Question

Mostly struggling with calculating and implementing the discount price for the last entry.

Journalize the following transactions for Flores Company using the gross method of accounting for purchase discounts. Assume a perpetual inventory system. March 9 Purchased goods from Wright Company on account, $12,600, terms 5/10, n/30. March 15 Returned merchandise to Wright Company that was previously purchased on account, $1,260. March 19 Paid the amount due to Wright Company.

Answer 1

Under the gross method of accounting, purchases are recorded at full invoice value without any deductions for discounts.

Journal Entries for Perpetual Inventory System

Debit Credit

March 9 Inventory A/c $12,600

To Accounts Payable $12,600

March 15 Accounts Payable A/c   $1,260

To Inventory $1,260

March 19 Accounts Payable A/c $12,600  

To Inventory $630

To Cash $11,970

WORKINGS:

According to the question, 5% discount will be given if the amount of purchase is paid within 10 days. The purchase was made on March 9 and the payment is made on March 19 which is exactly within 10 days. Therefore, Flores Company will receive a discount of 5% on the amount of $ 12,600.

Discount - $12,600 * 0.05 = $630

Note: As discount is not recorded under gross method, the amount of discount has been deducted from the value of Inventory.

Here, it has been assumed that the merchandise returned on March 15 does not relate to the purchase made on March 9. Purchase was made of goods on March 9 and it is specifically mentioned that MERCHANDISE was returned. Still,Students can take another assumption and solve the sums by deducting the amount of returns from $ 12600 and then calculate the discount.