Chapter 6, Problem 4PA

The following selected transactions were completed during August between Summit Company and Beartooth Co.:

Instructions

Journalize the August transactions for (1) Summit Company and (2) Beartooth Co.

To determine

 Prepare journal entries to record the transactions of Company S during the month of August 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 for the sale of inventory on account.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 1	Accounts Receivable	47,040 (1)
	Sales Revenue		47,040
	(To record the sale of inventory on account)

Table (1)

Working Note (1):

Calculate the amount of accounts receivable.

Sales = $48,000

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts receivable}\}\text{ = }\left(\text{Sales}-\text{Discount}\right)\\ \text{=}\text{Sales}-\left(\text{Sales}\times 1\%\right)\\ \text{= \$48,000 – }\left(\$48,000\times 2\%\right)\\ \text{= \$48,000}-\$960\\ =\$47,040\end{array}$

• Accounts receivable is an asset and it is increased by $47,040. Therefore, debit accounts receivable with $47,040.
• Sales revenue is revenue and it increases the value of equity by $47,040. Therefore, credit sales revenue with $47,040.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 1	Cost of Merchandise Sold	28,800
	Merchandise Inventory		28,800
	(To record the cost of goods sold)

Table (2)

• Cost of merchandise sold is an expense account and it decreases the value of equity by $28,800. Therefore, debit cost of merchandise sold account with $28,800.
• Merchandise Inventory is an asset and it is decreased by $28,800. Therefore, credit inventory account with $28,800.

Record the journal entry for delivery expense.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 2	Delivery expense	1,150
	Cash		1,150
	(To record the payment of delivery expenses)

Table (3)

• Delivery expense is an expense account and it decreases the value of equity by $1,150. Therefore, debit delivery expense account with $1,150.
• Cash is an asset and it is decreased by $1,150. Therefore, credit cash account with $1,150.

Record the journal entry for the sale of inventory on account.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 5	Accounts Receivable	66,000
	Sales Revenue		66,000
	(To record the sale of inventory on account)

Table (4)

• Accounts receivable is an asset and it is increased by $66,000. Therefore, debit accounts receivable with $66,000.
• Sales revenue is revenue and it increases the value of equity by $66,000. Therefore, credit sales revenue with $66,000.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 5	Cost of Merchandise Sold	40,000
	Merchandise Inventory		40,000
	(To record the cost of goods sold)

Table (5)

• Cost of merchandise sold is an expense account and it decreases the value of equity by $40,000. Therefore, debit cost of merchandise sold account with $40,000.
• Merchandise Inventory is an asset and it is decreased by $40,000. Therefore, credit inventory account with $40,000.

Record the journal entry for the sale of inventory on account.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 15	Accounts Receivable	58,113 (2)
	Sales Revenue		58,113
	(To record the sale of inventory on account)

Table (6)

• Accounts receivable is an asset and it is increased by $58,113. Therefore, debit accounts receivable with $58,113.
• Sales revenue is revenue and it increases the value of equity by $58,113. Therefore, credit sales revenue with $58,113.

Working Note (2):

Calculate the amount of accounts receivable.

Sales = $58,700

Discount percentage = 1%

  $\begin{array}{c}\text{Amount of accounts receivable}\}\text{ = }\left(\text{Sales}-\text{Discount}\right)\\ \text{=}\text{Sales}-\left(\text{Sales}\times 1\%\right)\\ \text{= \$58,700 – }\left(\$58,700\times 1\%\right)\\ \text{= \$58,700}-\$587\\ =\$58,113\end{array}$

Record the journal entry for the freight paid.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 15	Accounts Receivable	1,675
	Cash		1,675
	(To record the freight paid)

Table (7)

• Accounts receivable is an asset and it is increased by $1,675. Therefore, debit accounts receivable with $1,675.
• Cash is an asset and it is decreased by $1,675. Therefore, credit cash account with $1,675.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 15	Cost of Merchandise Sold	35,000
	Merchandise Inventory		35,000
	(To record the cost of goods sold)

Table (8)

• Cost of merchandise sold is an expense account and it decreases the value of equity by $35,000. Therefore, debit cost of merchandise sold account with $35,000.
• Merchandise Inventory is an asset and it is decreased by $35,000. Therefore, credit inventory account with $35,000.

Record the journal entry for the cash receipt against accounts receivable.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 16	Cash	47,040
	Accounts Receivable		47,040
	(To record the receipt of cash against accounts receivables)

Table (9)

• Cash is an asset and it is increased by $47,040. Therefore, debit cash account with $47,040.
• Accounts Receivable is an asset and it is increased by $47,040. Therefore, debit accounts receivable with $47,040.

Record the journal entry for sales return.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 20	Customer Refunds Payable		1,800
	Cash			1,800
	(To record sales returns)

Table (10)

• Customer refunds payable is a liability account and it is decreased by $1,800. Therefore, debit customer refunds payable account with $1,800.
• Accounts Receivable is an asset and it is decreased by $1,800. Therefore, credit account receivable with $1,800.

Record the journal entry for the cash receipt against accounts receivable.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 25	Cash	59,788 (3)
	Accounts Receivable		59,788
	(To record the receipt of cash against accounts receivables)

Table (11)

• Cash is an asset and it is increased by $59,788. Therefore, debit cash account with $59,788.
• Accounts Receivable is an asset and it is increased by $59,788. Therefore, debit accounts receivable with $59,788.

Working Note (3):

Calculation the amount of cash receipt.

