Exercise-6 (Gross method of recording purchases)

The United company made the following transactions during the month of March:

  • Mar.05: Purchased merchandise worth $21,600; credit terms were 2/20, n/45.
  • Mar.08: Returned merchandise to vendor worth $5,000 (gross).
  • Mar.20: Payment made for merchandise purchased on March 5.

The company uses gross method of recording purchases.

Required: Prepare journal entries to record the above transactions assuming the United company uses:

  1. Perpetual inventory method
  2. Periodic inventory method

 Solution:

(1) Journal entries if perpetual inventory method is used:

exercise-6-icm-img1

*21,600 × 0.02 = 432
**21,600 – 432 = 21,168

(2) Journal entries if periodic inventory method is used:

exercise-6-icm-img2

*21,600 × 0.02 = $432
**21,600 -432 = $21,168

By Rashid Javed (M.Com, ACMA)
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6 Comments on Exercise-6 (Gross method of recording purchases)

  1. Negede

    Hello guys i have quasion on the above answer.
    How the united company can pay $21,160 on Mar 20? because $5000 worth of marchandise is aredy returned to the seller, it should pay (- )$5000 and puchase dicount.
    let’s me know if i am wong.

    Reply
    1. Jessie Dao

      I totally agree with your thought. It doesnt make sense to me since $5000 returned before making payment. It’s true that there should have deduction of that returning on date of payment. Please help me to clarify it!

      Reply
      1. Accounting For Management

        The merchandise returned on March 8 were not from the merchandise purchased on March 5. Those merchandise belonged to another vendor.

        Reply
        1. Noor

          You should mention that in the question!

          Reply
  2. Tedla

    I need your assistance to solve this problem ?
    i need answer for beginning inventory on Jan1,2012 ABC company had 500 units merchandise that costs $ 88 per unit. the ff transactions were completed during 2012.
    March 15 ,purchased on credit 460 units of merchandise at $ 50 per unit. March 25, returned 30 defective units from February 5 purchases to the supplier. April 25 ,purchased for cash 500 units of merchandise at $ 19 per unit May 19 ,sold 750 units of merchandise for cash at a price of $200 per unit for march purchases.December 31,680 units are left on hand ,40 unit from March 15 purchases. prepare general journal for both periodic and perpetual inventory system

    Reply
    1. FEI

      Periodic:
      March 15 Purchases 23000 ([email protected])
      Accounts Payable 23000
      March 25 Accounts Payable 2640 ([email protected])
      Purchases Returns and Allowances 2640
      April 25 Purchases 8500 ([email protected])
      Cash 8500
      May 19 Cash 150000 ([email protected])
      Sales 150000
      December 31 Inventory 20020 ([email protected][email protected][email protected])
      Cost of Goods Sold 53840 ([email protected][email protected])
      Purchases Returns and Allowances 2640
      Purchases 32500 ([email protected][email protected])
      Inventory 44000
      Is my answer correct?

      Reply

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