Question

Cruise Industries purchased \(10,800 of merchandise on February 1, 2017,

subject to a trade discount of 10% and with credit terms of 3/15, n/60. It returned \)2,500 (gross price before trade or cash discount)on February 4. The invoice was paid on February 13.

Instructions

(a) Assuming that Cruise uses the perpetual method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(b) Assuming that Cruise uses the periodic method for recording merchandise transactions, record the purchase, return, and payment using the gross method.

(c) At what amount would the purchase on February 1 be recorded if the net method were used?

Short answer

Under the gross method, the cash discount would be $224.1, and under the net method, the cash discount would be$291.6.

Step-by-step solution

Journal entry under perpetual system and gross method

Date	Description	Debit	Credit
Feb 1, 2017	Inventory A/c	$10,800
	Accounts Payable		$9,720
	Trade Discount		$1,080
	(Being goods purchased on account)
Feb 4, 2017	Accounts Payable	$2,250
	Trade Discount	$250
	Inventory A/c		$2500
	(Being goods return to supplier)
Feb 13, 2017	Accounts Payable	$7,470
	Cash A/c		$7,245.9
	Discount		$224.1
	(Being payment made to the creditor after getting discount)

Working Note:

$\begin{array}{rcl}1.\mathrm{Trade}\mathrm{Discount}& =& \mathrm{Purchase}\mathrm{value}\times \mathrm{Trade}\mathrm{discount}\mathrm{Percent}\\ & =& \$10,800\times \frac{10}{100}\\ & =& \$1,080\end{array}$

$\begin{array}{rcl}2.\mathrm{Purchase}\mathrm{Discount}& =& (\mathrm{Invoice}\mathrm{Amount}-\mathrm{Return})\times \mathrm{Discount}\mathrm{Percent}\\ & =& (\$9,720-\$2,250)\times \frac{3}{100}\\ & =& \$224.1\end{array}$

Journal entry under periodic system and gross method

Date	Description	Debit	Credit
Feb 1, 2017	Purchase A/c	$10,800
	Accounts Payable		$9,720
	Trade Discount		$1,080
	(Being goods purchased on account)
Feb 4, 2017	Accounts Payable	$2,250
	Trade Discount	$250
	Purchase return & allowances		$2500
	(Being goods return to supplier)
Feb 13, 2017	Accounts Payable	$7,470
	Cash A/c		$7,245.9
	Discount		$224.1
	(Being payment made to the creditor after getting discount)

Working Note:

$\begin{array}{rcl}1.\mathrm{Trade}\mathrm{Discount}& =& \mathrm{Purchase}\mathrm{value}\times \mathrm{Trade}\mathrm{discount}\mathrm{Percent}\\ & =& \$10,800\times \frac{10}{100}\\ & =& \$1,080\end{array}$

$\begin{array}{rcl}2.\mathrm{Purchase}\mathrm{Discount}& =& (\mathrm{Invoice}\mathrm{Amount}-\mathrm{Return})\times \mathrm{Discount}\mathrm{Percent}\\ & =& (\$9,720-\$2,250)\times \frac{3}{100}\\ & =& \$224.1\end{array}$

Purchase value under net method

Under the net method, purchase value would be computed after taking both trade and cash discounts. This is called the net method, as only the net amount is recorded for purchase.

$\begin{array}{rcl}\mathrm{Purchase}\mathrm{value}\mathrm{of}\mathrm{Feb}1& =& \left(\mathrm{Purchase}\mathrm{amount}-\mathrm{Trade}\mathrm{Discount}\right)-\left[\left(\mathrm{Purchase}\mathrm{amount}-\mathrm{Trade}\mathrm{Discount}\right)\times \mathrm{Cash}\mathrm{Discount}\mathrm{Percent}\right]\\ & =& (\$10,800-\$1,080)-\left[\left(\$10,800-\$1,080\right)\times \frac{3}{100}\right]\\ & =& \$9,720-\left(\$9,720\times 0.03\right)\\ & =& \$9,720-\$291.6\\ & =& \$9,428.4\end{array}$