A company purchased 1000 units of inventory on September 25 and the cost per unit was $8.50. Terms of the purchase were 2/10, n/30. The invoice was paid in full on October 4. (Assume a perpetual inventory system). Prepare the journal entries to fully reflect these merchandise transactions VERY CONFUSED
To prepare the journal entries for the merchandise transactions, we need to consider the purchase of inventory and the subsequent payment of the invoice.
First, let's record the purchase of 1000 units of inventory on September 25:
1. Purchase of Inventory:
Date: September 25
Inventory: 1000 units x $8.50 = $8,500
Accounts Payable: $8,500
Debit: Inventory - $8,500
Credit: Accounts Payable - $8,500
Next, let's record the payment of the invoice in full on October 4, considering the terms of the purchase:
2. Payment of Invoice:
Date: October 4
Accounts Payable: $8,500
Cash (Payment amount after discount): $8,500 - ($8,500 x 2%) = $8,330
Debit: Accounts Payable - $8,500
Debit: Purchase Discounts (2% discount) - $170
Credit: Cash - $8,330
These two journal entries adequately represent the merchandise transactions involving the purchase and payment of inventory.
To prepare the journal entries for the merchandise transactions, we need to consider the purchase, payment, and any applicable discounts.
1. Purchase on September 25:
The purchase of 1000 units of inventory at $8.50 per unit creates an accounts payable. The journal entry for this transaction is:
Date Account Debit Credit
------------------------------------------
Sept 25 Inventory 8,500
Accounts Payable 8,500
Explanation:
Inventory increases by 1000 units, which is valued at $8.50 per unit, resulting in a total debit of $8,500. At the same time, an accounts payable is created as the company owes this amount to the supplier.
2. Payment on October 4:
The payment takes place on October 4, and if made within the discount period, a discount can be taken. The journal entry for this transaction is:
Date Account Debit Credit
------------------------------------------
Oct 4 Accounts Payable 8,500
Cash 8,500
Explanation:
The accounts payable is reduced by the full amount of $8,500, as the invoice is paid in full. Cash decreases by the same amount as it is used to make the payment.
3. Discount Calculation (If applicable):
Remember, the terms of the purchase were 2/10, n/30, which means that a 2% discount can be taken if the payment is made within 10 days. If the discount is applicable, we need to account for it in our journal entry.
To calculate the discount amount, multiply the total amount (before discount) by the discount percentage:
Discount amount = Total amount * Discount percentage
Discount amount = $8,500 * 0.02 = $170
So, the updated journal entry, considering the discount, would be:
Date Account Debit Credit
------------------------------------------
Oct 4 Accounts Payable 8,500
Cash 8,330
Purchase Discounts 170
Explanation:
The accounts payable is still reduced by the full amount of $8,500, as the invoice is paid in full. However, cash decreases by $8,330, reflecting the payment made after taking the discount of $170. Lastly, a new account called "Purchase Discounts" is credited for the discount amount given.
These journal entries accurately reflect the merchandise transactions involving the purchase and payment of inventory while also considering any applicable discounts.