Question

Prepare journal entries to record the following merchandising transactions of Lou’s, which uses the perpetual inventory system and the gross method. Hint: It will help to identify each receivable and payable; for example, record the purchase on August 1 in Accounts Payable—Aron.

Aug. 1 Purchased merchandise from Aron Company for $8,000 under credit terms of 1/10, n/30, FOB destination, invoice dated August 1.

5 Sold merchandise to Baird Corp. for $5,600 under credit terms of 2/10, n/60, FOB destination, invoice dated August 5. The merchandise had cost $4,000. 8 Purchased merchandise from Waters Corporation for $7,000 under credit terms of 1/10, n/45, FOB shipping point, invoice dated August 8. 9 Paid $140 cash for shipping charges related to the August 5 sale to Baird Corp.

10 Baird returned merchandise from the August 5 sale that had cost Lou’s $500 and was sold for $1,000. The merchandise was restored to inventory. 12 After negotiations with Waters Corporation concerning problems with the purchases on August 8, Lou’s received a price reduction from Waters of $700 off the $7,000 of goods purchased. Lou's debited accounts payable for $700.

14 At Aron’s request, Lou’s paid $380 cash for freight charges on the August 1 purchase, reducing the amount owed (accounts payable) to Aron. 15 Received balance due from Baird Corp. for the August 5 sale less the return on August 10.

18 Paid the amount due Waters Corporation for the August 8 purchase less the price allowance from August 12. 19 Sold merchandise to Tux Co. for $4,800 under credit terms of n/10, FOB shipping point, invoice dated August 19. The merchandise had cost $2,400.

22 Tux requested a price reduction on the August 19 sale because the merchandise did not meet specifications. Lou’s gave a price reduction (allowance) of $800 to Tux, and credited Tux's accounts receivable for that amount.

29 Received Tux’s cash payment for the amount due from the August 19 sale less the price allowance from August 22. 30 Paid Aron Company the amount due from the August 1 purchase.

Answer 1

Date	Account Titles	Debit	Credit
Aug 1	Inventory	$8,000
	Accounts Payable - Aaron		$8,000
	(To record purchase of inventory)
Aug 5	Accounts Receivable - Baird Corp	$5,600
	Sales		$5,600
	(To record sale of merchandise)
Aug 5	Cost of Good Sold	$4,000
	Inventory		$4,000
	(To record cost of good sold)
Aug 8	Inventory	$7,000
	Accounts Payable - Walter Corporation		$7,000
	(To record purchase of inventory)
Aug 9	Freight - Out	$140
	Cash		$140
	(To record freight outward expense)
Aug 10	Sales Return and Allowance	$1,000
	Accounts Receivable - Baird Corp		$1,000
	(To record sales return)
Aug 10	Inventory	$500
	Cost of Good Sold		$500
	(To record restore the inventory )
Aug 12	Accounts Payable - Walter Corporation	$700
	Inventory		$700
	(To record price reduction)
Aug 14	Accounts Payable - Aaron	$380
	Cash		$380
	(To record payment of freight charges on behalf of Aaron)
Aug 15	Cash	$4,508
	Discount on Sales	$92		[($5600-$1000) x2%]
	Accounts Receivable - Baird Corp		$4,600
	(To record amount received from Baird Corp)
Aug 18	Accounts Payable - Walter Corporation	$6,300
	Discount on Purchase		$63	[($7000-$700) x1%]
	Cash		$6,237
	(To record payment made to Walter Corporation)
Aug 19	Accounts Receivable - Tux Co	$4,800
	Sales		$4,800
	(To record sale of merchandise)
Aug 19	Cost of Good Sold	$2,400
	Inventory		$2,400
	(To record cost of good sold)
Aug 22	Sales Return and Allowance	$800
	Accounts Receivable - Tux Co		$800
	(To record price reduction for sales made to Tux Co)
Aug 29	Cash	$4,000
	Accounts Receivable - Tux Co		$4,000
	(To record payment received from Tux Co)
Aug 30	Accounts Payable - Aaron	$7,620
	Cash		$7,620
	(To record payment made to Aaron)
Note (i)	Perpetual inventory System: It is a system in which the information of inventory quantity and availability is updated on a continuous basis and entry is passed in the books for cost of good sold for every sales.
Note (ii)	Gross Method of accounting means that the sales/purchase are accounted based on the invoice value without considering the cash discounts offered/received and discount will be passed when the payment is received/made within the discount period.
Note (iii)	FOB Destination : The seller pays the freight charges.
Note (iv)	FOB Shipping : The buyer pays the freight charges
Note (v)	Credit term of 1/10, n/45 means that payment is be done in 45 days and if made within 10 days then 1% cash discount will be given in case of sales and cash discount received in case of purchase