Effect of purchase returns and allowances and freight costs on the journal, ledger, and financial statements: Perpetual system
The trial balance for Jerry’s Auto Shop as of January 1, 2011 follows:
Account Titles | Debit | Credit |
Cash | $28,000 |
|
inventory | 14,000 |
|
Common stock |
| $36,000 |
Retained earnings |
| 6,000 |
Total | $42,000 | $42,000 |
The following events affected the company during the 2011 accounting period:
1. Purchased merchandise on account that cost $18,000.
2. The goods in Event 1 were purchased FOB shipping point with freight cost of $1,000 cash.
3. Returned $3,600 of damaged merchandise for credit on account.
4. Agreed to keep other damaged merchandise for which the company received a $1,400 allowance.
5. Sold merchandise that cost $16,000 for $34,000 cash.
6. Delivered merchandise to customers in Event 5 under terms FOB destination with freight costs amounting to $800 cash.
7. Paid $12,000 on the merchandise purchased in Event 1.
Required
a. Record the events in general journal format.
b. Open general ledger T-accounts with the appropriate beginning balances, and post the journal entries to the T-accounts.
c. Prepare an income statement, balance sheet, and statement of cash Hows. (Assume that closing entries have been made.)
d. Explain why a difference does or does not exist between net income and net cash flow from operating activities.
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