Question

9:45 Aa -» QD P8.3 (LO 2) Excel (Purchases Recorded Gross and Net) Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method. August Purchased merchandise on account, $12,000, terms 2/10, n/30. 13 Returned part of the purchase of August 10, $1,200, and received credit on account. Purchased merchandise on account, $16,000, terms 1/10, n/60. 25 Purchased merchandise on account, $20,000, terms 2/10, n/30. 28 Paid invoice of August 15 in full. Instructions a. Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken: 1. Prepare general journal entries to record the transactions. 2. Describe how the various items would be shown in the financial statements. b. Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses: 1. Prepare general journal entries to enter the transactions. 2. Prepare the adjusting entry necessary on 8-44 ... eader Contents Notebook Bookmarks More

Answer 1

a) Under GROSS Method

The journal entries will be booked as under:

Date	Description	Debit	Credit
Aug-10	Purchases	$           12,000
	Accounts Payable		$           12,000
Aug-13	Accounts Payable	$             1,200
	Purchases returns & allowances		$             1,200
Aug-15	Purchases	$           16,000
	Accounts Payable		$           16,000
Aug-25	Purchases	$           20,000
	Accounts Payable		$           20,000
Aug-28	Accounts Payable	$           16,000
	Cash		$           16,000

The various items to be shown will be:

Purchases = In Income Statement - as part of Cost of Goods Sold

Purchases Returns and Allowances = In Income Statement - as part of Cost of Goods Sold and deducted from Gross Purchases

Accounts Payable - In Balance Sheet - as Current Liability

Cash - In Balance Sheet - as Current Asset

b) Under NET Method

journal entries will be

Date	Description	Debit	Credit	Workings
Aug-10	Purchases	$           11,760		12000*(12000*2%)
	Accounts Payable		$           11,760
Aug-13	Accounts Payable	$             1,176		1200-(1200*2%)
	Purchases returns & allowances		$             1,176
Aug-15	Purchases	$           15,840		16000-(16000*1%)
	Accounts Payable		$           15,840
Aug-25	Purchases	$           19,600		20000-(20000*2%)
	Accounts Payable		$           19,600
Aug-28	Accounts Payable	$           15,840		(from Aug 15)
	Purchase discount lost	$                 160		16000*1%
	Cash		$           16,000	15840+160

The various items to be shown will be:

Purchases = In Income Statement - as part of Cost of Goods Sold

Purchases Returns and Allowances = In Income Statement - as part of Cost of Goods Sold and deducted from Gross Purchases

Purchases Discount lost = In Income Statement - as part of finance expense

Accounts Payable - In Balance Sheet - as Current Liability

Cash - In Balance Sheet - as Current Asset

c) The preferred method will be the Net Method because by adopting this method the purchaser is reporting lower inventory since the purchases are recorded at discounted prices.