Question

On July 15, 2018, the Nixon Car Company purchased 1,100 tires from the Harwell Company for $50 each. The terms of the sale were 3/10, n/30. Nixon uses a periodic inventory system and the gross method of accounting for purchase discounts.

Required:

1. Prepare the journal entries to record the purchase on July 15 and payment on July 23, 2018.
2. Prepare the journal entry to record the payment on August 15, 2018.
3. If Nixon instead uses a perpetual inventory system, explain any changes to the journal entries created in requirements 1 and 2.

Answer 1

Journal entries for the Nixon Car Company's tire purchase and payments were provided, noting the impact of payment terms and the inventory accounting systems used. Discounts and exact accounting treatments under both periodic and perpetual inventory systems were explained.

Step-by-step explanation:

The question involves the accounting treatment for the purchase of inventory on credit and the associated discounts under periodic and perpetual inventory systems. The gross method is being used for purchase discounts.

Journal Entries for Periodic Inventory System

1. Purchase on July 15, 2018:
   Inventory 55,000
   Accounts Payable 55,000
   (Record the purchase of inventory on credit)
2. Payment on July 23, 2018:
   Accounts Payable 55,000
   Purchase Discounts 1,650
   Cash 53,350
   (Record the payment with discount 3% of 55,000)

Journal Entry for Payment without Discount

If the payment was made on August 15, 2018 without taking the discount:

Accounts Payable 55,000
Cash 55,000
(Record the payment without discount)

Changes with Perpetual Inventory System

Under a perpetual inventory system, the initial purchase would also credit Inventory. However, when a discount is taken, Inventory would be debited to reflect the actual cost of the inventory purchased. This is because the perpetual system continuously updates the inventory records for each transaction.

Answer 2

Purchases = Number of units × Price per unit

= 1,100 × $50

= $55,000

`Purchase\ discount=(Total\ purchases\ Amount* Discount\ percentage)/(100)`

`Purchase\ discount=(55,000* 3)/(100)`

= $1,650

The journal entries are as follows:

(1) On July 15,

Purchases A/c ($55,000 - $1,650) Dr. $53,350

To Accounts payable $53,350

(To record purchase of inventory on account)

On July 23,

Accounts payable A/c Dr. $53,350

To cash $53,350

(To record the payment of cash against accounts receivable)

(2) On August 15, 2018

Accounts payable A/c Dr. $53,350

Interest expenses A/c Dr. $1,650

To cash $55,000

(To record the payment on accounts payable)

(3) Perpetual inventory system:

(i) On July 15,

Merchandise Inventory A/c Dr. $53,350

To Accounts payable $53,350

(To record purchase of inventory on account)

(ii) On July 23,

Accounts payable A/c Dr. $53,350

To cash $53,350

(To record the payment of cash against accounts receivable)

(iii) On August 15, 2018

Accounts payable A/c Dr. $53,350

Interest expenses A/c Dr. $1,650

To cash $55,000

(To record the payment of cash against accounts payable and to recognize interest expense due lost discount)