ACCT1101 Tutorial Solutions – Week 4 (Tute 3)

CHAPTER 6
DISCUSSION QUESTION

D4 What is a cash discount? What are the benefits to the seller of allowing cash discounts? Distinguish
between a cash discount and a trade discount.

A ‘cash discount‘ or settlement discount is a percentage reduction on the invoice amount offered for
payment of a credit sale within the discount period and is an incentive offered to the purchaser to pay for
goods purchased early. The seller benefits by having the cash available earlier than the end of the normal
credit period, and this can potentially reduce losses from bad debts.
A ‘trade discount‘ is a percentage reduction granted to a customer from the normal list price. In contrast
to a cash discount, a trade discount is not related to early payment but is used in determining the actual
invoice price to the customer. Trade discounts enable the business to print one price list but nevertheless
vary prices in dealing with different customers. Trade discounts are not recorded in the accounts by either
the buyer or the seller, and are disclosed as reductions in the list price on the sales invoice.

Exercise 6.3 Journal entries — perpetual inventory system, GST

Using the perpetual inventory system, record transactions (1) to (7) in exercise 6.2 in the general journal
assuming the business is registered for GST, and that GST has to be added to the figures given.

1. Inventory (240  $220) 52 800

GST Receivable (240  $22) 5 280
Accounts Payable(240  $242) 58 080
Purchase of inventory on credit.

2. Accounts Payable (12  $242) 2 904

Inventory (12  $220) 2 640
GST Receivable (12  $22) 264
Return of merchandise

3. Accounts Receivable (48  $418) 20 064

Sales (48  $380) 18 240
GST Payable (48  $38) 1 824
Sales on credit.

Cost of Sales (48  $220) 10 560

Inventory 10 560
Cost of inventory sold.

4. Office Supplies 360

GST Receivable 36
Cash at Bank 396

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 Purchase of office supplies.

5. Sales Returns and Allowances (6  $380) 2 280

GST Payable (6  $38) 228
Accounts Receivable (6  $418) 2 508
Return of merchandise from customer.

Inventory (6  $220) 1 320

Cost of Sales 1 320
Returned merchandise put back into inventory.

6. Accounts Receivable (42  $429) 18 018

Sales (42  $390) 16 380
GST Payable (42  $39) 1 638
Sales on credit.

Cost of Sales (42  $220) 9 240

Inventory 9 240
Cost of sales.

7. Inventory Shortage Expense (4  $220) 880

Inventory 880
Missing units of inventory.

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Exercise 6.5 Journal entries — periodic inventory system, GST

Using the periodic inventory system, prepare general journal entries to record transactions (1) to (7) in
exercise 6.4, assuming the business is registered for the GST, and that GST has to be added to the figures
given.

1. Purchases 58 200
GST Receivable 5 820
Accounts Payable 64 020
Credit purchases of inventory.

2. Cash at Bank 20 680

Accounts Receivable 18 403
Sales 35 530
GST Payable 3 553
Cash and credit sales.

3. Sales Returns and Allowances 1 840

GST Payable 184
Accounts Receivable 2 024
Return of merchandise from customer.

4. Office Equipment 2 400

GST Receivable 240
Cash at Bank 2 640
Purchase of office computer.

5. Accounts Payable 1 166

Purchases Returns and Allowances 1 060
GST Receivable 106
Merchandise returned from customer.

6. Purchases ($12 800  75%) 9 600

GST Receivable 960
Accounts Payable 10 560
Merchandise purchased at a trade discount.

7. Accounts Receivable 8 360

Sales 7 600
GST Payable 760
Credit sales.

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 Problem 6.6 Journal entries involving discounts, closing entries, and
income statement — perpetual inventory system

Vaucluse Ltd sells handheld video consoles for $120 each. It buys the consoles for $90 each. On 1 June
2017, 60 consoles are in inventory. Vaucluse Ltd completed the following transactions during June (ignore
GST):

June 1 Sold 12 consoles for cash.

2 Paid the supplier for 24 consoles purchased on 6 May. Terms: 2/10, n/30.
4 Purchased 32 consoles on credit. Terms: 2/10, n/30, EXW supplier’s warehouse.
5 A customer returned 4 of the consoles sold on 1 June and received a cash refund. The
consoles were not defective in any way.
8 Paid $20 in freight charges on 4 June purchase.
10 Returned 3 of the consoles purchased on 4 June for credit.
12 Sold 18 consoles on credit. Credit terms: 2/10, n/30.
14 Paid the supplier the amount due on the 4 June purchase.
23 A customer returned 3 consoles sold on 12 June and included a cheque for the amount
due on the other 15 consoles. The consoles were not defective and were returned to
inventory.
24 Purchased 40 consoles on credit. Terms: 2/10, n/30, EXW supplier’s warehouse.
29 Paid the supplier for the 24 June purchase.

A physical inventory count taken on 30 June disclosed that 103 consoles were on hand.

Required
A. Prepare general journal entries to record the transactions, assuming that a perpetual inventory system
is used. Ignore GST.
B. Assuming that Vaucluse Ltd completes the closing process at the end of each month, prepare entries to
close the accounts.
C. Prepare an income statement for the month of June 2017.

