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Chapter 5: Q3SE (page 296)

Consider the following transactions for Burlington Drug Store:

Feb. 2 Burlington buys \(23,800 worth of inventory on account with credit terms of 2/15, n/30, FOB shipping point.

4 Burlington pays a \)50 freight charge.

9 Burlington returns $5,200 of the merchandise due to damage during shipment.

14 Burlington paid the amount due, less return and discount.

Requirements

1. Journalize the purchase transactions. Explanations are not required.

2. In the final analysis, how much did the inventory cost Burlington Drug Store?

Short Answer

Expert verified

Answer

The cost of inventory is$18,278.

Step by step solution

01

Meaning of Credit Term

In accounting, credit term refers to the terms and conditions associated with the payment of goods sold or bought by a business entity. Credit term generally depicts thediscount and due daysof payment.

02

Journal entries for purchase transactions

Date

Accounts and Explanation

Debit ($)

Credit ($)

Feb 2

Merchandise Inventory

23,800

Accounts payable

23,800

Feb 4

Merchandise inventory

50

Cash

50

Feb 9

Accounts payable

5,200

Merchandise inventory

5,200

Feb 14

Accounts payable (23,800-5,200)

18,600

Cash (18,600-372)

18,228

Merchandise inventory (18,600*2%)

372

03

Computation of inventory cost

Inventorycost=Valueofinventory+Freightcharges-Returns-Discount=$23,800+$50-$5,200-$372=$18,278

Hence, the Company Burlington Drug Store consisting an inventory cost of $18,278.

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Most popular questions from this chapter

Camilia Communications reported the following figures from its adjusted trial balance for its first year of business, which ended on July 31, 2018:

Cash \( 2,900 Cost of Goods Sold \) 18,700

Selling Expenses 1,400 Equipment, net 9,500

Accounts Payable 4,300 Accrued Liabilities 1,800

Common Stock 4,365 Net Sales Revenue 29,200

Notes Payable, long-term 500 Accounts Receivable 3,200

Merchandise Inventory 1,100 Interest Expense 65

Administrative Expenses 3,300

Requirements

1. Prepare Camilia Communication鈥檚 statement of retained earnings for the year ended July 31, 2018. Assume that there were no dividends declared during the year and that the business began on August 1, 2017.

2. Prepare Camilia Communication鈥檚 classified balance sheet at July 31, 2018. Use the report format.

Match the accounting terms with the corresponding definitions.

1. Credit Terms a. The cost of the merchandise inventory that the business has sold to customers.

2. FOB Destination b. An amount granted to the purchaser as an incentive to keep goods that are not 鈥渁s ordered.鈥�

3. Invoice c. A type of merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers.

4. Cost of Goods Sold d. A situation in which the buyer takes ownership (title) at the delivery destination point.

5. Purchase Allowance e. A type of merchandiser that buys goods from manufacturers and then sells them to retailers.

6. FOB Shipping Point f. A discount that businesses offer to purchasers as an incentive for early payment.

7. Wholesaler g. A situation in which the buyer takes title to the goods after the goods leave the seller鈥檚 place of business.

8. Purchase Discount h. The terms of purchase or sale as stated on the invoice.

9. Retailer i. A seller鈥檚 request for cash from the purchaser.

Under the new revenue recognition standard, how is the sale of inventory recorded?

When granting a sales allowance is there a return of merchandise inventory from the customer? Describe the journal entry(ies) that would be recorded.

Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across eight Western states. She was an old pro and had known most of the other warehouse managers for many years. Around December each year, auditors would come to do a physical count of the inventory at each warehouse. Recently, Rae鈥檚 brother started his own drilling company and persuaded Rae to 鈥渓oan鈥� him 80 joints of 5-inch drill pipe to use for his first well. He promised to have it back to Rae by December, but the well encountered problems and the pipe was still in the ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another Atkins warehouse. 鈥淪end me over 80 joints of 5-inch pipe tomorrow, and I鈥檒l get them back to you ASAP,鈥� said Rae. When the auditors came, all the pipe on the books was accounted for, and they filed a 鈥渘o-exception鈥� report.

Requirements

1. Is there anything the company or the auditors could do in the future to detect this kind of fraudulent practice?

2. How would this kind of action affect the financial performance of the company?
See all solutions

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