Chapter 8, Problem 7PB

The following transactions took place at The Garden Center during June 2019. The Garden Center uses a perpetual inventory system. Record the transactions in a general journal. Use 10 as the page number for the general journal.

Analyze: Assume 20 lawn mowers were purchased from Mow Down Corporation on June 1. What was the average cost per lawn mower? (Hint: Include the freight charges as part of the cost of the lawn mowers.)

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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 1, 2019	Merchandise inventory		5,400
	Accounts payable/Company MDC			5,400
	(to record the merchandise purchased on credit with 2/10, n/30 terms)

Table (1)

• • The merchandise inventory account is an asset account and the account balance is increasing. Therefore, it is debited. 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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 5, 2019	Accounts Receivable/ Company AG		1000
	Sales			1000
	(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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 5, 2019	Cost of goods sold		500
	Merchandise inventory			500
	(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 an asset account and the account balance is increasing. Therefore, it is debited.

Record the receiving of credit memorandum and merchandise returned:

GENERAL JOURNAL				Page 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 7, 2019	Accounts payable/Company MDC		550
	Merchandise inventory			550
	(to record the merchandise returned and receiving credit memorandum)

Table (4)

• • 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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 9, 2019	Sales returns and allowances		100
	Accounts Receivable/ Company AG			100
	(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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 9, 2019	Merchandise inventory		50
	Cost of goods sold			50
	(to record the cost of returned merchandise sold)

Table (6)

• • The merchandise inventory account is an asset account and the account balance is increasing. Therefore, it is debited.
• • 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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 10, 2019	Accounts payable/Company MDC		4,850
	Merchandise inventory			90.6
	Cash			4,759.4
	(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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 15, 2019	Sales discount		9
	Cash		891
	Accounts Receivable/Company AG			900
	(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 an asset account and the account balance is increasing. Therefore, the cash account is debited.
• • 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 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 15, 2019	Credit card expense		300
	Cash		14,700
	Sales			15,000
	(to record the merchandise sold on credit)

Table (9)

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

Recording of the cost of merchandise sold:

GENERAL JOURNAL				Page 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 15, 2019	Cost of goods sold		7,500
	Merchandise inventory			7,500
	(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 an asset account and the account balance is decreasing. Therefore, it is credited.

Recording the purchases on credit:

GENERAL JOURNAL				Page 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 17, 2019	Merchandise inventory		5,670
	Accounts payable/Company PW			5,670
	(to record the inventory purchased on account with terms 1/10,n/30)

Table (11)

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

Recording the payment made with purchase discount:

GENERAL JOURNAL				Page 10
Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
June 26, 2019	Accounts payable/Company PW		5,670
	Merchandise inventory			56.7
	Cash			5,613.3
	(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.

Calculations for determining the cost per item purchased from company MDC are as follows:

The total cost incurred on purchasing 20 items is given as $5,400 including freight charges.

The formula for calculating cost per item is as follows:

$\text{Cost per item}=\frac{\text{Total cost incurred on purchasing of items}}{\text{Number of items}}$

Substitute $5,400 for the total cost incurred on purchasing of items and 20 for number of items.

$\begin{array}{c}\text{Cost per item}=\frac{\$5,400}{20}\\ =\$270\end{array}$

The cost per item is calculated as $270.

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.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\left(\$5,400-\$320-\$550\right)\times \frac{2}{100}\\ =\$90.6\end{array}$

The amount of purchase discount would be $90.6.

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.

$\begin{array}{c}\text{Amount of sales discount}=\left(\text{Sales}-\text{Sales returns}\right)\times \left(\frac{\text{Percentage of sales discount}}{100}\right)\\ =\left(\$1,000-\$100\right)\times \frac{1}{100}\\ =\$9\end{array}$

The amount calculated as per given information would be $9.

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 two percent for all credit card sales.

$\begin{array}{c}\text{Credit card fee}=\text{Sales amount }\times \frac{\text{Percentage of credit fees}}{100}\\ =\$15,000\times \frac{2}{100}\\ =\$300\end{array}$

The expense would amount to be $300.

Calculations for the purchases amount:

The seller provides the trade discount of thirty 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.

$\begin{array}{c}\text{First trade discount}=\text{List price}\times \frac{\text{Percentage}}{100}\\ =\$9,000\times \frac{30}{100}\\ =\$2,700\end{array}$

$\begin{array}{c}\text{Second trade discount}=\left(\text{List price}-\text{First trade discount}\right)\times \left(\frac{\text{Percentage}}{100}\right)\\ =\left(\$9,000-\$2,700\right)\times \frac{10}{100}\\ =\$630\end{array}$

$\begin{array}{c}\text{Total trade discount }=\text{ First trade discount}+\text{Second trade discount}\\ =\$2,700+\$630\\ =\$3,330\end{array}$

$\begin{array}{c}\text{Invoice price}=\text{List price}-\text{Trade discount}\\ =\$9,000-\$3,330\\ =\$5,670\end{array}$

The purchases amount that would be calculated is $5,670.

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.

$\begin{array}{c}\text{Amount of purchases discount}=\left[\begin{array}{c}\left(\begin{array}{l}\text{Purchases amount}-\text{Purchases reutrns}\\ -\text{Freight charges}\end{array}\right)\\ \times \left(\frac{\text{Percentage of purchases discount}}{100}\right)\end{array}\right]\\ =\$5,670\times \frac{1}{100}\\ =\$56.7\end{array}$

The amount of purchase discount would be $56.7.