Chapter 8, Problem 8.1P

Various inventory transactions; journal entries

• LO8–1 through LO8–3

James Company began the month of October with inventory of $15,000. The following inventory transactions occurred during the month:

a. The company purchased merchandise on account for $22,000 on October 12, 2018. Terms of the purchase were 2/10, n/30. James uses the net method to record purchases. The merchandise was shipped f.o.b. shipping point and freight charges of $500 were paid in cash.

b. On October 31, James paid for the merchandise purchased on October 12.

c. During October merchandise costing $18,000 was sold on account for $28,000.

d. It was determined that inventory on hand at the end of October cost $19,060.

Required:

1. Assuming that the James Company uses a periodic inventory system, prepare journal entries for the above transactions including the adjusting entry at the end of October to record cost of goods sold.

2. Assuming that the James Company uses a perpetual inventory system, prepare journal entries for the above transactions.

To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

Perpetual Inventory System refers to the inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis. It shows the exact on-hand-inventory at any point of time.

To Record: The journal entries using periodic inventory system.

Explanation of Solution

a. Record the entry for purchase on account.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 12, 2018	Purchases		21,560 (1)
	Accounts Payable			21,560
	(To record the purchase of inventories on account)

Table (1)

Working Note:

Compute the purchase price of the inventory.

$\begin{array}{c}\text{Purchase Price of Inventory}=\$22,000-2\%\\ =\text{\$22,000}-\$440\\ =\text{\$21,560}\end{array}$ (1)

• Purchases account is an expense and it is decreased the equity value by $21,560. Therefore, debit purchase account with $21,560.
• Accounts payable is a liability and it is increased by $21,560. Therefore, credit accounts payable account with $21,560.

Record the freight paid.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 12, 2018	Freight-in		500
	Cash			500
	(To record the freight cost)

Table (2)

• Freight-in account is an expense and it is decreased the equity value by $500. Therefore, debit freight-in account with $500.
• Cash is an asset and it is decreased by $500. Therefore, credit cash account with $500.

b. Record the payment of accounts payable.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 31, 2018	Accounts Payable		21,560 (1)
	Interest Expense		440 (2)
	Cash			22,000
	(To record the payment made to the supplier)

Table (3)

Working Note:

Compute the interest expense.

$\begin{array}{c}\text{Interest expense}=\$22,000\times 2\%\\ =\$440\end{array}$ (2)

• Accounts payable is a liability and it is decreased by $21,560. Therefore, debit accounts payable account with $21,560.
• Interest expense account is an expense and it is decreased the equity value by $440. Therefore, debit interest expense account with $440.
• Cash is an asset and it is decreased by $22,000. Therefore, credit cash account with $22,000.

c. Record the sales entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 2018	Accounts Receivable		28,000
	Sales Revenue			28,000
	(To record the sales on account)

Table (4)

• Accounts receivable is an asset and it is increased by $28,000. Therefore, debit accounts receivable account with $28,000.
• Sales revenue is revenue and it increases the value of equity by $28,000. Therefore, credit sales revenue with $28,000.

Note:

There is no entry required for cost of goods sold under the periodic method.

d. Record the year-end adjusting entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 31, 2018	Cost of Goods Sold (Refer Table 6)		18,000
	Ending Inventory		19,060
	Beginning Inventory			15,000
	Purchases			21,560
	Freight-in			500
	(To record the cost of goods sold)

Table (5)

Working Note:

Calculate the cost of goods sold.

Particulars	Amount ($)	Amount ($)
Beginning Inventory		15,000
Add: Net Purchases
Purchases	21,560
Freight-in	500	22,060
Cost of goods available for sale		37,060
Less: Ending Inventory		(19,060)
Cost Of Goods Sold		18,000

Table (6)

• Cost of Goods Sold and Ending Inventory generally shows a credit balance. Therefore, to close these accounts, it should be debited. Therefore, debit all the above mentioned accounts with their respective amounts.
• Beginning Inventory, Purchases, and Freight-In generally shows a debit balance. Therefore, to close these accounts, it should be credited. Therefore, credit all the above mentioned accounts with their respective amounts.

To determine

To Record: The journal entries using perpetual inventory system.

Explanation of Solution

a. Record the entry for purchase on account.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 12, 2018	Inventory		21,560
	Accounts Payable			21,560
	(To record the purchase of inventories on account)

Table (7)

• Inventory is an asset and it is increased by $21,560. Therefore, debit inventory account with $21,560.
• Accounts payable is a liability and it is increased by $21,560. Therefore, credit accounts payable account with $21,560.

Record the freight paid.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Inventory		500
	Cash			500
	(To record the freight cost)

Table (8)

• Inventory is an asset and it is increased by $500. Therefore, debit inventory account with $500.
• Cash is an asset and it is decreased by $500. Therefore, credit cash account with $500.

b. Record the payment of accounts payable.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 31, 2018	Accounts Payable		21,560 (1)
	Interest Expense		440(2)
	Cash			22,000
	(To record the payment made to the supplier)

Table (9)

• Accounts payable is a liability and it is decreased by $21,560. Therefore, debit accounts payable account with $21,560.
• Interest expense account is an expense and it is decreased the equity value by $440. Therefore, debit interest expense account with $440.
• Cash is an asset and it is decreased by $22,000. Therefore, credit cash account with $22,000.

c. Record the sales entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 2018	Accounts Receivable		28,000
	Sales Revenue			28,000
	(To record the sales on account)

Table (10)

• Accounts receivable is an asset and it is increased by $28,000. Therefore, debit accounts receivable account with $28,000.
• Sales revenue is revenue and it increases the value of equity by $28,000. Therefore, credit sales revenue with $28,000.

The following is the journal entry.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
October 2018	Cost of Goods Sold		18,000
	Merchandised Inventory			18,000
	(To record the cost of goods sold)

Table (11)

• Cost of goods sold is an expense account and it decreases the value of equity by $18,000. Therefore, debit cost of goods sold account with $18,000.
• Inventory is an asset and it is decreased by $18,000. Therefore, credit inventory account with $18,000.

d. Record the year-end adjusting entry.

Note:

No entry required for the year-end adjusting entry under perpetual inventory system.