[ The following information applies to the questions displayed below .] The tran

ID: 2455474 • Letter: #

Question

[The following information applies to the questions displayed below.]

The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms 2/10, n/30, and that the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.

New Books sold merchandise to Readers’ Corner at a selling price of $650,000. The merchandise had cost New Books $455,000.

Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $13,500 to Readers’ Corner.

Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.

1-Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers' Corner. (Enter all amounts as positive values.)

Prepare the journal entries that Readers’ Corner would record and show any computations. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Explanation / Answer

Part-1:-

a)Inventory Balance of Reader’s Corner will increase by $650,000

b)NO effect on Inventory balance of Reader’s Corner.(Since allownace is an item of Profit & Loss Account will be credited to it without effectinf the inventory balance of Reader’s Corner

c) NO effect on Inventory balance of Reader’s Corner

Part-2:-

a)Debit Inventory = 650,000

Credit New Books = 650,000

b)Debit New Books = 13500

Credit Allownace on Purchases = 13500

c)Since payament has been made within 10 days Reader’s Corner will get a discount of 2%.

Discount = (650,000-13500)*2%

= 12,730

Debit New Books = 636,500

Credit Bank = 623,770

Credit Discount = 12,730