Presented below are transactions related to Tom Brokaw, Inc.

May 10 Purchased goods billed at \(15,000 subject to cash discount terms of 2/10, n/60.

11 Purchased goods billed at \)13,200 subject to terms of 1/15, n/30.

19 Paid invoice of May 10.

24 Purchased goods billed at $11,500 subject to cash discount terms of 2/10, n/30.

Instructions

(a) Prepare general journal entries for the transactions above under the assumption that purchases are to be recorded at net amounts after cash discounts and that discounts lost are to be treated as financial expense.

(b) Assuming no purchase or payment transactions other than those given above, prepare the adjusting entry required on May 31 if financial statements are to be prepared as of that date.

Step by step solution

01

Transaction recording based on net purchase method

Date	Description	Debit	Credit
May 10	Purchase A/c	$14,700
	Accounts Payable		$14,700
	(being goods purchased at discount)
May 11	Purchase A/c	$13,068
	Accounts Payable		$13,068
	(Being goods purchase at discount)
May 19	Accounts Payable	$14,700
	Cash A/c		$14,700
	(Being payment made to the supplier)
May 24	Purchase A/c	$11,270
	Accounts Payable		$11,270
	(being goods purchased at the discount)

Working note:

$$\begin{gathered} \mathrm{Net}\mathrm{purchase}\mathrm{value}\mathrm{on}\mathrm{May}10=\mathrm{Invoice}\mathrm{Amount}-\mathrm{Discount} \\ =\$15,000-\left(\$15,000\times \frac{2}{100}\right) \\ =\$15,000-\$300 \\ =\$14,700 \end{gathered}$$

$$\begin{gathered} \mathrm{Net}\mathrm{present}\mathrm{value}\mathrm{on}\mathrm{May}11=\mathrm{Invoice}\mathrm{amount}-\mathrm{Discount} \\ =\$13,200-\left(13,200\times \frac{1}{100}\right) \\ =\$13,200-\$132 \\ =\$13,068 \end{gathered}$$

$$\begin{gathered} \mathrm{Net}\mathrm{purchase}\mathrm{value}\mathrm{on}\mathrm{May}24=\mathrm{Invoice}\mathrm{Amount}-\mathrm{Discount} \\ =\$11,500-\left(11,500\times \frac{2}{100}\right) \\ =\$11,500-\$230 \\ =\$11,270 \end{gathered}$$

02

Adjusting journal entry

As no other payments have been made during the month, the discount earned on May 11 purchase has been lost. On May 31, the adjusting entry would be made for the lost discount. The journal entry would be as follow –

Date	Description	Debit	Credit
May 31	Purchase Discount loss	$132
	Accounts Payable		$132
	(being discount lost due to expiry of the discount period)

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