Question

On July 15, 2018, the Nixon Car Company purchased 1,100 tires from the Harwell Company for $50 each. The terms of the sale were 3/10, n/30. Nixon uses a periodic inventory system and the gross method of accounting for purchase discounts.

Required:

1. Prepare the journal entries to record the purchase on July 15 and payment on July 23, 2018.
2. Prepare the journal entry to record the payment on August 15, 2018.
3. If Nixon instead uses a perpetual inventory system, explain any changes to the journal entries created in requirements 1 and 2.

Answer 1

Answer:

Purchases = Number of units × Price per unit

                 = 1,100 × $50

                 = $55,000

$Purchase\ discount=\frac{Total\ purchases\ Amount\times Discount\ percentage}{100}$

$Purchase\ discount=\frac{55,000\times 3}{100}$

                                       = $1,650

The journal entries are as follows:

(1) On July 15,

Purchases A/c ($55,000 - $1,650)      Dr. $53,350

To Accounts payable                                                  $53,350

(To record purchase of inventory on account)

On July 23,

Accounts payable A/c    Dr.     $53,350

To cash                                                      $53,350

(To record the payment of cash against accounts receivable)

(2) On August 15, 2018

Accounts payable A/c    Dr.    $53,350

Interest expenses A/c    Dr.    $1,650

To cash                                                               $55,000

(To record the payment on accounts payable)

(3) Perpetual inventory system:

(i) On July 15,

Merchandise Inventory A/c           Dr. $53,350

To Accounts payable                                                  $53,350

(To record purchase of inventory on account)

(ii) On July 23,

Accounts payable A/c    Dr.     $53,350

To cash                                                      $53,350

(To record the payment of cash against accounts receivable)

(iii)  On August 15, 2018

Accounts payable A/c    Dr.    $53,350

Interest expenses A/c    Dr.    $1,650

To cash                                                               $55,000

(To record the payment of cash against accounts payable and to recognize interest expense due lost discount)