Chapter 6, Problem 2COP

Preparing Journal Entries for Inventory Purchases, Sales, Returns, and (Gross Method) Discounts, and Adjusting Income Tax (Chapters 4 and 6)

Use the information in C6-1 to complete the following requirements.

Required:

1. 1. Prepare journal entries for the transactions described in events (a) through (j), using the date of each transaction as its reference. Assume BSS uses perpetual inventory accounts. If you complete this problem in Connect, these journal entries will be summarized for you in T-accounts and an unadjusted trial balance.
2. 2. Prepare adjusting journal entries to accrue office expenses of $500 incurred on account and to accrue income taxes of $133. If you complete this problem in Connect, these adjusting entries will be summarized for you in T-accounts and an adjusted trial balance.
3. 3. Report the financial effects of the above transactions in a multistep income statement for the month ended October 31 prepared for external use.

To determine

Prepare journal entries for the transactions from (a) to (j).

Explanation of Solution

Journal Entry:

Journal entry is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Merchandise Inventory: Merchandise is the stock of goods bought by a wholesaler, or a retailer, or a trader, to be sold within a year. Merchandise Inventory is a current asset account which includes all the costs incurred to acquire merchandise, and process it further for sale.

Perpetual Inventory System:

It refers to an inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis.

There is no journal entry for the transaction occurred on October 1 because the payment is made in future and the delivery for the order is done in future. Similarly, the sales of orders to faculty and students during the October first week are not transactions and they do not require journal entry.

Prepare journal entries for the transactions from (a) to (j) as follows:

a. On October 1, Company B placed an order for 100 golf shirts at a unit cost of $20:

In this case, the journal entry is not required, because it is not a business transaction, and the payment is made in future and the delivery for the order is done in future.

b. On October 10, the golf shirts purchased on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 10	Inventory (1)	2,000
	Accounts Payable		2,000
	(To record the golf shirts purchased on account)

Table (1)

• Inventory is an asset and it increases the value of assets. Therefore, debit inventory by $2,000.
• Accounts payable is a liability and it increases the value of liabilities. Therefore, credit accounts payable by $2,000.

Working note (1):

Calculate the value of purchased inventories (gross):

$\begin{array}{c}\text{Value of ordered inventories = Number of golf }\times \text{ Price per golf}\\ \text{=100 golf }\times \text{ \$ 20 per golf}\\ \text{=\$2,000}\end{array}$

c. On October 11, Company B returned golf shirts to supplier.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 11	Accounts Payable	400
	Inventory		400
	(To record the return of golf shirts )

Table (2)

• Accounts payable is a liability and it decreases the value of liabilities. Therefore, debit accounts payable by $400.
• Inventory is an asset and it decreases the value of assets. Therefore, credit inventory by $400.

d. On October 12, allowances amount from the supplier is setoff against its inventory.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 12	Accounts Payable	100
	Inventory		100
	(To record the inventory allowances)

Table (3)

• Accounts payable is a liability and it is decreases the value of liabilities. Therefore, debit accounts payable by $100.
• Inventory is an asset and it decreases the value of assets. Therefore, credit inventory by $100.

e. On October 13, company B paid credit amounts to the supplier.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 13	Accounts payable (2)	1,500
	Cash (4)		1,470
	Inventory (3)		30
	(To record the cash paid to supplier)

Table (4)

• Accounts payable is a liability and it is decreases the value of liabilities. Therefore, debit accounts payable by $1,500
• Cash is an asset and it is decreases the value of assets. Therefore, credit cash by $1,470.
• Inventory is an asset and it decreases the value of assets. Therefore, credit inventory by $30.

Working note (2):

Calculate the value of purchased inventories (net):

$\begin{array}{c}\text{Purchased inventories (net) =}\left(\begin{array}{l}\text{Value of ordered inventories}-\text{Purchase}\text{Returns}-\\ \text{Purchase}\text{Allowances}\end{array}\right)\\ \text{=}\left(\text{\$2,000 (working note 1)}-\text{\$400}-\text{\$100}\right)\\ \text{=\$1,500}\end{array}$

Working note (3):

Calculate the value of purchase discount:

$\begin{array}{c}\text{Purchase discount = Value of purchased inventories ×Percentage}\text{of purchase}\text{discount}\\ \text{ =\$1,500 (working note 2) × }\frac{2}{\text{100}}\\ \text{= \$30}\end{array}$

Working note (4):

Calculate the cash paid to supplier:

$\begin{array}{c}\text{Cash}\text{paid to supplier = Net value of inventories purchased }-\text{Purchase}\text{discount}\\ \text{=\$1,500 (refer working note 2) }-\text{\$30 (refer working note 3)}\\ \text{=\$1,470}\end{array}$

f. During the first week of October, company B received student and faculty orders for 80 golf shirts.

In this case, the journal entry is not required, because it is not a business transaction.

g. On October 18, golf shirts are delivered to the students and faculty on account.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 18	Accounts Receivable	4,800
	Sales revenue (5)		4,800
	(To record the sales made on account )

Table (5)

• Accounts receivable is an asset and it increases the value of assets. Therefore, debit accounts receivable by $4,800.
• Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $4,800.

