Chapter 5, Problem 5.3AP

(a)

To determine

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.

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.

To Record: The journal entries in books of Company GH using perpetual inventory system during April.

Explanation of Solution

Prepare the journal entries for Company GH during April:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 5	Inventory		1,500
	Accounts payable			1,500
	(To record purchase on account)
April 7	Inventory		80
	Cash			80
	(To record Freight-in on purchase)
April 9	Accounts payable		200
	Inventory			200
	(To record the purchase returns)
April 10	Accounts receivable		1,340
	Sales Revenue			1,340
	(To record sales on account)
	Cost of goods sold		820
	Inventory			820
	(To record cost of goods sold)
April 12	Inventory		830
	Accounts payable			830
	(To record purchase on account)
April 14	Accounts payable		1,300 (1)
	Inventory			39 (2)
	Cash			1,261 (3)
April 17	Accounts payable		30
	Inventory			30
	(To record purchase returns)
April 20	Accounts receivable		810
	Sales revenue			810
	(To record sales on account)
	Cost of goods sold		550
	Inventory			550
	(To record cost of goods sold)
April 21	Accounts payable		800 (4)
	Inventory			8 (5)
	Cash			792 (6)
	(To record payment in full settlement)
April 27	Sales returns and allowances		80
	Accounts receivable			80
	(To record sales returns)
April 30	Cash		1,220
	Accounts receivable			1,220
	(To record payment received on account)

Table (1)

Working notes:

Calculate the amount of net accounts payable.

Inventory = $1,500

Purchase returns = $200

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$1,500–\$200\\ =\$1,300\end{array}$ (1)

Calculate the amount of purchase discount.

Net accounts payable = $1,300 (1)

Discount percentage = 3%

$\begin{array}{c}\text{Purchase discount = \$1,300 × }\frac{3}{\text{100}}\\ \text{= \$39}\end{array}$ (2)

Calculate the amount of cash paid.

Net accounts payable = $1,300 (1)

Purchase discount = $39 (2)

$\begin{array}{c}\text{Cash paid = Net accounts payable – Purchase discount}\\ \text{= \$1,300 – \$39}\\ \text{= \$1,261}\end{array}$ (3)

Calculate the amount of net accounts payable.

Inventory = $830

Purchase returns = $30

$\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$830–\$30\\ =\$800\end{array}$ (4)

Calculate the amount of purchase discount.

Net accounts payable = $800 (4)

Discount percentage = 1%

$\begin{array}{c}\text{Purchase discount = \$800 × }\frac{1}{\text{100}}\\ \text{= \$8}\end{array}$ (5)

Calculate the amount of cash paid.

Net accounts payable = $800 (4)

Purchase discount = $8 (5)

$\begin{array}{c}\text{Cash paid = Net accounts payable – Purchase discount}\\ \text{= \$800 – \$8}\\ \text{= \$792}\end{array}$ (6)

(b)

To determine

T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where, they are recorded and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.

To Post: The above transactions to T-accounts of Company GH.

Explanation of Solution

The following is the T-account for cash.

Cash Account:

Cash Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 1	Beginning Balance	2,500		April 7	Inventory	80
April 30	Accounts receivable	1,220		April 14	Accounts payable	1,261
				April 21	Accounts payable	792
				April 30	Ending Balance	1,587
April 30	Total	3,720		April 30	Total	3,720

Table (2)

Accounts Receivable Account:

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 10	Sales revenue	1,340		April 27	Cash	80
April 20	Sales revenue	810		April 30	Sales discount	1,220
				April 30	Ending Balance	850
April 30	Total	2,150		April 30	Total	2,150

Table (3)

Inventory Account:

Inventory Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 1	Beginning Balance	3,500		April 9	Accounts payable	200
April 5	Accounts payable	1,500		April 10	Cost of goods sold	820
April 7	Cash	80		April 14	Accounts payable	39
April 12	Accounts payable	830		April 17	Accounts payable	30
				April 20	Cost of goods sold	550
				April 21	Accounts payable	8
				April 30	Ending Balance	4,263
April 30	Total	5,910		April 30	Total	5,910

Table (4)

Accounts Payable Account:

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 9	Inventory	200		April 5	Inventory	1,500
April 14	Inventory	39		April 12	Inventory	830
April 14	Cash	1,261
April 17	Inventory	30
April 21	Inventory	8
April 21	Cash	792
April 30	Total	2,330		April 30	Total	2,330

Table (5)

Common Stock Account:

Common Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 30	Ending Balance	6,000		April 1	Beginning Balance	6,000
April 30	Total	6,000		April 30	Total	6,000

Table (6)

Sales Revenue Account:

Sales Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 30	Ending Balance	2,150		April 10	Accounts receivable	1,340
				April 20	Accounts receivable	810
April 30	Total	2,150		April 31	Total	2,150

Table (7)

Sales Return and Allowances Account:

Sales Return and Allowances Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 27	Accounts receivable	80		April 30	Ending Balance	80
April 30	Total	80		April 30	Total	80

Table (8)

Cost of Goods Sold Account:

Cost of Goods Sold Account
Date	Details	Debit ($)		Date	Details	Credit ($)
April 10	Inventory	820		April 30	Ending Balance	1,370
April 20	Inventory	550
April 30	Total	1,370		April 30	Total	1,370

Table (9)

(c)

To determine

Trial balance: This is a statement prepared to show all the year-end account balances of a business. The balances are shown in separate columns as debit and credit. Trial balance is made to check whether books of accounts of the business are arithmetically accurate.

To determine: Prepare trial balance for Company GH on April 30, 2017.

Answer to Problem 5.3AP

The following table shows the trial balance of Company GH as on April 30, 2017.

COMPANY GH Trial Balance As on April 30,2017
Account Title	Debit	Credit
Cash	$1,587
Accounts Receivable	$850
Inventory	$4,263
Common Stock		$6,000
Sales Revenue		$2,150
Sales Returns and Allowances	$80
Cost of Goods Sold	$1,370
Total	$8,150	$8,150

Table (10)

Explanation of Solution

The trial balance as shown in Table (10) is prepared after placing the journals to ledger account. It will show the ending balance of all the accounts. Here, the total debit balance is matched with the credit balance.

Conclusion

Therefore, the total debit balance and credit balance of Company GH is $8,150.

(d)

To determine

The income statement: This is a financial statement that shows the net income earned, or net loss suffered by a company, through reporting all the revenues earned, and expenses incurred, by the company over a specific period of time. An income statement is also known as an operations statement, an earnings statement, a revenue statement, or a profit and loss statement. The net income is the excess of revenue over expenses.

To Prepare: The income statement through gross profit for the month ended April 30, 2017.

Explanation of Solution

Following is the income statement of Company GH.

Company GH Income statement (Partial) For the Month Ended April, 2017
Particulars	Amount
Sales Revenue	$2,150
Less: Sales returns and allowances	$80
Net sales	$2,070
Less: Cost of goods sold	$1,370
Gross profit	$700

Table (11)

Conclusion

Therefore, the gross profit of Company GH is $700.