Chapter 6, Problem 5PA

a.

To determine

Prepare the journal entry to record the transactions for Company SS using gross invoice method.

Explanation of Solution

Prepare the journal entry to record the sale of merchandise on account:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 9	Accounts receivable (Company SM)	10,000
	Sales		10,000
	(To record the sale made to Company SM on account)

Table (1)

• Accounts receivable is an asset account and it is increased. Therefore, debit accounts receivable with $10,000.
• Sale is a revenue account and it increases the stockholders’ equity account. Therefore, credit sales account with $10,000.

Prepare the journal entry to record the cost of goods sold:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 9	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:

ate	Accounts title and explanation	Debit ($)	Credit ($)
February 12	Delivery expense	40
	Cash		40
	(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 $40.
• Cash is an asset account and it is decreased. Therefore, credit cash with $40.

Prepare the journal entry to record the sales return from Company SM:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 13	Sales returns and allowances $\left(\$100\text{Per pair}\times \text{10pairs}\right)$	1,000
	Accounts receivable (Company SM)		10,000
	(To record the sales returns and allowances from Company SM)

Table (4)

• Sales returns and allowance are the contra-revenue account which decreases the amount of revenue. Therefore, debit sales discounts with $1,000.
• Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivable account with $1,000.

Prepare the journal entry to record the cost of goods sold for the returned goods:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 13	Inventory $\left(10\text{Pairs}\times \text{\$60Per pair}\right)$	600
	Cost of goods sold		600
	(To record the reduction in the cost of goods sold for the returned goods)

Table (5)

• Inventory is an asset account and it is increased. Therefore, debit inventory account with $600.
• Cost of goods sold is an expense account and it is decreased. Therefore, credit cost of goods sold with $600.

Prepare the journal entry to record the collection of accounts receivable within the discount period:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 19	Cash $\left(9,000\times 99\%\right)$	8,910
	Sales discount $\left(9,000\times 1\%\right)$	90
	Accounts receivable		9,000
	(To record the collection of accounts receivable from Company SM)

Table (6)

• Cash is an asset account and it is increased. Therefore, debit inventory account with $8,910.
• Sales discount is an expense account and it decreases the stockholder’s equity. Therefore, debit sales discount with $90.
• Accounts receivable is an asset account and it is decreased. Therefore, credit accounts receivables with $9,000.

b.

To determine

Prepare the journal entries to record the transactions for Company SM using net cost method.

Explanation of Solution

Prepare the journal entry to record the purchase of inventory on account:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 9	Inventory	9,900
	Accounts payable (Company SS) (1)		9,900
	(To record the purchase made from Company GW)

Table (7)

Working note:

Calculate the amount of accounts payable:

$\begin{array}{c}\text{Accounts payable to Company SS}=\text{Purchase price}-\left(\text{Purchase price}\times \text{Discount rate}\right)\\ =\$10,000-\left(\$10,000\times 1\%\right)\\ =\$9,900\end{array}$ (1)

• Inventory is an asset account and it is increased. Therefore, debit inventory account with $9,900.
• Accounts payable is a liability account and it is increased. Therefore, credit accounts payable with $9,900.

Prepare the journal entry to record the transportation charge in in bound:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 12	Transportation in	40
	Cash		40
	(To record the transportation charge in bound)

Table (8)

• Transportation charge is an expense account and it decreases the stockholders’ equity. Therefore, debit transportation charge with $40.
• Cash is an asset account and it is decreased. Therefore, credit cash with $40.

Prepare the journal entry to record the return of goods:

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 13	Accounts payable (Company SS)	990
	Inventory $\left(\$99\text{Per unit}\times \text{10Pairs}\right)$		990
	(To record the returned goods)

Table (5)

• Accounts payable is a liability account and it is decreased. Therefore, debit accounts payable with $99.
• Inventory is an asset account and it is decreased. Therefore, credit inventory account with $990.

Prepare the journal entry to record the payment made within the discount period.

Date	Accounts title and explanation	Debit ($)	Credit ($)
February 19	Accounts payable (Company SS)	8,910
	Cash $\left(\$9,900-\$990\right)$		8,910
	(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 $8,910.
• Cash is an asset account and it is decreased. Therefore, credit cash account with $8,910.

c.

To determine

Explain whether Company SM should take the advantage of cash discount even if it borrow money at the annual rate of 11 percent.

Answer to Problem 5PA

Yes, Company SM must take the advantage of 1/1,n/30 purchase discount.

Explanation of Solution

Company SM is borrowing money from the bank at the rate of 11%. If the Company SM takes the advantage of cash discount, then the company saves 1% by making the payment within the 20days. The bank is charging 11% per year for the loan borrowed by Company SM. hence, the bank charges nearly 0.6% $\left(11\%\times \frac{20\text{Days}}{365\text{Days}}\right)$ for the 20days period. Since, the cost of passing up the cash discount is larger than the cost of short-term borrowing, Company SM should take the advantage of cash discount.