Chapter 6, Problem 4PB

The following selected transactions were completed during April between Swan Company and Bird Company:

Instructions

Journalize the April transactions for (1) Swan Company and (2) Bird Company.

To determine

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

Explanation of Solution

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.

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.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 2	Accounts Receivable	31,360 (1)
	Sales Revenue		31,360
	(To record the sale of inventory on account)

Table (1)

• Accounts receivable is an asset and it is increased by $31,360. Therefore, debit accounts receivable with $31,360.
• Sales revenue is revenue and it increases the value of equity by $31,360. Therefore, credit sales revenue with $31,360.

Working Note (1):

Calculate the amount of accounts receivable.

Sales = $32,000

Discount percentage = 2%

  $\begin{array}{c}\text{Amount of accounts receivable}\}\text{ = }\left(\text{Sales}-\text{Discount}\right)\\ \text{=}\text{Sales}-\left(\text{Sales}\times 2\%\right)\\ \text{= \$32,000 – }\left(\$32,000\times 2\%\right)\\ \text{= \$32,000}-\$640\\ =\$31,360\end{array}$

Record the journal entry for the freight paid.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 2	Accounts Receivable	330
	Cash		330
	(To record the freight paid)

Table (2)

• Accounts receivable is an asset and it is increased by $330. Therefore, debit accounts receivable with $330.
• Cash is an asset and it is decreased by $330. Therefore, credit cash account with $330.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 2	Cost of Merchandise Sold	19,200
	Merchandise Inventory		19,200
	(To record the cost of goods sold)

Table (3)

• Cost of merchandise sold is an expense account and it decreases the value of equity by $19,200. Therefore, debit cost of merchandise sold account with $19,200.
• Merchandise Inventory is an asset and it is decreased by $19,200. Therefore, credit inventory account with $19,200.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 8	Accounts Receivable	49,005 (2)
	Sales Revenue		49,005
	(To record the sale of inventory on account)

Table (4)

• Accounts receivable is an asset and it is increased by $49,005. Therefore, debit accounts receivable with $49,005.
• Sales revenue is revenue and it increases the value of equity by $49,005. Therefore, credit sales revenue with $49,005.

Working Note (2):

Calculate the amount of accounts receivable.

Sales = $49,500

Discount percentage = 1%

  $\begin{array}{c}\text{Amount of accounts receivable}\}\text{ = }\left(\text{Sales}-\text{Discount}\right)\\ \text{=}\text{Sales}-\left(\text{Sales}\times 1\%\right)\\ \text{= \$49,500 – }\left(\$49,500\times 1\%\right)\\ \text{= \$49,500}-\$495\\ =\$49,005\end{array}$

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 8	Cost of Merchandise Sold	29,700
	Merchandise Inventory		29,700
	(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 $29,700. Therefore, debit cost of merchandise sold account with $29,700.
• Merchandise Inventory is an asset and it is decreased by $29,700. Therefore, credit inventory account with $29,700.

Record the journal entry for delivery expense.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 8	Delivery expense	710
	Cash		710
	(To record the payment of delivery expenses)

Table (6)

• Delivery expense is an expense account and it decreases the value of equity by $710. Therefore, debit delivery expense account with $710.
• Cash is an asset and it is decreased by $710. Therefore, credit cash account with $710.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 12	Cash	31,690 (3)
	Accounts Receivable		31,690
	(To record the receipt of cash against accounts receivables)

Table (7)

Working Note (3):

Calculation the amount of cash receipt.

Net accounts receivable = $31,360

Accounts receivable for freight paid = $330

  $\begin{array}{c}\text{Amount of cash received}\}\text{ = }\left(\begin{array}{l}\text{Net accounts receivable}\text{+}\\ \text{Accounts receivable for freight paid}\end{array}\right)\\ \text{=}\$31,360+\$330\\ =\$31,690\end{array}$

• Cash is an asset and it is increased by $31,690. Therefore, debit cash account with $31,690.
• Accounts Receivable is an asset and it is increased by $31,690. Therefore, debit accounts receivable with $31,690.

Record the journal entry for sales return.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 18	Customer Refunds Payable		2,000
	Cash			2,000
	(To record sales returns)

Table (8)

• Customer refunds payable is a liability account and it is decreased by $2,000. Therefore, debit customer refunds payable account with $2,000.
• Accounts Receivable is an asset and it is decreased by $2,000. Therefore, credit account receivable with $2,000.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 23	Cash	49,005
	Accounts Receivable		49,005
	(To record the receipt of cash against accounts receivables)

Table (9)

• Cash is an asset and it is increased by $49,005. Therefore, debit cash account with $49,005.
• Accounts Receivable is an asset and it is increased by $49,005. Therefore, debit accounts receivable with $49,005.

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

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 24	Accounts Receivable	67,350
	Sales Revenue		67,350
	(To record the sale of inventory on account)

Table (10)

• Accounts receivable is an asset and it is increased by $67,350. Therefore, debit accounts receivable with $67,350.
• Sales revenue is revenue and it increases the value of equity by $67,350. Therefore, credit sales revenue with $67,350.

