P8-3 (Purchases Recorded Gross and Net) Some of the transactions of Torres Company during August are listed below. Torres uses the periodic inventory method.
| Aug 10 |
Purchased merchandise on account, terms 2/10, n/30 |
$12,000 |
| Aug 13 |
Returned part of the purchase of Aug 10, and received credit on acct |
$1,200 |
| Aug 15 |
Purchased merchandise on account, terms 1/10, n/60 |
$16,000 |
| Aug 25 |
Purchased merchandise on account, terms 2/10, n/30 |
$20,000 |
| Aug 28 |
Paid invoice of August 15 in full. |
|
Instructions
(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 finance expenses:
(1) Prepare general journal entries to record 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?