Question 1: Big Oak’s Company

Apr. 15 Sold lumber on account to Hard Hat Construction, $19,700. The inventory subsidiary
ledger shows the cost of this merchandise was $10,300.

Apr. 19 Purchased lumber on account from LHP Company, $3,700.

May 10 Collected in cash the $19,700 account receivable from Hard Hat Construction.

May 19 Paid the $3,700 owed to LHP Company.

Dec. 31 Big Oak’s personnel counted the inventory on hand and determined its cost to be
$114,000. The accounting records, however, indicate inventory of $116,500 and a cost
of goods sold of $721,000. The physical count of the inventory was observed by the
company’s auditors and is considered correct.

Prepare journal entries for both periodic and perpetual inventory systems.

Solution 1

Perpetual Inventory System Periodic Inventory System

Apr. 15 Accounts receivable 19,700 Accounts receivable 19,700

Sales 19,700 Sales 19,700

Cost of Goods Sold 10,300

Inventory 10,300

Apr. 19 Inventory 3,700 Purchases 3,700

Accounts Payable 3,700 Accounts Payable 3,700

May 10 Cash 19,700 Cash 19,700

Accounts receivable 19,700 Accounts receivable 19,700

May 19 Accounts Payable 3,700 Accounts Payable 3,700

Cash 3,700 Cash 3,700

Dec 31 Cost of Goods Sold 2,500 No entry required as inventory account is

Inventory 2,500 not maintained and inventory value is only
determined through stock count.
(to account for normal loss of inventory)
Question 2

The following is a series of related transactions between Hip Pants and Sleek, a chain of retail clothing
stores:

Oct. 12 Hip Pants sold Sleek 300 pairs of pants on account, terms 1/10, n/30. The cost of these
pants to Hip Pants was $20 per pair, and the sales price was $60 per pair.

Oct. 15 Wings Express charged $50 for delivering this merchandise to Sleek. These charges were
split evenly between the buyer and the seller and were paid immediately in cash.

Oct. 16 Sleek returned four pairs of pants to Hip Pants because they were the wrong size. Hip
Pants allowed Sleek full credit for this return.

Oct. 22 Sleek paid the remaining balance due to Hip Pants within the discount period.

Required:

a) Prepare journal entries for Hip Pants under periodic and perpetual inventory systems.
b) Prepare journal entries for Sleek under periodic and perpetual inventory systems.

Solution 2

Hip Pants

Perpetual Inventory System Periodic Inventory System

Oct. 12 Accounts receivable 18,000 Accounts receivable 18,000

Sales 18,000 Sales 18,000

Cost of Goods Sold 6,000

Inventory 6,000

Oct. 15 Selling & Dist. exp 25 Selling & Dist. exp 25

Cash 25 Cash 25

Oct. 16 Sales Returns 240 Sales Returns 240

Accounts receivable 240 Accounts receivable 240

Inventory 80
Cost of Goods Sold 80

Oct. 22 Cash 17,582.4 Cash 17,582.4

Discount Allowed 177.6 Discount Allowed 177.6
Accounts receivable 17,760 Accounts receivable 17,760
 Sleek

Perpetual Inventory System Periodic Inventory System

Oct. 12 Inventory 18,000 Purchases 18,000

Accounts Payable 18,000 Accounts Payable 18,000

Oct. 15 Inventory 25 Freight charges 25

Cash 25 Cash 25

Oct. 16 Accounts payable 240 Accounts payable 240

Inventory 240 Purchase returns 240

Oct. 22 Accounts Payable 17,760 Accounts Payable 17,760

Inventory 177.6 Discount received 177.6
Cash 17,582.4 Cash 17,582.4