Question

Assume you are the senior accountant on an audit engagement of a fictitious business, Pine Street Company (PSC). Assume the instructor is the engagement partner. You are to prepare an audit program for PSC. The firm manufactures and sells bicycles. The audit program must be in one of the following areas of the business: accounts receivable and revenues; inventories and costs of goods sold; accounts payable; payroll; or property, plant and equipment.

Week 1 – Assume you are applying for an accounting position at PSC. The controller asks you to prepare the journal entries to record the following transactions for retail store operations of PSC. Assume a perpetual inventory system.

April 2
Purchased merchandise from Johns Company under the following terms: $5,900 price, invoice dated

April 2
Explain credit terms of 2/15/, n/60, and FOB shipping point in a sentence or two.

April 3
Paid $330 for shipping charges on April 2 purchases.

April 4
Returned to Johns Company unacceptable merchandise that had an invoice price of $900.

April 17
Sent a check to Johns Company for the April 2 purchase, net of the discount and the returned merchandise.

April 18
Purchased merchandise from William Corp. under the following terms: $12,250 price, invoice dated April 18, credit terms of 2/10, n/30, and FOB destination.

April 21
After negotiations, received from William Corp. a $3,250 allowance on April 18 purchase.

April 28
Sent check to William paying for the April 18 purchase, net of the discount and allowance.

Submit your April journal entries for Week 1 .

Answer 1

Credit terms of 2/15/, n/60, and FOB shipping point

The term ''2/15'' means the following:

"2" shows the percentage of discount offered by the supplier (Johns Company) and ''15'' represents the number of days (from the date of invoice) within which the buyer need to pay the cash for goods bought to avail the discount of 2%.

The term ''n/60'' means the following:

If the buyer does not pay the invoice amount within 15 days to qualify for the discount of 2%, then the net invoice amount is due within in 60 days from the date on Invoice.

FOB shipping Point or Free On Board Shipping Point:

It is one of the shipping terms which means that the buyer is resposible for the the payment of shipping and must pay and record for shipping. When there is a merchandise purchase on FOB shipping Point, buyer will become the owner of the merchandise once the merchandise leaves the supplier's shipping dock and the buyer must record purchase right after the merchandise leaves the seller's shipping dock.

April - Journal Entries under Perpetual Inventory System

Date	Account Titles and Explanation	Debit	Credit
April 2	Merchandise Inventory a/c	$5,900
	Accounts payable a/c		$5,900
	[To record the puchase of inventory on account]
April 3	Merchandise Inventory a/c	$330
	Cash a/c		$330
	[To record the payment of shipping charges paid]
April 4	Accounts payable a/c	$900
	Merchandise Inventory a/c		$900
	[To record purchase return]
April 17	Accounts payable a/c [Note 1]	$5,000
	Merchandise Inventory a/c		$100
	Cash a/c		$4,900
	[To record the payment for the merchandise less 2% discount]
April 18	Merchandise Inventory a/c	$12,250
	Accounts payable a/c		$12,250
	[To record the purchase of inventory on account]
April 21	Accounts payable a/c [Note 2]	$3,250
	Merchandise Inventory a/c		$3,250
	[To record the allowance on merchandise purchase]
April 28	Accounts payable a/c [Note 3]	$9,000
	Merchandise Inventory a/c		$180
	Cash a/c		$8,820

Note 1 - Calculation of Accounts payable and cash to be paid for the purchases on April 2

	Amount
Accounts payable [Total Purchases on April 2]	$5,900
Less: Purchases returns on April 4	$900
Accounts payable [after purchase returns]	$5,000
Discount @2% [$5,000 x 2%]	$100
Cash to be paid	$4,900

Note 2 - Allowance on purchases

Regardless of whether we have return or allowance, the process is exactly the same under the perpetual inventory system. Both returns and allowances reduce the buyer’s debt to the seller (accounts payable) and decrease the cost of the goods purchased (inventory).

Note 3 - Calculation of Accounts payable and cash to be paid for the purchases on April 18

	Amount
Accounts payable [Total Purchases on April 18]	$12.250
Less: Allowance received on April 21	$3,250
Accounts payable [after purchase allowances]	$9,000
Discount @2% [$9,000 x 2%]	$180
Cash to be paid [Net of allowances and discount]	$8,820