Question

At the beginning of July, CD City has a balance in inventory of $2,450. The following transactions occur during the month of July.

July 3 Purchase CDs on account from Wholesale Music for $1,350, terms 2/10, n/30.
July 4 Pay cash for freight charges related to the July 3 purchase from Wholesale Music, $110.
July 9 Return incorrectly ordered CDs to Wholesale Music and receive credit, $200.
July 11 Pay Wholesale Music in full. July 12 Sell CDs to customers on account, $3,900, that had a cost of $2,050.
July 15 Receive full payment from customers related to the sale on July 12.
July 18 Purchase CDs on account from Music Supply for $2,150, terms 2/10, n/30.
July 22 Sell CDs to customers for cash, $3,250, that had a cost of $1,550.
July 28 Return CDs to Music Supply and receive credit of $110.
July 30 Pay Music Supply in full.

Required:

a. Assuming that CD City uses a perpetual inventory system, record the transactions. (If no entry is required for a transaction/event, state "No journal entry required".)
b. Prepare the top section of the multiple-step income statement through gross profit for the month of July.

Answer 1

To record the transactions using a perpetual inventory system, journal entries are made to update the inventory balance after each transaction. The top section of the multiple-step income statement can be prepared by calculating net sales revenue, cost of goods sold, and gross profit.

Step-by-step explanation:

To record the transactions using a perpetual inventory system, we need to update the inventory balance after each transaction. Here are the journal entries for the July transactions:

1. July 3: Debit Inventory ($1,350) and Credit Accounts Payable ($1,350)
2. July 4: Debit Freight Charges ($110) and Credit Cash ($110)
3. July 9: Debit Accounts Payable ($200) and Credit Inventory ($200)
4. July 11: Debit Accounts Payable ($1,150) and Credit Cash ($1,150)
5. July 12: Debit Accounts Receivable ($3,900), Credit Sales Revenue ($3,900), Debit Cost of Goods Sold ($2,050), and Credit Inventory ($2,050)
6. July 15: Debit Cash ($3,900), Credit Accounts Receivable ($3,900)
7. July 18: Debit Inventory ($2,150) and Credit Accounts Payable ($2,150)
8. July 22: Debit Cash ($3,250), Credit Sales Revenue ($3,250), Debit Cost of Goods Sold ($1,550), and Credit Inventory ($1,550)
9. July 28: Debit Accounts Payable ($110) and Credit Inventory ($110)
10. July 30: Debit Accounts Payable ($2,150) and Credit Cash ($2,150)

To prepare the top section of the multiple-step income statement through gross profit, we need to calculate net sales revenue, cost of goods sold, and gross profit. Here are the calculations:

• Net Sales Revenue: $3,900 + $3,250 = $7,150
• Cost of Goods Sold: $2,050 + $1,550 = $3,600
• Gross Profit: $7,150 - $3,600 = $3,550

Answer 2

CD City

a. Journal Entries, using perpetual inventory system:

July 3:

Debit Inventory $1,350

Credit Accounts Payable (Wholesale Music) $1,350

To record purchase of CDs on account, terms, 2/10, n/30.

July 4:

Debit Freight-in $110

Credit Cash $110

To record cash payment for freight.

July 9:

Debit Accounts Payable (Wholesale Music) $200

Credit Inventory $200

To record return of CDs.

July 11:

Debit Accounts Payable (Wholesale Music) $1,150

Credit Cash Discount $23

Credit Cash $1,127

To record full settlement on account.

July 12:

Debit Accounts Receivable $3,900

Credit Sales $3,900

To record sales of CDs on account.

Debit Cost of Goods Sold $2,050

Credit Inventory $2,050

To record the cost of sales.

July 15:

Debit Cash $3,900

Credit Accounts Receivable $3,900

To record cash receipt from customers.

July 18:

Debit Inventory $2,150

Credit Accounts Payable (Music Supply) $2,150

To record purchase of CDs on account, terms, 2/10, n/30.

July 22:

Debit Cash $3,250

Credit Sales $3,250

To record cash sales.

Debit Cost of Goods Sold $1,550

Credit Inventory $1,550

To record cost of sales.

July 28:

Debit Accounts Payable (Music Supply) $110

Credit Inventory $110

To record return of CDs.

July 30:

Debit Accounts Payable (Music Supply) $2,040

Credit Cash $2,040

To record full settlement.

b. Top Section of Multiple-step Income Statement for the month of July:

Sales $7,150

Cost of Goods Sold = ($3,600)

Gross Profit = $3,550

Step-by-step explanation:

a) Sales

July 12 = $3,900

July 22 = $3,250

Total $7,150

b) Inventory

Beginning Balance = $2,450

July 3 purchase = 1,350

July 9 return = -200

July 12 cost of sales -2,050

July 18 purchase = 2,150

July 22 cost of sales -1,550

July 28 return = -110

Ending Balance = $2,040

c) Cost of Goods Sold

July 12 cost of sales $2,050

July 22 cost of sales 1,550

Total $3,600