PROBLEM 1-2

Step-by-Step explanation
There are two system in recording inventories of an entity:
a) Periodic System 
- Uses the account titles such as Purchases, Purchases Returns & Allowances, Purchase
Discounts, and Freight-In for recording Inventory.
- Relies on physical count for ending inventory to determine the cost of goods sold
 
b) Perpetual System
- Uses the account Merchandise Inventory and Cost of Goods Sold, in which the Inventory
count is updated every transaction of purchase and sales
- Cost of Goods Sold is already determined by the use of ledger
 
Journal Entries:
1) Purchase goods worth P120,000
Periodic System
DR Purchases 120,000
CR Accounts Payable 120,000
To record for purchased goods/merchandise
 
Perpetual System
DR Merchandise Inventory 120,000
CR Accounts Payable 120,000
To record for purchased goods/merchandise
 
Note: You can observe that periodic uses 'purchases' account while perpetual records
directly to merchandise inventory.
 
2. Paid transportation costs of P12,000 on the purchase above.
Periodic System
DR Freight In 12,000
CR Cash 12,000
To record for freight charges on merchandised purchased
 
Perpetual System
DR Merchandise Inventory 12,000
CR Cash 12,000
To record for freight charges on merchandised purchased
 
Note: Freight In is included in the cost of merchandise, instead of recording it under
expense because it would not have incurred if the purchase is not made. As for that,
perpetual adds it to merchandise inventory.
 
3. Returned damaged goods worth P2,400 to the supplier.
Periodic System
DR Accounts Payable 2,400
CR Purchase Returns and Allowances 2,400
To record for goods/merchandise returned to supplier
 
Perpetual System
DR Accounts Payable 2,400
CR Merchandise Inventory 2,400
To record for goods/merchandise returned to supplier
 
Note: Returned goods are deduction to purchases, in which under periodic, it uses
"purchase returns and allowances". In line with this, it is also deducted from Merchandise
Inventory account. To add, payable to supplier counts it as a deduction as well.
 
4. Sold goods costing P98,400 for P147,600 on account. 
Periodic System
DR Accounts Receivable 147,600
CR Sales 147,600
To record for sales to customers
 
Perpetual System
DR Accounts Receivable 147,600
CR Sales 147,600
 
DR Cost of Goods Sold 98,400
CR Merchandise Inventory 98,400
To record for sales to customers
 
Note: Both periodic and perpetual have the same entry for sales. The only difference is the
update of the transaction to its cost of goods sold and merchandise inventory using the
original cost, instead of selling price.
 
5. A customer returned goods with sale price of P10,800 and cost of P7,200
Periodic System
DR Sales Returns and Allowances 10,800
CR Accounts Receivable 10,800
To record for goods/merchandise returned by the customer
 
Perpetual System
DR Sales Returns and Allowances 10,800
CR Accounts Receivable 10,800
 
DR Merchandise Inventory 7,200
CR Cost of Goods Sold 7,200
To record for goods/merchandise returned by the customer
 
Note: In return goods, both system also uses the same entry. Also, similar to recording of
sales, cost of goods sold and merchandise inventory is updated with the use of cost.
 
Cost of Goods Sold:
Periodic System
This system uses a formula to compute for the cost of goods sold. You have to compute for
the total goods available for sale depending on the transaction recorded under the accounts
below and usually, ending inventory is given and determined through the use of physical
count.

 
Perpetual System
The amount of cost of goods sold is calculated by the entries under the transactions of
sales, sales returns & allowances, and sales discount, if any.
 
Cost of Goods Sold 
Journal Entry #4 = DR 98,400
Journal Entry #5 = CR 7,200
Total: P91,200