What account is debited when recording a purchase of inventory when using the perpetual inventory system?
When the perpetual inventory system is used, the merchandise inventory account is debited at the time of purchase.
Both inventory systems of accounting record the transactions differently in the books of accounts. The periodic inventory system uses a sales and purchases account, while the perpetual inventory system uses a merchandise inventory account.
When the business entities use the perpetual inventory system, the merchandise inventory account is debited or credited at the time of purchase or sale of inventory.
The journal entry for inventory purchase is as follows:
Accounts and Explanation
(To record the purchase of inventory)
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:
Year Ended December 31, 2017
Net Sales Revenue $350,000
Cost of Goods Sold 210,000
Gross Profit 140,000
Selling Expense 40,000
Administrative Expense 25,000
Net Income $75,000
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to $100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing $20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each; Party-Time can mark these dresses up 100% and sell them for $80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
Suppose Piranha.com sells 3,500 books on account for $17 each (cost of these books is $35,700) on October 10, 2018 to The Textbook Store. One hundred of these books (cost $1,020) were damaged in shipment, so Piranha.com later received the damaged goods from The Textbook Store as sales returns on October 13, 2018.
1. Journalize The Textbook Store’s October 2018 transactions.
2. Journalize Piranha.com’s October 2018 transactions. The company estimates sales returns at the end of each month.
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.
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Burlington Drug Store?
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