of the transactions of Torres Company during August ases listed below. Torres us
ID: 2560417 • Letter: O
Question
of the transactions of Torres Company during August ases listed below. Torres uses the periodic inventory method. August 10 Purchased merchandise on Retuned part of the purchase of August 10, $1,200, and received credit on account. on account, $16,000, terms 1/10, n/60. 15 25 28 Purchased merchandise Purchased merchandise on account, $20,000, terms 2/10, n/30 Paid invoice of August 15 in full. Instructions (a) Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken (1) Prepare general journal entries to record the transactions. (2) Describe how the various items would be shown in the financial statements (b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses: (1) Prepare general journal entries to enter the transactions. (2) Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time. (3) Describe how the various items would be shown in the financial statements Which of the two methods do you prefer and why? (c)Explanation / Answer
A-1
date
explanation
debit
credit
1-Aug
purchase
12000
accounts payable
12000
13-Aug
accounts payable
1200
ppurchase return
1200
15-Aug
purchase
16000
accounts payable
16000
25-Aug
purchase
20000
accounts payable
20000
28-Aug
accounts payable
16000
cash
20000
2-
Purchases—addition in cost of goods sold section of income statement.
Purchase Returns and Allowances—deduction from purchases in cost of goods sold section of the income statement.
Accounts Payable—current liability in the current liabilities section of the balance sheet
B-1
date
explanation
debit
credit
1-Aug
purchase
11760
accounts payable
11760
13-Aug
accounts payable
1176
purchase return
1176
15-Aug
purchase
15840
accounts payable
15840
25-Aug
purchase
19600
accounts payable
19600
28-Aug
accounts payable
15840
purchase discount lost
160
cash
16000
B-2
31-Aug
purchase discount lost
216
accounts payable
216
B-3
Purchases—addition in cost of goods sold section of income statement.
Purchase Returns and Allowances—deduction from purchases in cost of goods sold section of the income statement.
Accounts Payable—current liability in the current liabilities section of the balance sheet
Purchase discount lost-treat Purchases Discounts Lost as financial expense the income statement
C-
The second method is better theoretically because it results in the inventory being carried net of purchase discounts, and purchase discounts not taken are shown as an expense. The first method is normally used, however, for practical reasons.
A-1
date
explanation
debit
credit
1-Aug
purchase
12000
accounts payable
12000
13-Aug
accounts payable
1200
ppurchase return
1200
15-Aug
purchase
16000
accounts payable
16000
25-Aug
purchase
20000
accounts payable
20000
28-Aug
accounts payable
16000
cash
20000
2-
Purchases—addition in cost of goods sold section of income statement.
Purchase Returns and Allowances—deduction from purchases in cost of goods sold section of the income statement.
Accounts Payable—current liability in the current liabilities section of the balance sheet
B-1
date
explanation
debit
credit
1-Aug
purchase
11760
accounts payable
11760
13-Aug
accounts payable
1176
purchase return
1176
15-Aug
purchase
15840
accounts payable
15840
25-Aug
purchase
19600
accounts payable
19600
28-Aug
accounts payable
15840
purchase discount lost
160
cash
16000
B-2
31-Aug
purchase discount lost
216
accounts payable
216
B-3
Purchases—addition in cost of goods sold section of income statement.
Purchase Returns and Allowances—deduction from purchases in cost of goods sold section of the income statement.
Accounts Payable—current liability in the current liabilities section of the balance sheet
Purchase discount lost-treat Purchases Discounts Lost as financial expense the income statement
C-
The second method is better theoretically because it results in the inventory being carried net of purchase discounts, and purchase discounts not taken are shown as an expense. The first method is normally used, however, for practical reasons.
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