In: Accounting
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:
Date: MM/DD/YY
Dr. Account………...XX
Cr. Account…………...XX
Date: MM/DD/YY
Dr. Account………...XX
Cr. Account…………...XX
Date: MM/DD/YY
Dr. Account………...XX
Cr. Account…………...XX
Date: MM/DD/YY
Dr. Account………...XX
Cr. Account…………...XX
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.
Date: MM/DD/YY
Dr. Account………...XX
Cr. Account…………...XX
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 |