Net accounts receivable = $58,113

Accounts receivable for freight paid = $1,675

  $\begin{array}{c}\text{Amount of cash received}\}\text{ = }\left(\begin{array}{l}\text{Net accounts receivable}\text{+}\\ \text{Accounts receivable for freight paid}\end{array}\right)\\ \text{=}\$58,113+\$1,675\\ =\$59,788\end{array}$

Record the journal entry for sales return.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 31	Customer Refunds Payable		5,880 (4)
	Accounts Receivable			5,880
	(To record sales returns)

Table (12)

• Customer refunds payable is a liability account and it is decreased by $5,880. Therefore, debit customer refunds payable account with $5,880.
• Accounts Receivable is an asset and it is decreased by $5,880. Therefore, credit account receivable with $5,880.

Working Note (4):

Calculate the amount of refund owed to the customer.

Sales return = $6,000

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of refund owed to customer = Sales}\text{Return}-\text{Discount}\\ =\text{Sales}\text{return}-\left(\text{Sales}\text{return}\times \text{discount}\right)\\ \text{= \$6,000}-\left(\$6,000\times 2\%\right)\\ =\$6,000-\$120\\ =\$5,880\end{array}$

Record the journal entry for the return of the merchandise.

Date	Accounts and Explanation	Debit ($)	Credit ($)
August 31	Merchandise Inventory	3,200
	Estimated Returns Inventory		3,200
	(To record the return of the merchandise)

Table (13)

• Merchandise Inventory is an asset and it is increased by $3,200. Therefore, debit inventory account with $3,200.
• Estimated returns inventory is an expense account and it increases the value of equity by $3,200. Therefore, credit estimated returns inventory account with $3,200.

To determine

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

Explanation of Solution

Record the journal entry of Company B during August.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 1	Merchandise Inventory		47,040
	Accounts payable			47,040
	(To record purchase on account)

Table (14)

• Merchandise Inventory is an asset and it is increased by $47,040. Therefore, debit Merchandise Inventory account with $47,040.
• Accounts payable is a liability and it is increased by $47,040. Therefore, credit accounts payable account with $47,040.

Record the journal entry of Company B during August.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 5	Merchandise Inventory		66,000
	Accounts payable			66,000
	(To record purchase on account)

Table (15)

• Merchandise Inventory is an asset and it is increased by $66,000. Therefore, debit Merchandise Inventory account with $66,000.
• Accounts payable is a liability and it is increased by $66,000. Therefore, credit accounts payable account with $66,000.

Record the journal entry of Company B during August.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 9	Merchandise Inventory		2,300
	Cash			2,300
	(To record freight paid)

Table (16)

• Merchandise Inventory is an asset and it is increased by $2,300. Therefore, debit Merchandise Inventory account with $2,300.
• Cash is an asset and it is decreased by $2,300. Therefore, credit cash account with $2,300.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 15	Merchandise Inventory		59,788
	Accounts payable			59,788 (5)
	(To record purchase on account)

Table (17)

Working Note (5):

Calculate the amount of accounts payable.

Purchases = $58,700

Discount percentage = 1%

Freight charges = $1,675

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left[\left(\text{Purchases}-\text{Discount}\right)+\text{Freight}\right]\\ \text{=}\left[\text{Purchases}-\left(\text{Purchases}\times 1\%\right)+\text{Freight}\right]\\ \text{= }\left[\text{\$58,700 – }\left(\$58,700\times 1\%\right)+\$1,675\right]\\ \text{= \$58,700}-\$587+\$1,675\\ =\$59,788\end{array}$

• Merchandise Inventory is an asset and it is increased by $59,788. Therefore, debit Merchandise Inventory account with $59,788.
• Accounts payable is a liability and it is increased by $59,788. Therefore, credit accounts payable account with $59,788.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 16	Accounts payable		47,040
	Cash			47,040
	(To record payment made in full settlement less discounts)

Table (18)

• Accounts payable is a liability and it is decreased by $47,040. Therefore, debit accounts payable account with $47,040.
• Cash is an asset and it is decreased by $47,040. Therefore, credit cash account with $47,040.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 20	Cash		1,800
	Merchandise Inventory			1,800
	(To record purchase return)

Table (19)

• Cash is an asset and it is increased by $1,800. Therefore, debit cash account with $1,800.
• Merchandise Inventory is an asset and it is decreased by $1,800. Therefore, credit Merchandise Inventory account with $1,800.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 25	Accounts payable		59,788
	Cash			59,788
	(To record payment made in full settlement less discounts)

Table (20)

• Accounts payable is a liability and it is decreased by $59,788. Therefore, debit accounts payable account with $59,788.
• Cash is an asset and it is decreased by $59,788. Therefore, credit cash account with $59,788.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 31	Accounts payable		5,880 (6)
	Merchandise Inventory			5,880
	(To record purchase return)

Table (21)

• Accounts payable is a liability and it is decreased by $5,880. Therefore, debit accounts payable account with $5,880.
• Merchandise Inventory is an asset and it is decreased by $5,880. Therefore, credit Merchandise Inventory account with $5,880.

Working Note (6):

Calculate the amount of accounts payable.

Purchases return = $6,000

Discount percentage = 2%

$\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases return}-\text{Discount}\right)\\ \text{=}\text{Purchases return}-\left(\text{Purchases return}\times 2\%\right)\\ \text{= \$6,000 – }\left(\$6,000\times 2\%\right)\\ \text{= \$6,000}-\$120\\ =\$5,880\end{array}$