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Chapter 5: Problem 5

Recording Purchases-Perpetual System On July 1, Hernandez, Inc. purchased merchandise for \(\$ 2,500\), with terms of \(1 / 10, n / 30\). On July 5 , the firm returned \(\$ 1,000\) of the merchandise to the seller. Payment of the account occurred on July 8 . Hernandez uses the perpetual inventory system. Required a. Prepare the journal entries for July 1, July 5 , and July 8 . b. Assuming that the account was paid on July 14, prepare the joumal entry for payment on that date.

Short Answer

Expert verified
July 1 entry: Increase inventory \(\$2,500\), July 5 return: Reduce both accounts \(\$1,000\), July 8 payment: Pay \(\$1,485\), reducing inventory \(\$15\). July 14: Pay \(\$1,500\) without discount.

Step by step solution

01

Record the Initial Purchase on July 1

On July 1, Hernandez, Inc. purchased merchandise for \(\\(2,500\) with terms \(1 / 10, n / 30\). Under the perpetual inventory system, purchases are recorded in the Merchandise Inventory account. The journal entry is: Merchandise Inventory \)2,500 Accounts Payable $2,500 This reflects an increase in inventory and a liability for the amount owed.
02

Record the Merchandise Return on July 5

On July 5, Hernandez, Inc. returned \(\\(1,000\) worth of the merchandise to the seller. This reduces the Accounts Payable and the Merchandise Inventory account. Accounts Payable \)1,000 Merchandise Inventory $1,000 This entry reverses part of the original purchase, decreasing both inventory and liability.
03

Record Payment with Discount on July 8

The payment is made on July 8, within the discount period \(1/10\). Therefore, Hernandez, Inc. is eligible for a \(1\%\) discount on the remaining amount of \(\\(1,500\) (original \(\\)2,500\) minus the return of \(\\(1,000\)). The discount is \(\\)15\) (1% of \(\\(1,500\)). Accounts Payable \)1,500 Cash \(1,485 Merchandise Inventory \)15 This journal entry clears the entire liability while reflecting the inventory reduction by the discount amount.
04

Optional Step: Record Payment without Discount on July 14

If the payment is made on July 14, the discount period would have ended. Hernandez, Inc. would pay the full remaining \(\\(1,500\) without any discount. Accounts Payable \)1,500 Cash $1,500 This entry eliminates the liability by full payment without adjustment to the inventory for any discount.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Journal Entries
In accounting, journal entries are the building blocks for all financial reporting. They record all financial transactions of a business. Each transaction affects at least two accounts, one will be debited and one credited to ensure the accounting equation holds: Assets = Liabilities + Equity.
In the scenario of Hernandez, Inc., journal entries are used to track their purchases, returns, and payments. Each entry provides a historical record of these financial activities. For example:
  • On July 1, the purchase of merchandise increases the Merchandise Inventory (an asset) and increases Accounts Payable (a liability).
  • On July 5, the return reduces both the Merchandise Inventory and Accounts Payable.
  • On July 8, when Hernandez pays, the Accounts Payable account decreases, and the Cash and Merchandise Inventory accounts reflect the payment and discount respectively.
These entries help the business maintain an accurate and up-to-date record of its financial status.
Accounts Payable
Accounts Payable represent the money that a business owes to its suppliers for purchases made on credit. It is recorded as a liability on the balance sheet and is crucial for tracking short-term debts.
In a perpetual inventory system, as used by Hernandez, Inc., each purchase is recorded immediately, impacting both the Accounts Payable and Merchandise Inventory accounts. This precise tracking ensures accurate financial reporting and cash flow management.
  • In our example, every time merchandise is purchased, Accounts Payable increases to reflect the obligation to pay the supplier.
  • When merchandise is returned, Accounts Payable decreases, lowering the liability.
  • Once Hernandez pays, the Accounts Payable account decreases, demonstrating the fulfillment of this obligation.
Keeping track of Accounts Payable ensures that businesses honor their debts timely, which is fundamental to maintaining good supplier relationships and a high credit score.
Merchandise Inventory
Merchandise Inventory is the goods available for sale by a business. Under the perpetual inventory system, every inventory movement, whether purchase or sale, is updated in real-time in the Merchandise Inventory account.
Hernandez, Inc.'s use of the perpetual system allows for an immediate and ongoing record of their inventory levels. Each transaction affects the Merchandise Inventory account:
  • Purchasing merchandise increases the Merchandise Inventory account, showing an addition to stock.
  • Returning goods to the supplier decreases it, reflecting a reduction in inventory.
  • Taking advantage of a discount when paying off Accounts Payable also reduces the Merchandise Inventory account.
This constant update aids Hernandez in evaluating their inventory needs and making informed purchasing decisions.
Discount Terms
Discount terms are conditions set by suppliers that offer buyers a reduced price if payments are made within a specified period. This is an incentive for prompt payment.
In the transaction with Hernandez, Inc., the terms "1/10, n/30" mean that if the payment is made within 10 days, a 1% discount is offered; otherwise, the net amount is due in 30 days.
  • On July 8, Hernandez pays within the discount period, saving \(\\(15\) by paying \(\\)1485\) instead of the full \(\$1500\).
  • If payment is delayed beyond the 10-day window, such as paying on July 14, the discount is forfeited, and the full amount is due.
Understanding and utilizing discount terms can significantly reduce costs for businesses, enhancing profitability and cash flow management.

