Question

Tracy Company, a manufacturer of air conditioners, sold 300 units to Thomas Company on November 17, 2021. The units have a list price of $275 each, but Thomas was given a 20% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a perpetual inventory system.

Required:
1. Prepare the journal entries to record the (a) purchase by Thomas on November 17 and (b) payment on November 26, 2021. Thomas uses the gross method of accounting for purchase discounts.
2. Prepare the journal entry for the payment, assuming instead that it was made on December 15, 2021 using the gross method of accounting for purchase discounts

Answer 1

First of all, we will compute the cost of each unit:

Cost per unit = List price - Trade Discount

= $275 - 20% of $275 = $220

Cost of purchase of 300 units = 300units * $220 = $66,000

1. Journal Entries:

Date	Account and explanations	Debit	Credit
Nov. 17	Inventory	$66,000
	Accounts Payable		$66,000
(To record purchase of goods)
Nov. 26	Accounts Payable	$66,000
	Purchase discount*		$1,320
	Cash		$64,680
(To record payment to accounts payable)
* Purchase discount = ($66000)*2% = $1,320 as payment made within 10 days

2. Journal Entries in case payment is made on December 15, 2021 i.e. beyond the time period of discount.
Therefore no discount will be offered.

Date	Account and explanations	Debit	Credit
Dec. 15	Accounts Payable	$66,000
	Cash		$66,000
(To record payment to accounts payable)