Question

In: Accounting

Tracy Company, a manufacturer of air conditioners, sold 300 units to Thomas Company on November 17,...

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

Solutions

Expert Solution

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)

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