Purchase Discounts The following are transactions of Buckeye Corporation. Identify and analyze each of the following transactions of Buckeye Corporation. (All purchases on credit are made with terms of 1/10, n/30, and Buckeye uses the periodic system of inventory.) July 3: Purchased merchandise on credit from Wildcat Corp. for $3,500. Activity Operating Accounts Account Payable Increase, Purchases Increase Statement(s) Balance Sheet and Income Statement Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record inventory purchased (increase to purchases) on account payable (increase). How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank or enter "0". If the effect is negative, use the minus sign. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income No Entry Accounts Payable 3,465 No Entry Purchases Feedback Partially correct July 12: Paid amount owed to Wildcat Corp. Activity Operating Accounts Cash Decrease, Account Payable Decrease Statement(s) Balance Sheet only Feedback 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Cost of goods purchased in periodic inventory system. Purchases is a temporary account used to record acquisitions of merchandise. Recording purchases in a periodic system increase cost of goods sold, which is an expense. Purchases function as an expense indirectly to retained earnings. Purchases is not an asset account. 5) Purchase returns & allowances and purchase discounts (contra-purchases account used in a periodic inventory system causing expenses to decrease) are deducted from purchases to arrive at net purchases. The costs incurred for shipping is called transportation-in. These costs are added to net purchases, which increases the cost of goods purchased, and therefore added to the expenses. 6) Record payment of cash (decrease) reducing accounts payable (liability) and recording purchase discount (increase). Discount is 1% if paid within ten days. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank or enter "0". If the effect is negative, use the minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Cash 7,000 Accounts Payable No Entry No Entry