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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions digcfl)les of Accounting, Volume 1: Financial Acconti_ Chapter 6: Merchandising Transactions Note: All of the following assessments assume a periodic inventory system unless otherwise noted. Multiple Choice 1. LO 6.1 Which of the following is an example of a contra revenue account? A. sales B. merchandise inventory C. sales discounts D. accounts payable Solution C 2. LO 6.1 What accounts are used to recognize a retailer’s purchase from a manufacturer on credit? A. accounts receivable, merchandise inventory B. accounts payable, merchandise inventory C. accounts payable, cash D. sales, accounts receivable Solution B 3. LO 6.1 Which of the following numbers represents the discount percentage applied if a customer pays within a discount window and credit terms are 3/15, n/60? A. 3 B. 15 C. 60 D. 3and 15 Solution A 4. L.O 6.1 If a customer purchases merchandise on credit and returns the defective merchandise before payment, what accounts would recognize this transaction? A. sales discount, cash B. sales returns and allowances, cash C. accounts receivable, sales discount D. accounts receivable, sales returns and allowances Solution D 5. LO 6.2 Which of the following is a disadvantage of the perpetual inventory system? A. Inventory information is in real-time. B. Inventory is automatically updated. C. It allows managers to make current decisions about purchases, stock, and sales. D. It is cost-prohibitive. Solution D Page 1 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions 6. LO 6.2 Which of the following is an advantage of the periodic inventory system? A. frequent physical inventory counts B. cost prohibitive C. time consuming D. real-time information for managers Solution A 7. LO 6.2 Which of the following is not a reason for the physical inventory count to differ from what is recognized on the company’s books? A. mismanagement B. shrinkage C. damage D. sale of services to customers Solution D 8. LO 6.2 Which of the following is not included when computing Net Purchases? A. purchase discounts B. beginning inventory C. purchase returns D. purchase allowances Solution B 9. LO 6.3 Which of the following accounts are used when recording a purchase? A. cash, merchandise inventory B. accounts payable, merchandise inventory C. AorB D. cash, accounts payable Solution C 10. LO 6.3 A retailer pays on credit for $650 worth of inventory, terms 3/10, n/40. If the merchandiser pays within the discount window, how much will the retailer remit in cash to the manufacturer? A. $19.50 B. $630.50 C. $650 D. $195 Solution B 11. L.O 6.3 A retailer returns $400 worth of inventory to a manufacturer and receives a full refund. What accounts recognize this return before the retailer remits payment to the manufacturer? A. accounts payable, merchandise inventory B. accounts payable, cash C. cash, merchandise inventory D. merchandise inventory, cost of goods sold Solution Page 2 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions A 12. LO 6.3 A retailer obtains a purchase allowance from the manufacturer in the amount of $600 for faulty inventory parts. Which of the following represents the journal entry for this transaction if the retailer has already remitted payment? Solution B 13. LO 6.4 Which of the following accounts are used when recording the sales entry of a sale on credit? A. merchandise inventory, cash B. accounts receivable, merchandise inventory C. accounts receivable, sales D. sales, cost of goods sold Solution C 14. L.O 6.4 A customer pays on credit for $1,250 worth of merchandise, terms 4/15, n/30. If the customer pays within the discount window, how much will they remit in cash to the retailer? A. $1,250 B. $1,200 C. $50 D. $500 Solution B 15. LO 6.4 A customer returns $870 worth of merchandise and receives a full refund. What accounts recognize this sales return (disregarding the merchandise condition entry) if the return occurs before the customer remits payment to the retailer? A. accounts receivable, sales returns and allowances B. accounts receivable, cash C. sales returns and allowances, merchandise inventory D. accounts receivable, cost of goods sold Solution A 16. LO 6.4 A customer obtains a purchase allowance from the retailer in the amount of $220 for damaged merchandise. Which of the following represents the journal entry for this transaction if the customer has not yet remitted payment? A. Page 3 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution B 17. LO 6.5 Which of the following is not a characteristic of FOB Destination? A. The seller pays for shipping. B. The seller owns goods in transit. C. The point of transfer is when the goods leave the seller’s place of business. D. The point of transfer is when the goods arrive at the buyer’s place of business. Solution C 18. LO 6.5 Which two accounts are used to recognize shipping charges for a buyer, assuming the buyer purchases with cash and the terms are FOB Shipping Point? A. delivery expense, cash B. merchandise inventory, cash C. merchandise inventory, accounts payable D. The buyer does not record anything for shipping since it is FOB Shipping Point. Solution B 19. LO 6.5 Which of the following is not a characteristic of FOB Shipping Point? A. The buyer pays for shipping. B. The buyer owns goods in transit. C. The point of transfer is when the goods leave the seller’s place of business. D. The point of transfer is when the goods arrive at the buyer’s place of business. Solution D 20. LO 6.6 A multi-step income statement A. separates