Chapter 8, Problem 14E

(a)

To determine

Journalize the purchase transactions under gross method in the books of P Imports, using perpetual inventory system.

Explanation of Solution

Gross method: The method of recording the inventory purchases without deducting any purchase discounts is referred to as gross method.

Purchase discounts: The sellers offer a reduction in purchase price on initial purchases, to accelerate the collection of on account purchases, by their customers, within the purchase terms promptly. Such a reduction in purchase price is referred to as purchase discount.

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.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the purchase transactions under gross method in the books of P Imports.

October 2:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	2	Merchandise Inventory			3,000
			Accounts Payable			3,000
		(Record purchase of merchandise on account)

Table (1)

Description:

• Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

October 10:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	10	Accounts Payable			500
			Merchandise Inventory			500
		(Record merchandise purchased on account returned)

Table (2)

Description:

• Accounts Payable is a liability account. Since amount owed decreased, liability decreased, and a decrease in liability is debited.
• Merchandise Inventory is an asset account. Since merchandise purchased is returned, asset value decreased, and a decrease in asset is credited.

October 17:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	17	Merchandise Inventory			5,400
			Accounts Payable			5,400
		(Record purchase of merchandise on account)

Table (3)

Description:

• Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

October 27:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	27	Accounts Payable			5,400
			Merchandise Inventory			108
			Cash			5,292
		(Record cash paid for merchandise purchased on account)

Table (4)

Description:

• Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
• Merchandise Inventory is an asset account. Since cost of merchandise purchased is reduced by receiving discount, asset value decreased, and a decrease in asset is credited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute purchase discount.

$\begin{array}{c}\text{Purchase discount = }\left\{\begin{array}{l}\left(\text{Purchases–Purchase returns}\right)\text{×}\\ \text{Purchase discount percentage}\end{array}\right\}\\ \text{= }\left(\text{\$5,400–\$0}\right)\text{×2\%}\\ \text{= \$5,400×2\%}\\ \text{= \$108}\end{array}$ (1)

Compute cash paid.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Purchases–}\\ \text{Purchase returns–}\\ \text{Purchase discount}\end{array}\right\}\\ \text{= }\left(\text{\$5,400–\$0–\$108}\right)\\ \text{= \$5,292}\end{array}$

Note: Refer to Equation (1) for computation of purchase discount.

October 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	31	Accounts Payable			2,500
			Cash			2,500
		(Record cash paid for merchandise purchased on account)

Table (5)

Description:

• Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Working Notes:

Compute cash paid.

$\begin{array}{c}\text{Cash paid = }\left\{\begin{array}{l}\text{Purchases–}\\ \text{Purchase returns}\end{array}\right\}\\ \text{= }\left(\text{\$3,000–\$500}\right)\\ \text{= \$2,500}\end{array}$

(b)

To determine

Journalize the purchase transactions under net method in the books of P Imports, using perpetual inventory system.

Explanation of Solution

Net method: The method of recording the inventory purchases at net of purchase discounts is referred to as net method.

Journalize the purchase transactions under net method in the books of P Imports.

October 2:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	2	Merchandise Inventory			2,940
			Accounts Payable			2,940
		(Record purchase of merchandise on account)

Table (6)

Description:

• Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of merchandise purchased.

Step 1: Compute purchase discount.

$\begin{array}{c}\text{Purchase discount = }\left\{\begin{array}{l}\text{Purchases×}\\ \text{Purchase discount percentage}\end{array}\right\}\\ \text{= \$3,000×2\%}\\ \text{= \$60}\end{array}$ (2)

Step 2: Compute amount of merchandise purchased.

$\begin{array}{c}\text{Merchandise purchased = Purchases – Purchase discount}\\ \text{=\$3,000–\$60}\\ \text{=\$2,940}\end{array}$

Note: Refer to Equation (2) for computation of purchase discount.

October 10:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	10	Accounts Payable			490
			Merchandise Inventory			490
		(Record merchandise purchased on account returned)

Table (7)

Description:

• Accounts Payable is a liability account. Since amount owed decreased, liability decreased, and a decrease in liability is debited.
• Merchandise Inventory is an asset account. Since merchandise purchased is returned, asset value decreased, and a decrease in asset is credited.

Working Notes:

Compute amount of merchandise returned.

Step 1: Compute purchase discount on purchase returns.

$\begin{array}{c}\text{Purchase discount = }\left\{\begin{array}{l}\text{Purchase returns×}\\ \text{Purchase discount percentage}\end{array}\right\}\\ \text{= \$500×2\%}\\ \text{= \$10}\end{array}$ (3)

Step 2: Compute amount of merchandise returned

$\begin{array}{c}\text{Merchandise returned = Purchase returns – Purchase discount}\\ \text{=\$500–\$10}\\ \text{=\$490}\end{array}$

Note: Refer to Equation (3) for computation of purchase discount.

October 17:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	17	Merchandise Inventory			5,400
			Accounts Payable			5,400
		(Record purchase of merchandise on account)

Table (8)

Description:

• Merchandise Inventory is an asset account. Since merchandise is purchased, asset value increased, and an increase in asset is debited.
• Accounts Payable is a liability account. Since amount owed increased, liability increased, and an increase in liability is credited.

Working Notes:

Compute amount of merchandise purchased.

Step 1: Compute purchase discount.

$\begin{array}{c}\text{Purchase discount = }\left\{\begin{array}{l}\text{Purchases×}\\ \text{Purchase discount percentage}\end{array}\right\}\\ \text{= \$5,400×2\%}\\ \text{= \$108}\end{array}$ (4)

Step 2: Compute amount of merchandise purchased.

$\begin{array}{c}\text{Merchandise purchased = Purchases – Purchase discount}\\ \text{=\$5,400–\$108}\\ \text{=\$5,292}\end{array}$ (5)

Note: Refer to Equation (4) for computation of purchase discount.

October 27:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	27	Accounts Payable			5,292
			Cash			5,292
		(Record cash paid for merchandise purchased on account)

Table (9)

Description:

• Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Note: Refer to Equation (5) for computation of cash paid.

October 31:

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	31	Accounts Payable			2,500
			Cash			2,500
		(Record cash paid for merchandise purchased on account)

Table (10)

Description:

• Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.
• Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

October 31 (discounts lost):

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
October	31	Discounts Lost			50
			Accounts Payable			50
		(Record cash paid for merchandise purchased on account)

Table (11)

Description:

• Discounts Lost is an expense account. Expenses decrease equity value, and a decrease in equity is debited, hence, Discounts Lost is debited.
• Accounts Payable is a liability account. Since amount owed is paid, liability decreased, and a decrease in liability is debited.

Working Notes:

Compute purchase discount lost.

$\begin{array}{c}\text{Purchase discount lost = }\left\{\begin{array}{l}\left(\text{Purchases–Purchase returns}\right)\text{×}\\ \text{Purchase discount percentage}\end{array}\right\}\\ \text{= }\left(\text{\$3,000–\$500}\right)\text{×2\%}\\ \text{= \$2,500×2\%}\\ \text{= \$50}\end{array}$