Question

Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products. Prepare journal entries to record the following transactions for Allied assuming it uses a perpetual inventory system and the gross method. (Allied estimates returns using an adjusting entry at each year-end.)

May 3 Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of \(10 cash per unit (for a total cost of \)20,000).

5 Allied sold 1,500 of the units in inventory for \(14 per unit (invoice total: \)21,000) to Macy Co. under credit terms 2∕10, n∕60. The goods cost Allied \(15,000.

7 Macy returns 125 units because they did not fit the customer’s needs (invoice amount: \)1,750). Allied restores the units, which cost \(1,250, to its inventory.

8 Macy discovers that 200 units are scuffed but are still of use and, therefore, keeps the units. Allied sends Macy a credit memorandum for \)300 toward the original invoice amount to compensate for the damage.

15 Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount.

Short answer

Answer

Both credit and debit sides of the journal amount to$78,250 each.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of cost of goods sold

The account reported in the income statement representing the cost incurred by a business entity to produce the goods that have been sold is known as the cost of goods sold.

Journal entries

Date	Accounts and Explanation	Debit $	Credit $
3 May	Merchandise inventory	$20,000
	Cash		$20,000
5 May	Accounts receivable – Macy Co.	21,000
	Sales revenue		21,000
	Cost of goods sold	15,000
	Merchandise inventory		15,000
7 May	Sales return and allowance	1,750
	Accounts receivable		1,750
	Merchandise inventory	1,250
	Cost of goods sold		1,250
8 May	Sales return and allowance	300
	Accounts receivable		300
15 May	Cash	18,571
	Discount allowed	379
	Accounts receivable		18,950
		$78,250	$78,250