Q3SE - Horngren'S Financial And Managerial Accounting

Question

Consider the following transactions for Burlington Drug Store:

Feb. 2 Burlington buys \(23,800 worth of inventory on account with credit terms of 2/15, n/30, FOB shipping point. 

        4 Burlington pays a \)50 freight charge. 

        9 Burlington returns $5,200 of the merchandise due to damage during shipment. 

        14 Burlington paid the amount due, less return and discount.

Requirements 

1. Journalize the purchase transactions. Explanations are not required. 

2. In the final analysis, how much did the inventory cost Burlington Drug Store?

 

Step-by-Step Solution

Answer

Answer

The cost of inventory is $18,278.

Step 1: Meaning of Credit Term

In accounting, credit term refers to the terms and conditions associated with the payment of goods sold or bought by a business entity. Credit term generally depicts the discount and due days of payment. 

Step 2: Journal entries for purchase transactions

Date	Accounts and Explanation	Debit ($)	Credit ($)
Feb 2	Merchandise Inventory	23,800
	Accounts payable		23,800
Feb 4	Merchandise inventory	50
	Cash		50
Feb 9	Accounts payable	5,200
	Merchandise inventory		5,200
Feb 14	Accounts payable (23,800-5,200)	18,600
	Cash (18,600-372)	18,228
	Merchandise inventory (18,600*2%)		372

Step 3: Computation of inventory cost

$\begin{array}{rcl}\mathrm{Inventory} \mathrm{cost} & =& \mathrm{Value} \mathrm{of} \mathrm{inventory}+\mathrm{Freight} \mathrm{charges}-\mathrm{Returns}-\mathrm{Discount}\\ & =& \$23,800+\$50-\$5,200-\$372\\ & =& \$18,278\end{array}$

Hence, the Company Burlington Drug Store consisting an inventory cost of $18,278.