Periodic inventory: Buyer’s entries
Entry 1 on July 10:
The purchase is made on account, which means that it is made on credit.
Debit Purchases: Purchases, which represents the cost of inventory purchased this period, is debited (increased).
Credit Accounts Payable: Accounts Payable, a current liability, is credited (increased) because Watson owes Ward Company more.
Entry 2 on July 16:
Goods are returned before payment is made.
Debit Accounts Payable: Due to the return, the seller is owed less. Accounts Payable, a current liability, is debited (decreased).
Credit Purchase Returns and Allowances: The return is recorded in a contra-purchases account, Purchase Returns and Allowances. It would have been logical to credit (decrease) the Purchases account. However, many entities want to account separately for merchandise that has been returned. In this way, the amount of returned merchandise can be tracked, and if this amount is significant, it may be possible to change suppliers or make other arrangements. Purchase Returns and Allowances, a contra-purchases account, is credited (increased).
Entry 3 on July 17:
Payment is made within the discount period.
Debit Accounts Payable for $20,500 ($22,000 – $1,500), the amount owed: When the bill is paid, Accounts Payable is debited (decreased) for $20,500 because Watson owes the seller less.
Credit Purchase Discounts: The terms of the sale were 5/10, n/30. Since the payment was made within 10 days, the buyer will be entitled to the cash discount (purchase discount). The purchase discounted is computed on the net purchase, the purchase less the return, $20,500.
| Purchase discounts | = | 5% of $20,500 |
|---|---|---|
| = | $1,025 |
Under the periodic inventory system, the discount is recorded in the Purchase Discounts account, a contra-purchases account. It would have been logical to credit Purchases; however, many entities want to keep separate track of the discounts taken. Purchase Discounts, a contra-purchase account, is credited (increased).
Credit Cash: We pay the difference, $19,475 ($20,500 – $1,025). Cash is credited (decreased).
Therefore, the answer is:
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