Question

Exercise 4-17A Recording sales, purchases, and discounts: buyer and seller- periodic LO P5

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 $22,700. The merchandise had cost Mesa $15,481. Assume that both buyer and seller use a perpetual inventory system and the gross method.

1. Prepare entries that the buyer should record for (a) the purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period.
2. Prepare entries that the seller should record for (a) the sale, (b) cash collection within the discount period, and (c) cash collection after the discount period.

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

• Record the purchase.

• 2

  Record the cash payment within the discount period.

• 3

  Record the cash payment after the discount period.

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

• 1

  Record the sale.

• 2

  Record the cash collection within the discount period.

• 3

  Record the cash collection after the discount period.

Answer 1

Perpetual Inventory System: In this system, the cost of sales and inventories are updated on every sales and purchase transactions.

Gross Method of accounting : In this method the invoice (i.e. either sales or purchase) is accounted at full value without giving the effect of any cash discount. The cash discount is accounted once the payment is made with in the credit term period as applicable.