cost of goods sold from operating expenses B. considers interest revenue an operating activity C. is another name for a simple income statement D. combines cost of goods sold and operating expenses Solution A 21. LO 6.6 Which of the following accounts would be reported under operating expenses on a multi-step income statement? sales advertising expense sales returns and allowances interest expense OO W Page 4 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution B; under Selling Expense, a subcategory of operating expenses 22. L.LO 6.6 A simple income statement A. combines all revenues into one category B. does not combine all expenses into one category C. separates cost of goods sold from operating expenses D. separates revenues into several categories Solution A 23. LO 6.6 Which of the following accounts would not be reported under revenue on a simple income statement? A. Interest revenue B. net sales C. rent revenue D. operating expenses Solution D 24. L.O 6.7 Which of the following accounts are used when recording a purchase using a periodic inventory system? A. cash, purchases B. accounts payable, sales C. accounts payable, accounts receivable D. cash, merchandise inventory Solution A 25. LO 6.7 A retailer obtains a purchase allowance from the manufacturer in the amount of $600 for faulty inventory parts. Which of the following represents the journal entry for this transaction, assuming the retailer has already remitted payment? Solution B 26. LO 6.7 A customer returns $690 worth of merchandise and receives a full refund. What accounts recognize this sales return, assuming the customer has not yet remitted payment to the retailer? A. accounts receivable, sales returns and allowances B. accounts receivable, cash C. sales returns and allowances, purchases Page 5 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions D. sales discounts, cost of goods sold Solution A 27. L0 6.7 A customer obtains an allowance from the retailer in the amount of $450 for damaged merchandise. Which of the following represents the journal entry for this transaction, assuming the customer has not remitted payment? A. Solutio‘n. | B Questions 1. LO 6.1 What are some benefits to a retailer for offering a discount to a customer? Solution It helps solidify a long-term relationship with the customer, encourages the customer to purchase more, and decreases the time it takes for the company to see a liquid asset (cash). Cash can be used for other purposes immediately, such as reinvesting the business, paying down loans quicker, and distributing dividends to shareholders. 2. LO 6.1 What do credit terms of 4/10, n/30 mean in regard to a purchase? Solution A retailer will receive a 4% discount on their purchase if they pay within 10 days, or they have a total of 30 days to pay in full without receiving a discount. 3. LO 6.1 What is the difference between a sales return and a sales allowance? Solution A sales return occurs when a customer returns merchandise for a full refund. A sales allowance occurs when a customer keeps the merchandise and is issued a partial refund. 4. LO 6.1 If a retailer made a purchase in the amount of $350 with credit terms of 2/15, n/60. What would the retailer pay in cash if they received the discount? Solution $343; $350 x 2% = $7; $350 — $7 = $343 5. LO 6.2 What are two advantages and disadvantages of the perpetual inventory system? Solution Advantages could include real-time data and more robust information. Disadvantages could include fewer inventory counts with opportunity for mismanagement of inventory. It is also costly, and time consuming. 6. LO 6.2 What are two advantages and disadvantages of the periodic inventory system? Solution Page 6 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Advantages could include more frequent inventory counts, reducing chances for shrinkage and damaged merchandise. It is also cheaper to maintain. Disadvantages could include difficulties for businesses to keep track of inventory costs and for making present decisions about their business. 7. LO 6.2 Sunrise Flowers sells flowers to a customer on credit for $130 on October 18, with a cost of sale to Sunrise of $50. What entry to recognize this sale is required if Sunrise Flowers uses a periodic inventory system? Solution Oct. 18 Accounts Receivable 130 Sales 130 To recognize sale under periodic inventory system Note: No cost of sale entry is required currently, only at the end of the period under periodic. 8. LO 6.2 Sunrise Flowers sells flowers to a customer on credit for $130 on October 18, with a cost of sale to Sunrise of $50. What entry to recognize this sale is required if Sunrise Flowers uses a perpetual inventory system? Solution: Oct. 18 Accounts Receivable 130 Sales 130 To recognize sale under perpetual inventory system Oct. 18 Cost of Goods Sold 50 Merchandise Inventory 50 To recognize cost of sale under perpetual inventory system 9. LO 6.3 Name two situations where cash would be remitted to a retailer from a manufacturer after purchase. Solution Cash would be remitted to a retainer if the retailer returns merchandise to a manufacturer after payment, or if the retailer receives an allowance for damaged merchandise after payment. 