Some of the transactions of Torres Company during August are

Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.

August 10 Purchased merchandise on account, $12,000, terms 2/10, n/30.

13 Returned part of the purchase of August 10, $1,200, and received credit on account.

15 Purchased merchandise on account, $16,000, terms 1/10, n/60.

25 Purchased merchandise on account, $20,000, terms 2/10, n/30.

28 Paid invoice of August 15 in full.

Instructions:

1) Assuming that purchases are recorded at gross amounts and that discounted are to be recorded when taken:

a) Prepare general journal entries to record the transactions.

b) Describe how the various items would be shown in the financial statements.

2) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:

a) Prepare general journal entries to enter the transactions.

b) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.

c) Describe how the various items would be shown in the financial statements.

3) Which of the two methos do you prefer and why?

Solution

The answer is .1699

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PART-1

August 10 Dr. Inventory 12000

               Cr. Account payable 12000

August 13 Dr. Account payable 1200

               Cr. Inventory 1200

August 15 Dr. Inventory 16000

                Cr. Account payable 16000

August 25 Dr. Inventory 20000

               Cr. Account payable 20000

August 28 Dr. Account payable 10,800

                Dr. Purchase Discount 1,200

                Cr. Cash 12,000

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PART-2

1)

August 10 Dr. Inventory 11760

               Cr. Account payable 11760

August 13 Dr. Account payable 1,176

                Cr. Inventory 1,176

August 15 Dr. Inventory 15,840

                Cr. Account Payable 15,840

August 25 Dr. Inventory 19,600

                 Cr. Account payable 19,600

August 28 Account payable 10,584

                Purchase discount lost/ inventory 216

                Cash 10,800

2)

Purchase Discounts Lost 216

Accounts Payable (.02 X $12,000-1,200) 216

3)

Same as part (a)(2) except purchases discounts lost- treat as financial expense in income statement

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PART-C

The second method is better. The reason is that it results in the inventory being carried net of purchases discounts and purchase discounts not taken as shown as an expense. The first method is normally used--------------------------------------------------------------------------------------------------------------------------

Hope that helps.

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