Question
Sandhill Traders uses a perpetual inventory system. The following purchase transactions occurred in May 2026.
| Date | Event |
|---|
| May 2 | Purchased merchandise on account, $20,000, terms 2/10, n/30. |
| May 5 | Returned $2,000 of defective merchandise to the supplier. |
| May 11 | Paid the balance due, within the discount period. |
Required: Prepare the journal entries. Under a perpetual system, purchase returns and purchase discounts reduce the Merchandise Inventory account directly.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 2 — Inventories
A merchandising business buys finished goods and resells them, so its income statement leads with net sales, cost of sales and gross profit. Establish which inventory system is in use before recording anything, because the entries for the same transaction differ entirely between perpetual and periodic.
Common mistakes
- Mixing perpetual and periodic mechanics within a single set of entries.
- Omitting freight inwards from inventory cost, or netting freight outwards against sales rather than treating it as a distribution expense.
- Reporting sales gross when returns and allowances should reduce it.
Further readingIAS 2: costing methods and NRV