Chapter 5, Problem 5E

To determine

Concept Introduction:

Inventory: These are goods which are owned by company and expected to sell in its normal course of business

Merchandise: The goods are referred as merchandise which the company purchases and resells the same goods to customers

Merchandiser: The Company who business is to buy the merchandise at purchases cost and sell the same merchandise at higher price which is sales price and earns profit. Merchandiser can be categorized as wholesaler and retailer

Perpetual Inventory System: Each merchandise purchase and sales cost are recorded and updated continuously for all merchandise. In perpetual Inventory system if merchandise is sold. The company determines the cost of goods sold and passes an accounting entry. It will debit “Cost of goods sold” and credit “Merchandise Inventory” . If merchandise is purchased it will pass the accounting entry by debiting “Merchandise Inventory” and crediting “Account payable” if purchases on credit or “Cash or Bank “if paid Cash or Cheque for the purchases

Sales under perpetual Inventory System: when merchandiser sells the goods it can be through cash sale or credit Sale. There will be two entries for each sales transaction as explained below

1. When sale of merchandise is made as per revenue recognition principle. The revenue will be recognized by debiting “Accounts receivable” if there is credit sales or “Cash” if it cash sales and by crediting “Sales”
2. The amount of cost of inventory which is sold the accounting entry will debiting “ cost of goods sold” and crediting “Merchandise Inventory”

Sales Return and allowance under Perpetual Inventory system: when the merchandise is returned by purchaser to the seller it is called Sales return . There will be two entries for each sales return transaction

1. The quantity of merchandise returned by purchaser. the seller will record the accounting entry by debiting with “Sales return and allowance “ and crediting “Accounts receivable” if there is credit sales or “Cash” if cash is paid to purchaser
2. As the merchandise has physically arrived at seller location and his physical inventory has increased. the accounting entry will be by Debiting “ Merchandise inventory “ and crediting “Cost of goods sold”

If the seller does not take back the merchandise from the purchaser but gives allowance by issuing credit memorandum. They will be only one entry which is by debiting “Sales return and allowance” and crediting “Accounts receivable”

1. To Prepare: journal entries for Allied Parts