inventories on account:
Accounts Payable is a liability and is decreased due to the return of inventory. Thus, Accounts Payable is debited with $280.
Inventory is an asset and is reduced due to credit purchase returns. Thus, credit the Inventory account with $280.
June 30: To record the purchase discount and payment of merchandise purchased on account:
Accounts Payable is a liability and is decreased because the company has paid the amount due for credit purchases. Therefore, it is debited with $2,600.
Inventory is an asset account. The amount has decreased because the purchase discount is reduced from the cost of inventory. Hence, credit Inventory account with $52.
Cash is an asset and it is reduced because amount is paid for credit purchases. Therefore, Cash account is credited with $2,548.
Working Note:
Compute the discount on purchases.
Credit terms:
Compute the cash paid to accounts payable (suppliers).
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Chapter 5 Solutions
Financial Accounting for Undergraduates
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