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?