Question

Hirsch Company buys inventory for $30,000 on terms of 1/10, n/30. It pays within the discount period.

1. Prepare the journal Hirsch entries to record the purchase and the payment under both the (a) gross price and (b) net price methods. Assume that uses a periodic inventory system. 2. Prepare the journal entries to record the purchase and payment under both the (a) gross price and the (b) net price methods. Assume that Hirsch uses a perpetual inventory system.

Answer 1

The journal entries for the purchase and payment of inventory differ based on the accounting method used (gross price or net price) and the type of inventory system (periodic or perpetual). Under the gross price method, purchase discounts are recorded when payment is made, while under the net price method, discounts are assumed to be taken. The perpetual system affects the accounts debited and credited at the time of payment.

Step-by-step explanation:

The subject of the question involves the recording of inventory purchases and payments using different accounting methods under the periodic and perpetual inventory systems. Here, we will discuss the journal entries for both the gross price and net price method.

Gross Price Method

1. Purchase Inventory for $30,000: Debit Inventory $30,000, Credit Accounts Payable $30,000.
2. Pay within discount period (within 10 days), 1% discount: Debit Accounts Payable $30,000, Debit Cash for the discounted amount of $29,700 (1% of $30,000 = $300 discount), and Credit Inventory or Purchase Discounts for $300.

Net Price Method

1. Purchase Inventory assuming the discount will be taken: Debit Inventory $29,700, Credit Accounts Payable $29,700.
2. Pay within discount period: Debit Accounts Payable $29,700, Credit Cash $29,700.

Perpetual Inventory System: The process would be similar, but instead of debiting Inventory, we would debit Purchases for the periodic system. When the payment is made within the discount period, the Inventory account would be directly credited under the perpetual system.