Question

Tracy Company, a manufacturer of air conditioners, sold 260 units to Thomas Company on November 17, 2018. The units have a list price of $250 each, but Thomas was given a 20% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a periodic inventory system.

Required:
1. & 2. Prepare the journal entries to record the purchase by Thomas on November 17 and payment on November 26, 2018 and December 15, 2018 using the gross method of accounting for purchase discounts.
3. Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.

Answer 1

• All working forms part of the answer
• Requirement 1 & 2: GROSS METHOD

Date	Accounts title	Debit	Credit
17-Nov	Purchases [260 x $ (250 - 20%)]	$           52,000.00
	Accounts Payable		$          52,000.00
	(purchase made on credit)
26-Nov	Accounts Payable	$           52,000.00
	Purchase Discount [52000 x 2%]		$            1,040.00
	Cash [52000 x 98%]		$          50,960.00
	(payment made within discount term of 10 days)
15-Dec	Accounts Payable	$           52,000.00
	Cash		$          52,000.00
	(payment made after discount term of 10 days)

• Requirement 3: NET METHOD

Date	Accounts title	Debit	Credit
17-Nov	Purchases [(260 x $ (250 - 20%)) x 98%]	$      50,960.00
	Accounts Payable		$        50,960.00
	(purchase made on credit)
26-Nov	Accounts Payable	$      50,960.00
	Cash		$        50,960.00
	(payment made within discount term of 10 days)
15-Dec	Accounts Payable	$      50,960.00
	Purchases discount lost	$        1,040.00
	Cash		$        52,000.00
	(payment made after discount term of 10 days)