The transactions listed below are typical of those involving Amalgamated Textiles and American Fashions. Amalgamated is a wholesale merchandiser and American Fashions is a retail merchandiser. Assume all sales of merchandise from Amalgamated to American Fashions 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 December 31.

a. Amalgamated sold merchandise to American Fashions at a selling price of $ 230,000. The merchandise had cost Amalgamated $ 175,000.

b. Two days later, American Fashions complained to Amalgamated that some of the merchandise differed from what American Fashions had ordered. Amalgamated agreed to give an allowance of $ 5,000 to American Fashions.

c. Just three days later, American Fashions paid Amalgamated, which settled all amounts owed.

Required:

1. Indicate the effect (direction and amount) of each transaction on the Inventory balance of American Fashions.

2. Prepare the journal entries that American Fashions would record and show any computations.