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Horngren'S Financial And Managerial Accounting
Found in: Page 294

Short Answer

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.

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Step by Step Solution

Process of Accounting under Perpetual Inventory System

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.

Recording of purchase of inventory under a perpetual inventory system

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:

Date

Accounts and Explanation

Debit ($)

Credit ($)

Merchandise Inventory

XXX

Cash/Accounts payable

XXX

(To record the purchase of inventory)

Most popular questions for Business-studies Textbooks

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:

PARTY-TIME T-SHIRTS

Income Statement

Year Ended December 31, 2017

Net Sales Revenue $350,000

Cost of Goods Sold 210,000

Gross Profit 140,000

Operating Expenses:

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.

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