Question

Swifty Industries purchased $10,100 of merchandise on February 1, 2020, subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned $2,600 (gross price before trade or cash discount) on February 4. The invoice was paid on February 13.

a) Assuming that Swifty uses the perpetual method for recording merchandise transactions, record
the purchase, return, and payment using the gross method.
(b) Assuming that Swifty uses the periodic method for recording merchandise transactions, record the
purchase, return, and payment using the gross method.
(c) At what amount would the purchase on February 1 be recorded if the net method were used?

Answer 1

perpetual method

Inventory 9090 debit

Accounts Payable 9090 credit

--to record purchase--

Accounts Payable 2340 debit

Inventory 2340 credit

--to record returned goods--

Accounts Payable 6750 debit

Inventory 202.5 credit

Cash 6547.5

--to record payment within discount--

periodic method:

Purchase 10,100 debit

Accounts Payable 10,100 credit

--to record purchase--

Accounts Payable 2,600 debit

Purchase Returns 2,600 credit

--to record returned goods--

Accounts Payable 7,500 debit

Purchase Discount and Allowance 952.5 credit

Cash 6547.5 credit

--to record payment within discount--

Step-by-step explanation:

Perpetual mehod;

10,100 x (1 - 10%) = 9,090

2,600 x (1 - 10%) = 2,340

balance 9,090 - 2,340 = 6,750

discount 6,750 x 3% = 202.5

Period method:

purhcase 10,100

return 2,600

discount and allowance: 7,500 - 6,547.5 = 952.5

Answer 2

A) perpetual method:

February 1, 2020, merchandise purchased on account credit terms 3/15, n/60

Dr Merchandise inventory 9,090

Cr Accounts payable 9,090

February 4, 2020, merchandise returned

Dr Accounts payable 2,340

Cr Merchandise inventory 2,340

February 13, 2020, invoice paid within discount term

Dr Accounts payable 6,750

Cr Cash 6,547.50

Cr Purchase discounts 202.50

B) periodic method:

February 1, 2020, merchandise purchased on account credit terms 3/15, n/60

Dr Purchases 9,090

Cr Accounts payable 9,090

February 4, 2020, merchandise returned

Dr Accounts payable 2,340

Cr Purchases 2,340

February 13, 2020, invoice paid within discount term

Dr Accounts payable 6,750

Cr Cash 6,547.50

Cr Purchase discounts 202.50

C) using net method:

perpetual

Dr Merchandise inventory 8,817.30

Cr Accounts payable 8,817.30

periodic

Dr Purchases 8,817.30

Cr Accounts payable 8,817.30

Both perpetual and periodic inventory systems record purchase prices after trade discounts, there is no ledger account for trade discounts. In this case, both systems record the initial purchase at $10,100 x 90% = $9,090. The difference between both systems is that periodic system uses the purchases account while perpetual uses the inventory account directly.

The main difference between perpetual and periodic inventory systems is when COGS are determined, since perpetual inventory calculates COGS after each sale, instead, the periodic inventory calculates COGS at the end of the accounting period.