10. LO 6.3 If a retailer purchased inventory in the amount of $750, terms 2/10, n/60, returned $30 of the inventory for a full refund, and received an allowance for $95, how much would the discount be if the retailer remitted payment within the discount window? Solution $12.50; $625 x 2% 11. LO 6.3 A retailer discovers that 50% of the total inventory items delivered from the manufacturer are damaged. The original purchase for all inventory was $1,100. The retailer decides to return 20% of the damaged inventory for a full refund and keep the remaining 80% of damaged inventory. What is the value of the merchandise returned? Solution $110; $1,100 x 50% = $550, $550 x 20% = $110 12. L.O 6.4 Name two situations where cash would be remitted to a customer from a retailer after purchase. Solution The retailer remits cash to a customer if the customer returns merchandise to a retailer after payment or if the customer receives an allowance for damaged merchandise after payment. Page 7 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions 13. LO 6.4 If a customer purchased merchandise in the amount of $340, terms 3/10, n/30, returned $70 of the inventory for a full refund, and received an allowance for $65, how much discount would be applied if the customer remitted payment within the discount window? Solution $6.15; $205 % 3% 14. LO 6.4 A customer discovers 60% of the total merchandise delivered from a retailer is damaged. The original purchase for all merchandise was $3,600. The customer decides to return 35% of the damaged merchandise for a full refund and keep the remaining 65%. What is the value of the merchandise returned? Solution $756; $3,600 x 60% = $2,160, $2,160 x 35% = 756 15. LO 6.5 What are the main differences between FOB Destination and FOB Shipping Point? Solution With FOB Destination, the seller is responsible for goods in transit, the seller pays for shipping, and the point of transfer is when the goods reach the buyer’s place of business. With FOB Shipping Point, the buyer is responsible for goods in transit, the buyer pays for shipping, and the point of transfer is when the goods leave the seller’s place of business. 16. LO 6.5 A buyer purchases $250 worth of goods on credit from a seller. Shipping charges are $50. The terms of the purchase are 2/10, n/30, FOB Destination. What, if any, journal entry or entries will the buyer record for these transactions? Solution Merchandise Inventory 250 Accounts Payable 250 To recognize purchase on credit, FOB Destination Since this is FOB Destination, the buyer does not pay shipping charges. 17. LO 6.5 A seller sells $800 worth of goods on credit to a customer, with a cost to the seller of $300. Shipping charges are $100. The terms of the sale are 2/10, n/30, FOB Destination. What, if any, journal entry or entries will the seller record for these transactions? Solution Accounts Receivable 800 Sales 800 To recognize sale on credit, 2/10, n/30, FOB Destination Cost of Goods Sold 300 Merchandise Inventory 300 To recognize cost of sale Delivery Expense 100 Cash 100 To recognize shipping charge, FOB Destination 18. LO 6.5 Which statement and where on the statement is freight-out recorded? Why is it recorded there? Solution Page 8 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Freight-out is located on the income statement as a sales and administrative expense. Unlike freight-in, which is a component of the Cost of Goods Sold calculation, freight-out is not a component of Cost of Goods Sold. 19. LO 6.6 The following is select account information for Sunrise Motors. Sales: $256,400; Sales Returns and Allowances: $34,890; Cost of Goods Sold: $120,470; Sales Discounts: $44,760. Given this information, what is the Gross Profit Margin Ratio for Sunrise Motors? (Round to the nearest whole percentage.) Solution 32% or $.32; ($176,750 — 120,470) / $176,750 20. LO 6.6 What is the difference between a multi-step and simple income statement? Solution A multi-step income statement is more detailed than a simple income statement. Sales of goods and their associated costs are separated from operating expenses and other revenue and expenses on a multi-step statement. A simple statement combines all revenues and all expenses into one category. 21. LO 6.6 How can an investor or lender use the Gross Profit Margin Ratio to make financial contribution decisions? Solution The gross profit margin ratio shows the company’s margin over costs of sales to cover operating expenses and profit. If margin continue to increase over time, an investor or lender might consider the financial contribution less risky. If the ratio decreases, the stakeholder may perceive an increased risk that the company may not have enough revenue to service debt. 22. L.O 6.6 The following is select account information for August Sundries. Sales: $850,360; Sales Returns and Allowances: $148,550; Cost of Goods Sold: $300,840; Operating Expenses: $45,770; Sales Discounts: $231,820. If August Sundries uses a multi-step income statement format, what is their gross margin? Solution $169,150 23. LO 6.7 If a retailer purchased inventory in the amount of $680, terms 3/10, n/60, returned $120 of the inventory for a full refund, and received an allowance for $70, how much would the discount be if the retailer remitted payment within the discount window? Solution $14.70; $490 x 3% 24. L.O 6.7 A customer discovers 50% of the total merchandise delivered from the retailer is damaged. The original purchase for all merchandise was $5,950. The customer decides to return 40% of the damaged merchandise for a full refund and keep the remaining 60%. What is the value of the merchandise returned? Solution $1,190; $5,950 x 50% = $2,975, $2,975 x 40% = $1,190 25. LO 6.7 What is the difference in reporting requirements for customer-returned merchandise in sellable condition under a perpetual inventory system versus a periodic inventory system? Solution Recognizing the return of merchandise to