Fundamentals of Financial Accounting 4th Edition by Fred Phillips,Robert Libby,Patricia Libby

Exercise 3

Reporting Sales Transactions between Wholesale and Retail Merchandisers, with Sales Allowances and Sales Discounts Using a Perpetual Inventory System
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' Comer 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, 2013.
a. New Books sold merchandise to Readers' Comer at a selling price of $550,000. The merchandise had cost New Books $415,000.
b. Two days later, Readers' Comer 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' Comer.
c. Just three days later, Readers' Corner paid New Books, which settled all amounts owed.
Required:
1. For each of the events ( a ) through ( c ), indicate the amount and direction of the effect (+ for increase, for decrease, and NE for no effect) on New Books in terms of the following items.

2. Which of the above items are likely to be reported on New Books' external financial statements, and which items will be combined "behind the scenes"
3. Prepare the journal entries that New Books would record, and show any computations.