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Chapter 8: Question 8E (page 425)

Cruise Industries purchased \(10,800 of merchandise on February 1, 2017,

subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned \)2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.

Instructions

(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(c) At what amount would the purchase on February 1 be recorded if the net method were used?

Short Answer

Expert verified

Under the gross method, the cash discount would be $224.1, and under the net method, the cash discount would be$291.6.

Step by step solution

01

Journal entry under perpetual system and gross method

Date

Description

Debit

Credit

Feb 1, 2017

Inventory A/c

$10,800

Accounts Payable

$9,720

Trade Discount

$1,080

(Being goods purchased on account)

Feb 4, 2017

Accounts Payable

$2,250

Trade Discount

$250

Inventory A/c

$2500

(Being goods return to supplier)

Feb 13, 2017

Accounts Payable

$7,470

Cash A/c

$7,245.9

Discount

$224.1

(Being payment made to the creditor after getting discount)

Working Note:

1.TradeDiscount=Purchasevalue脳TradediscountPercent=$10,800脳10100=$1,080

2.PurchaseDiscount=(InvoiceAmount-Return)脳DiscountPercent=($9,720-$2,250)脳3100=$224.1

02

Journal entry under periodic system and gross method

Date

Description

Debit

Credit

Feb 1, 2017

Purchase A/c

$10,800

Accounts Payable

$9,720

Trade Discount

$1,080

(Being goods purchased on account)

Feb 4, 2017

Accounts Payable

$2,250

Trade Discount

$250

Purchase return & allowances

$2500

(Being goods return to supplier)

Feb 13, 2017

Accounts Payable

$7,470

Cash A/c

$7,245.9

Discount

$224.1

(Being payment made to the creditor after getting discount)

Working Note:

1.TradeDiscount=Purchasevalue脳TradediscountPercent=$10,800脳10100=$1,080

2.PurchaseDiscount=(InvoiceAmount-Return)脳DiscountPercent=($9,720-$2,250)脳3100=$224.1

03

Purchase value under net method

Under the net method, purchase value would be computed after taking both trade and cash discounts. This is called the net method, as only the net amount is recorded for purchase.

PurchasevalueofFeb1=Purchaseamount-TradeDiscount-Purchaseamount-TradeDiscount脳CashDiscountPercent=($10,800-$1,080)-$10,800-$1,080脳3100=$9,720-$9,720脳0.03=$9,720-$291.6=$9,428.4

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Most popular questions from this chapter

Some of the information found on a detail inventory card for Slatkin Inc. for the first month of operations is as follows.

Received

Issued, Balance,

Date No. of Units Unit Cost No. of Units No. of Units

January 2 1,200 $3.00 1,200

7 700 500

10 600 3.20 1,100

13 500 600

18 1,000 3.30 300 1,300

20 1,100 200

23 1,300 3.40 1,500

26 800 700

28 1,600 3.50 2,300

31 1,300 1,000

Instructions

(a) From these data compute the ending inventory on each of the following bases. Assume that perpetual inventory records are kept in units only. (Carry unit costs to the nearest cent and ending inventory to the nearest dollar.)

(1) First-in, first-out (FIFO).

(2) Last-in, first-out (LIFO).

(3) Average cost.

(b) If the perpetual inventory record is kept in dollars, and costs are computed at the time of each withdrawal, would the amounts shown as ending inventory in (1), (2), and (3) above be the same? Explain and compute. (Round average unit costs to four decimal places.)

Question:In your audit of Jose Oliva Company, you find that a physical inventory on December 31, 2017, showed merchandise with a cost of \(441,000 was on hand at that date. You also discover the followingitems were all excluded from the \)441,000.

1. Merchandise of \(61,000 which is held by Oliva on consignment. The consignor is the Max Suzuki Company.

2. Merchandise costing \)38,000 which was shipped by Oliva f.o.b. destination to a customer on December 31, 2017. The customerwas expected to receive the merchandise on January 6, 2018.

3. Merchandise costing \(46,000 which was shipped by Oliva f.o.b. shipping point to a customer on December 29, 2017. Thecustomer was scheduled to receive the merchandise on January 2, 2018.

4. Merchandise costing \)83,000 shipped by a vendor f.o.b. destination on December 30, 2017, and received by Oliva on January4, 2018.

5. Merchandise costing $51,000 shipped by a vendor f.o.b. shipping point on December 31, 2017, and received by Oliva onJanuary 5, 2018.

Instructions

Based on the above information, calculate the amount that should appear on Oliva鈥檚 balance sheet at December 31, 2017, for inventory.

Question:Matlock Company uses a perpetual inventory system. Its beginning inventory consists of 50 units that cost \(34 each. During June, the company purchased 150 units at \)34 each, returned 6 units for credit, and sold 125 units at $50 each.

Journalize the June transactions.

Ann M. Martin Company makes the following errors during the current year.

(Evaluate each case independently and assume ending inventory in the following year is correctly stated.)

1. Ending inventory is overstated, but purchases and related accounts payable are recorded correctly.

2. Both ending inventory and purchases and related accounts payable are understated. (Assume this purchase was recordedand paid for in the following year.)

3. Ending inventory is correct, but a purchase on account was not recorded. (Assume this purchase was recorded and paidfor in the following year.)

Instructions

Indicate the effect of each of these errors on working capital, current ratio (assume that the current ratio is greater than 1), retained earnings, and net income for the current year and the subsequent year.

Jane Yoakam, president of Estefan Co., recently read an article that claimed that at least 100 of the country鈥檚 largest 500 companies were either adopting or considering adopting the last-in, first-out (LIFO) method for valuing inventories. The article stated that the firms were switching to LIFO to

(1) neutralize the effect of inflation in their financial statements,

(2) eliminate inventory profits, and (3) reduce income taxes. Ms. Yoakam wonders if the switch would benefit her company.

Estefan currently uses the first-in, first-out (FIFO) method of inventory valuation in its periodic inventory system. The company has a high inventory turnover rate, and inventories represent a significant proportion of the assets.

Ms. Yoakam has been told that the LIFO system is more costly to operate and will provide little benefit to companies with high turnover. She intends to use the inventory method that is best for the company in the long run rather than selecting a method just because it is the current fad.

Instructions

(a) Explain to Ms. Yoakam what 鈥渋nventory profits鈥� are and how the LIFO method of inventory valuation could reduce them.

(b) Explain to Ms. Yoakam the conditions that must exist for Estefan Co. to receive tax benefits from a switch to the LIFO method.
See all solutions

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