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Concept explainers
a.
Prepare the
a.
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Explanation of Solution
Perpetual inventory system: The method or system of maintaining, recording, and adjusting the inventory perpetually throughout the year, is referred to as perpetual inventory system.
Net cost method: In net cost method, the companies will record the purchase of inventory at net cost which is calculated by deducting the available discount from the invoice price.
Gross invoice method: In gross invoice method, the companies will record the purchase of the inventory at total invoice price.
1. Prepare the journal entry to record the purchase made at net cost method:
Date |
Account titles and |
Debit ($) |
Credit ($) |
March 6 | Inventory | 2,744 | |
Accounts payable (Industry W) (1) | 2,744 | ||
(To record the purchase of 8 TVs at net cost) | |||
March 11 | Cash | 1,200 | |
Sales | 1,200 | ||
(To record the cash sales) | |||
March 11 | Cost of goods sold | 686 | |
Inventory | 686 | ||
(To record the cost of goods sold for 2 TVs) | |||
March 16 | Accounts payable (Industry W) | 2,744 | |
Cash | 2,744 | ||
(To record the payment made within the discount period) |
Table (1)
Working note:
Calculate the amount of accounts payable:
Thus, the total amount of accounts payable would be $2,744
(1)
March 10: To record the purchase of TVs at net cost.
- Inventory is an asset account and it is increased. Therefore, debit inventory with $2,744.
- Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $2,744.
March 11: To record the sales made.
- Cash is an asset account and it is increased. Therefore, debit cash with $1,200.
- Sales are a revenue account and it increases the
stockholders’ equity . Therefore, credit sales with $1,200.
March 11: To record the cost of goods sold.
- Cost of goods sold is an expense account and it decreases the stockholders’ equity account. Therefore, debit cost of goods sold with $686.
- Inventory is an asset account and it is decreased. Therefore, credit inventory account with $686.
March 16: To record the payment made with in the discount period:
- Accounts payable is a liability account and it is decreased. Therefore, credit accounts payable with $2,744.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $2,744.
2. Prepare the journal entry to record the purchase made at gross invoice method:
Date |
Account titles and |
Debit ($) |
Credit ($) |
March 6 | Inventory | 2,800 | |
Accounts payable (Industry W) | 2,800 | ||
(To record the purchase of 8 TVs at gross invoice price) | |||
March 11 | Cash | 1,200 | |
Sales | 1,200 | ||
(To record the cash sales) | |||
March 11 | Cost of goods sold | 700 | |
Inventory | 700 | ||
(To record the cost of goods sold for TVs) | |||
March 16 | Accounts payable (Industry W) | 2,800 | |
Cash | 2,744 | ||
Purchase discount taken | 56 | ||
(To record the payment made within the discount period) |
Table (2)
March 6: To record the purchase of TVs at net cost.
- Inventory is an asset account and it is increased. Therefore, debit inventory with $2,800.
- Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $2,800.
March 11: To record the sales made.
- Cash is an asset account and it is increased. Therefore, debit cash with $1,200.
- Sales are a revenue account and it increases the stockholders’ equity. Therefore, credit sales with $1,200.
March 11: To record the cost of goods sold.
- Cost of goods sold is an expense account and it decreases the stockholders’ equity account. Therefore, debit cost of goods sold with $700.
- Inventory is an asset account and it is decreased. Therefore, credit inventory account with $700.
March 16: To record the payment made with in the discount period:
- Accounts payable is a liability account and it is decreased. Therefore, credit accounts payable with $2,800.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $2,744.
- Purchase discount taken reduces the cost of goods sold. Therefore, credit purchase discount taken with $56.
b.
Prepare the journal entry to record the payment assuming that M TV did not pay Industry W within the discount period.
b.
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Explanation of Solution
1. Prepare the journal entry to record the payment made on April 6 under net cost method.
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
April 6 | Accounts payable (Industry W) | 2,744 | |
Purchase discount lost | 56 | ||
Cash | 2,800 | ||
(To record the payment made after the discount period) |
Table (3)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $2,744.
- Purchase discount lost is an expense account and it decreases the stockholders’ equity. Therefore, debit the purchase discount lost with $56.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $2,800.
2. Prepare the journal entry to record the payment made on April 6 under gross invoice price method.
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
April 6 | Accounts payable (Company P) | 2,800 | |
Cash | 2,800 | ||
(To record the payment made after the discount period) |
Table (4)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $2,800.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $2,800.
c.
Explain whether net cost method or gross invoice price will provide the most useful information.
c.
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Explanation of Solution
By evaluating the net cost method and gross invoice price method it is identified that net cost method will provide most useful information for estimating the efficiency of the company to pay its bills. This method clearly specifies the lowest price that the company may pay and it records the additional cost incurred as purchase discount lost. Whereas in gross invoice price method, the liability is not recorded at the lowest price in which the amount can be settled. Thus, the available discounts that were not taken are not aware by the company.
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