a.
Prepare the
a.

Explanation of Solution
Gross invoice method: In gross invoice method, the companies will record the purchase of the inventory at total invoice price.
Prepare the journal entry to record the sale of merchandise on account:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 12 | 18,000 | ||
Sales | 18,000 | ||
(To record the sale made to Company S on account) |
Table (1)
- Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $18,000.
- Sale is a revenue account and it increases the
stockholders’ equity account. Therefore, credit sales account with $18,000.
Prepare the journal entry to record the cost of goods sold:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 12 | Cost of goods sold | 6,000 | |
Inventory | 6,000 | ||
(To record the cost of goods sold) |
Table (2)
- Cost of goods sold is an expense account and it decreases the stockholders’ equity. Therefore, debit cost of goods sold with $6,000.
- Inventory is an asset account and it is decreased. Therefore, credit inventory with $6,000.
Prepare the journal entry to record the delivery expenses:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 15 | Delivery expense | 25 | |
Cash | 25 | ||
(To record the cost of goods sold) |
Table (3)
- Delivery expense is an expense account and it decreases the stockholders’ equity. Therefore, debit delivery expense with $25.
- Cash is an asset account and it is decreased. Therefore, credit cash with $25.
Prepare the journal entry to record the sales return from Company S:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 16 | Sales returns and allowances | 240 | |
Accounts receivable | 240 | ||
(To record the sales returns and allowances from Company S) |
Table (3)
- Sales returns and allowance are the contra-revenue account which decreases the amount of revenue. Therefore, debit sales discounts with $240.
- Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivable account with $240.
Prepare the journal entry to record the cost of goods sold for the returned goods:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 16 | Inventory | 80 | |
Cost of goods sold | 80 | ||
(To record the reduction in the cost of goods sold for the returned goods) |
Table (4)
- Inventory is an asset account and it is increased. Therefore, debit inventory account with $80.
- Cost of goods sold is an expense account and it is decreased. Therefore, credit cost of goods sold with $80.
Prepare the journal entry to record the collection of accounts receivable within the discount period:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 22 | Cash | 17,582.40 | |
Sales discount | 177.60 | ||
Accounts receivable (Company S) | 17,760 | ||
(To record the collection of accounts receivable from Company SM) |
Table (4)
- Cash is an asset account and it is increased. Therefore, debit inventory account with $17,582.40.
- Sales discount is an expense account and it decreases the stockholder’s equity. Therefore, debit sales discount with $177.60.
- Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivables with $17,760.
b.
Prepare the journal entries to record the transactions for Company S using net cost method.
b.

Explanation of Solution
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.
Prepare the journal entry to record the purchase of inventory on account:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 12 | Inventory | 17,820 | |
Accounts payable (Company HP) | 17,820 | ||
(To record the purchase made from Company HP) |
Table (4)
Working note:
Calculate the amount of accounts payable:
- Inventory is an asset account and it is increased. Therefore, debit inventory account with $17,820.
- Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $17,820.
Prepare the journal entry to record the transportation charge in in bound:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 15 | Transportation in | 25 | |
Cash | 25 | ||
(To record the transportation charge in bound) |
Table (5)
- Transportation charge is an expense account and it decreases the stockholders’ equity. Therefore, debit transportation charge with $25.
- Cash is an asset and it is decreased. Therefore, credit cash account with $25.
Prepare the journal entry to record the return of goods:
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 16 | Accounts payable (Company HP) | 237.60 | |
Inventory | 237.60 | ||
(To record the returned goods) |
Table (5)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $237.60.
- Inventory is an asset account and it is decreased. Therefore, credit inventory account with $237.60.
Prepare the journal entry to record the payment made within the discount period.
Date | Accounts title and explanation |
Debit ($) |
Credit ($) |
October 22 | Accounts payable (Company HP) | 17,582.40 | |
Cash | 17,582.40 | ||
(To record the payment made with in discount period) |
Table (5)
- Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $17,582.40.
- Cash is an asset account and it is decreased. Therefore, credit cash account with $17,582.40.
c.
Explain whether Company S should take the advantage of cash discount even if it borrow money at the annual rate of 12 percent.
c.

Answer to Problem 5BP
Yes, Company SM must take the advantage of 1/1,n/30 purchase discount.
Explanation of Solution
Company S is borrowing money from the bank at the rate of 12%. If the Company S takes the advantage of cash discount, then the company can save 1% by making the payment within the 20days. The bank is charging 11% per year for the loan borrowed by Company S. hence, the bank charges nearly 0.66%
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Chapter 6 Solutions
Financial & Managerial Accounting With Connect Plus Access Code: The Basis For Business Decisions
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