Question

Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2016. The units have a list price of $500 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30. Thomas uses a periodic inventory system.

1. Prepare the journal entries to record the purchase by Thomas on November 17 and payment on November 26, 2016, using the gross method of accounting for purchase discounts.
2. Prepare the journal entry to record the payment on December 15, 2016, using the gross method of accounting for purchase discounts.
3. Repeat requirements 1 and 2 using the net method of accounting for purchase discounts.

Answer 1

1)

The journal entries using the gross method are:

November 17, 2016, purchased merchandise on account, terms 2/10, n/30.

Dr Merchandise inventory 35,000

Cr Accounts payable 35,000

November 26, 2016, invoice paid to Tracy Company within discount period

Dr Accounts payable 35,000

Cr Cash 34,300

Cr Purchase discounts 700

2)

journal entry to record a later payment of the invoice after discount period

December 15, 2016, invoice paid to Tracy Company

Dr Accounts payable 35,000

Cr Cash 35,000

3)

November 17, 2016, purchased merchandise on account, terms 2/10, n/30.

Dr Merchandise inventory 34,300

Cr Accounts payable 34,300

November 26, 2016, invoice paid to Tracy Company within discount period

Dr Accounts payable 34,300

Cr Cash 34,300

December 15, 2016, invoice paid to Tracy Company after discount period

Dr Accounts payable 34,300

Dr Purchase discount lost 700

Cr Cash 35,000

When you use the net method, any lost discount must be recorded as an expense.