inventory occurs under the perpetual inventory system but not under the periodic inventory system. Page 9 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Exercise Set A EA1. LO 6.1 On March 1, Bates Board Shop sells 300 surfboards to a local lifeguard station at a sales price of $400 per board. The cost to Bates is $140 per board. The terms of the sale are 3/15, n/30, with an invoice date of March 1. Create the journal entries for Bates to recognize the following transactions. A. the initial sale B. the subsequent customer payment on March 10 Solution A. Mar.1 Accounts Receivable 120,000 Sales 120,000 To recognize sale of 300 surfboards, terms 3/15, n/30, 300 x $400 Mar.1 Cost of Goods Sold 42,000 Merchandise Inventory 42,000 To recognize cost of sale B. Mar. 10 Cash 116,400 Sales Discounts 3,600 Accounts Receivable 120,000 To recognize customer payment, less discount, 120,000 % 3% EA2. LO 6.1 Marx Corp. purchases 135 fax machines on credit from a manufacturer on April 7 at a price of $250 per machine. Terms of the purchase are 4/10, n/20 with an invoice date of April 7. Marx Corp pays in full for the fax machines on April 17. Create the journal entries for Marx Corp. to record: A. the initial purchase B. the subsequent payment on April 17 Solution A. Apr. 7 Merchandise Inventory 33,750 Accounts Payable 33,750 To recognize purchase of fax machine, terms 4/10, n/20, 135 x $250 B. Apr. 17 Accounts Payable 33,750 Cash 32,400 Merchandise Inventory 1,350 To recognize payment, less discount, $33,750 x 4% EA3. LO 6.1 Match each of the following terms with the best corresponding definition. A. Sales allowance i. A customer returns merchandise for a full refund B. Purchase return ii. A retailer receives a partial refund but keeps the Page 10 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions defective merchandise C. Sales discount iii. A customer receives a partial refund but keeps the defective merchandise D. Purchase discount iv. A customer pays their account in full within the discount window E. Sales return v. A type of purchase discount negotiated between a manufacturer and a retailer before settlement on a final price F. Trade discount vi. A retailer returns merchandise for a full refund G. Purchase allowance vii. A retailer pays their account in full within the discount window Solution A.1iil. B.vi. C.iv. D. vil. E. 1. F. v. G. 1i. EA4. LO 6.2 The following is selected information from Mars Corp. Compute net purchases, and cost of goods sold for the month of March. Inventory, February 28, 2018 $450,000 Inventory, March 31, 2018 330,500 Purchase discounts 12,450 Purchase returns and allowances 23,870 Sales 276,900 Sales discounts 34,660 Gross purchases 120,400 Solution Net Purchases = $120,400 — $12,450 — $23,870 = $84,080 Cost of Goods Sold = $450,000 + $84,080 — $330,500 = $203,580 EA5. LO 6.2 On April 5, a customer returns 20 bicycles with a sales price of $250 per bike to Barrio Bikes. Each bike cost Barrio Bikes $100. The customer had yet to pay on their account. The bikes are in sellable condition. Prepare the journal entry or entries to recognize this return if the company uses A. the perpetual inventory system B. the periodic inventory system Solution A. Perpetual Apr. 5 Sales Returns and Allowances 5,000 Accounts Receivable 5,000 To recognize sales return under perpetual inventory system, 20 x $250 Apr. 5 Merchandise Inventory 2,000 Cost of Goods Sold 2,000 To recognize cost of inventory returned, 20 x $100 B. Periodic Apr. 5 Sales Returns and Allowances 5,000 Accounts Receivable 5,000 To recognize sales return under periodic inventory system; no cost entry recorded Page 11 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions EAG6. LO 6.3 Record journal entries for the following purchase transactions of Flower Company. Oct. 13 | Purchased 85 bushels of flowers with cash for $1,300. Oct. 20 | Purchased 240 bushels of flowers for $20 per bushel on credit. Terms of the purchase are 5/10, n/30, invoice dated October 20. Oct. 30 | Paid account in full from the October 20 purchase. Solution Oct. 13 Merchandise Inventory 1,300 Cash 1,300 To recognize inventory purchase with cash Oct. 20 Merchandise Inventory 4,800 Accounts Payable 4,800 To recognize inventory purchase, 5/10, n/30, 240 x $20 Oct. 30 Accounts Payable 4,800 Merchandise Inventory 240 Cash 4,560 To recognize payment, less discount, 4,800 % 5% EA7. LO 6.3 Record journal entries for the following purchase transactions of Apex Industries. Nov. 6 Purchased 24 computers on credit for $560 per computer. Terms of the purchase are 4/10, n/60, invoice dated November 6. Nov. 10 | Returned 5 defective computers for a full refund from the manufacturer. Nov. 22 | Paid account in full from the November 6 purchase. Solution Nov. 6 Merchandise Inventory 13,440 Accounts Payable 13,440 To recognize inventory purchase on credit, 4/10, n/60, 24 x $560 Nov. 10 Accounts Payable 2,800 Merchandise Inventory 2,800 To recognize return 5 computers, full refund, 5 x $560 Nov. 22 Accounts Payable 10,640 Cash 10,640 To recognize payment, less return, did not make discount window, $13,440 — $2,800 EA8. LO 6.3 Record the journal entry for each of the following transactions. Glow Industries purchases 750 strobe lights at $23 per light from a manufacturer on April 20. The terms of purchase are 10/15, n/40, invoice dated April 20. On April 22, Glow discovers 100 of the lights are the wrong model and is granted an allowance of $8 per light for the error. On April 30, Glow pays for the lights, less the allowance. Solution | Apr. 20 Merchandise Inventory 17,250 | Page 