Chapter 6, Problem 4PB

a.

To determine

Prepare the journal entry to record the transaction that Industry W records the purchases of merchandise at (1) net cost and (2) gross invoice price.

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 $\left(\$343\times 2\text{units}\right)$	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:

$\begin{array}{c}\text{Accounts payable at March 6}=\text{Invoice price}-\text{Discount on invoice price}\\ =\$350-\left(\$350\times 2\%\right)\\ =\$343\text{Per unit}\end{array}$

Thus, the total amount of accounts payable would be $2,744$\left(\text{\$343}\times 8\text{Units}\right)$.

(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 $\left(\$350\text{Per unit}\times \text{2Unit}\right)$	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 $\left(\$2,800\times 2\%\right)$		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.

To determine

Prepare the journal entry to record the payment assuming that M TV did not pay Industry W within the discount period.

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.

To determine

Explain whether net cost method or gross invoice price will provide the most useful information.

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.