A.
2017
June 1 Cash at Bank 1 440
Sales 1 440
12 consoles sold for cash.

Cost of Sales 1 080

Inventory 1 080
Cost of consoles sold.

2 Accounts Payable 2 160

Cash at Bank 2 160
Payment for consoles purchased on 6 May

4 Inventory 2 880
Accounts Payable 2 880
Purchase of consoles on credit

5 Sales Returns & Allowances 480

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 Cash at Bank 480
Refund for consoles returned.

Inventory 360
Cost of Sales 360
Consoles returned to inventory.

June
8 Freight Inwards 20
Cash at Bank 20
Freight on June 4 purchase.

10 Accounts Payable 270

Inventory 270
Returned 3 consoles purchased on 4 June.

12 Accounts Receivable 2 160

Sales 2 160
Sold 18 consoles on credit.

Cost of Sales 1 620

Inventory 1 620
Cost of consoles sold.

14 Accounts Payable 2 610

Discount Received 52.20
Cash at Bank 2 557.80
(32 – 3 returned = 29)
Paid for 4 June purchase.

23 Sales Returns & Allowances 360

Accounts Receivable 360
Consoles returned by customer.

Inventory 270
Cost of Sales 270
Consoles returned put back into inventory.

Cash at Bank 1 800

Accounts Receivable 1 800
Cash received from customer.

24 Inventory 3600
Accounts Payable 3600

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 40 consoles purchased on credit.

June
29 Accounts Payable 3600
Discount Received 72
Cash at Bank 3528
Paid for 24 April purchase.

Inventory shortage:
Physical Count 103 consoles @ $90
Records show 106 consoles @ $90 should be on hand.

Entry to record shortage 3 units @ $90.

Inventory Shortage Expense 270
Inventory 270
Inventory short by 3 consoles.

B.
Closing entries
30 Profit or Loss Summary 3 200
Sales Returns & Allows 840
Cost of Sales 2 070
Inventory shortage 270
Freight Inwards 20
Close debit temporary accounts

Discount Received 124.20

Sales 3 600
Profit or Loss Summary 3 724.20
Close credit temporary accounts

Profit or Loss Summary (3 724.20 - 3 200 = 524.20) 524.20

Retained Earnings 524.20
Transfer profit to retained earnings.

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C. Perpetual

VAUCLUSE LTD
Income Statement
for the month ended 30 June 2017
INCOME
Sales Revenue $3 600
Less: Sales returns and allowances 840
Net sales revenue 2 760

Cost of sales 2 090

Less: Discount received 124.20
1965.8
GROSS PROFIT 794.2
Less: Expenses
Inventory shortage 270
PROFIT 524.2

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Decision analysis Jewellery store inventory records

The All That Sparkles Store sells expensive limited edition jewellery items and maintains its inventory
records manually, keeping a separate card for each type of jewellery in store. Every time jewellery is
purchased or sold, the card for that item is adjusted. Once a year, staff count the inventory of jewellery and
compare the amount with the cards. Appropriate alterations are made for differences between inventory on
hand and the cards. Prue Diamond is in charge of the shop and she has decided that it is time to install a
computer-based system. She has heard that there are two ways to account for inventory but she is not sure
which method she has been using and which method to use if she computerises the inventory records. You
are an accounting student working part time in the shop, so Prue approaches you for help.

Required
Explain the main differences between the two methods of accounting for inventory and how each method
works. Which method of inventory has the All That Sparkles Store been using? Which inventory method
would you recommend when the computerised accounting system is installed, and why?

The perpetual inventory system keeps a continuous (perpetual) record of inventory on hand and inventory sold year to

date. When inventory is purchased, it is recorded in an inventory control account in the general ledger and a

record is kept in a subsidiary account, such as the card system the jewellery store has been using. When

inventory is sold, the inventory is then transferred from the inventory account to the cost of sales account

reported in the income statement and the subsidiary records are adjusted.

The periodic inventory system records inventory purchases directly reported in the purchases account in the
general ledger. At the end of the accounting period, a physical stocktake of inventory is taken and this is used
to calculate the Cost of Sales to be shown in the income statement and also this balance of inventory is
shown in the balance sheet.

The advantages and disadvantages of each system are listed below:

Perpetual system
Advantages
Provides a current and continuous record Requires less clerical work
of inventory transactions
Provides more timely information to
management for use in controlling and
planning for inventory
Assists profit control as it enables
management to obtain interim profit
results without the need for a physical
stocktake.

Periodic system
Disadvantages
More costly to operate (although with the Does not provide a record of goods sold or
advent of computerised inventory o hand throughout the year without
systems, this is not as significant as it undertaking a physical count or using one
once was. of the estimating methods available.
Most often used by a business that sells a
large number of items with low unit cost.

All That Sparkles Store has been using a perpetual inventory system as it keeps a separate card for each item
of jewellery in the store and every time an item is purchased or sold, the card is adjusted. When the
computerised accounting system is installed, it would be wise to keep the perpetual inventory system as
computerisation will make this even simpler to do and the advantages listed above are greater than for the
periodic inventory system.

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