Some of the transactions of Collins Corp. during August follow. Collins uses the periodic inventory method.

Aug 10

Purchased merchandise on account, $12,000 terms 2/10, n/30.

13

Returned $1,200 of the purchases of August 10 and received a credit on account.

15

Purchased merchandise on account, $16,000 terms 1/10.

25

Purchased merchandise on account, $20,000 terms 2/10, n/30.

28

Paid the 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 financial expenses:

1. Prepare general journal entries to enter the transactions.

2. Prepare the adjusting entry that is necessary on August 31 if financial statements are prepared at that time.

3. Describe how the various items would be shown in the financial statements.

(c) Which method results in a higher reported gross profit ratio? Explain.

(d) Which of the two methods do you prefer and why?