Question

Tracy Company, a manufacturer of air conditioners, sold 270 units to Thomas Company on November 17, 2021. The units have a list price of $400 each, but Thomas was given a 25% trade discount. The terms of the sale were 3/10, n/30. Thomas uses a perpetual inventory system.

1. Prepare the journal entries to record the (a) purchase by Thomas on November 17 and (b) payment on November 26, 2021. Thomas uses the gross method of accounting for purchase discounts.
2. Prepare the journal entry for the payment, assuming instead that it was made on December 15, 2021.

1. Record the purchase of air conditioners.

Answer 1

Answer:

See explanation section

Explanation:

Requirement 1

November 17, 2021   Merchandise Inventory     Debit     $81,000 (Note - 1)

Accounts payable - Tracy Company                  Credit    $81,000

Calculation - $270 units × $400 = $108,000

$108,000 × (100 - 25)% = $81,000

To record the purchase of office equipment on account with a trade discount and a credit terms of 3/10, n/30. As the company uses perpetual inventory system, merchandise inventory is debit.

November 26, 2021  Accounts payable - Tracy Company   Debit   $81,000

                                   Cash                                       Credit      $78,570

                                   Merchandise Inventory         Credit      $2,430

As Thomas gave the payment within 10 days, Tracy Company provided a 3% discount according to the terms.

Calculation - $81,000 - ($81,000 × 3)% = $81,000 - 2,430 = $78,570

Requirement 2

If Thomas paid on December 15, 2021, Tracy company would not give any discount. However, Thomas paid within 30 days.

Therefore, the journal entry to record the payment is as follows:

December 15, 2021  Accounts payable - Tracy Company   Debit   $81,000

                                   Cash                                       Credit      $81,000

This time he did not receive the discount as he failed to pay within 10 days to get discount.