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On May 22, Hanlon paid We Ship It $200 for shipping on the items purchased May 21. The journal entry would be as follows:DateAccountDebitCreditMay 22Merchandise Inventory200Cash200To record the payment of shipping charges.Purchase Returns and AllowancesA purchase returnoccurs when a buyer returns merchandise to a seller. When a buyerreceives a reduction in the price of goods shipped but does not return the merchandise, a purchase allowanceresults.Regardless of whether we have a return or an allowance, the process is exactlythe same under the perpetual inventory system. Both returns and allowances reduce the buyer’s debt to the seller (accounts payable) and decrease the cost of the goods purchased (inventory). We will debit Accounts Payable and credit Merchandise Inventory.If Hanlon returned $350 of merchandise to Smith Wholesale on May 6 before paying for the goods, Hanlon would make this journal entry:DateAccountDebitCreditMay 6Accounts Payable350Merchandise Inventory350To record return of merchandise.The entry would have been the same to record a $350 allowance. Only the explanation would change.
If Hanlon had already paid the account, the debit would be to Cash instead of Accounts Payable, becausee Hanlon would receive a refund of cash. If the company took a discount at the time it paid the account, only the net amount would be refunded. For instance, if a 2% discount had been taken, the return amount would be $350 – (350 x 2%), or $343. Hanlon’s journal entry for the return would be:AccountDebitCreditMay 6Cash343Merchandise Inventory343To record return of merchandise for a refund less the 2% discount.Paying for Inventory Purchased on CreditWhen paying for inventory purchased on credit, we will decrease what we owe to the seller (accounts payable) and cash. If we take a discount for paying early, we record thisdiscount in the merchandise inventory account because it will reduce what we paid for inventory.Using the purchase transaction from May 4 and no returns, Hanlon pays the amount owed on May 10. May 10 is within the discount period, and Hanlon will take the 2% discount provided in the terms 2/10, n30 (remember, this means a 2% discount if paid in10 days of the invoice date; otherwise, the full amount is due in 30 days).DateAccountDebitCreditMay 10Accounts Payable30,000Merchandise Inventory (30,000 × 2%)600Merchandise Inventory Cash (30,000 – 600)29,400To record payment for merchandise less the 2% discount.We reduce the full amount owed on May 4 and calculate the 2% discount based on this amount. The cash amount is the amount we owe – discount.Assume we also had the return on May 6 of $350. Hanlon pays the amount owed less the return and takes the 2% discount on May 12. The journal entry for this payment would be:DateAccountDebitCreditMay Accounts Payable (30,000 – 350)29,650
12Merchandise Inventory (29,650 × 2%)593Cash (29,650 – 593)29,057To record payment for merchandise less the 2% discount and a $350 return.