12 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Accounts Payable To recognize inventory purchase on credit, 10/15, n/40, 750 x $23 Apr. 22 Accounts Payable Merchandise Inventory To recognize allowance 100 lights, $8 each, 100 % $8 Apr. 30 Accounts Payable Merchandise Inventory Cash To recognize payment, less allowance and discount, $17,250 — $800; $16,450 x 10% 800 16,450 17,250 800 1,645 14,805 EA9. LO 6.4 Record journal entries for the following sales transactions of Flower Company. Oct. 12 Sold 25 bushels of flowers to a customer for $1,000 cash; cost of sale $700. Oct. 21 Sold 40 bushels of flowers for $30 per bushel on credit. Terms of the sale are 4/10, n/30, invoice dated October 21. Cost per bushel is $20 to Flower Company. Oct. 31 Received payment in full from the October 21 sale. Solution Oct. 12 Cash 1,000 Sales 1,000 To recognize sale with cash Oct. 12 Cost of Goods Sold 700 Merchandise Inventory 700 To recognize cost of sale Oct. 21 Accounts Receivable 1,200 Sales 1,200 To recognize sale on credit, 4/10, n/30 Oct. 21 Cost of Goods Sold 800 Merchandise Inventory 800 To recognize cost of sale, 40 x $30; 40 x $20 Oct. 31 Cash 1,152 Sales Discounts 48 Accounts Receivable 1,200 To recognize customer payment, less discount, $1,200 x 4% EA10. LO 6.4 Record the journal entries for the following sales transactions of Apache Industries. Nov. 7 Sold 10 computers on credit for $870 per computer. Terms of the sale are 5/10, n/60, invoice dated November 7. The cost per computer to Apache is $560. Page 13 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Nov. 14 | The customer returned 2 computers for a full refund from Apache. Apache returns the computers to their inventory at full cost of $560 per computer. Nov. 21 | The customer paid their account in full from the November 7 sale. Solution Nov. 7 Accounts Receivable 8,700 Sales 8,700 To recognize sale on credit, 5/10, n/60 Nov. 7 Cost of Goods Sold 5,600 Merchandise Inventory 5,600 To recognize cost of sale, 10 x $560; 10 x $870 Nov. 14 Sales Returns and Allowances 1,740 Accounts Receivable 1,740 To recognize return 2 computers, full refund Nov. 14 Merchandise Inventory 1,120 Cost of Goods Sold 1,120 To recognize return 2 computers, full refund, 2 x $870; 2 x $560 Nov. 21 Cash 6,960 Accounts Receivable 6,960 To recognize payment, less return, did not make discount window, $8,700 — $1,740 EA11. LO 6.4 Record the journal entry or entries for each of the following sales transactions. Glow Industries sells 240 strobe lights at $40 per light to a customer on May 9. The cost to Glow is $23 per light. The terms of the sale are 5/15, n/40, invoice dated May 9. On May 13, the customer discovers 50 of the lights are the wrong color and are granted an allowance of $10 per light for the error. On May 21, the customer pays for the lights, less the allowance. Solution May 9 Accounts Receivable 9,600 Sales 9,600 To recognize sale on credit, 5/15, n/40 May 9 Cost of Goods Sold 5,520 Merchandise Inventory 5,520 To recognize cost of sale, 240 % $40; 240 x $23 May 13 Sales Returns and Allowances 500 Accounts Receivable 500 To recognize allowance 50 lights, $10 each, 50 x $10 May 21 Cash 8,645 Sales Discounts 455 Page 14 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Accounts Receivable 9,100 To recognize payment, less allowance and discount, $9,600 — 500, $9,100 x 5% EA12. LO 6.5 Review the following situations and record any necessary journal entries for Mequon’s Boutique. May 10 | Mequon’s Boutique purchases $2,400 worth of merchandise with cash from a manufacturer. Shipping charges are an extra $130 cash. Terms of the purchase are FOB Shipping Point. May 14 | Mequon’s Boutique sells $3,000 worth of merchandise to a customer who pays with cash. The merchandise has a cost to Mequon’s of $1,750. Shipping charges are an extra $150 cash. Terms of the sale are FOB Shipping Point. Solution May 10 Merchandise Inventory 2,400 Cash 2,400 To recognize purchase, FOB Shipping Point Note: Mequon’s is the buyer in this case. May 10 Merchandise Inventory 130 Cash 130 To recognize shipping charges, FOB Shipping Point Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Students may choose to make these as one entry. May 14 Cash 3,000 Sales 3,000 To recognize sale with cash, FOB Shipping Point May 14 Cost of Goods Sold 1,750 Merchandise Inventory 1,750 To recognize cost of sale Note: Mequon’s does not recognize shipping charges because this is FOB Shipping Point and Mequon’s is the seller in this case, not the buyer. EA13. LO 6.5 Review the following situations and record any necessary journal entries for Letter Depot. Mar. 9 Letter Depot purchases $11,420 worth of merchandise on credit from a manufacturer. Shipping charges are an extra $480 cash. Terms of the purchase are 2/10, n/40, FOB Destination, invoice dated March 9. Mar. 20 | Letter Depot sells $7,530 worth of merchandise to a customer who pays on credit. The merchandise has a cost to Letter Depot of $2,860. Shipping charges are an extra $440 cash. Terms of the sale are 3/15, n/50, FOB Destination, invoice dated March 20. Solution Mar. 9 Merchandise Inventory 11,420 Accounts Receivable 11,420 To recognize purchase on credit, FOB Destination, 2/10, n/40 Page 15 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Note: Letter Depot is the buyer in this case, so they do not pay for shipping since this is FOB Destination. Mar. 20 Accounts Receivable 7,530 Sales 7,530 To recognize sale on credit, FOB Destination, 3/15, n/50 Mar. 20 Cost of Goods Sold 2,860 Merchandise Inventory 2,860 To recognize cost of sale Mar. 20 Delivery Expense 440 Cash 440 To recognize shipping charges, FOB Destination Note: Letter Depot is the seller in this scenario, so they pay shipping since it is FOB Destination. Recording shipping charges in a separate entry can reduce confusion with sales discounts later on since the discount does not apply to shipping charges. EA14. 