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Chapter 5: Q3SE (page 296)

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?

Short Answer

Expert verified

Answer

The cost of inventory is$18,278.

Step by step solution

01

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 thediscount and due daysof payment.

02

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

03

Computation of inventory cost

Inventorycost=Valueofinventory+Freightcharges-Returns-Discount=$23,800+$50-$5,200-$372=$18,278

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

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Most popular questions from this chapter

Lawrence Appliances had the following purchase transactions. Journalize all necessary transactions using the periodic inventory system. Explanations are not required.

Sep. 4 Purchased inventory of \(6,900 on account from Max Appliance Wholesale, an appliance wholesaler. Terms were 3/15, n/30, FOB shipping point.

4 Paid freight charges, \)480.

10 Returned \(300 of inventory to Max.

17 Paid Max Appliance Wholesale, less return, and discount.

20 Purchased inventory of \)3,900 from MY Appliance, an appliance wholesaler. Terms were 1/10, n/45, FOB destination.

22 Received a $400 allowance from MY Appliance for damaged but usable goods.

29 Paid MY Appliance, less allowance and discount.

Rocky RV Center’s accounting records include the following accounts at December 31, 2018.

Cost of Goods Sold \( 372,000 Accumulated Depreciation—Building \) 38,000

Accounts Payable 16,000 Cash 47,000

Rent Expense 26,000 Sales Revenue 636,500

Building 113,000 Depreciation Expense—Building 13,000

Common Stock 115,000 Dividends 58,000

Retained Earnings 83,100 Interest Revenue 14,000

Merchandise Inventory 239,600

Notes Receivable 34,000

Requirements

1. Journalize the required closing entries for Rocky.

2. Determine the ending balance in the Retained Earnings account.

Describe FOB shipping point and FOB destination. When does the buyer take ownership of the goods, and who typically pays the freight?

Journalize the following transactions that occurred in November 2018 for May’s Adventure Park. Assume May’s uses the gross method to record sales revenue. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name.

Nov. 4 Purchased merchandise inventory on account from Valera Company, \(8,000. Terms 1/10, n/EOM, FOB shipping point.

6 Paid freight bill of \)160 on November 4 purchase.

8 Returned half the inventory purchased on November 4 from Valera Company.

10 Sold merchandise inventory for cash, \(1,700. Cost of goods, \)680. FOB destination.

11 Sold merchandise inventory to Garrison Corporation, \(10,300, on account, terms of 3/10, n/EOM. Cost of goods, \)5,150. FOB shipping point.

12 Paid freight bill of \(30 on November 10 sale.

13 Sold merchandise inventory to Cain Company, \)9,000, on account, terms of 1/10, n/45. Cost of goods, \(4,500. FOB shipping point.

14 Paid the amount owed on account from November 4, less return and discount.

18 Purchased inventory of \)3,700 on account from Regan Corporation. Payment terms were 2/10, n/30, FOB destination.

20 Received cash from Garrison Corporation, less discount.

26 Paid amount owed on account from November 18, less discount.

28 Received cash from Cain Company.

29 Purchased inventory from Sanders Corporation for cash, \(12,000, FOB shipping point. Freight in paid to shipping company, \)200.

Comparing periodic and perpetual inventory systems

For each statement below, identify whether the statement applies to the periodic inventory system, the perpetual inventory system, or both.

a. Normally used for relatively inexpensive goods.

b. Keeps a running computerized record of merchandise inventory.

c. Achieves better control over merchandise inventory.

d. Requires a physical count of inventory to determine the quantities on hand.

e. Uses bar codes to keep up-to-the-minute records of inventory.
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