Buying goods and supplies: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Buying merchandise for cash
A store buys merchandise for resale at a cash-and-carry wholesaler for $1,200.00 and pays in cash. Goods bought for resale are exempt from sales tax.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $1,200.00 Cash $1,200.00 Why
Under the perpetual system the goods go into Inventory at their cost ($1,200.00). They are paid at once, so Cash falls by the same amount and nothing is owed to the supplier.
Buying two lines of merchandise on account
A store buys merchandise for resale on account from one supplier: shirts for $1,400.00 and trousers for $900.00, on a single invoice payable in 60 days. Goods bought for resale are exempt from sales tax.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $2,300.00 Accounts Payable $2,300.00 Why
Under the perpetual system both lines of goods go into Inventory at their cost, $1,400.00 + $900.00 = $2,300.00, and the store owes the supplier the same amount in Accounts Payable.
Buying merchandise, paying part in cash and the rest on account
A store buys merchandise for resale for $4,000.00. On delivery it pays $1,500.00 in cash; the rest is on account, payable in 30 days. Goods bought for resale are exempt from sales tax.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $4,000.00 Cash $1,500.00 Accounts Payable $2,500.00 Why
Under the perpetual system the goods go into Inventory at their full cost ($4,000.00), whatever the payment terms. Cash falls by the $1,500.00 paid, and the rest ($2,500.00) is owed to the supplier in Accounts Payable.
Paying a supplier’s invoice in full
Last month a store bought merchandise on account for $3,200.00 and recorded the purchase. Today it pays the supplier the full amount by check.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. No discount is granted for the payment.
Account Debit Credit Accounts Payable $3,200.00 Cash $3,200.00 Why
The purchase was recorded last month (Inventory and Accounts Payable). The payment only settles the debt: Accounts Payable falls by $3,200.00 and so does Cash. Inventory is not touched again.
Returning part of a purchase on account
A store bought 60 lamps on account at $45.00 each and recorded the purchase. 8 of them are the wrong model, so it sends them back, and the supplier issues a credit memo for them. The invoice has not been paid yet.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Accounts Payable $360.00 Inventory $360.00 Why
Only the returned lamps leave the books: 8 × $45.00 = $360.00. Under the perpetual system they come out of Inventory at their cost, and the debt in Accounts Payable falls by the same amount.
Paying a supplier within the discount period
A store bought merchandise on account for $5,000.00, terms 2/10, n/30, and recorded the purchase at the invoice price. It pays the supplier by check within the discount period.
Assumptions: This store uses the periodic inventory system: purchases are recorded in Purchases at the invoice price, and discounts taken are recorded in Purchase Discounts.
Account Debit Credit Accounts Payable $5,000.00 Purchase Discounts $100.00 Cash $4,900.00 Why
The discount is 2% of $5,000.00 = $100.00, so the store pays $4,900.00. The whole debt ($5,000.00) leaves Accounts Payable. Under the periodic system the discount is credited to Purchase Discounts, a contra account to Purchases; under the perpetual system it would reduce Inventory instead.
Paying freight on purchased merchandise
A store bought merchandise FOB shipping point, so it pays the shipping. On delivery it pays the trucking company $360.00 in cash. The supplier’s invoice for the goods was recorded earlier.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $360.00 Cash $360.00 Why
Under the perpetual system, freight paid by the buyer to bring goods in (freight-in) is part of their cost, so it is debited to Inventory; Cash falls by $360.00. Freight-out on sales would be an expense instead.
Buying office supplies for cash
A company buys office supplies (paper, toner, folders) for $240.00, sales tax included, and pays in cash.
Assumptions: The company records supplies as an asset (Supplies) when it buys them and expenses them as they are used. Sales tax paid on supplies is part of their cost.
Account Debit Credit Supplies $240.00 Cash $240.00 Why
Supplies are an asset until they are used: debit Supplies and credit Cash for $240.00. The sales tax is part of their cost, so there is no tax line.
Buying office supplies on account
A company buys a stock of office supplies (paper, toner, folders) on account for $850.00, sales tax included. The supplier’s invoice is payable in 30 days.
Assumptions: The company records supplies as an asset (Supplies) when it buys them and expenses them as they are used. Sales tax paid on supplies is part of their cost.
Account Debit Credit Supplies $850.00 Accounts Payable $850.00 Why
Supplies are an asset until they are used: debit Supplies and credit Accounts Payable for $850.00. The sales tax is part of their cost, so there is no tax line.
Buying merchandise with a trade discount
A store buys merchandise for resale on account. The supplier’s invoice shows a list price of $8,000.00, less a 15% trade discount. Goods bought for resale are exempt from sales tax.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $6,800.00 Accounts Payable $6,800.00 Why
A trade discount is a price reduction, not a separate event: the goods cost $8,000.00 − $1,200.00 = $6,800.00, and Inventory and Accounts Payable are recorded at that amount. No discount account is used.
Buying merchandise on account
A store buys merchandise for resale on account for $2,000.00. Goods bought for resale are exempt from sales tax. The supplier’s invoice is payable in 30 days.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $2,000.00 Accounts Payable $2,000.00 Why
Under the perpetual system, merchandise bought for resale goes into Inventory at its cost ($2,000.00), and the store owes the supplier the same amount in Accounts Payable. No sales tax is charged on goods bought for resale, so the entry has no tax line.
Returning merchandise bought on account
A store returns to its supplier damaged merchandise that it bought on account for $500.00. The supplier issues a credit memo for the full amount; the invoice had not been paid yet.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Accounts Payable $500.00 Inventory $500.00 Why
Under the perpetual system a purchase return takes the goods out of Inventory at their cost ($500.00), and the debt to the supplier in Accounts Payable falls by the same amount.
Buying merchandise with a cash discount on the invoice
A store buys merchandise for resale and pays at once in cash. Because it pays immediately, the supplier’s invoice deducts a 2% cash discount from the price of $6,000.00. Goods bought for resale are exempt from sales tax.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold.
Account Debit Credit Inventory $5,880.00 Cash $5,880.00 Why
The discount is 2% of $6,000.00 = $120.00, so the store pays $5,880.00. Under the perpetual system the goods go into Inventory at the price actually paid, $5,880.00; no discount account is needed when the discount is taken at the time of purchase.
Buying merchandise under the periodic inventory system
A store’s Inventory account still shows $18,000.00, the value of the goods counted at the end of last year. In March it buys merchandise for resale on account for $4,500.00; the goods go straight into its stockroom. Goods bought for resale are exempt from sales tax.
Assumptions: This store uses the periodic inventory system: purchases are recorded in a Purchases account, and Inventory is updated only after the year-end count.
Account Debit Credit Purchases $4,500.00 Accounts Payable $4,500.00 Why
Under the periodic system the goods are debited to Purchases ($4,500.00), not to Inventory, even though they are in the stockroom; Inventory keeps last year’s $18,000.00 until the year-end count. The store owes $4,500.00 in Accounts Payable. No cost of goods sold is recorded during the year.
Paying part of a supplier’s invoice by bank transfer
A store owes a supplier $9,700.00 for merchandise bought on account last month and already recorded. The supplier agrees to be paid in two parts: today the store transfers $4,000.00 from its bank account, and the rest is due next month.
Account Debit Credit Accounts Payable $4,000.00 Cash $4,000.00 Why
Only the amount paid settles part of the debt: Accounts Payable falls by $4,000.00 and so does Cash (the US convention keeps bank balances in Cash). The rest stays in Accounts Payable until it is paid.
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