Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.

Aug 10

Purchased merchandise on account, $12,000, terms 2/10, n/30.

13

Returned part of the purchase of August 10, $1,200, and received credit on account.

15

Purchased merchandise on account, $16,000, terms 1/10, n/60.

25

Purchased merchandise on account, $20,000, terms 2/10, n/30.

28

Paid invoice of August 15 in full.

Required

(a)

Assuming that purchases are recorded at gross amounts and that discounts are to be recorded when taken:

1.

Prepare general journal entries to record the transactions.

2.

Describe how the various items would be shown in the financial statements.

(b)

Assuming that purchases are recorded at net amounts and that discounts lost are treated as financial expenses:

1.

Prepare general journal entries to enter the transactions.

2.

Prepare the adjusting entry necessary on August 31 if financial statements are to be prepared at that time.

3.

Describe how the various items would be shown in the financial statements.

(c)

Which of the two methods do you prefer and why?

Purchase  12000 debit

Accounts Payable  12000 credit

--to record purchase--    

Accounts Payable   1200 debit

Returns&Allowance       1200 credit

--to record returned goods--

Purchase  16000 debit

Accounts Payable  16000 credit

--to record purchase--    

Purchase          20000 debit

Accounts Payable  20000 credit

--to record purchase--  

Account Payable    16,000 debit

     Purchase Discount      160 credit

     Cash                        15,840 credit

-to record payment within--

SECOND METHOD:

Purchase  11,760 debit

Accounts Payable  11,760 credit

--to record purchase--    

Accounts Payable   1,176 debit

Returns&Allowance       1,176 credit

--to record returned goods--

Purchase  15,840 debit

Accounts Payable  15,840 credit

--to record purchase--    

Purchase          19,600 debit

Accounts Payable  19,600 credit

--to record purchase--  

Account Payable    16,000 debit

     Cash                        15,840 credit

-to record payment within--

interst expense      216 debit

  account payable         216 credit

--to record interest incurred--

Explanation:

As we use periodic system we calculate the inventory and COGS at the end of the period so we use purchase and returns accounts rather than adjusting inventories in every transactions.

In the second method we use itnerest expense when the discount is loss.

interest incurred for the period:

(12,000 - 1,200) x 2% = 216

The secodn purchase at the end of the monthcan be paid within discount period therefore, we do not recognize interest expense yet.