On July 15, 2018, the Nixon Car Company purchased 2,100 tires from the Harwell C

Question

On July 15, 2018, the Nixon Car Company purchased 2,100 tires from the Harwell Company for $40 each. The terms of the sale were 3/10, n/30. Nixon uses a periodic inventory system and the gross method of accounting for purchase discounts.

Required:

1. Prepare the journal entries to record the purchase on July 15 and payment on July 23, 2018.
2. Prepare the journal entry to record the payment on August 15, 2018.
3. If Nixon instead uses a perpetual inventory system, explain any changes to the journal entries created in requirements 1 and 2.

Explanation / Answer

Solution:

Under the gross method, the purchases are recorded at its cost without decreasing the amount of probable purchase discount. Later on when the company pays within the terms of availing cash discount, the discount is recorded separately in the entry on the date of payment done.

Part 1 – Journal Entry

Date

General Journal

Debit

Credit

July.15

Purchases (2100*40)

$84,000

Accounts Payable

$84,000

July.23

Accounts Payable

$84,000

Cash (84,000*97%)

$81,480

Cash Discount (84000 - 81480)

$2,520

(Since the payment is made within 10 days from the date of purchase. Company is entitled to avail the discount on early payment at 3%)

Part 2 –

Date

General Journal

Debit

Credit

Aug.15

Accounts Payable

$84,000

Cash

$84,000

(Since the company has not paid the amount within cash discount availing period. The company has to pay full amount after the cash discount availing period i.e. after 10 days from the date of purchase)

Part 3 --- No change in journal entry, Since the perpetual inventory system is a system for valuation of inventory. It does not effect the purchase transaction .

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

General Journal

Debit

Credit

July.15

Purchases (2100*40)

$84,000

Accounts Payable

$84,000

July.23

Accounts Payable

$84,000

Cash (84,000*97%)

$81,480

Cash Discount (84000 - 81480)

$2,520

(Since the payment is made within 10 days from the date of purchase. Company is entitled to avail the discount on early payment at 3%)

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