1.O 6.5 Review the following situations and record any necessary journal entries for Nine Lives Inc. Jan. 15 | Nine Lives Inc. purchases $8,770 worth of merchandise with cash from a manufacturer. Shipping charges are an extra $345 cash. Terms of the purchase are FOB Shipping Point. Jan. 23 | Nine Lives Inc. sells $4,520 worth of merchandise to a customer who pays with cash. The merchandise has a cost to Nine Lives of $3,600. Shipping charges are an extra $190 cash. Terms of the sale are FOB Destination. Solution Jan. 15 Merchandise Inventory 8,770 Cash 8,770 To recognize purchase, FOB Shipping Point Note: Nine Lives is the buyer in this case. Jan. 15 Merchandise Inventory 345 Cash 345 To recognize shipping charges, FOB Shipping Point Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Students may choose to make these as one entry. Jan. 23 Cash 4,520 Sales 4,520 To recognize sale with cash, FOB Destination Jan. 23 Cost of Goods Sold 3,600 Merchandise Inventory 3,600 To recognize cost of sale Jan. 23 Delivery Expense 190 Cash 190 To recognize shipping charges, FOB Destination Page 16 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Note: Nine Lives is the seller in this scenario, so they pay shipping since it is FOB Destination. Recording shipping charges in a separate entry can reduce confusion with sales discounts later on since the discount does not apply to shipping charges. EA15. LO 6.6 The following select account data is taken from the records of Reese Industries for 2019. Use the data provided to compute net sales for 2019. Prepare a simple income statement for the year ended December 31, 2019. Compute the gross margin for 2019. Prepare a multi-step income statement for the year ended December 31, 2019. Solution A. Net sales: $492,091 cnwplirilbEnr gy B. Reese Industries Simple Income Statement For Year Ended December 31, 2019 Revenues: Net sales $492.091 Rent Revenue 23,622 Interest Revenue 10,268 Total Revenues 525,981 Expenses: Cost of Goods Sold $224,598 Total Selling Expenses 74,316 Total General and Administrative Expenses 22,330 Interest Expense 3.677 Total Expenses 324,921 Net Income $201,060 C. Gross margin: $267,493 D. | Reese Industries | Page 17 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Multi-step Income Statement For Year Ended December 31, 2019 Sales: $640,363 Sales Discounts $(58,040) Sales Returns and Allowances (90,232) 148,272 Net sales 492,091 Cost of Goods Sold 224,598 Gross Margin: 267,493 Operating Expenses: Selling Expenses Advertising Expense 12,906 Marketing Expense 31,000 Sales Salaries Expense 30,410 Total Selling Expenses 74,316 General and Administrative Expenses: Depreciation Expense-Office Equipment 3,200 Office Supplies Expense 1,600 Rent Expense 15,080 Insurance Expense 2,450 Total General and Administrative Expenses 22,330 Total Operating Expenses 96,646 Income from Operations: 170,847 Other Revenue and Expenses: Interest Revenue 10,268 Rent Revenue 23,622 Interest Expense (3,677) Total other revenue and expenses 30,213 Net Income 201,060 EA16. LO 6.7 Record journal entries for the following purchase transactions of Flower Company. A. On October 13, Flower Company purchased 85 bushels of flowers with cash for $1,300. B. On October 20, Flower Company purchased 240 bushels of flowers for $20 per bushel on credit. Terms of the purchase were 5/10, n/30, invoice dated October 20. C. On October 30, Flower Company paid its account in full for the October 20 purchase. Solution A. Oct. 13 Purchases 1,300 Cash 1,300 To recognize inventory purchase with cash B. Page 18 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Oct. 20 Purchases 4,800 Accounts Payable 4,800 To recognize inventory purchase, 5/10, n/30, 240 x $20 C. Oct. 30 Accounts Payable 4,800 Purchase Discounts 240 Cash 4,560 To recognize payment, less discount, 4,800 % 5% EA17. 1.O 6.7 Record journal entries for the following purchase transactions of Apex Industries. Nov. 6 Purchased 24 computers on credit for $560 per computer. Terms of the purchase are 4/10, n/60, invoice dated November 6. Nov. 10 | Returned 5 defective computers for a full refund from the manufacturer. Nov. 22 | Paid account in full from the November 6 purchase. Solution Nov. 6 Purchases 13,440 Accounts Payable 13,440 To recognize inventory purchase on credit, 4/10, n/60, 24 x $560 Nov. 10 Accounts Payable 2,800 Purchase Returns and Allowances 2,800 To recognize return 5 computers, full refund, 5 x $560 Nov. 22 Accounts Payable 10,640 Cash 10,640 To recognize payment, less return, did not make discount window, $13,440 — $2,800 EA18. LO 6.7 Record the journal entries for the following sales transactions of Julian Sundries. Nov. 7 Sold 10 tables on credit for $870 per table. Terms of the sale are 5/10, n/60, invoice dated November 7. The cost per table to Julian is $560. Nov. 14 | The customer returned 2 slightly damaged tables for a full refund from Julian. Nov. 21 | The customer paid their account in full from the November 7 sale. Solution Nov. 7 Accounts Receivable 8,700 Sales 8,700 To recognize sale on credit, 5/10, n/60, 10 x $870 Nov. 14 Sales Returns and Allowances 1,740 Accounts Receivable 1,740 To recognize return 2 tables, full refund, 2 x $870 Nov. 21 Cash 6,960 Accounts Receivable 6,960 