Working note (5):

Calculate the sales revenue from sale of golf shirts:

$\begin{array}{c}\text{Sales}\text{revenue =Number}\text{of}\text{golf}\text{shirts}\text{sold×Price}\text{per}\text{unit}\\ \text{=80shirts × \$60}\\ \text{=\$4,800}\end{array}$

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 18	Cost of goods sold (6)	1,470
	Inventory		1,470
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit cost of goods sold by $1,470.
• Inventory is an asset and it is decreased. Therefore, credit inventory by $1,470.

Working note (6):

Calculate the cost of goods sold for sale of golf shirt:

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold=}\left(\begin{array}{l}\text{Value of inventories purchased}-\text{PurchaseReturns}-\\ \text{PurchaseAllowances}-\text{Purchase}\text{discount}\end{array}\right)\\ \text{=}\left(\text{\$2,000 (working note 1)}-\text{\$400}-\text{\$100}-\text{\$30 (working note 3)}\right)\\ \text{=\$1,470}\end{array}$

h. On October 19, students and faculty returned half of shirts to Company B.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 19	Sales revenue (7)	2,400
	Accounts receivable		2,400
	(To record the sales returns from customer )

Table (7)

• Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $2,400.
• Accounts receivable is an asset and it is decreases the value of assets. Therefore, credit cash by $2,400.

Working note (7):

Calculate the value of sales return:

$\begin{array}{c}\text{Value of sales return = Value of sales }\times \text{}\text{Sales returned}\\ \text{=\$4,800 (working note 5) }\times \frac{1}{2}\\ =\$2,400\end{array}$

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 19	Inventory(8)	735
	Cost of goods sold		735
	(To record the cost of goods sold)

Table (8)

• Inventory is an asset and it increases the value of assets. Therefore, debit inventory by $735.
• Cost of goods sold is a component of stockholders’ equity and it is decreases the value of stockholder’s equity. Therefore, credit cost of goods sold by $735.

Working note (8):

Calculate the cost of returned inventory:

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold=Original}\text{cost}\text{of}\text{goods}\text{sold×Number}\text{of}\text{golf}\text{shirts}\text{returned}\\ \text{=\$1,470 (working note 4)×}\frac{\text{1}}{\text{2}}\\ \text{=\$735}\end{array}$

i. On October 20, Company B paid allowances to the customer, and setoff against its sales revenue.

Date	Account Title and Explanation	Debit ($)	Credit ($)
October 20	Sales revenue (9)	500
	Accounts receivable		500
	(To record the sales allowances set off against its sales revenue)

Table (9)

• Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $500.
• Accounts payable is a liability and it increases the value of liabilities. Therefore, credit cash by $500.

Working note (9):

Calculate the value of sales allowance.

$\begin{array}{c}\text{Sales allowances = Remaining number of shirts }\times \text{ Allowances per shirt}\\ \text{=40 shirts }\times \text{ \$12}\text{.50}\\ \text{=\$500 }\end{array}$

j. On October 31, Company B received cash from the customer.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash (10)	1,900
	Accounts Receivable		1,900
	(To record the cash received from the customer)

Table (10)

• Cash is an asset and it increases the value of assets. Therefore, debit cash by $1,900.
• Accounts receivable is an asset and it decreases the value of assets. Therefore, credit accounts receivable by $1,900.

Working note (10):

Calculate the value of cash received from the customer:

$\begin{array}{c}\text{Cash received from customer = }\left(\begin{array}{l}\text{Sales}\text{revenue}-\text{Sales}\text{returns}-\\ \text{Sales allowances}\end{array}\right)\\ \text{= }\left(\begin{array}{l}\text{\$4,800 (refer working note 5)}-\\ \$2,400\text{(refer working note 7)}-\\ \$500\text{(refer working note 9)}\end{array}\right)\\ \text{= \$1,900}\end{array}$

To determine

Prepare adjusting journal entries for the given transactions.

Explanation of Solution

Adjusting entries:

Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare adjusting journal entries for the given transactions as follows:

Office expense of $500 incurred on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Office expense	500
	Accounts payable		500
	(To record the office expense incurred on account)

Table (11)

• Office expense is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit office expense by $500.
• Accounts payable is a liability and it is increases the value of liabilities. Therefore, credit accounts payable by $500.

Income tax expense of $133 incurred.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Income tax expense	133
	Income tax payable		133
	(To record the income tax expense incurred during the year)

Table (12)

• Income tax expense is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit income tax expense by $133.
• Income tax payable is a liability and it is increases the value of liabilities. Therefore, credit income tax payable by $133.

To determine

Prepare the multi-step income statement of Company B.

Explanation of Solution

Multi-Step Income Statement:

This is a financial statement which shows income and subtotals of expenses in detail for a given period of time. Multi-step income statement reports gross profit, operating income, and net income.

Prepare the multi-step income statement of Company B as follows:

Company B
Multi-step Income Statement
For the Year Ended December 31
Particulars	Amount($)
Net Sales (11)	1,900
Less: Cost of goods sold (12)	735
Gross Profit	1,165
Less: Office Expense	500
Income from Operations	665
Less: Income Tax Expense	133
Net Income	532

Table (13)

Working note 11:

Calculate the value of net sales.

Particulars	$
Transaction (g)	4,800
Transaction (h)	(2,400)
Transaction (i)	(500)
Net sales	1,900

Table (14)

Working note 12:

Calculate the value of cost of goods sold, net:

$\begin{array}{c}\text{Cost of goods sold, net = Cost of goods sold }-\text{Cost of goods sold returned}\\ \text{=\$1,470 (working note 6)}-\$735\text{ (working note 8)}\\ \text{=\$735}\end{array}$