Question
Ridgeway Garden Supply uses a perpetual inventory system and records purchases at the gross (invoice) price. Its Inventory account showed $10,000 on May 1, 2026. During May:
- May 3 — bought garden tools on account for $8,000, terms 2/10, n/30.
- May 4 — paid $300 in cash to a carrier to deliver the May 3 goods.
- May 6 — returned $500 of damaged tools from the May 3 purchase to the supplier.
- May 12 — paid the supplier the amount owing, taking the discount.
- May 20 — sold goods on account for $7,200. The goods had cost $4,800.
- May 31 — a stock count shows inventory costing $12,610.
Required:
- Journal Entries — every May transaction, including any adjustment from the count. Use Inventory, Accounts Payable, Cash, Accounts Receivable, Sales Revenue and Cost of Goods Sold.
- Shrinkage — the inventory shrinkage revealed by the count.
- Effect of the Sale — the effect of the May 20 sale (both halves of the entry) on the financial statements.
Statements in this challenge
- Journal EntriesJournal Entry
- ShrinkageNumeric Answer
- Effect of the SaleStatement Impact
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories; IFRS 15 — Revenue from Contracts with Customers
Work each transaction from the perspective stated in the question: the same shipment is a purchase to one party and a sale to the other, and the entries are not mirror images because only the seller recognises revenue and cost of sales. Read the credit terms and the freight terms before writing anything.
Common mistakes
- Ignoring the shipping terms — they decide who owns goods in transit and who bears the freight.
- Applying a settlement discount to the gross invoice when returns have already reduced the amount owed.
- Confusing a trade discount, which never enters the records, with a settlement discount, which does.
Further readingIAS 2: costing methods and NRV