Chapter 8, Problem 7PA

The following transactions took place at Fine Fashions Outlet during July 2019. Fine Fashions Outlet uses a perpetual inventory system. Record the transactions in a general journal. Use 8 as the page number for the general journal.

Analyze: What percentage of the total amount due to Fashion Expo on July 1 is due to the freight charge?

To determine

Post the transactions in the general journal using perpetual inventory system.

Explanation of Solution

Perpetual Inventory System:

The perpetual inventory systems are used for the management of the inventory which provides the latest information about inventory records. The transactions are recorded in inventory ledger correspondingly with each inventory purchase, inventory sale and inventory returns under the perpetual inventory system. The general ledger merchandise inventory account is also updated by the system.

The transactions are posted to general journal as follows:

Merchandise purchased on credit including freight charges:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 1, 2019	Merchandise inventory		5,000
	Accounts payable/Company FE			5,000
	(to record the merchandise purchased on credit with 2/10, n/30 terms)

Table (1)

• • The merchandise inventory account is debited. This is because the merchandise inventory can be identified as asset account and the account balance is increasing. The freight charges are included within merchandise inventory account. No separate account is prepared for the freight charges under perpetual inventory system.
• • Accounts payable is liability and the account balance is increasing. Therefore, it is credited.

Recording of the merchandise sold:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 5, 2019	Accounts Receivable/ Company AC		600
	Sales			600
	(to record the merchandise sold on credit on terms 1/10,n/30)

Table (2)

• • The accounts receivables account is an asset account and the account balance is increasing. Therefore, the accounts receivables account is debited.
• • The sales account is credited. This because the sales account is identified as the revenue account and the revenue is generated from selling merchandise.

Recording of the cost of merchandise sold:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 5, 2019	Cost of goods sold		400
	Merchandise inventory			400
	(to record the cost of merchandise sold)

Table (3)

• • The cost of goods sold account is an expense account and the account balance is increasing. Therefore, the cost of goods sold account is debited.
• • The merchandise inventory account is credited. This is because merchandise inventory account is an asset account and the account balance is decreasing.

Record the receiving of credit memorandum and merchandise returned:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 7, 2019	Accounts payable/Company FE		550
	Merchandise inventory			550
	(to record the merchandise returned and receiving credit memorandum)

Table (4)

• • Since, the accounts payable is liability and the account balance is decreasing. Therefore, it is debited.
• • The merchandise inventory is an asset account and the account balance is decreasing. Therefore, its balance is credited.

Recording the returned merchandise sold and the credit memorandum:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 9, 2019	Sales returns and allowances		200
	Accounts Receivable/ Company AC			200
	(to record the merchandise returned plus sales tax)

Table (5)

• • The sales returns and allowances account is identified as contra revenue account with debit normal balance and increasing. Therefore, it is debited.
• • The account receivable account is an asset account and the account balance is decreasing. Therefore, the accounts payable account is credited.

Recording the cost of returned merchandise sold:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 9, 2019	Merchandise inventory		135
	Cost of goods sold			135
	(to record the cost of returned merchandise sold)

Table (6)

• • The merchandise inventory account is debited. This is because it is an asset account and the account balance is increasing.
• • The cost of goods sold is an expense account and the account balance is decreasing. Therefore, it is credited.

Recording the payment made with purchase discount:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 10, 2019	Accounts payable/Company FE		4,650
	Merchandise inventory			84
	Cash			4,566
	(to record the payment made and taking purchase discount )

Table (7)

• • The accounts payable is liability and the account balance is decreasing. Therefore, accounts payable account is debited. The amount in accounts payable accounts is calculated after subtracting the purchase returns amount.
• • The purchase discount is received of the payment made and there is reduction is merchandise purchases cost. Therefore, merchandise inventory account is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the payment received from the accounts receivable:

	GENERAL JOURNAL			Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 15, 2019	Sales discount		4
	Cash		396
	Accounts Receivable/Company AC			400
	(to record the payment received from the account receivable)

Table (8)

• • The sales discount account is identified as contra revenue account and it has debit normal balance which is increasing. Therefore, it is debited.
• • The cash account is debited. This is because the cash account is asset account and the account balance is increasing.
• • The accounts receivable account is asset account and the account balance is decreasing. Therefore, it is credited.

Recording of the merchandise sold using credit card:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 15, 2019	Credit card expense		360
	Cash		11,640
	Sales			12,000
	(to record the merchandise sold on credit on terms 1/10,n/30)

Table (9)

• • The credit card expense is the expense account which has normal debit balance. The balance is increasing. Therefore, it is debited.
• • The accounts receivables account is an asset account and the account balance is increasing. Therefore, the accounts receivables account is debited.
• • The sales account is credited. This because the sales account is identified as the revenue account and the revenue is generated from selling merchandise.