Record the journal entry for cost of goods sold.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 24	Cost of Merchandise Sold	40,400
	Merchandise Inventory		40,400
	(To record the cost of goods sold)

Table (11)

• Cost of merchandise sold is an expense account and it decreases the value of equity by $40,400. Therefore, debit cost of merchandise sold account with $40,400.
• Merchandise Inventory is an asset and it is decreased by $40,400. Therefore, credit inventory account with $40,400.

Record the journal entry for sales return.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 30	Customer Refunds Payable		11,300
	Accounts Receivable			11,300
	(To record sales returns)

Table (12)

• Customer refunds payable is a liability account and it is decreased by $11,300. Therefore, debit customer refunds payable account with $11,300.
• Accounts Receivable is an asset and it is decreased by $11,300. Therefore, credit account receivable with $11,300.

Record the journal entry for the return of the merchandise.

Date	Accounts and Explanation	Debit ($)	Credit ($)
April 30	Merchandise Inventory	6,500
	Estimated Returns Inventory		6,500
	(To record the return of the merchandise)

Table (13)

• Merchandise Inventory is an asset and it is increased by $6,500. Therefore, debit inventory account with $6,500.
• Estimated returns inventory is an expense account and it increases the value of equity by $6,500. Therefore, credit estimated returns inventory account with $6,500.

To determine

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

Explanation of Solution

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 2	Merchandise Inventory		31,690
	Accounts payable			31,690 (4)
	(To record purchase on account)

Table (14)

• Merchandise Inventory is an asset and it is increased by $31,690. Therefore, debit Merchandise Inventory account with $31,690.
• Accounts payable is a liability and it is increased by $31,690. Therefore, credit accounts payable account with $31,690.

Working Note (4):

Calculate the amount of accounts payable.

Purchases = $31,360

Freight charges = $330

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ =}\left[\text{Purchases}+\text{Freight}\right]\\ \text{= \$31,360}\text{+}\text{\$330}\\ =\$31,690\end{array}$

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
August 8	Merchandise Inventory		49,005
	Accounts payable			49,005 (5)
	(To record purchase on account)

Table (15)

• Merchandise Inventory is an asset and it is increased by $49,005. Therefore, debit Merchandise Inventory account with $49,005.
• Accounts payable is a liability and it is increased by $49,005. Therefore, credit accounts payable account with $49,005.

Working Note (5):

Calculate the amount of accounts payable.

Purchases = $49,500

Discount percentage = 1%

  $\begin{array}{c}\text{Amount of accounts payable}\}\text{ = }\left(\text{Purchases}-\text{Discount}\right)\\ \text{=}\text{Purchases}-\left(\text{Purchases}\times 1\%\right)\\ \text{= \$49,500 – }\left(\$49,500\times 1\%\right)\\ \text{= \$49,500}-\$495\\ =\$49,005\end{array}$

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 12	Accounts payable		31,690
	Cash			31,690
	(To record payment made in full settlement less discounts)

Table (16)

• Accounts payable is a liability and it is decreased by $31,690. Therefore, debit accounts payable account with $31,690.
• Cash is an asset and it is decreased by $31,690. Therefore, credit cash account with $31,690.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 18	Cash		2,000
	Merchandise Inventory			2,000
	(To record purchase return)

Table (17)

• Cash is an asset and it is increased by $2,000. Therefore, debit cash account with $2,000.
• Merchandise Inventory is an asset and it is decreased by $2,000. Therefore, credit Merchandise Inventory account with $2,000.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 23	Accounts payable		49,005
	Cash			49,005
	(To record payment made in full settlement less discounts)

Table (18)

• Accounts payable is a liability and it is decreased by $49,005. Therefore, debit accounts payable account with $49,005.
• Cash is an asset and it is decreased by $49,005. Therefore, credit cash account with $49,005.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 24	Merchandise Inventory		67,350
	Accounts payable			67,350
	(To record purchase on account)

Table (19)

• Merchandise Inventory is an asset and it is increased by $67,350. Therefore, debit Merchandise Inventory account with $67,350.
• Accounts payable is a liability and it is increased by $67,350. Therefore, credit accounts payable account with $67,350.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 26	Merchandise Inventory		875
	Cash			875
	(To record freight paid)

Table (20)

• Merchandise Inventory is an asset and it is increased by $875. Therefore, debit Merchandise Inventory account with $875.
• Cash is an asset and it is decreased by $875. Therefore, credit cash account with $875.

Record the journal entry of Company B.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
April 30	Accounts payable		11,300
	Merchandise Inventory			11,300
	(To record purchase return)

Table (21)

• Accounts payable is a liability and it is decreased by $11,300. Therefore, debit accounts payable account with $11,300.
• Merchandise Inventory is an asset and it is decreased by $11,300. Therefore, credit Merchandise Inventory account with $11,300.