Question

The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms 2/10, n/30, and that the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.

1. New Books sold merchandise to Readers’ Corner at a selling price of $650,000. The merchandise cost New Books $455,000.
2. Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $13,500 to Readers’ Corner.
3. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.

Required:
1. For each of the events (a) through (c), indicate the amount and direction of the effect on New Books in terms of the following items. (Enter any decreases to account balances with a minus sign.)

Answer 1

Firstly we need to pass journal entries for the given transactions in the books of New Books which is shown as follows:-

Journal Entries (Amounts in $)

No	Account Titles and Explanations	Debit	Credit
1)	Accounts Receivable	650,000
	Sales Revenue		650,000
	(To record the sales revenue)
	Cost of goods sold	455,000
	Inventory		455,000
	(To record the cost of goods sold)
2)	Sales Returns and Allowances	13,500
	Accounts Receivable		13,500
	(To record the allowance given to readers' Corner)
3)	Cash (636,500-12,730)	623,770
	Sales Discounts (636,500*2%)	12,730
	Accounts Receivable (650,000-13,500)		636,500
	(To record the cash received after discount)

The effect of each transaction is shown as follows:- (Amounts in $)

Transaction	Accounts Receivable	Sales Revenue	Cost of Goods Sold	Inventory	Sales Returns and Allowances	Cash	Sales Discounts
1)	+650,000	+650,000	+455,000	-455,000
2)	-13,500				+13,500
3)	-636,500					+623,770	+12,730