Recording of the cost of merchandise sold:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 15, 2019	Cost of goods sold		8,000
	Merchandise inventory			8,000
	(to record the cost of merchandise sold)

Table (10)

• • The cost of goods sold account is an expense account and the account balance is increasing. Therefore, the cost of goods sold account is debited.
• • The merchandise inventory account is credited. This is because merchandise inventory account is an asset account and the account balance is decreasing.

Recording the purchases on credit:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 17, 2019	Merchandise inventory		2,430
	Accounts payable/Company FW			2,430
	(to record the inventory purchased on account with terms 1/10,n/30)

Table (11)

• • The merchandise inventory account is debited. This is because it is an asset account and the account balance is increasing.
• • Since, the accounts payable is liability and account balance is increasing. Therefore, it is credited.

Recording the payment made with purchase discount:

GENERAL JOURNAL				Page 8
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
July 26, 2019	Accounts payable/Company FW		2,430
	Merchandise inventory			24.3
	Cash			2,405.7
	(to record the payment made and taking purchase discount )

Table (12)

• • The accounts payable is liability and the account balance is decreasing. Therefore, accounts payable account is debited. The amount in accounts payable accounts is calculated after subtracting the purchase returns amount.
• • The purchase discount is received of the payment made and there is reduction is merchandise purchases cost. Therefore, merchandise inventory account is credited.
• • The cash account is an asset account and the account balance is decreasing. Therefore, it is credited.

The percentage of freight charges in the total due amount can be calculated as follows:

$\text{Percentage of Freight charges}=\frac{\text{Freight charges}}{\text{Total due payment}}\times 100$

Substitute 250 for freight charges and 5000 for total due amount in the above formula.

$\begin{array}{c}\text{Percentage of Freight charges}=\frac{250}{5000}\times 100\\ =5\%\end{array}$

The amount $250 as freight charges can be identified as five percent of total amount $5,000 due to the company FE.

Working Note:

Calculating purchase discount:

Under the perpetual inventory system, the purchase discount is represented by the merchandise inventory account. The purchased discount is calculated on the merchandise purchases cost excluding purchase returns and the freight charges. The purchase discount is given as two percent of the merchandise purchase.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$5,000-\$250-\$550\right)\times \frac{2}{100}\\ =\$84\end{array}$

The amount of purchase discount would be $84.

Calculations for sales discount:

The sales discount is provided to the customer by the seller fulfilling the terms of making the payments as per 1/10, n/30 terms. The customer is entitled to receive the one percent of sales discount on the merchandise sold if the payment is made with ten days of invoice provided.

$\begin{array}{c}\text{Amount of sales discount}=\left(\text{Sales}-\text{Sales returns}\right)\times \left(\frac{\text{Percentage of sales discount}}{100}\right)\\ =\left(\$600-\$200\right)\times \frac{1}{100}\\ =\$4\end{array}$

The amount calculated as per given information would be $4.

Calculations for the credit card expense:

The fee is charged for availing the services of credit card. The bank fee to be charged as credit card is given as three percent for all credit card sales.

$\begin{array}{c}\text{Credit card fee}=\text{Sales amount }\times \frac{\text{Percentage of credit fees}}{100}\\ =\$12,000\times \frac{3}{100}\\ =\$360\end{array}$

The expense would amount to be $360.

Calculations for the purchases amount:

The seller provides the trade discount of forty percent and the ten percent on the list price to the buyer. The purchases amount to be recorded by the buyer would be the invoice price.

$\begin{array}{c}\text{First trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}\\ =\$4,500\times \frac{40}{100}\\ =\$1,800\end{array}$

$\begin{array}{c}\text{Second trade discount}=\left(\text{List price}-\text{First trade discount}\right)\times \left(\frac{\text{Percentage}}{100}\right)\\ =\left(\$4,500-\$1,800\right)\times \frac{10}{100}\\ =\$270\end{array}$

$\begin{array}{c}\text{Total trade discount }=\text{ First trade discount}+\text{Second trade discount}\\ =\$1,800+\$270\\ =\$2,070\end{array}$

$\begin{array}{c}\text{Invoice price}=\text{List price}-\text{Trade discount}\\ =\$4,500-\$2,070\\ =\$2,430\end{array}$

The purchases amount that would be calculated is $2,430.

Calculating purchase discount:

Under the perpetual inventory system, the purchase discount is represented by the merchandise inventory account. The purchased discount is calculated on the merchandise purchases cost excluding trade discount. The purchase discount is given as one percent of the merchandise purchase.

$\begin{array}{c}\text{Amount of Purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{purchases reutrns}\\ -\text{freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of Purchases discount}}{100}\right)\end{array}\right]\\ =\$2,430\times \frac{1}{100}\\ =\$24.3\end{array}$

The amount of purchase discount would be $24.3.