Question

What is the Impact on Income (Increase/Decrease to Income) for the following problem?

Prepare journal entries to record the following merchandising transactions of Lee's, which uses the perpetual inventory system and the gross method. (Hint: It will help to identify each receivable and payable; for example, record the purchase on July 1 in Accounts Payable—Clark.)

Jul.		1		Purchased merchandise from Clark Company for $8,000 under credit terms of 1/15, n/30, FOB shipping point, invoice dated July 1.
Jul.		2		Sold merchandise to Clinton Co. for $1,900 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 2. The merchandise had cost $1,140.
Jul.		3		Paid $525 cash for freight charges on the purchase of July 1.
Jul.		8		Sold merchandise that had cost $2,200 for $3,700 cash.
Jul.		9		Purchased merchandise from Griffin Co. for $3,200 under credit terms of 2/15, n/60, FOB destination, invoice dated July 9.
Jul.		11		Returned $600 of merchandise purchased on July 9 from Griffin Co. and debited its account payable for that amount.
Jul.		12		Received the balance due from Clinton Co. for the invoice dated July 2, net of the discount.
Jul.		16		Paid the balance due to Clark Company within the discount period.
Jul.		19		Sold merchandise that cost $2,200 to Knight Co. for $3,200 under credit terms of 2/15, n/60, FOB shipping point, invoice dated July 19.
Jul.		21		Gave a price reduction (allowance) of $600 to Knight Co. for merchandise sold on July 19 and credited Knight’s accounts receivable for that amount.
Jul.		24		Paid Griffin Co. the balance due, net of discount.
Jul.		30		Received the balance due from Knight Co. for the invoice dated July 19, net of discount.
Jul.		31		Sold merchandise that cost $5,400 to Clinton Co. for $9,000 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 31.

For each transaction, indicate the impact each item had on income and the dollar amount of the change in income, if any. Input decreases to net income as minus sign. Upon completion, compare the gross profit with the amount reported on the partial income statement.

	Impact on income	Increase (decrease) to income
July 1) Purchased merchandise from Clark Company for $8,000 under credit terms of 1/15, n/30, FOB shipping point, invoice dated July 1.	No impact on income
July 2) Sold merchandise to Clinton Co. for $1,900 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 2.	Increases net income
July 2) The cost of the merchandise sold to Clinton Co. was $1,140.	Decreases net income
July 3) Paid $525 cash for freight charges on the purchase of July 1.	No impact on income
July 8) Sold merchandise for $3,700 cash.	Increases net income
July 8) The cost of the merchandise sold was $2,200.	Decreases net income
July 9) Purchased merchandise from Griffin Co. for $3,200 under credit terms of 2/15, n/60, FOB destination, invoice dated July 9.	No impact on income
July 11) Received a $600 credit memorandum from Griffin Co. for the return of part of the merchandise purchased on July 9.	No impact on income
July 12) Received the balance due from Clinton Co. for the invoice dated July 2, net of the discount.	Decreases net income
July 16) Paid the balance due to Clark Company within the discount period.	No impact on income
July 19) Sold merchandise to Knight Co. for $3,200 under credit terms of 2/15, n/60, FOB shipping point, invoice dated July 19.	Increases net income
July 19) The cost of the merchandise sold to Knight Co. was $2,200.	Decreases net income
July 21) Issued a $600 credit memorandum to Knight Co. for an allowance on goods sold on July 19.	Decreases net income
July 24) Paid Griffin Co. the balance due, net of discount.	No impact on income
July 30) Received the balance due from Knight Co. for the invoice dated July 19, net of discount.	Decreases net income
July 31) Sold merchandise to Clinton Co. for $9,000 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 31.	Increases net income
July 31) The cost of the merchandise sold to Clinton Co. was $5,400.	Decreases net income
Total gross profit		$0

Answer 1

Your answer is as follows:

Date	Transaction	Impact on income	Increase (decrease) to income
Jul-01	Purchased merchandise from Clark Company for $8,000 under credit terms of 1/15, n/30, FOB shipping point, invoice dated July 1.	No impact on income
Jul-02	Sold merchandise to Clinton Co. for $1,900 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 2.	Increases net income	$                           1,900
Jul-02	The cost of the merchandise sold to Clinton Co. was $1,140.	Decreases net income	$                        (1,140)
Jul-03	Paid $525 cash for freight charges on the purchase of July 1.	No impact on income
Jul-08	Sold merchandise for $3,700 cash.	Increases net income	$                           3,700
Jul-08	The cost of the merchandise sold was $2,200.	Decreases net income	$                        (2,200)
Jul-09	Purchased merchandise from Griffin Co. for $3,200 under credit terms of 2/15, n/60, FOB destination, invoice dated July 9.	No impact on income
Jul-11	Received a $600 credit memorandum from Griffin Co. for the return of part of the merchandise purchased on July 9.	No impact on income
Jul-12	Received the balance due from Clinton Co. for the invoice dated July 2, net of the discount.	Decreases net income ($1,900*2%)	$                              (38)
Jul-16	Paid the balance due to Clark Company within the discount period.	No impact on income
Jul-19	Sold merchandise to Knight Co. for $3,200 under credit terms of 2/15, n/60, FOB shipping point, invoice dated July 19.	Increases net income	$                           3,200
Jul-19	The cost of the merchandise sold to Knight Co. was $2,200.	Decreases net income	$                        (2,200)
Jul-21	Issued a $600 credit memorandum to Knight Co. for an allowance on goods sold on July 19.	Decreases net income	$                            (600)
Jul-24	Paid Griffin Co. the balance due, net of discount.	No impact on income
Jul-30	Received the balance due from Knight Co. for the invoice dated July 19, net of discount.	Decreases net income ($3200-$600)*2%	$                              (52)
Jul-31	Sold merchandise to Clinton Co. for $9,000 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 31.	Increases net income	$                           9,000
Jul-31	The cost of the merchandise sold to Clinton Co. was $5,400.	Decreases net income	$                        (5,400)
Total gross profit	$                           6,170