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The document provides examples of journal entries for inventory purchases by Sarah Company, detailing transactions for both FOB shipping point and FOB destination. It explains the concepts of purchase returns and allowances, including how to record defective goods and price reductions. Additionally, it illustrates the accounting treatment for freight costs and their impact on inventory and operating expenses.

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abdelrahmanahmed
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6 views6 pages

5

The document provides examples of journal entries for inventory purchases by Sarah Company, detailing transactions for both FOB shipping point and FOB destination. It explains the concepts of purchase returns and allowances, including how to record defective goods and price reductions. Additionally, it illustrates the accounting treatment for freight costs and their impact on inventory and operating expenses.

Uploaded by

abdelrahmanahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Example : On March 1, 2022 , Sarah company

purchased 2,000 units for $2 per unit from


Mohamed company.
Prepare the journal entry for Sarah company (the buyer) :
March 1 Inventory 4,000
Accounts Payable 4,000
To record payment on (April 6) :
April 6 Accounts Payable 4,000
cash 4,000

Copyright ©2018 John Wiley & Son, Inc. 1


ILLUSTRATION 5.6

Example : on May 4 , 2024 , Sarah company purchased 380


units for $10 per unit from Mohamed company.
Prepare the journal entry for Sarah company (the buyer) :

May 4 Inventory 3,800


Accounts Payable 3,800

LO 2 Copyright ©2018 John Wiley & Son, Inc. 2


Freight Costs
free on Board (FOB): indicates when the ownership of goods
transfers from buyer to seller
we have 2 Cases :
Ownership of goods passes
to buyer when public
carrier accepts goods from
seller.
(buyer pays freight costs).
Ownership of goods
remains with seller until the
goods reach buyer.
(seller pay freight costs ).
FOB shipping point- Freight costs incurred by the buyer increase cost of inventory.

FOB destination -Freight costs incurred by the seller increase operating expenses.
Freight Costs
Example : (FOB shipping point)
If Sarah (the buyer) pays Public Carrier Co. $150 for freight
charges on May 6, the entry on Sarah’s books is:
May 6 Inventory 150
Cash 150
Example : (FOB destination )
If the freight terms on the invoice had required Mohamed
company (the seller) to pay the freight charges, the entry by
Mohamed company would be:
May 4 Freight-Out (Delivery Expense) 150
Cash 150
LO 2 Copyright ©2018 John Wiley & Son, Inc. 4
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.
Purchase Return Purchase Allowance
Return goods for credit if May choose to keep
sale was made on credit, merchandise if seller will
or for a cash refund if grant a reduction from
purchase was for cash purchase price

LO 2 Copyright ©2018 John Wiley & Son, Inc. 5


Purchase Returns and Allowances
Example : (purchase returns)
Assume that Sarah returned goods (defective) costing
$300 or (30 unit for $10 per unit ) to Mohamed company
on May 8.
May 8 Accounts Payable 300
Inventory 300
Example : (Purchase Allowances)
Suppose instead that Sarah chose to keep the goods
(defective units) after being granted a $100 allowance
(reduction in price).
May 8
LO 2 Accounts Payable 100 6

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