Question

PA6-1 Reporting Purchase Transactions between Wholesale and Retail Merchandisers Using Perpetual Inventory Systems [LO 6-3]

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The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms n/30, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.

1. New Books sold merchandise to Readers’ Corner at a selling price of $610,000. The merchandise had cost New Books $439,000.
2. Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $9,500 to Readers’ Corner. Readers’ Corner also returned some books, which had cost New Books $3,200 and had been sold to Readers’ Corner for $4,700.
3. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.

Answer 1

Journal entries:

Sr No	Account	Debit	Credit
a (1)	Accounts receivable	$610,000
	Sales revenue		$610,000
	To record credit sales
a (2)	Cost of Goods Sold	$439,000
	Inventory		$439,000
	To record the cost of goods sold
b (1)	Sales returns and allowances ($9,500 + $4,700)	$14,200
	Accounts receivables		$14,200
	To record sales returns and allowances
b (2)	Inventory	$3,200
	Cost of Goods Sold		$3,200
	To record return of inventory
(c)	Cash*	$595,800
	Accounts receivable		$595,800
	To record cash received

* Calculation of cash received

Cash Received = Total sales - Allowances - Value of returned merchandise

= $610,000 - $9,500 - $4,700

= $595,800