Question

On December 27, 2017, Mint Company placed an order to purchase merchandise on account from a seller, Lemon, Inc. Lemon’s listed catalog price for the merchandise is $13,000. Lemon’s historical cost for these items is $4,000. Mint has been a customer of Lemon’s for years and was able to negotiate these terms: (i) a 7% trade discount and (ii) payment terms of 2/10, n/30. The goods were shipped by Lemon FOB shipping point on December 30, 2017 and arrived at Mint’s facility on January 5, 2018. At the time of shipment, Lemon paid $700 in shipping costs. On January 6, Mint returned $2,000 worth of merchandise to Lemon, which had an original cost to Lemon of $615. Mint paid Lemon in full on January 7.

Show all of your work and calculations, and make sure you answer all parts of the question.

Required:

1. Prepare the seller’s (Lemon) entries for the sale, return, and collection of payment in the following format:

Date: MM/DD/YY

Dr. Account………...XX

     Cr. Account…………...XX

2. Prepare the buyer’s (Mint) entries for the purchase, return, and payment to Lemon in the following format:

            Date: MM/DD/YY

Dr. Account………...XX

     Cr. Account…………...XX

3. Assume all facts are the same, except the shipping terms are FOB destination. Prepare the seller’s (Lemon) entry for the sale in the following format:

Date: MM/DD/YY

Dr. Account………...XX

     Cr. Account…………...XX

4. Assume all facts are the same, except the shipping terms are FOB destination. Prepare the buyer’s (Mint) entry for the sale in the following format:

Date: MM/DD/YY

Dr. Account………...XX

     Cr. Account…………...XX

5. Explain the difference between a purchase discount and a trade discount.

Facts (Problems 6-7):

On June 29, 2019 Hulu Company placed an order to purchase 10,000 units of “This is Us” Merchandise from the seller The Big Three Company. Unit price for the merchandise was $4.50 while The Big Three company originally paid a cost of $3.00.

As The Big Three Company was trying to attract more customers and expand, it began its promotion of providing a discount of 15% to any customers that order 10,000 units or more with an additional discount of 2/10, n/30. Both companies use the gross method for purchases and discounts. On July 2, 2019 The Big Three Company shipped the merchandise on F.O.B. Shipping Point, and the merchandise arrived on July 10th. Shipping cost of $3,000 was pre-paid by The Big Three Company. On July 11th, Hulu paid off the balance after returning 500 units.

6. Choose either Hulu or The Big Three and prepare all the journal entries related to this transaction from the chosen company’s perspective in the following format:

Date: MM/DD/YY

Dr. Account………...XX

     Cr. Account…………...XX

7. Using the same facts as in problem #6, prepare a single-step income statement.

Answer 1

1. Journal Entries in Lemon Accounts:

12/27/2017

Mint Company A/c Dr $12,090 (13000-{13000*7%=910})

To Sales A/c 12,090

12/30/2017

     Cost of good sold A/c Dr $4,000

To Merchandise Inventory A/c $4,000

        Delivery Expenses A/c Dr $ 700

to Cash A/c $700

Mint Company A/c Dr $700

To Delivery Expenses A/c $700

(It is mentioned in the question that FOB shipping point which means the buyer is responsible for shipping and must pay and record for shipping.)

01/06/2018

  Sale Return A/c Dr $1,860 (2000-{2000*7%=140})

To Mint Company A/c $ 1,860

   Merchandise Inventory A/c Dr $615

to Cost of good sold A/c Dr $615

01/07/2018

   Bank A/c Dr $10,930

To Mint Company A/c $10,930

(Note: Mint Company would not be eligible for the payment discount. Reason: The Payment should have been made within 10days from the day after the invoice date to get the discount of 2% that means, the payment should be made on 6th January 2018.)

2. Journal Entries in Mint Company Accounts:

01/05/2018

Merchandise Inventory A/c Dr $12,090 (13000-{13000*7%=910})

Delivery Expenses A/c Dr $700

     To Lemon A/c $12,790

01/06/2018

Lemon A/c Dr $ 1,860 (2000-{2000*7%=140})

       To Merchandise Inventory A/c $ 1,860

01/07/2018

Lemon A/c Dr $10,930

      To Bank A/c $10,930

3. Sale Journal Entry in Lemon Accounts:

12/27/2017

Mint Company A/c Dr $12,090 (13000-{13000*7%=910})

To Sales A/c 12,090

12/30/2017

     Cost of good sold A/c Dr $4,000

To Merchandise Inventory A/c $4,000

        Delivery Expenses A/c Dr $ 700

              To Cash  A/c $700

(It is mentioned in the question that FOB Destination point which means the seller is responsible for shipping and must pay and record for shipping.)

4. Purchase Journal Entry in Mint Company Accounts:

01/05/2018

Merchandise Inventory A/c Dr $12,090 (13000-{13000*7%=910})

     To Lemon A/c $12,090

5. A trade discount is one that is allowed by the seller to its buyer, calculated on the catalog price of the goods, whereas a purchase discount is allowed to stimulate on instant payment of the goods purchased. The main difference between a trade discount and a purchase discount is that the ledger account is opened for a purchase discount, but not for a trade discount.

6. Journal Entries in The Big Three Company's Accounts:-

06/29/2019

Hulu Company A/c Dr $38,250

Discount A/c Dr $6,750

To Sales A/c $ 45,000

07/02/2019

     Cost of good sold A/c Dr $30,000

           To Merchandise Inventory A/c $30,000

        Delivery Expenses A/c Dr $ 3,000

To Cash A/c $3,000

         Hulu Company A/c Dr $3,000

To Delivery Expenses A/c $3,000

(It is mentioned in the question that FOB shipping point which means the buyer is responsible for shipping and must pay and record for shipping.)

07/11/2019

  Sale Return A/c Dr 2250 (500*4.5)

      To Hulu Company A/c $ 2,250

   Merchandise Inventory A/c Dr $1,500

                      To Cost of good sold A/c Dr $1,500

Hulu Company A/c Dr $337.5(2250*15%)

     To Discount A/c $337.5

    Bank A/c Dr $39337.5

               To Hulu Company A/c $39337.5

(Note: 1- Hulu Company would be eligible for the promotion discount. Reason: It is mentioned in the question that order should be made of 10,000 or more units and Hulu Company has ordered 10,000. It is a different matter that Hulu Company has returned the goods afterward.

2- Hulu Company would not be eligible for the payment discount. Reason: The Payment should have been made within 10days from the day after the invoice date to get the discount of 2% which means, the payment should be made on 8th July 2019.)

7.

The Big Three Company
Single Step Income Statement
Sales	$ 42,750.00
Cost of Good Sold	$ 28,500.00
Discount	$   6,412.50
Net Income	$   7,837.50