To recognize payment, less return, did not make discount Page 19 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions window, $8,700 — $1,740 | EA19. LO 6.7 Record the journal entry or entries for each of the following sales transactions. Glow Industries sells 240 strobe lights at $40 per light to a customer on May 9. The cost to Glow is $23 per light. The terms of the sale are 5/15, n/40, invoice dated May 9. On May 13, the customer discovers 50 of the lights are the wrong color and are granted an allowance of $10 per light for the error. On May 21, the customer pays for the lights, less the allowance. Solution May 9 Accounts Receivable 9,600 Sales 9,600 To recognize sale on credit, 5/15, n/40, 240 % $40 May 13 Sales Returns and Allowances 500 Accounts Receivable 500 To recognize allowance 50 lights, $10 each, 50 x $10 May 21 Cash 8,645 Sales Discounts 455 Accounts Receivable 9,100 To recognize payment, less allowance and discount, $9,600 — $500; $9,100 x 5% Exercise Set B EB1. LO 6.1 On June 1, Lupita Candy Supplies sells 1,250 candy buckets to a local school at a sales price of $10 per bucket. The cost to Lolita is $2 per bucket. The terms of the sale are 2/10, n/60, with an invoice date of June 1. Create the journal entries for Lupita to recognize the following transactions. A. the initial sale B. the subsequent customer payment on July 12 Solution A. Jun. 1 Accounts Receivable 12,500 Sales 12,500 To recognize sale of 1,250 candy buckets, terms 2/10, n/60, 1,250 x $10 Jun. 1 Cost of Goods Sold 2,500 Merchandise Inventory 2,500 To recognize cost of sale B. Jul. 12 Cash 12,500 Accounts Receivable 12,500 To recognize customer payment Page 20 of 65
OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions EB2. LO 6.1 Ariel Enterprises purchases 32 cellular telephones on credit from a manufacturer on November 3 at a price of $400 per phone. Terms of the purchase are 3/5, n/30 with an invoice date of November 3. Ariel Enterprises pays in full for the phones on November 6. Create the journal entries for Ariel Enterprises for the following transactions. A. the initial purchase B. the subsequent payment on November 6 Solution A. Nov.3 Merchandise Inventory 12,800 Accounts Payable 12,800 To recognize purchase of phones, terms 3/5, n/30, $400 x 32 B. Nov. 6 Accounts Payable 12,800 Cash 12,416 Merchandise Inventory 384 To recognize payment, less discount, $12,800 x 3% EB3. LO 6.1 For each of the following statements, fill in the blanks with the correct account names. A. Aretailer purchases merchandise on credit. The retailer would recognize this transaction by debiting _ and crediting B. A retailer pays for purchased merchandlse within the discount window. The retailer would recognize this transaction by debiting and crediting and C. A customer returns merchandise to the retailer and receives a full refund. The retailer would recognize this transaction by debiting and crediting if the customer had not yet paid on their account. D. A customer pays for purchased merchandise within the discount window. The retailer would recognize this transaction by debiting and , and crediting Solution A. Merchandise Inventory, Accounts Payable. B. Accounts Payable, Cash, Merchandise Inventory. C. Sales Returns and Allowances, Accounts Receivable. D. Cash, Sales Discounts, Accounts Receivable. EB4. LO 6.2 The following is selected information from Orange Industries. Compute net purchases, and cost of goods sold for the month of June. Solution Net purchases = $435,080 — $50,932 — $14,664 = $369,484 Cost of Goods Sold = $321,908 + 369,484 — $254,075 = $437,317 Page 21 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions EB5. LO 6.2 On April 20, Barrio Bikes purchased 30 bicycles at a cost of $100 per bike. Credit terms were 4/10, n/30, with an invoice date of April 20. On April 26, Barrio Bikes pays in full for the purchase. Prepare the journal entry or entries to recognize the purchase and subsequent payment if Barrio Bikes uses: A. the perpetual inventory system B. the periodic inventory system Solution A. Perpetual Apr. 20 Merchandise Inventory 3,000 Accounts Payable 3,000 To recognize purchase under perpetual inventory system, 4/10, n/30, 30 x $100 Apr. 26 Accounts Payable 3,000 Cash 2,880 Merchandise Inventory 120 To recognize payment, less discount, $3,000 % 4% B. Periodic Apr. 20 Purchases 3,000 Accounts Payable 3,000 To recognize purchase under periodic inventory system, 4/10, n/30 Apr. 26 Accounts Payable 3,000 Cash 2,880 Purchase Discounts 120 To recognize payment, less discount EB6. LO 6.3 Blue Barns purchased 888 gallons of paint at $19 per gallon from a supplier on June 3. Terms of the purchase are 2/15, n/45, invoice dated June 3. Blue Barns pays their account in full on June 20. On June 22, Blue Barns discovers 20 gallons are the wrong color and returns the gallons for a full cash refund. Record the journal entries to recognize these transactions for Blue Barns. Solution Jun. 3 Merchandise Inventory 16,872 Accounts Payable 16,872 To recognize inventory purchase on credit, 2/15, n/45, 888 x $19 Jun. 20 Accounts Payable 16,872 Cash 16,872 To recognize payment, no discount Jun. 22 Cash 380 Merchandise Inventory 380 To recognize return after payment, 20 x $19 Page 22 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions EB7. LO 6.3 Canary Lawnmowers purchased 300 lawnmower parts at $3.50 per part from a supplier on December 4. Terms of the purchase are 4/10, n/25, invoice dated December 4. Canary Lawnmowers pays their account in full on December 16. On December 21, Canary discovers 34 of the parts are the