Question

The transactions listed below are typical of those involving Amalgamated Textiles and American Fashions. Amalgamated is a wholesale merchandiser and American Fashions is a retail merchandiser. Assume all sales of merchandise from Amalgamated to American Fashions are made with terms n/60, 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 December 31.

1. Amalgamated sold merchandise to American Fashions at a selling price of $230,000. The merchandise had cost Amalgamated $175,000.
2. Two days later, American Fashions returned goods that had been sold to the company at a price of $20,000 and complained to Amalgamated that some of the remaining merchandise differed from what American Fashions had ordered. Amalgamated agreed to give an allowance of $5,000 to American Fashions. The goods returned by American Fashions had cost Amalgamated $15,270.
3. Just three days later, American Fashions paid Amalgamated, which settled all amounts owed.

1. Indicate the amount and direction of the effect (+ for increase, − for decrease, and NE for no effect) of each transaction on the Inventory balance of American Fashions. (Enter all amounts as positive values.)

2.  Prepare the journal entries American Fashions would record. TIP: The selling price charged by the seller is the purchaser’s cost. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

1
	Effect on
Transaction	Inventory balance
a	+	230000
b	-	25000
c	NE	0

2
	General Journal	Debit	Credit
a	Inventory	230000
	Accounts Payable		230000
b	Accounts Payable	25000		=20000+5000
	Inventory		25000
c	Accounts Payable	205000		=230000-25000
	Cash		205000