Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 26. The units have a list price of $500 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a periodic inventory system.
1. prepare the journal entries to record the purchase by Thomas on November 17 and payment on November 26,2009, using the gross method of accounting for purchase discounts.
2. Prepare the journal entry to record the payment on December 15,2009, using the gross method of accounting for purchase discounts.
3. Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.
To answer these questions, we can follow these steps:
Step 1: Calculate the amount after the trade discount.
Step 2: Determine the cost of the goods sold.
Step 3: Record the journal entry for the purchase.
Step 4: Record the journal entry for the payment.
Now we can break down each requirement and go through the steps.
Requirement 1: Prepare the journal entries to record the purchase by Thomas on November 17 and payment on November 26, 2009, using the gross method of accounting for purchase discounts.
Step 1: Calculate the amount after the trade discount.
The trade discount is 30%. To find the amount after the discount, we multiply the list price by (1 - trade discount percentage):
Amount after discount = List price * (1 - Trade discount percentage)
Amount after discount = $500 * (1 - 0.30)
Amount after discount = $500 * 0.70
Amount after discount = $350
Step 2: Determine the cost of the goods sold.
The cost of goods sold is the amount after the trade discount. In this case, it is $350.
Step 3: Record the journal entry for the purchase.
On November 17, the journal entry for the purchase would be:
Date Account Debit Credit
Nov 17 Purchases (or Inventory) $35,000
Nov 17 Accounts Payable $35,000
Step 4: Record the journal entry for the payment.
On November 26, the payment journal entry would be:
Date Account Debit Credit
Nov 26 Accounts Payable $35,000
Nov 26 Cash $34,300
Nov 26 Purchase Discounts (contra-expense) $ 700
Requirement 2: Prepare the journal entry to record the payment on December 15, 2009, using the gross method of accounting for purchase discounts.
Since the payment is made on December 15, outside the discount period, the buyer doesn't get the purchase discount.
The journal entry for the payment on December 15 would be:
Date Account Debit Credit
Dec 15 Accounts Payable $35,000
Dec 15 Cash $35,000
Requirement 3: Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.
Step 1: The net method calculates the purchase discount on the amount after the trade discount.
The amount after the trade discount is still $350.
Step 2: The cost of the goods sold remains $350.
Step 3: Record the journal entry for the purchase using the net method.
On November 17, the journal entry for the purchase would be:
Date Account Debit Credit
Nov 17 Purchases (or Inventory) $35,000
Nov 17 Accounts Payable $35,000
Step 4: Record the journal entry for the payment using the net method.
On November 26, the payment journal entry would be:
Date Account Debit Credit
Nov 26 Accounts Payable $34,300
Nov 26 Cash $34,300
No discount is given in the payment since it is made outside the discount period.
That's it! These are the journal entries to record the purchase and payment using the gross and net methods of accounting for purchase discounts.