Chapter 6, Problem 1PB

The following selected transactions were completed by Niles Co. during March of the current year:

Instructions

Journalize the entries to record the transactions of Niles Co. for March.

To determine

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

Explanation of Solution

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.

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.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 1	Merchandise Inventory		43,035
	Accounts payable			43,035 (1)
	(To record purchase on account)

Table (1)

• Merchandise Inventory is an asset and it is increased by $43,035. Therefore, debit Merchandise Inventory account with $43,035.
• Accounts payable is a liability and it is increased by $43,035. Therefore, credit accounts payable account with $43,035.

Working Note (1):

Calculate the amount of accounts payable.

Purchases = $43,250

Discount percentage = 2%

Freight charges = $650

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left[\left(\text{Purchases}-\text{Discount}\right)+\text{Freight}\right]\\ \text{=}\left[\text{Purchases}-\left(\text{Purchases}\times 2\%\right)+\text{Freight}\right]\\ \text{= }\left[\text{\$43,250 – }\left(\$43,250\times 2\%\right)+\$650\right]\\ \text{= \$43,250}-\$865+\$650\\ =\$43,035\end{array}$

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 5	Merchandise Inventory		19,175
	Accounts payable			19,175
	(To record purchase on account)

Table (2)

• Merchandise Inventory is an asset and it is increased by $19,175. Therefore, debit Merchandise Inventory 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 of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 10	Accounts payable		43,035
	Cash			43,035
	(To record the payment against accounts payable)

Table (3)

• Accounts payable is a liability and it is decreased by $43,035. Therefore, debit accounts payable account with $43,035.
• Cash is an asset and it is decreased by $43,035. Therefore, credit cash account with $43,035.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 13	Merchandise Inventory		15,239
	Accounts payable			15,239 (2)
	(To record purchase on account)

Table (4)

• Merchandise Inventory is an asset and it is increased by $15,239. Therefore, debit Merchandise Inventory account with $15,239.
• Accounts payable is a liability and it is increased by $15,239. Therefore, credit accounts payable account with $15,239.

Working Note (2):

Calculate the amount of accounts payable.

Purchases = $15,550

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases}-\text{Discount}\right)\\ \text{=}\text{Purchases}-\left(\text{Purchases}\times 2\%\right)\\ \text{= \$15,550 – }\left(\$15,550\times 2\%\right)\\ \text{= \$15,550}-\$311\\ =\$15,239\end{array}$

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 14	Accounts payable		3,675 (3)
	Merchandise Inventory			3,675
	(To record purchase return)

Table (5)

• Accounts payable is a liability and it is decreased by $3,675. Therefore, debit accounts payable account with $3,675.
• Merchandise Inventory is an asset and it is decreased by $3,675. Therefore, credit Merchandise Inventory account with $3,675.

Working Note (3):

Calculate the amount of accounts payable.

Purchases return = $3,750

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases return}-\text{Discount}\right)\\ \text{=}\text{Purchases return}-\left(\text{Purchases return}\times 2\%\right)\\ \text{= \$3,750 – }\left(\$3,750\times 2\%\right)\\ \text{= \$3,750}-\$75\\ =\$3,675\end{array}$

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Merchandise Inventory		13,560
	Accounts payable			13,560
	(To record purchase on account)

Table (6)

• Merchandise Inventory is an asset and it is increased by $13,560. Therefore, debit Merchandise Inventory 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 of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 18	Merchandise Inventory		140
	Cash			140
	(To record freight charges paid)

Table (7)

• Merchandise Inventory is an asset and it is increased by $140. Therefore, debit Merchandise Inventory account with $140.
• Cash is an asset and it is decreased by $140. Therefore, credit cash account with $140.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 19	Merchandise Inventory		6,370
	Accounts payable			6,370 (4)
	(To record purchase on account)

Table (8)

• Merchandise Inventory is an asset and it is increased by $6,370. Therefore, debit Merchandise Inventory account with $6,370.
• Accounts payable is a liability and it is increased by $6,370. Therefore, credit accounts payable account with $6,370.

Working Note (4):

Calculate the amount of accounts payable.

Purchases = $6,500

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases}-\text{Discount}\right)\\ \text{=}\text{Purchases}-\left(\text{Purchases}\times 2\%\right)\\ \text{= \$6,500 – }\left(\$6,500\times 2\%\right)\\ \text{= \$6,500}-\$130\\ =\$6,370\end{array}$

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 23	Accounts payable		11,564 (5)
	Cash			11,564
	(To record payment made in full settlement less discounts)

Table (9)

• Accounts payable is a liability and it is decreased by $11,564. Therefore, debit accounts payable account with $11,564.
• Cash is an asset and it is decreased by $11,564. Therefore, credit cash account with $11,564.

Working Note (5):

Calculate the amount of net accounts payable.

Merchandise Inventory = $15,239 (2)

Purchase returns = $3,675 (3)

    $\begin{array}{c}\text{Net accounts payable = Inventory – Purchase returns}\\ =\$15,239–\$3,675\\ =\$11,564\end{array}$

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 29	Accounts payable		6,370
	Cash			6,370
	(To record payment made in full settlement less discounts)

Table (10)

• Accounts payable is a liability and it is decreased by $6,370. Therefore, debit accounts payable account with $6,370.
• Cash is an asset and it is decreased by $6,370. Therefore, credit cash account with $6,370.

Record the journal entry of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts payable		13,560
	Cash			13,560
	(To record payment made in full settlement less discounts)

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 of Company N.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 31	Accounts payable		19,175
	Cash			19,175
	(To record payment made in full settlement less discounts)

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.