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Most popular questions from this chapter

Journal Entries for Merchandise Transactions on Seller's and Buyer's Books- Periodic System Fame Distributing Company had the following transactions with Arlington, Inc., during November: Nov. 10 Fame sold and shipped \(\$ 8,000\) worth of merchandise to Arlington, terms \(2 / 10, n / 30\). 12 Arlington, Inc., paid freight charges on the shipment from Fame Company, \(\$ 450 .\) 14 Fame received \(\$ 850\) of merchandise retumed by Arlington from the November 10 sale. 19 Fame received payment in full for the net amount due on the November 10 sale. 24 Arlington returned goods that had originally been billed at \(\$ 700\). Fame issued a check for \(\$ 686 .\) Required Prepare the necessary joumal entries (a) on the books of Fame Distributing Company and (b) on the books of Arlington, Inc. Assume that both companies use the periodic inventory system.

Journal Entries for Sale, Return, and Remittance-Periodic System On March 10, the Stone Company sold merchandise listing for \(\$ 3,000\) to the Dillard Company with terms of \(1 / 10, n / 30\). On March 14, \$200 of merchandise was returned because it was the wrong size. On March 20, Stone Company received a check for the amount due. Required Prepare the journal entries made by Stone Company for these transactions. Stone uses the periodic inventory system.

Journal Entries for Merchandise Transactions-Periodic System Drake Company was established on July 1. Its sales terms are \(2 / 10, \mathrm{n} / 30\). Credit terms for its purchases vary with the supplier. Selected transactions for the first month of operations are given below. Unless noted, all transactions are on account and involve merchandise held for resale. All purchases are recorded using the periodic inventory system. July 1 Purchased goods from Dawson, Inc., \(\$ 3,500 ;\) terms \(1 / 10, n / 30\). 2 Purchased goods from Penn Company, \(\$ 5,100 ;\) terms \(2 / 10, n / 30\). 3 Paid freight on shipment from Dawson, \(\$ 200\). 5 Sold merchandise to Ward, Inc., \(\$ 1,700\). 5 Paid freight on shipment to Ward, Inc., \$80. (Hint: debit Delivery Expense) July 8 Returned \(\$ 300\) worth of the goods purchased July 1 from Dawson, Inc., because some goods were damaged. Dawson approved the return. 9 Received returned merchandise from Ward, Inc., \$200. 10 Paid Dawson, Inc., the amount due. 10 Purchased goods from Dom Company with a price of \(\$ 2,200\). Terms \(2 / 10, n / 30\). 11 Paid freight on shipment from Dorn Company, \(\$ 130\). 15 Received the amount due from Ward, Inc. 15 Sold merchandise to Colby Corporation, \(\$ 4,200\). 16 Mailed a check to Penn Company for the amount due on its July 2 invoice. 18 Received an allowance of \(\$ 100\) from Dorn Company for defective merchandise purchased on July \(10 .\) 19 Paid Dorn Company the amount due. 25 Received the amount due from Colby Corporation. Required Prepare the necessary journal entries for Drake Company.

Which of the following statements regarding cost flows is true? a. Cost of goods available for sale is equal to beginning inventory minus cost of goods purchased. b. Cost of goods available for sale is equal to beginning inventory plus cost of goods purchased. c. CGAS \(=\) beginning inventory minus ending inventory. d. \(\mathrm{CGAS}=\) cost of goods sold minus cost of goods purchased.

Journal Entries for Merchandise Transactions on Seller's and Buyer's Books- Periodic System The following are selected transactions of Fedor. Inc., during the month of January: Jan. 20 Sold and shipped on account to Lawrence Stores merchandise listing for \(\$ 4,500\) with tems of \(2 / 10, n / 30\). 27 Lawrence Stores was granted a \(\$ 500\) allowance on goods shipped January \(20 .\) 29 Received from Lawrence Stores a check for full settlement of the January 20 transaction. Required Prepare joumal entries for (a) Fedor, Inc., and (b) Lawrence Stores. Both companies use the periodic inventory system.
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