Question

Tennis Shop Ltd (the “Shop”), a GST registered company, has a 30 June year-end. Stock takes are performed at the end of each quarter, i.e., 30 June is the end of the second quarter. Included in the general ledger are accounts for Cash, Accounts Receivable, Inventory, Accounts Payable, GST Clearing, Discounts Lost, Cost of Goods Sold, Sales, Sales Discounts, Sales Returns and Allowances. All suppliers are GST registered, as well.

The Shop has been operating under the gross purchases method applied in a perpetual inventory system. Management is interested in comparing the gross purchases method to the net purchases method and has employed you as a consultant to help with this.

The following transactions occurred during July 2018. On 1 July, there was a balance of $2,100 in Accounts Payable relating to a June inventory purchase. If the net purchases method had been used, the balance would have been $2,058.

Required:

a) Journalise, in the table provided below, the following July transactions, assuming the perpetual inventory system. First, do so under the gross purchases method, then do so under the net purchases method. If necessary, round to two decimal places. You may assume that the sale of 12 July was the only sale for the month.

Date   Transaction details:
(i)   2/7   Paid the Accounts Payable within the discount period.

(ii)   7/7    Purchased tennis racquets on account from Racquets Ltd $2,040, not including GST, terms 2/10, n/30.
      
(iii)   9/7   The Shop returned some racquets to Racquets Ltd and received credit for $230, including GST.
      
(iv) 12/7   Sold racquets on account $1,242, terms 2/10, n/30, including GST, to Sterling Sports. The inventory sold had a cost of $756, net of GST, under both methods, i.e., the discount had been taken.
      
(v)  16/7   Paid Racquets Ltd the amount due and took the discount.
      
(vi)  18/7   Sterling Sports returned some racquets and received a credit of $92, including GST. The Balls, which had cost the Shop $58, net of GST under both methods, would be re-sold.
      
(vii)  22/7   Sterling Sports paid the balance due within the discount period.

b) Revisit the transaction described in (v) above. Suppose the Shop paid Racquets Ltd after the discount period had expired. Prepare the Shop’s journal entries under both the gross and net purchases methods.

c)    Why might the Shop prefer the net purchases method over the gross purchases method?

Answer 1

Note : I have taken GST Rate as 5%, as the question does not define the GST Rate, neither it presents the country name in which the Company is registered.

a) Journal entries for Gross purchase method

a) ii) Journal entries for Net purchase method

b) i) Gross Purchase method entry (if discount is not availed)

In this case, the following entry will be passed

(ii) Net Purchase method entry ( if discount is not availed)

In this case the following entry will be passed

C) The Shop might prefer the net purchase method, in case if he is regularly paying before the discount due date to avail discount, as it will avoid an extra entry.