June 1 Purchased 170 books on account for $7 each from Reader’s World Publishers, terms n/30, FOB destination — Phantom Book Warehouse distributes hardcover retail stores and
Phantom Book Warehouse distributes hardcover books to retail stores and extends credit terms of n/30 to all of its customers. Phantom uses a perpetual inventory system and at the end of May had an inventory of 230 books purchased at $7 each. During the month of June, the following merchandise transactions occurred:
June 1 Purchased 170 books on account for $7 each from Reader’s World Publishers, terms n/30, FOB destination.
2 The correct company paid $85 freight on the June 1 purchase.
3 Sold 190 books on account to Book Nook for $12 each.
6 Received $70 credit for 10 books returned to Reader’s World Publishers.
18 Issued a $48 credit to Book Nook for the return of four damaged books. The books were determined to be no longer saleable and were destroyed.
20 Purchased 140 books on account for $6.50 each from Reader’s World Publishers, terms n/30, FOB shipping point.
21 The correct company paid $70 freight for the July 20 purchase.
27 Sold 100 books on account to Readers Bookstore for $12 each.
28 Granted Readers Bookstore a $180 credit for 15 returned books. These books were restored to inventory.
30 Paid Reader’s World Publishers for the June 1 purchase.
30 Received the balance owing from Book Nook.
Instructions
(a) Record the transactions for the month of June for Phantom Book Warehouse.
(b) Create a T account for Merchandise Inventory. Post the opening balance and June’s transactions, and calculate the June 30 balance.
(c) Determine the number of books on hand at the end of the month and calculate the average cost per book of the inventory on hand at June 30.
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Taking It Further
Explain how freight terms can affect the selling price, and the cost, of merchandise. Use the transactions on June 1 and 20 between Phantom Book Warehouse and Reader’s World Publishers as part of your explanation.
SOLUTION
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
June 1
Merchandise Inventory (170 × $7)
1,190
Accounts Payable
1,190
2
(FOB destination means the seller pays
the freight, therefore no entry required here.)
3
Accounts Receivable (190 × $12)
2,280
Sales
2,280
Cost of Goods Sold (190 × $7)
1,330
Merchandise Inventory
1,330
6
Accounts Payable
70
Merchandise Inventory
70
18
Sales Returns and Allowances
48
Accounts Receivable
48
20
Merchandise Inventory (140 × $6.50)
910
Accounts Payable
910
21
Merchandise Inventory
70
Cash
70
27
Accounts Receivable (100 × $12)
1,200
Sales
1,200
Cost of Goods Sold (100 × $7)
700
Merchandise Inventory
700
28
Sales Returns and Allowances
180
Accounts Receivable
180
Merchandise Inventory (15 × $7)
105
Cost of Goods Sold
105
30
Accounts Payable ($1,190 − $70)
1,120
Cash
1,120
30
Cash
2,232
Accounts Receivable ($2,280 − $48)
2,232
(b)
Merchandise Inventory
Bal. 1,610* June 1 1,190 910 21 70 28 105
June 3 1,330 6 70 27 700
Bal. 1,785
* On May 31, there were 230 books on hand at a cost of $7 per book = $1,610
(c) There are 255 books on hand on June 30. The balance in the merchandise inventory account is: $7 per book × 255 books = $1,785.
Taking It Further:
Freight terms indicate when ownership of the goods transfers from the seller to the buyer and who pays for the transportation charges.
In the June 1st transaction, the freight terms are FOB destination. The seller, Reader’s World Publishers, pays for the freight charges, resulting in an inventory cost of $7 per item. When the seller pays for the freight costs, this usually results in a higher invoice price to cover the shipping expense, as shown in the June 20th transaction.
In the June 20th transaction, the freight terms are FOB shipping point. The buyer, Phantom Book Warehouse, pays for the freight charges.