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Q4-6E

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Financial & Managerial Accounting
Found in: Page 210
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Santa Fe Retailing purchased merchandise “as is” (with no returns) from Mesa Wholesalers with credit terms of 3∕10, n∕60 and an invoice price of $24,000. The merchandise had cost Mesa $16,000. Assume that both buyer and seller use a perpetual inventory system and the gross method.

1. Prepare entries that the buyer records for the (a) purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period.

2. Prepare entries that the seller records for the (a) sale, (b) cash collection within the discount period, and (c) cash collection after the discount period.

Answer

  1. Both debit and credit sides of the journal amount to $72,000 each.
  2. Both debit and credit sides of the journal amount to $88,000 each.
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Perpetual Inventory System

The system used to account for all the inventory transactions in which the business entity updates the balance in the inventory account after each sale and purchase transaction is known as the perpetual inventory system.

Step 2: Journal entries for the purchaser

Date

Accounts and Explanation

Debit $

Credit $

(a)

Merchandise inventory

$24,000

Account payable

$24,000

(b)

Accounts payable

24,000

Discount received

720

Cash

23,280

(c)

Accounts payable

24,000

Cash

24,000

$72,000

$72,000

Step 3: Journal entries for the seller

Date

Accounts and Explanation

Debit $

Credit $

(a)

Accounts receivable

$24,000

Sales revenue

$24,000

Cost of goods sold

16,000

Merchandise inventory

16,000

(b)

Cash

23,280

Discount allowed

720

Accounts receivable

24,000

(c)

Cash

24,000

Accounts receivable

24,000

$88,000

$88,000

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