PROBLEM 10-6 (IAA)

a. Prepare journal entries to record the transactions using gross method and net method.
GROSS METHOD NET METHOD
1. PURCHASES 4,750,000 1. PURCHASES 4,655,000
ACCOUNTS PAYABLE 4,750,000 ACCOUNTS PAYABLE 4,655,000
2. FREIGHT IN 250,000 2. FREIGHT IN 250,000
CASH 250,000 CASH 250,000
3. ACCOUNTS PAYABLE 1,650,000 3. ACCOUNTS PAYABLE 1,617,000
CASH 1,617,000 CASH 1,617,000
PURCHASE DISCOUNT 33,000
ACCOUNTS PAYABLE 2,100,000 ACCOUNTS PAYABLE 2,058,000
CASH 2,100,000 PURCHASE DISCOUNT LOST 42,000
CASH 2,100,000
4. PURCHASE DISCOUNT LOST 20,000
ACCOUNTS PAYABLE(1,000,000 x 2%) 20,000
5. INVENTORY 1,000,000 5. INVENTORY 981,000
INCOME SUMMARY 1,000,000 INCOME SUMMARY 981,000

b. Compute inventory and cost of sales under each method.

GROSS NET
METHOD METHOD
PURCHASES 4,750,000 4,655,000
FREIGHT IN 250,000 250,000
TOTAL 5,000,000 4,905,000
LESS: PURCHASE DISCOUNTS 33,000 -
GOODS AVAILABLE FOR SALE 4,967,000 4,905,000
LESS: INVENTORY-DEC.31 1,000,000 981,000
COST OF SALES 3,967,000 3,924,000

ENDING INVENTORY:
GROSS (5,000,000/5) 1,000,000
NET (4,905,000/5) 981,000