Question

The transactions listed below are typical of those involving New Books Inc. and Readers’ Corner. New Books is a wholesale merchandiser and Readers’ Corner is a retail merchandiser. Assume all sales of merchandise from New Books to Readers’ Corner are made with terms n/30, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended August 31.(a) New Books sold merchandise to Readers’ Corner at a selling price of $595,000. The merchandise had cost New Books $433,000.(b) Two days later, Readers’ Corner complained to New Books that some of the merchandise differed from what Readers’ Corner had ordered. New Books agreed to give an allowance of $14,500 to Readers’ Corner.(c) Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers' Corner. (Enter all amounts as positive values.)

Answer 1

Answer:

(A) Inventory increases by 595,000

(B) Inventory decreases by 14,500

(C) no effect

Inventory balance: 595,000 - 14,500 = 580,500

Explanation:

We are asked for Readers' Corner

(A) Reades purchase at 595,000 so we use this value. Reader has no informaiton about the cost of New Books.

(B) there is an allowance for 14,500 the inventory account will decrease immediately as it works with perpetual invnetory method

(C) no effect. The payment do not alter the invnetory valuation.