Purchase & Sales of Inventory – Answer Key

Purchasing Inventory either with Cash or On-Account

1. Juma Company purchased Dh5,000 of inventory for cash and Dh12,000 of

inventory on account on Jan 2. Jan 31 the second purchase is paid for by
Juma. What would the journal entries be for these two purchases?

Cash Purchase of Dh5,000

Jan. 1 Inventory (Asset +) 5,000
Cash (Asset -) 5,000

Jan. 1 Inventory (Asset +) 12,000

Accounts Payable (Liability +) 12,000

Jan. 31 Accounts Payable (Liability -) 12,000

Cash (Asset -) 12,000

Purchase discount - the seller reduces the amount the buyer must re-pay if the
amount is paid off within a certain number of days. For example:

1. On Jan. 1 received an invoice for Dh10,000 has credit terms which read
“2/10, n/60”. This means, that if the buyer re-pays the amounts due
within 10 day s/he will get a 2% reduction in the invoice price of Dh10,000.
If s/he does not pay within 10 days, the full (net amount) Dh10,000 of the
invoice is due in 60 days.
2. On Jan. 2 another invoice for Dh18,000 received the term is “1/12, n/30”
(means a 1% discount if paid within 12 days, otherwise full (net) amount
due in 30 days).
3. On Jan. 3 invoice for Dh25,000 received it has credit terms of “1.5/14,
n/30” (1.5% discount if re-pay within 14 days, balance (net amount) due in
30 days).

1
The buyer takes the discount on the first and second purchase but does not pay
early for the third invoice. What would be the journal entries for these three
purchases?

First Purchase of Dh10,000, with terms “2/10, n/60”

Jan. 1 Inventory (Asset +) 10,000
Accounts Payable (Liability +) 10,000
Jan. 5 Re-Payment before the 10th day
Accounts Payable (Liability -) 10,000
Cash (Asset -) 9,800
Inventory (discount) (Asset -) 200

10,000 x .98 = 9,800 10,000 x .02 = 200

Second Purchase of Dh18,000, with terms “1/12, n/30”

Jan. 2 Inventory 18,000
Accounts Payable 18,000
Jan. 8 Re-Payment before the 12th day
Accounts Payable 18,000
Cash 17,820
Inventory 180
18,000 x .99 = 17,820 18,000 x .01 = 180

Third Purchase of Dh25,000, with terms “1.5/14, n/30”

Jan. 3 Inventory (Asset +) 25,000
Accounts Payable (Liability +) 25,000

Jan. 19 Re-Payment on 30th day

Accounts Payable (Liability -) 25,000
Cash (Asset -) 25,000

2
Purchase Returns and Purchase Allowances
1. Juma Company returned Dh2,000 of goods to the seller as Juma does not
need these goods. What would be the journal entries for the purchase
returns?

Purchase Return of Dh2,000

Note, in this case the goods are actually physically returned to the seller.
Accounts Payable (Liability -) 2,000
Inventory (Asset -) 2,000

2. Juma gets from another suppliers a purchase allowance of Dh3,500 as some

of the goods it bought are broken (but can be sold, but only at a discount).
What would be the journal entries for the purchase allowances?

Purchase Allowance of Dh3,500

Note, in this case the seller reduces the amount that the buyer owes the seller but
the buyer still keeps the actual goods. Restated, no goods are moved.

Accounts Payable (Liability -) 3,500

Inventory (Asset -) 3,500

Transportation Costs and Ownership Transfer

Inventory purchased from the seller have to be moved to the buyers location.
There are several questions that need to be asked related to this movement of
the goods. Who pays for the transportation costs of shipping these goods?
Whose is responsible for the goods if they are damaged while in transit? Who
pays for insurance of the inventory while it is in transit? Whose goods are they
while they are on the road (or sea or train or plane)?

The term Free on Board (FOB) Shipping Point and Free-on-Board (FOB)
Destination have been established to deal with these issues. The table below
summarizes how to account for transportation and ownership issues.

3
 Ownership Transfers Transportation and
Insurance Costs Paid by
FOB Shipping Point When goods leave seller’s Buyer (as they own the
store or warehouse and are goods while in transit)
put on a truck, train, plane

FOB Destination When goods arrive at the Seller (as they own the
buyer’s warehouse or store goods while in transit)

Example: Juma Company ordered inventory from two suppliers.

1. From Aisha Company it purchased Dh25,000 of goods. These goods were

shipped FOB Shipping Point on January 15th 2009 and arrived on January
26th. The transportation costs to ship these goods were Dh500.

First Purchase, with terms “FOB Shipping Point”.

Buyer pays and it’s added to inventory.
Jan. 15 Inventory (Asset +)
Accounts Payable (Liability +) 25,000
25,000
Jan. 15 Pay Transportation costs of Dh500
Inventory (Asset +) 500
Cash (Asset -) 500

2. From Reem Company it purchased DH34,000 of goods. These goods were

shipped FOB Destination on February 18th and arrived on February 22nd.
Transportation costs to ship these goods were Dh900.

Second Purchase, with terms “FOB Destination”.

Seller pays – buyer does not pay anything.
Feb. 22 Inventory (Asset +)
Accounts Payable (Liability +) 34,000
34,000
Feb. 22 Transportation costs of Dh900
Not applicable. Paid by seller as terms are FOB
destination

4
Sale of Merchandise either for Cash or On-Account

Accounting for the sale of goods is similar to how the sale of a service was
recorded. The only additional requirement is that the Cost of the Goods Sold
must also be recorded at the time of the sale.

