Prepare journal entries to record each of the following transactions of a merchandising company. The company uses a perpetual inventory system and the gross method. Nov. 5 Purchased 600 units of product at a cost of $10 per unit. Terms of the sale are 2/10, n/60; the invoice is dated November 5. Nov. 7 Returned 25 defective units from the November 5 purchase and received full credit. Nov. 15 Paid the amount due from the November 5 purchase, minus the return on November 7.

Nov 5

Dr Inventory $6,000

Cr Accounts payable $6,000

Nov 7

Dr Accounts payable $250

Cr Inventory $250

Nov 15

Dr Accounts $5,750

Cr Cash $5,635

Cr Purchase discount $115

Explanation:

Nov 5 (Date of acquisition)

Using Gross method of Perpetual inventory method, all purchases must be recorded on gross amount so we have to debit inventory to recognize the purchase and credit accounts payable to recognize the purchases on account in the amount of $6,000 (600 units x $10). Discount must be recognized upon payment within the discount period.

Nov 7 (Purchase return)

During the purchase return, we reverse the original entry we made so we debit accounts payable and credit inventory account in the amount of $250 (25 units x $10)

Nov 15 (Date of settlement)

During the payment period, we consider first if it is within the discount period (10 days in this scenario). After which, we will deduct purchase returns before computing discount. So the original purchase of $6,000 less $250 purchase return equals $5,750. Then finally we can now compute the discount, $5,750 x 2% = $115. We will deduct this amount from $5,750 to arrive the net cash payment. So to entry, we will debit Accounts payable $5,750 then credit Cash of $5,635 ($5,750-115) and another credit of purchase discount of $115.

The Journal entries are as follows:

(a) On November 5,

Merchandise inventory A/c Dr. $6,000

To Accounts payable $6,000

(To record the purchasing of Merchandise inventory)

(b) On November 7,

Accounts payable A/c Dr. $250

To Merchandise inventory $250

(To record the returned units)

(c) On November 15,

Accounts payable A/c Dr. $5,750

To cash $5,635

To Merchandise inventory $115

Workings:

Final amount due:

= Cost of goods purchased - Cost of goods returned

= 6,000 - 250

= $5,750

Discount amount:

= Final amount due * Discount percentage

= 5,750 * 2/100

= $115

Cash payment to be made:

= Final amount due - Discount amount

= 5,750 - 115

= $5,635