Exercise 5-4 Part Level Submission On June 10 Tuzun Company

Exercise 5 4 Part Level Submissionon June 10 Tuzun Company Purchase

Exercise 5-4 (Part level Submission) On June 10, Tuzun Company purchased $8,000 of merchandise from Epps Company, FOB shipping point, terms 2/10, n/30. Tuzun pays the freight costs of $400 on June 11. Damaged goods totaling $300 are returned to Epps for credit on June 12. The fair value of these goods is $70. On June 19, Tuzun pays Epps Company in full, less the purchase discount.

Both companies use a perpetual inventory system. (a) Prepare separate entries for each transaction on the books of Tuzun Company. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit

Paper For Above instruction

The following paper provides detailed journal entries for Tuzun Company’s purchase transaction with Epps Company, including invoice processing, freight costs, return of damaged goods, and final payment with discounts, adhering to the principles of the perpetual inventory system.

Introduction

In the realm of accounting, recording purchase transactions accurately is vital for maintaining correct inventory and accounts payable records. The transaction involves multiple steps: initial purchase, freight costs, return of damaged goods, and final payment considering discounts. This paper will illustrate the journal entries recorded by Tuzun Company, a purchaser, under a perpetual inventory system, following the specific details of the scenario provided.

Initial Purchase on June 10

On June 10, Tuzun Company purchased merchandise worth $8,000 from Epps Company, shipped FOB shipping point, with terms 2/10, n/30. Since the FOB shipping point term indicates that ownership transfers at the shipping point, Tuzun records the purchase and the payable immediately. The purchase discount applies if paid within 10 days.

The journal entry on June 10 is: 

Debit Inventory $8,000


Credit Accounts Payable $8,000

This entry records the increase in inventory and the corresponding liability to Epps Company.

Freight Costs on June 11

Despite FOB shipping point terms, Tuzun Company pays the freight costs of $400 on June 11. Under a perpetual system, freight-in is capitalized as part of inventory. Therefore, the entry on June 11 is:

Debit Inventory $400


Credit Cash $400

This adds freight costs to the inventory account, reflecting the total cost of acquiring goods.

Return of Damaged Goods on June 12

On June 12, Tuzun returns damaged goods valued at $300. The fair value of these goods is $70, which affects the inventory and the accounts payable. Under a perpetual system, the merchandise returned is removed from inventory at cost or fair value, and the payable is reduced accordingly.

The journal entry for the return is: 

Debit Accounts Payable $300


Credit Inventory $300

This reduces both the liability and the inventory, reflecting the return of damaged goods.

Final Payment on June 19

On June 19, Tuzun pays Epps Company in full, net of the purchase discount. The terms 2/10, n/30 indicate that a 2% discount applies if paid within 10 days of the invoice date, which is June 10. Payment within the discount period yields a discount of:

$8,000 - $300 (return) = $7,700


Discount = 2% of $7,700 = $154

The amount payable, after deducting the discount, is:

$7,700 - $154 = $7,546

The journal entry on June 19 is:

Debit Accounts Payable $8,000


Credit Inventory $154


Credit Cash $7,546

This accounts for the settlement of accounts payable and applies the purchase discount, reducing the cost of inventory.

Conclusion

Accurate recording of purchase transactions under a perpetual inventory system involves capturing each component—initial purchase, freight costs, returns, and discounts—precisely and sequentially. The entries outlined reflect the proper accounting treatment consistent with generally accepted accounting principles (GAAP) and demonstrate the detailed process by which Tuzun Company manages its inventory and liabilities in this scenario.

References

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  • Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, FASB.
  • International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with Customers.
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