Question

a. Microprints Inc. had the following transactions for the month of August 20X1

Aug. 2     Sold merchandise on account for $25,000; terms 2/10, n/30, FOB shipping point. The cost of goods sold is $18,000.

18 Received payment for the sale of August 2.

20 A total of $1,000 of the merchandise sold on August 2 was returned, and a full refund was made because it was the wrong merchandise. The cost of goods sold is $720.

28 An allowance of $1,300 was granted on the sale from August 2 because some merchandise was damaged; $1,300 cash was returned to the customer.

b. Ashley Company engaged in the following transactions in August 20x1:

Aug. 4 Purchased merchandise on account at a cost of $ 14,000; terms 2/10, n/30, FOB shipping Point.

6 Paid freight of $200 on the purchase of August 4.

10 Sold goods for $10,000; terms 2/10, n/30. The cost of goods sold is $9,000.

12 Returned to the vendor, $2,400 worth of the merchandise purchased on August 4.

14 Paid the amount due on the purchase of August 4.

Requirement:

1) Using the template, prepare journal entries for both Microprints and Ashley transactions assuming:

i) Periodic system.

ii) Perpetual system.

2) Your client has asked for advice on whether to use the perpetual or periodic inventory system. Recommend an inventory system giving reasons why it is best for your client.

Module 4: Critical Thinking Template Option #2
[COMPANY NAME]
Journal Entries
Date		Account Name	Periodic System			Perpetual System
August			Debit	Credit		Debit	Credit
2	a)
	b)
18
20	a)
	b)
28
					Unadjusted Trial Balance
		Account Name				Credit
		Cash
		Accounts receivable
		Equipment
		Supplies
		Accounts payable				#REF!
		Capital stock				#REF!
		Revenue				#REF!
		Rent expense
		Total				#REF!

Module 4: Critical Thinking Template Option #2
[COMPANY NAME]
Journal Entries
Date		Account Name	Periodic System			Perpetual System
August			Debit	Credit		Debit	Credit
4
6
10	a)
	b)
12
14

Answer 1

1.

Prepare the required journal entries for both the companies in the following manner:

Company M
Journal Entries
Date		Account Name	Periodic System		Perpetual System
August			Debit	Credit	Debit	Credit
2	a)	Accounts Receivable	25000		25000
		Sales		25000		25000
	b)	Cost of Goods Sold	No entry		18000
		Merchandise Inventory				18000
18		Cash	25000
		Accounts Receivable		25000
20	a)	Sales Returns and Allowances	1000		1000
		Cash		1000		1000
	b)	Merchandise Inventory	No entry		720
		Cost of Goods Sold				720
28		Sales Returns and Allowances	1300		1300
		Cash		1300		1300
An unadjusted trial balance cannot be prepared because the information provided in the question is insufficient. The question provides details of transactions only related to sales and inventory. A lot more information is required to prepare an unadjusted trial balance.
							Company A
Journal Entries
Date		Account Name	Periodic System		Perpetual System
August			Debit	Credit	Debit	Credit
4		Purchases	14000
		Merchandise Inventory			14000
		Accounts Payable		14000		14000
6		Freight-in	200
		Merchandise Inventory			200
		Cash		200		200
10	a)	Accounts Receivable	10000		10000
		Sales		10000		10000
	b)	Cost of Goods Sold	No entry		9000
		Merchandise Inventory				9000
12		Accounts Payable	2400		2400
		Purchase Returns		2400
		Merchandise Inventory				2400
14		Accounts Payable ($14,000 - $2,400)	11600		11600
		Purchase Discounts ($11,600 x 2%)		232
		Merchandise Inventory ($11,600 x 2%)				232
		Cash ($11,600 - $232)		11368		11368

2.

Periodic inventory system is good if the business is small. However, a perpetual inventory system is advisable for large businesses because it allows you to access the balance in your inventory account at any point in time. Large business need to know how much inventory is available at any givev point of time so that they can plan their manufacturing or procuring activity within time so that the do not fall short of demand.