Question

Mitchell uses a perpetual inventory system. Mitchell sells a computer from inventory for $1,198 on credit. Mitchell originally bought the computer from IBM for $790. What journal entry (entries) will Mitchell prepare to record the sale?

A) Debit Cash and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790.
B) Debit Accounts Receivable for $1,198, credit Inventory for $790, and credit Gross Profit for $408.
C) Debit Accounts Receivable and credit Sales Revenue for $1,198; debit Cost of Goods Sold and credit Inventory for $790.
D) Debit Inventory for $790, debit Cost of Goods Sold for $408, and credit Accounts Receivable for $1,198.

Answer 1

The appropriate journal entries Mitchell should prepare are: Debit Accounts Receivable $1,198; Credit Sales Revenue $1,198; Debit Cost of Goods Sold $790; Credit Inventory $790. These entries capture both the revenue from credit sales and the cost of the inventory sold.

Step-by-step explanation:

The correct journal entries to record the sale of the computer using a perpetual inventory system would be:

• Debit Accounts Receivable for $1,198 because the sale was made on credit, increasing receivables.
• Credit Sales Revenue for $1,198 to record the revenue from the sale.
• Debit Cost of Goods Sold (COGS) for $790 which represents the cost of the inventory sold.
• Credit Inventory for $790 to reduce the inventory account for the item that was sold.

This reflects the dual effect of recording a sale: recognizing the revenue and matching the expense (cost of the goods sold) to the revenue.