Chapter 8, Problem 14BE

a)

To determine

Introduction:

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited / credited to reflect the effect of business transactions and events.

To Determine:

Journal entries to record the purchases for October at gross amounts.

Answer to Problem 14BE

Solution:

Date	Account Titles	Debit	Credit
October
2	Merchandise Purchase	$ 3,000
	Accounts Payable		$ 3,000
	(Being purchases made on credit)
10	Accounts Payable	$ 500
	Merchandise Purchase		$ 500
	(Being credit memorandum issued for past purchases)
17	Merchandise Purchase	$ 5,400
	Accounts Payable		$ 5,400
	(Being purchases made on credit)
27	Accounts Payable	$ 5,400
	Discount Receivable		$ 108
	Bank		$ 5,292
	(Being payment made for purchases made on credit net of discount)
31	Accounts Payable	$ 3,000
	Bank		$ 3,000
	(Being payment made for purchases made on credit)

Explanation of Solution

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• On October 2, Merchandise Purchase will be debited by $ 3,000 and Accounts Payable will be credited by $ 3,000 since purchases made on credit. The gross amount of purchases is recorded as discount is applicable on payment.

• The terms of purchase include discount terms 2/10, n/30. The discount terms 2/10, n/30 indicate 2% discount for prompt payment within 10 days and n/30 signifies that the due date for the payment of the bill without discount is 30 days.

• On October 10, Accounts Payable will be debited by $ 500 and Merchandise Purchase will be credited by $ 500 since credit memorandum was issued for past purchases made on October 2. This amount is recorded separately since the amounts of purchase are recorded on Gross Values.

• On October 17, Merchandise Purchase will be debited by $ 5,400 and Accounts Payable will be credited by $ 5,400 since purchases made on credit. The gross amount of purchases is recorded as discount is applicable on payment.

• The terms of purchase include discount terms 2/10, n/30. The discount terms 2/10, n/30 indicate 2% discount for prompt payment within 10 days and n/30 signifies that the due date for the payment of the bill without discount is 30 days.

• On October 27, Accounts Payable will be debited by $ 5,400, Discount Payable will be credited by $ 108 and Bank will be credited by $ 5,292 since payment was made for purchases made on credit net of discount. The discount calculated is 2% of the Purchase Price of $5,400.

• On October 31, Accounts Payable will be debited by $ 3,000 and Bank will be credited by $ 3,000 since payment was made for purchases made on credit. There is no discount that can be availed since the payment was made later than 10 days.

• Merchandise Purchasesis an asset and must be debited to indicate increase in expense and cash outflow. Bank are assets is an asset must be credited to indicate increase in expense and cash outflow

• Accounts Payable is a liability and must be credited to indicate increase in expense and cash outflow. Discount is an Income and must be credited to indicate decrease in expense.

Conclusion

Hence the transactions have been journalized at gross amounts.

b)

To determine

Introduction:

Accounting for Discounts Lost

• Discounts lost represent the value of the purchase discounts that are lost due to failure to comply with the conditions to avail discount, such as prompt payment within a stipulated period of time.

• Purchase discounts represent an important part of profitability and the discount on purchase of goods is directly proportional to the increase in profitability i.e. an increase in the purchase discounts availed leads to an increase in the profitability.

• Discounts lost represent expenses and have an adverse effect on profitability. Cash management believes in efficient utilization of cash and cash equivalents and purchase discounts form an important component of that since they result in higher profitability.

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited / credited to reflect the effect of business transactions and events.

To Determine:

Journal entries to record the purchases for October at net amounts.

Answer to Problem 14BE

Solution:

Date	Account Titles	Debit	Credit
October
2	Merchandise Purchase	$ 2,500
	Accounts Payable		$ 2,500
	(Being purchases made on credit recorded net of discount)
17	Merchandise Purchase	$ 5,292
	Accounts Payable		$ 5,292
	(Being purchases made on credit)
27	Accounts Payable	$ 5,292
	Bank		$ 5,292
	(Being payment made for purchases made on credit net of discount)
31	Accounts Payable	$ 2,500
	Discounts Lost	$ 500
	Bank		$ 3,000
	(Being payment made for purchases made on credit)

Explanation of Solution

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• On October 2, Merchandise Purchase will be debited by $ 3,000 and Accounts Payable will be credited by $ 3,000 since purchases made on credit. The gross amount of purchases is recorded as discount is applicable on payment.

• The terms of purchase include discount terms 2/10, n/30. The discount terms 2/10, n/30 indicate 2% discount for prompt payment within 10 days and n/30 signifies that the due date for the payment of the bill without discount is 30 days.

• On October 10, Accounts Payable will be debited by $ 500 and Merchandise Purchase will be credited by $ 500 since credit memorandum was issued for past purchases made on October 2. This amount is not recorded separately since the amounts of purchase are recorded on Net Values.

• On October 17, Merchandise Purchase will be debited by $ 5,400 and Accounts Payable will be credited by $ 5,400 since purchases made on credit. The gross amount of purchases is recorded as discount is applicable on payment.

• The terms of purchase include discount terms 2/10, n/30. The discount terms 2/10, n/30 indicate 2% discount for prompt payment within 10 days and n/30 signifies that the due date for the payment of the bill without discount is 30 days.

• On October 27, Accounts Payable will be debited by $ 5,292, and Bank will be credited by $ 5,292 since payment was made for purchases made on credit net of discount. The discount calculated is 2% of the Purchase Price of $5,400.

• On October 31, Accounts Payable will be debited by $ 3,000 and Bank will be credited by $ 3,000 since payment was made for purchases made on credit. There is no discount that can be availed since the payment was made later than 10 days.

• The net method advocates recording of purchase liabilities at the value inclusive of discount, i.e. recording the value of purchases in the books of accounts net of discount. In case the discount on prompt payment cannot be availed an amount in excess of the amount recorded in the books of account has to be paid.

• This excess amount is charged to an account called Discounts Lost account and it represents the cost of not paying the outstanding amounts payable early. It is an expense and debited in order to increase its’ balance.

• Merchandise Purchasesis an asset and must be debited to indicate increase in expense and cash outflow. Bank is an asset must be credited to indicate increase in expense and cash outflow. Accounts Payable is a liability and must be credited to indicate increase in expense and cash outflow.

Conclusion

Hence the transactions have been journalized at net amounts.