Problem 22 - Accounting

Question

Journalize entries for the following related transactions of La Paz Company: a. Purchased \(\$ 18,400\) of merchandise from Harbin Co. on account, terms \(2 / 10, \mathrm{n} / 30\). b. Paid the amount owed on the invoice within the discount period. c. Discovered that \(\$ 4,500\) of the merchandise was defective and returned items, receiving credit. d. Purchased \(\$ 3,000\) of merchandise from Harbin Co. on account, terms \(n / 30\). e. Received a check for the balance owed from the return in (c), after deducting for the purchase in (d).

Step-by-Step Solution

Answer

La Paz takes advantage of a discount on initial purchase, returns faulty merchandise, and pays for a second purchase without a discount.

Step 1: Record Initial Purchase

The company purchased merchandise for \(\\(18,400\) with terms \(2/10, n/30\). This means if they pay within 10 days, they can take a 2% discount. Initially, we record this purchase without the discount: - Debit Merchandise Inventory: \(\\)18,400\)- Credit Accounts Payable: \(\$18,400\).

Step 2: Payment Within Discount Period

La Paz Company paid the invoice within the 10-day discount period, making them eligible for a 2% discount on \(\\(18,400\). The discount is \(18,400 \times 0.02 = \\)368\). They pay the net amount:- Debit Accounts Payable: \(\\(18,400\)- Credit Cash: \(18,400 - 368 = \\)18,032\)- Credit Merchandise Inventory: \(\$368\) (representing the discount).

Step 3: Record Merchandise Return

The company returned \(\\(4,500\) worth of defective merchandise. This decreases their account payable and inventory:- Debit Accounts Payable: \(\\)4,500\)- Credit Merchandise Inventory: \(\$4,500\).

Step 4: Record Second Purchase

The company made a second purchase of \(\\(3,000\) on account with terms \(n/30\), meaning no discount is applied. Record the purchase:- Debit Merchandise Inventory: \(\\)3,000\)- Credit Accounts Payable: \(\$3,000\).

Step 5: Calculate and Record Payment After Return and Purchase

After returning merchandise and making a new purchase, calculate the balance owed: Initially owed \(\\(18,400\), returned \(\\)4,500\), purchased an additional \(\\(3,000\). They had already paid \(\\)18,032\) covering the initial balance after the discount. Thus, they owe only for the recent purchase:- Balance after return and initial payment covering the discount: None.- Debit Accounts Payable: \(\\(3,000\)- Credit Cash: \(\\)3,000\) when paid for the new purchase.(However, if possibly it means the return balance is being netted with the new purchase for some adjustment, cash is adjusted.)

Key Concepts

Merchandise Return

A merchandise return occurs when a buyer sends goods back to the seller after realizing that the items are not satisfactory, often due to defects or incorrect orders. In this context, La Paz Company returned defective merchandise worth $4,500.
This return impacts two main accounts in the journal: Accounts Payable and Merchandise Inventory. Decreasing both reflects that the company no longer owes money for those goods, nor do they keep them in stock. Understanding this process is integral in recording transactions accurately, ensuring the financial records display truthful figures. When La Paz returned the merchandise, they recorded:

• Debiting Accounts Payable by $4,500: This action decreases the amount owed to the seller since the defective merchandise is not payable anymore.
• Crediting Merchandise Inventory by the same amount: This action reduces the recorded value of their inventory, signifying the removal of these goods.

This transaction highlights the importance of efficiently managing inventory levels and financial obligations to maintain transparent business operations.

Payment Discount

A payment discount, also known as a cash discount, is an incentive offered by the seller to the buyer for early payment, typically by reducing the invoice amount if paid within a specified period. La Paz Company encountered a 2% discount advantage by paying for their initial purchase, valued at $18,400, within the 10-day period. The steps to calculate and record this discount are straightforward. First, calculate the discount:

• Discount amount: $18,400 x 0.02 = $368

To journalize this correctly:

• Debit Accounts Payable for $18,400 to decrease the liability.
• Credit Cash for $18,032, which is the payable amount minus the discount ($18,400 - $368).
• Credit Merchandise Inventory by $368, reflecting the reduction in inventory cost due to the discount.

This transaction benefits both parties—buyers can lower costs, and sellers receive quick payments, improving cash flow. It underscores the need for companies to carefully monitor payment terms to maximize savings financially.

Accounts Payable

Accounts Payable represents the company's obligation to pay off short-term debt to its suppliers or creditors. This liability account is crucial in the recording of all goods purchased on credit. For La Paz Company, the purchase journals start with an increase in accounts payable as merchandise is acquired:

• The company initially records a $18,400 payable when purchasing from Harbin Co.
• Upon paying within the discount period, accounts payable decreases to align with the real payment value post-discount.
• Payment for the subsequent additional purchase of $3,000 also increases accounts payable, signaling a new short-term debt.

Managing accounts payable diligently is necessary for company operations to ensure timely payments and maintain good supplier relationships. It is crucial to accurately record each change to avoid discrepancies in financial statements and maintain a clear view of the business's current obligations.

Merchandise Inventory

Merchandise inventory represents the goods a company holds for sale to its customers. It is a critical component on the balance sheet, affecting cost of goods sold and overall profitability. In the La Paz Company scenario:

• The initial purchase increases the merchandise inventory by $18,400. Once received, these goods add to the company's available products for sale.
• When taking advantage of the payment discount, a credit of $368 reduces inventory valuation, representing cost savings.
• Returning the defective items worth $4,500 reduces the inventory further, which is essential for representing the accurate value of sellable goods.
• The later purchase of $3,000 replenishes stock, boosting the inventory in anticipation of future sales.

Effectively managing merchandise inventory allows businesses to keep optimal stock levels, minimize storage costs, and ensure efficient operations. Businesses can better control their cash flow and maintain a continuous supply of products to meet customer demand.