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:

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

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

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