Question

Sydney Retailing (buyer) and Troy Wholesalers (seller) enter into the following transactions.
  

May		11		Sydney accepts delivery of $22,000 of merchandise it purchases for resale from Troy: invoice dated May 11; terms 3/10, n/90; FOB shipping point. The goods cost Troy $14,740. Sydney pays $320 cash to Express Shipping for delivery charges on the merchandise.
		12		Sydney returns $1,300 of the $22,000 of goods to Troy, who receives them the same day and restores them to its inventory. The returned goods had cost Troy $871.
		20		Sydney pays Troy for the amount owed. Troy receives the cash immediately.

  
Assume that both buyer and seller use a periodic inventory system and the gross method.

1. Prepare journal entries that Sydney Retailing records for these transactions.
2. Prepare journal entries that Troy Wholesalers records for these transactions.

Answer 1

1. Journal entries for Sydney:

For May 11 transaction: Since the delivery is FOB shipping point, it means that, Sydney has to bear the delivery charges. So, there will be 2 journal entries for May 11 transaction. One for inventory coming in and other for delivery charges.

Debit: Inventory $22000

Credit: Accounts Payable $22000

(To record merchandise purchase on credit)

Debit: Freight -in or Transportation-in $320

Credit Cash $320

(To record payment of delivery / shipping charges)

For May 12 transaction:

Debit: Accounts Payable $1300

Credit: Purchase returns and allowancesAccounts Payable $1300

(To record return of merchandise on credit)

For May 20 transaction: Sydney pays the amount owed less the return (i.e. 22000 - 1300 = 20700) and takes the 3% discount (discount amount is 3% * 20700 = 621) on May 20.  May 20 is within the discount period and Sydney will take the 3% discount provided in the terms 3/10, n/90 (this means 3% discount if paid in 10 days of the invoice date otherwise, full amount is due in 90 days). Accounts payable has been reduced to reflect the return. The journal entry for this payment would be:

Debit: Accounts Payable $20700

Credit : Purchase discounts $621

Credit Cash $20079

(To record payment for merchandise less 3% discount)

2. Journal entries for Troy Wholesalers:

For May 11 transaction: As the goods were sold FOB shipping point, the seller does not have to pay the freight cost and is now owed the 22000 for the goods.

Debit: Accounts Receivable $22000

Credit: Sales / Revenue $22000

(To record merchandise sale on credit)

For May 12 transaction: Troy wholesaler will record the sales returns and reduce the amount of accounts receivables.

Debit: Sales Returns $1300

Credit: Accounts receivable $1300

(To record return of merchandise on credit)

For May 20 transaction: Troy wholesalers received the amount owed less the return less discount (i.e. 22000 - 1300 - 621 = 20079) on May 20.  May 20 is within the discount period. Sales discount is an expense (or loss) to the Troy Wholesalers so it will be debited. Accounts receivable has been reduced to reflect the return. The journal entry for this receipt would be:

Debit: Cash $20079

Debit: Sales discounts $621

Credit Accounts Receivable $20700

(To record cash received after 3% discount)