Two Examples:

1 - Cash Sale of Dh45,000, with a Cost of the Goods Sold of Dh32,000

Jan. Cash (Asset +)
16 Sales (Revenue) 45,000
45,000
Jan. Cost of Goods Sold (Expense) 32,000
16 Inventory (Asset -) 32,000
1. The first was a cash sale for Dh45,000 to Yousuf Limited on January 16 th.
The cost of the good sold was Dh32,000.

2. The second was a credit sale for Dh83,000 to Mansouri Company on

January 17th. The cost of these goods that were sold was Dh60,000.
Mansouri paid off the amount on February 18th. How should these
transactions be accounted for?

2 - Credit Sale of Dh83,000, with a Cost of the Goods Sold of Dh60,000

Jan. Accounts Receivable (Asset +)
17 Sales (Revenue) 83,000
83,000
Jan. Cost of Goods Sold (Expense) 60,000
17 Inventory (Asset -) 60,000

Feb. received cash

18 Cash (Asset +) 83,000
Accounts Receivable (Asset -) 83,000

Sales Discounts
5
In the case of a sales discount the seller reduces the amount the buyer must re-
pay if the amount is paid off within a certain number of days.

Task:

1. On Jan. 1 - An invoice for Dh10,000 (cost of goods sold Dh7,000) has credit
terms which read “2/10, n/60”. This means, that if the seller collections
the amounts due within 10 day s/he will give a 2% reduction to the invoice
price of Dh10,000. If s/he does not collect within the first 10 days, the full
(net amount) Dh10,000 of the invoice is due in 60 days.
2. On Jan. 1 - A second invoice for Dh18,000 (cost of goods sold of Dh13,000)
says “1/12, n/30” (means a 1% discount if paid within 12 days, otherwise
full (net) amount due in 30 days).
3. On Jan. 1 - The third invoice for Dh25,000 (cost of goods sold of Dh18,000)
has credit terms of “1.5/14, n/30” (1.5% discount if re-pay within 14 days,
balance (net amount) due in 30 days).

The buyer takes the discount on the first and second purchase but does not
pay early for the third invoice. What would be the journal entries for these
three sales?

First Sale of Dh10,000, with terms “2/10, n/60”, with Cost of Goods Sold
of Dh7,000
Jan. 1 Accounts Receivable (Asset +) 10,000
Sales (Revenue) 10,000
Jan. 1 Cost of Goods Sold (Expense) 7,000
Inventory (Asset -) 7,000
Jan. 5 Collection before the 10th day
Cash (Asset +) 9,800
Sales Discount Expense (Expense) 200
Accounts Receivable (Asset -) 10,000
10,000 x .98 = 9,800 10,000 x .02 = 200

Second Sale of Dh18,000, with terms “1/12, n/30”, with Cost of Goods
Sold of Dh13,000
6
Jan. 1 Accounts Receivable (Asset +) 18,000
Sales (Revenue) 18,000

Jan. 1 Cost of Goods Sold (Expense) 13,000

Inventory (Asset -) 13,000

Jan. 8 Collection before the 12th day

Cash (Asset +) 17,820
Sales Discount Expense (Expense) 180
Accounts Receivable (Asset -) 18,000
18,000 x .99 = 17,820 18,000 x .01 = 180

Third Sale of Dh25,000, with terms “1.5/14, n/30”, with Cost of Goods
Sold of Dh18,000
Jan. 1 Accounts Receivable (Asset +) 25,000
Sales (Revenue) 25,000

Jan. 1 Cost of Goods Sold (Expense) 18,000

Inventory (Asset -) 18,000

Jan. 21 Collection on the 30th day

Cash (Asset +) 25,000
Accounts Receivable (Asset -) 25,000

7
Sales Returns and Allowances
Sales Returns occur when the purchaser returns goods to the seller for whatever reason. These
returned items must be put back into the store’s shelves or warehouse and the buyer gets a
refund for the amount of the invoice price. From an accounting perspective, both the sale and
cost of goods sold must be reversed.

A Sales Allowance is when the seller reduces the cost of an item sold after it has been originally
recorded at a higher amount. In this case the actual goods are not returned. From an
accounting procedure point-of-view, only a portion of the sales revenue must be reduced but
there is no adjustment to inventory or cost of goods sold.

Task:

1. Saeed Company granted a Sales Return to Mahlah Company. Mahlah

returned Dh10,000 of goods to Saaed. The goods were returned to
inventory. The cost of these goods was Dh7,500. How should this
transaction be accounted for?

Sales Return of Dh10,000; Original Cost of Good Returned Dh7,500

Sales (Revenue -) 10,000
Accounts Receivable (Asset -) 10,000

Inventory (Asset +) 7,500

Cost of Goods Sold (Expense) 7,500

2. Saeed Company gave a Sales Allowance to Mira Firm. Saeed had sold Mira
some goods that were broken (defective). Rather than returning the goods,
Saeed reduced the selling price of the goods from Dh29,000 to Dh26,500 by
giving Mira a Sales Allowance of Dh2,500. How should this transaction be
accounted for?

Sales Allowance of Dh2,500 (29,000 – 26,500)

Sales Allowance Expense (Expense) 2,500

Accounts Receivable (Asset -) 2,500