Question

On May 11, Sydney Co. accepts delivery of $40,000 of merchandise it purchases for resale from Troy Corporation. With the merchandise is an invoice dated May 11, with terms of 3/10, n/90, FOB shipping point. The goods cost Troy $30,000. When the goods are delivered, Sydney pays $345 to Express Shipping for delivery charges on the merchandise. On May 12, Sydney returns $1,400 of goods to Troy, who receives them one day later and restores them to inventory. The returned goods had cost Troy $800. On May 20, Sydney mails a check to Troy Corporation for the amount owed. Troy receives it the following day.

1.	Prepare entries that the buyer should record for (a) the purchase and (b) the cash payment.

2.	Prepare entries that the seller should record for (a) the sale and (b) the cash collection. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Part 1.a

Explanation

The purchase of inventory on credit will increase the inventory balance in the books of S. In case of an increase in asset, the related assets account is debited. Hence, merchandise inventory is debited.

Goods purchased on credit will increase the accounts payable. An increase in liability is recorded by crediting the liability account. Hence, accounts payable is credited.

Part 1.b

Explanation

The payment of shipping charges will be added to the cost of the inventory; hence the balance of inventory in the books of S will increase. In case of an increase in asset, the related assets account is debited. Hence, merchandise inventory is debited.

The shipping charges paid will reduce the cash balance. A decrease in assets is recorded by crediting the asset account. Hence, the cash account is credited.

Part 1.c

Explanation

The goods returned to seller will reduce the accounts payable balance. In case of a decrease in liability, the same is recorded by debiting the liability account. Hence, accounts payable is debited.

The goods returned will reduce the inventory balance in the books of S. In case of a decrease in asset, the related assets account will be credited. Hence, merchandise inventory is credited.

Part 1.d

Working Notes:

Compute the net accounts payable balance using the equation as follows:

Net accounts payable = Purchases -Purchase return

=$ 40,000 - $ 1,400 = $ 38,600

Hence, the net accounts payable are $38,600

Compute the discount on purchase using the equation as follows:

Discount =Net accounts payable X 3% = $ 38,600X 0.03 =$ 1,158

Hence, the discount offered by seller is $1,158.

Part 2.a

Explanation

Sales made on credit will increase the accounts receivables balance in the books of company T. In case of an increase in assets, the same is recorded by debiting the related asset account. Hence, the accounts receivables account is debited.

Subsequently, the sales revenue of the company will increase. All the revenues and incomes are of credit nature. An increase in revenue is recorded by crediting the related revenue account. Hence, the sales revenue is credited.

Part 2.b

Explanation

The goods sold are recorded at cost in the books of the seller. An increase in costs and expenses is recorded by debiting the related account. Hence, COGS is debited.

Subsequently, the sales will reduce the inventory balance of the company. In case of a decrease in asset, the related asset account will be credited. Hence, merchandise inventory is credited.

Part 2.c

Explanation

The sales return will reduce the sales revenue of the company. All the revenues and incomes are of credit nature. A decrease in revenue is recorded by debiting the related revenue account. Hence, the sales revenue is debited.

Sales return will decrease the accounts receivables balance in the books of company T. In case of a decrease in assets, the same is recorded by crediting the related asset account. Hence, the accounts receivables account is credited.

Part 2.d

Part 2.e

Working Notes:

Compute the net accounts receivable balance using the equation as follows:

Net accounts receivable=sales -Sales return

= $ 40,000 - $ 1,400

  $ 38,600​

Hence, the net accounts receivable are $38,600

Compute the discount on purchase using the equation as follows:

Discount = Net accounts receivable X 3%

=$ 38,600

Discount=Netaccountsreceivable×3%

=$38,600×0.03

=$1,158​

Hence, the discount offered to the purchaser is $1,158.