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 2/10, n/30, and that 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 $ 550,000. The merchandise had cost New Books $ 415,000.
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 $ 10,000 to Readers’ Corner.
c. Just three days later, Readers’ Corner paid New Books, which settled all amounts owed.
Required:
1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of Readers’ Corner.
2. Prepare the journal entries that Readers’ Corner would record and show any computations.