Chapter 7, Problem 7.23E

(Chapter Supplement C) Recording Sales and Purchases with Cash Discounts

Scott’s Cycles sells merchandise on credit terms of 2/15, n/30. A sale invoiced at $1,500 (cost of sales $975) was made to Shannon Allen on February 1. The company uses the gross method of recording sales discounts.

Required:

1. 1. Give the journal entry to record the credit sale. Assume use of the perpetual inventory system.
2. 2. Give the journal entry, assuming that the account was collected in full on February 9.
3. 3. Give the journal entry, assuming, instead, that the account was collected in full on March 2.

  On March 4, the company purchased bicycles and accessories from a supplier on credit, invoiced at $9,000; the terms were 3/10, n/30. The company uses the gross method to record purchases.

Required:

1. 4. Give the journal entry to record the purchase on credit. Assume use of the perpetual inventory system.
2. 5. Give the journal entry, assuming that the account was paid in full on March 12.
3. 6. Give the journal entry, assuming, instead, that the account was paid in full on March 28.

To determine

Record the journal entry for the credit sale under perpetual inventory system.

Answer to Problem 7.23E

The journal entry for the credit sale is recorded as follows:

Date	Account Title and Explanation		Post Ref.	Debit ($)	Credit ($)
February 1	Accounts Receivable			1,500
		Sales			1,500
	(To record the sales made on account)
February 1	Cost of Goods Sold			975
	Merchandised Inventory				975
	(To record the cost of goods sold)

Table (1)

Explanation of Solution

• Accounts receivable is an asset and increased by $1,500. Therefore, debit accounts receivable account with $1,500.
• Sales are revenue and increased by $1,500. Therefore, credit sales account with $1,500.
• Cost of goods sold is an expense and increased which has decreased the equity by $975. Therefore, debit cost of goods sold account with $975.
• Merchandised inventory is an asset and decreased by $975. Therefore, credit the merchandised inventory account with $975.

To determine

Record the journal entry for the account receivable that was collected in full on February 9.

Answer to Problem 7.23E

The journal entry for the account receivable that was collected on February 9 is recorded as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
February 9	Cash (2)		1,470
	Sales discounts (1)		30
	Accounts Receivable			1,500
	(To record the sale discounts)

Table (2)

Explanation of Solution

• Cash is an asset and increased by $1,470. Therefore, debit cash account with $1,470.
• Sale discount is a contra-sale account (with normal debit balance) and increased by $30. Therefore, credit the sale discount account with $30.
• Accounts receivable is an asset and decreased by $1,500. Therefore, credit accounts receivable account with $1,500.

Working note:

Compute the amount of sale discount:

$\begin{array}{c}\text{Discount Amount }=\left[\text{Sales Invoice}\times \text{Rate of Discount}\right]\\ =\text{\$1,50}0\times 2\text{\%}\\ =\text{\$30}\end{array}$ (1)

Determine the amount of cash:

$\begin{array}{c}\text{Cash }=\left[\text{Sale}-\text{Sales Discount}\right]\\ =\text{\$1,50}0-\$30\\ =\text{\$1,470}\end{array}$ (2)

To determine

Record the journal entry for the account receivable that was collected in full on March 2.

Answer to Problem 7.23E

The journal entry for the account receivable that was collected in full on March 2 is recorded as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
March 2	Cash		1,500
	Accounts Receivable			1,500
	(To record the sales discounts)

Table (3)

Explanation of Solution

• Cash is an asset and increased by $1,500. Therefore, debit cash account with $1,500.
• Accounts receivable is an asset and decreased by $1,500. Therefore, credit accounts receivable account with $1,500.

To determine

Record the journal entry for the purchase made on credit.

Answer to Problem 7.23E

The journal entry for the purchase made on credit is recorded as follows:

Date	Account Title and Explanation		Post Ref.	Debit ($)	Credit ($)
March 4	Merchandised Inventory			9,000
		Accounts Payable			9,000
	(To record the purchase of inventories on account)

Table (4)

Explanation of Solution

• Merchandised inventory is an asset and increased by $9,000. Therefore, debit the merchandised inventory account with $9,000.
• Accounts payable is a liability and increased by $9,000. Therefore, credit the accounts payable account with $9,000.

To determine

Record the journal entry for the account payable that was paid in full on March 12.

Answer to Problem 7.23E

Record the journal entry for the account payable that was paid in full on March 12.

Date	Account Title and Explanation		Post Ref.	Debit ($)	Credit ($)
March 12	Accounts Payable			9,000
		Inventory (3)			270
		Cash (4)			8,730
	(To record the payment made to the supplier)

Table (5)

Explanation of Solution

• Accounts Payable is liability and decreased by $9,000. Therefore, debit the accounts payable account with $9,000.
• Merchandised inventory is an asset and decreased by $270. Therefore, credit the merchandised inventory account with $270.
• Cash is an asset and decreased by $8,730. Therefore, credit cash account with $8,730.

Working notes:

Compute the amount of purchase discount:

$\begin{array}{c}\text{Discount Amount }=\left[\text{Purchase Invoice}\times \text{Rate of Discount}\right]\\ =\text{\$9,00}0\times 3\text{\%}\\ =\text{\$270}\end{array}$ (3)

Determine the amount of cash:

$\begin{array}{c}\text{Cash}=\text{Invoice Price}-\text{Purchase discount}\\ =\$9,000-\$270\\ =\$8,730\end{array}$ (4)

To determine

Record the journal entry for the account payable that was paid in full on March 28.

Answer to Problem 7.23E

Record the journal entry for the account payable that was paid in full on March 28.

Date	Account Title and Explanation		Post Ref.	Debit ($)	Credit ($)
March 12	Accounts Payable			9,000
		Cash			9,000
	(To record the payment made to the supplier)

Table (6)

Explanation of Solution

• Accounts Payable is liability and decreased by $9,000. Therefore, debit the accounts payable account with $9,000.
• Cash is an asset and decreased by $9,000. Therefore, credit cash account with $9,000.