Problem 21 - Accounting

Question

Versailles Co., a women's clothing store, purchased \(\$ 18,000\) of merchandise from a supplier on account, terms FOB destination, \(2 / 10, \mathrm{n} / 30\). Versailles Co. returned \(\$ 3,000\) of the merchandise, receiving a credit memo, and then paid the amount due within the discount period. Journalize Versailles Co.'s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.

Step-by-Step Solution

Answer

1. Purchase: Debit Inventory, Credit Accounts Payable \( \$18,000 \). 2. Return: Debit Accounts Payable, Credit Inventory \( \$3,000 \). 3. Payment: Debit Accounts Payable \( \$15,000 \), Credit Cash \( \$14,700 \), Credit Discounts \( \$300 \).

Step 1: Understand the purchase transaction

Versailles Co. purchased merchandise worth \( \$18,000 \) on account. The terms are FOB destination, \( 2/10, \mathrm{n}/30 \), meaning that they can avail a 2% discount if the payment is made within 10 days, and the net amount is due in 30 days. However, because it's FOB destination, they don't have to record shipping costs at this point.

Step 2: Record the Purchase

Journal Entry to record the purchase on account:- **Debit Merchandise Inventory**: \( \\(18,000 \)- **Credit Accounts Payable**: \( \\)18,000 \) The entry reflects the receipt of goods on account, increasing the Merchandise Inventory and corresponding Accounts Payable.

Step 3: Understand the merchandise return transaction

Versailles Co. returned \( \$3,000 \) worth of merchandise due to some reason and received a credit memo for the same. This transaction will reduce both the Merchandise Inventory and Accounts Payable.

Step 4: Record the Merchandise Return

Journal Entry to record the merchandise return:- **Debit Accounts Payable**: \( \\(3,000 \)- **Credit Merchandise Inventory**: \( \\)3,000 \)This entry decreases the liability (Accounts Payable) and the asset (Merchandise Inventory) by the amount of the merchandise returned.

Step 5: Understand the payment transaction with discount

The payment is to be made within the discount period. The remaining balance after return is \( \\(18,000 - \\)3,000 = \$15,000 \). A 2% discount can be applied because the payment is within the 10-day discount period.

Step 6: Calculate the Discount and Payable Amount

Calculate the discount on the remaining amount:The discount is \(2\%\) of \( \\(15,000 \):\[ \text{Discount} = \frac{2}{100} \times 15,000 = \\)300 \]Thus, the payable amount is:\[ 15,000 - 300 = \$14,700 \]

Step 7: Record the Final Payment

Journal Entry to record the payment:- **Debit Accounts Payable**: \( \\(15,000 \) (the full amount after return)- **Credit Cash**: \( \\)14,700 \) (amount paid after discount)- **Credit Purchase Discounts**: \( \\(300 \) (discount received)This entry reflects the full accounts payable being settled, but only \( \\)14,700 \) is paid in cash after discount deduction.

Key Concepts

Purchase Journal Entry

When Versailles Co. purchases merchandise on account for \( \\(18,000 \), they must record this in their Purchase Journal Entry. This involves two primary accounts:

• Debit Merchandise Inventory: This entry reflects the increase in assets for the company. Merchandise is an asset, thus increasing the inventory by \( \\)18,000 \).
• Credit Accounts Payable: This records the liability created by purchasing on credit, equal to \( \$18,000 \). This shows that Versailles Co. owes this amount to the suppliers.

The terms FOB destination and \(2/10, \text{n}/30\) imply that while the ownership changes hands, Versailles only pays shipping after receiving the goods. A 2% discount is available if they pay within 10 days, with the full amount due in 30 days if they don't avail the discount.

Merchandise Return Journal Entry

Occasionally, merchandise may not meet quality or order specifications, prompting a return. Versailles Co. decides to return \( \\(3,000 \) worth of merchandise. This affects two accounts as follows:

• Debit Accounts Payable: By debiting \( \\)3,000 \), the company decreases its obligations to its suppliers. The company is reducing its liability since they no longer owe this part of the original purchase amount.
• Credit Merchandise Inventory: The inventory value decreases by \( \$3,000 \) to reflect that these goods are no longer part of the company's stock.

This entry helps adjust both the inventory levels and the total payable amount accurately to reflect the return of goods.

Payment Journal Entry

To demonstrate good cash flow management and take advantage of the discount offered, Versailles Co. pays off its remaining debt within the discount period. Here's how the entry is recorded:
- **Calculate Remaining Amount**: After the return, the payable amount is \(18,000 - 3,000 = \\(15,000 \).- **Apply the 2% Discount**: The discount is calculated as \( 2\% \times 15,000 = \\)300 \).
With these calculations:

• Debit Accounts Payable: Reflect the entire payable amount of \( \\(15,000 \).
• Credit Cash: Reflects the actual payment made, \( \\)14,700 \), after applying the discount.
• Credit Purchase Discounts: Recognizes the \( \$300 \) discount received as a benefit to the company.

These entries demonstrate the company's efficiency in managing discounts and cash flows effectively.

Accounting for Discounts

Once Versailles Co. decides to pay within the discount period, they can account for the 2% discount. Here's why this is beneficial:

• **Cost Savings**: Discounts lower the total cash outflow. For Versailles, a \(\$300\) discount significantly reduces the expense, freeing up cash for other uses.
• **Accurate Financial Records**: By recording a Purchase Discount, Versailles accurately reflects this reduction in cost, showing better financial performance.

The formula to calculate the discount is straightforward: \( \text{Discount} = \frac{2}{100} \times \text{remaining payable amount} \). This approach ensures transparency and accuracy in financial reporting.