Chapter 5, Problem 7PB

Purchase-related transactions using periodic inventory system

Selected transactions for Niles Co. during March of the current year are listed in Problem 5-1B.

Instructions

Journalize the entries to record the transactions of Niles Co. for March using the periodic inventory system.

To determine

Record the purchase transactions under periodic inventory system.

Explanation of Solution

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

Purchases are an activity of acquiring the merchandise inventory of a business.

Record the journal entry for purchases of inventory along with freight charges.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 1	Purchases		43,250
	Freight-In		650
	Accounts Payable			43,900
	(To record the payment of freight charges)

Table (1)

• • Purchases account is an expense and it is decreased the equity value by $43,250. Therefore, debit purchase account with $43,250.
• • Freight-In is an expense and it is increased by $650. Therefore, debit freight-in account with $650.
• • Accounts payable is a liability and it is increased by $43,900. Therefore, credit accounts payable account with $43,900.

Record the journal entry in the books of Company C.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 5	Purchases		19,175
	Accounts Payable			19,175
	(To record purchases of inventory on account)

Table (2)

• • Purchases account is an expense and it is decreased the equity value by $19,175. Therefore, debit purchase account with $19,175.
• • Accounts payable is a liability and it is increased by $19,175. Therefore, credit accounts payable account with $19,175.

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 10	Accounts Payable		43,900 (1)
	Purchase Discount			865 (2)
	Cash			43,035 (3)
	(To record paying cash on purchases after discounts and returns)

Table (3)

Working Note (1):

Calculate accounts payable amount.

Purchases = $43,250

Freight paid = 650

$\begin{array}{c}\text{Accounts payable = Purchase + Freight paid}\\ =\$43,250+\$650\\ =\$43,900\end{array}$

Working Note (2):

Calculate purchase discount.

Accounts payable = $43,250

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$43,250 × }\frac{2}{\text{100}}\\ \text{= \$865}\end{array}$

Working Note (3):

Calculate cash paid.

Accounts payable = $43,250

Purchase discount = $865 (2)

Freight paid = $650

$\begin{array}{c}\text{Cash paid = }\left(\text{Accounts payable, net – Purchase discount}\right)+\text{Freight}\text{charges}\\ \text{= }\left(\text{\$43,250 – \$865}\right)+\$650\\ \text{= \$43,035}\end{array}$

• • Accounts payable is a liability and it is decreased by $43,900. Therefore, debit accounts payable account with $43,900.
• • Purchase discount is an income and it is increased the equity value by $865. Therefore, credit purchase discount account with $865.
• • Cash is an asset and it is decreased by $43,035. Therefore, credit cash account with $43,035.

Record the journal entry for purchases of inventory.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 13	Purchases		15,550
	Accounts Payable			15,550
	(To record purchases of inventory on account)

Table (4)

• • Purchases account is an expense and it is decreased the equity value by $15,550. Therefore, debit purchase account with $15,550.
• • Accounts payable is a liability and it is increased by $15,550. Therefore, credit accounts payable account with $15,550.

Record the journal entry for purchase returned.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 14	Accounts Payable		3,750
	Purchases Returns and Allowances			3,750
	(To record the purchases return)

Table (5)

• • Accounts payable is a liability and it is decreased by $3,750. Therefore, debit accounts payable account with $3,750.
• • Purchases returns and allowances account is an expense and it is increased the equity value by $3,750. Therefore, credit purchases returns and allowances account with $3,750.

Record the journal entry for purchases of inventory.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Purchases		13,560
	Accounts Payable			13,560
	(To record purchases of inventory on account)

Table (6)

• • Purchases account is an expense and it is decreased the equity value by $13,560. Therefore, debit purchase account with $13,560.
• • Accounts payable is a liability and it is increased by $13,560. Therefore, credit accounts payable account with $13,560.

Record the journal entry for freight paid.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Freight-In		140
	Cash			140
	(To record the payment of freight charges)

Table (7)

• • Freight-In is an expense and it is increased by $140. Therefore, debit freight-in account with $140.
• • Cash is an asset and it is decreased by $140. Therefore, credit cash account with $140.

Record the journal entry for purchases of inventory.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 19	Purchases		6,500
	Accounts Payable			6,500
	(To record purchases of inventory on account)

Table (8)

• • Purchases account is an expense and it is decreased the equity value by $6,500. Therefore, debit purchase account with $6,500.
• • Accounts payable is a liability and it is increased by $6,500. Therefore, credit accounts payable account with $6,500.

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 23	Accounts Payable		11,800 (4)
	Purchase Discount			236 (5)
	Cash			11,564 (6)
	(To record paying cash on purchases after discounts and returns)

Table (9)

Working Note (4):

Calculate accounts payable amount.

Purchase = $15,550

Purchase returns = $3,750

$\begin{array}{c}\text{Accounts payable = Purchase – Purchase returns}\\ =\$15,550–\$3,750\\ =\$11,800\end{array}$

Working Note (5):

Calculate purchase discount.

Net accounts payable = $11,800 (4)

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$11,800 × }\frac{2}{\text{100}}\\ \text{= \$236}\end{array}$

Working Note (6):

Calculate cash paid.

Accounts payable = $11,800 (4)

Purchase discount = $236 (5)

$\begin{array}{c}\text{Cash paid = Accounts payable, net – Purchase discount}\\ \text{= \$11,800 – \$236}\\ \text{= \$11,564}\end{array}$

• • Accounts payable is a liability and it is decreased by $11,800. Therefore, debit accounts payable account with $11,800.
• • Purchase discount is an income and it is increased the equity value by $236. Therefore, credit purchase discount account with $236.
• • Cash is an asset and it is decreased by $11,564. Therefore, credit cash account with $11,564.

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 29	Accounts Payable		6,500
	Purchase Discount			130 (7)
	Cash			6,370 (8)
	(To record paying cash on purchases after discounts and returns)

Table (10)

Working Note (7):

Calculate purchase discount.

Net accounts payable = $6,500

Discount percentage = 2%

$\begin{array}{c}\text{Purchase discount = \$6,500 × }\frac{2}{\text{100}}\\ \text{= \$130}\end{array}$

Working Note (8):

Calculate cash paid.

Accounts payable = $6,500

Purchase discount = $130 (7)

  $\begin{array}{c}\text{Cash paid = Accounts payable, net – Purchase discount}\\ \text{= \$6,500 – \$130}\\ \text{= \$6,370}\end{array}$

• • Accounts payable is a liability and it is decreased by $6,500. Therefore, debit accounts payable account with $6,500.
• • Purchase discount is an income and it is increased the equity value by $130. Therefore, credit purchase discount account with $130.
• • Cash is an asset and it is decreased by $6,370. Therefore, credit cash account with $6,370.

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts Payable		13,560
	Cash			13,560
	(To record paying cash on purchases after discounts and returns)

Table (11)

• • Accounts payable is a liability and it is decreased by $13,560. Therefore, debit accounts payable account with $13,560.
• • Cash is an asset and it is decreased by $13,560. Therefore, credit cash account with $13,560.

Record the journal entry for the due amount paid.

Journal Entry
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts Payable		19,175
	Cash			19,175
	(To record paying cash on purchases after discounts and returns)

Table (12)

• • Accounts payable is a liability and it is decreased by $19,175. Therefore, debit accounts payable account with $19,175.
• • Cash is an asset and it is decreased by $19,175. Therefore, credit cash account with $19,175.