Question

The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms n/30, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.

1. New Books sold merchandise to Readers’ Corner at a selling price of $550,000. The merchandise had cost New Books $415,000.

2. Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $10,000 to Readers’ Corner. Readers’ Corner also returned some books, which had cost New Books $2,000 and had been sold to Readers’ Corner for $3,500.

3. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.

Required:

1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers’ Corner.

2. Prepare the journal entries that Readers’ Corner would record and show any computations.

Answer 1

SOLUTION

Req. 1

a.	+550,000
b.	-10,000
c.	0	since, discount rate and within the days are not provided

                     

Req. 2

(a)	Inventory ......................................................................................	550,000
	Accounts Payable ...................................................................		550,000

(b)	Accounts Payable .................................................................................................	10,000
	Inventory ...........................................................................................		10,000

(c)	Accounts Payable ($550,000 – $10,000).............................................................................................	540,000
	Cash.......................................................................................		540,000
	Inventory .......................................		0

(a)	Accounts Payable ......................................................................................	3,500
	Inventory ...................................................................		3,500

note : the above entries are made using perpetual inventory systems.

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