Purchase-related transactions

Question

The debits and credits from four related transactions, (1) through (4), are presented in the following T accounts. Assume that the freight terms were FOB shipping point and that the credit terms were 1/10, n/30.

Cash
Transaction Debit amount Transaction Credit amount
(2) 150
(4) 11,880

Accounts Payable
Transaction Debit amount Transaction Credit amount
(3) 2,000 (1) 14,000
(4) 12,000

Inventory
Transaction Debit amount Transaction Credit amount
(1) 14,000 (3) 2,000
(2) 150 (4) 120
a. Describe each transaction.

1. fill in the blank 1 of 4

2. fill in the blank 2 of 4

3. fill in the blank 3 of 4

4. fill in the blank 4 of 4

Answer 1

Below is a description of each transaction based on the provided debits and credits.

1. Purchase of Inventory on Account
Transaction (1): The company purchased inventory worth $14,000 on account (credit transaction), increasing Accounts Payable and Inventory.

2. Payment of Freight Cost on Purchases
Transaction (2): The company paid $150 in cash for freight costs associated with the inventory purchase. This cost is debited to Inventory because the freight is part of the total cost of inventory (FOB shipping point).

3. Return of Inventory
Transaction (3): The company returned defective inventory worth $2,000, which reduces both Inventory (credit) and Accounts Payable (debit) as the seller needs to adjust the amount owed.

4. Payment of Accounts Payable
Transaction (4): The company made a cash payment of $11,880 to settle its accounts payable, which includes the purchase amount after considering the return and applicable cash discount (1% of $12,000). This transaction debits Accounts Payable and credits Cash.

This breakdown summarizes each transaction through the lenses of the T accounts provided.