wrong size but decides to keep them after the supplier gives Canary an allowance of $1.00 per part. Record the journal entries to recognize these transactions for Canary Lawnmowers. Solution Dec. 4 Merchandise Inventory 1,050 Accounts Payable 1,050 To recognize inventory purchase on credit, 4/10, n/25, 300 x $3.50 Dec. 16 Accounts Payable 1,050 Cash 1,050 To recognize payment, no discount Dec. 21 Cash 34 Merchandise Inventory 34 To recognize allowance after payment, 34 x $1.00 EBS8. L.O 6.3 Record journal entries for the following purchase transactions of Balloon Depot. Feb. 8 Purchased 3,000 balloon bundles on credit for $25 per bundle. Terms of the purchase are 10/10, n/30, invoice dated February 8. Feb. 11 | Returned 450 defective bundles for a full refund from the manufacturer. Feb. 18 | Paid account in full from the February 8 purchase. Solution Feb. 8 Merchandise Inventory 75,000 Accounts Payable 75,000 To recognize inventory purchase on credit, 10/10, n/30, 3,000 x $25 Feb. 11 Accounts Payable 11,250 Merchandise Inventory 11,250 To recognize return 450 bundles, full refund, 450 % $25 Feb. 18 Accounts Payable 63,750 Merchandise Inventory 6,375 Cash 57,375 To recognize payment, less return and discount, $75,000 — $11,250; $63,750 x 10% EB9. LO 6.4 Blue Barns sold 136 gallons of paint at $31 per gallon on July 6 to a customer with a cost of $19 per gallon to Blue Barns. Terms of the sale are 2/15, n/45, invoice dated July 6. The customer pays their account in full on July 24. On July 28, the customer discovers 17 gallons are the wrong color and returns the paint for a full cash refund. Blue Barns returns the gallons to Page 23 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions their inventory at the original cost per gallon. Record the journal entries to recognize these transactions for Blue Barns. Solution July 6 July 6 July 24 July 28 July 28 Accounts Receivable Sales To recognize sale on credit, 2/15, n/45 Cost of Goods Sold Merchandise Inventory To recognize cost of sale, 136 x $31; 136 x $19 Cash Accounts Receivable To recognize payment, no discount Sales Returns and Allowances Cash To recognize sales return after payment Merchandise Inventory Cost of Goods Sold To return gallons to inventory, 17 x $31; 17 x $19 4,216 2,584 4,216 527 323 4,216 2,584 4,216 527 323 EB10. LO 6.4 Canary Lawnmowers sold 70 lawnmower parts at $5.00 per part to a customer on December 4 with a cost to Canary of $3.00 per part. Terms of the sale are 5/10, n/25, invoice dated December 4. The customer pays their account in full on December 16. On December 21, the customer discovers 22 of the parts are the wrong size but decides to keep them after Canary gives them an allowance of $1.00 per part. Record the journal entries to recognize these transactions for Canary Lawnmowers. Solution Dec. 4 Accounts Receivable 350 Sales 350 To recognize sale on credit, 5/10, n/25 Dec. 4 Cost of Goods Sold 210 Merchandise Inventory 210 To recognize cost of sale, 70 x $5.00; 70 x $3.00 Dec. 16 Cash 350 Accounts Receivable 350 To recognize customer payment, no discount Dec. 21 Sales Returns and Allowances 22 Cash 22 To recognize sales allowance after payment, 22 x $1.00 Page 24 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions EB11. L.O 6.4 Record journal entries for the following sales transactions of Balloon Depot. Mar. 8 Sold 570 balloon bundles to a customer on credit for $38 per bundle. The cost to Balloon Depot was $25 per bundle. Terms of the sale are 3/10, n/30, invoice dated March 8. Mar. 11 | The customer returned 70 bundles for a full refund from Balloon Depot. Balloon Depot returns the balloons to their inventory at the original cost of $25 per bundle. Mar. 18 | The customer paid their account in full from the March 8 purchase. Solution Mar. 8 Accounts Receivable 21,660 Sales 21,660 To recognize sale on credit, 3/10, n/30 Mar. 8 Cost of Goods Sold 14,250 Merchandise Inventory 14,250 To recognize cost of sale, 570 % $38; 570 x $25 Mar. 11 Sales Returns and Allowances 2,660 Accounts Receivable 2,660 To recognize return 70 bundles, full refund Mar. 11 Merchandise Inventory 1,750 Cost of Goods Sold 1,750 To return 70 bundles to inventory, 70 % $38; 70 x $25 Mar. 18 Cash 18,430 Sales Discounts 570 Accounts Receivable 19,000 To recognize payment, less return and discount, $21,660 — $2,660; 19,000 x 3% EB12. LO 6.5 Review the following situations and record any necessary journal entries for Lumber Farm. Feb. 13 | Lumber Farm purchases $9,650 worth of merchandise with cash from a manufacturer. Shipping charges are an extra $210 cash. Terms of the purchase are FOB Destination. Feb. 19 | Lumber Farm sells $5,670 worth of merchandise to a customer who pays with cash. The merchandise has a cost to Lumber Farm of $2,200. Shipping charges are an extra $230 cash. Terms of the sale are FOB Destination. Solution Feb. 13 Merchandise Inventory 9,650 Cash 9,650 To recognize purchase, FOB Destination Note: Lumber Farm is the buyer in this case, so they do not pay for shipping since this is FOB Destination. Feb. 19 Cash 5,670 Sales 5,670 Page 25 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions To recognize sale with cash, FOB Destination Feb. 19 Cost of Goods Sold 2,200 Merchandise Inventory 2,200 To recognize cost of sale Feb. 19 Delivery Expense 230 Cash 230 To recognize shipping charges, FOB Destination Note: Lumber is the seller in this scenario, so they pay shipping since it is FOB Destination. Recording shipping charges in a separate entry can reduce confusion with sales discounts later on since the discount does not apply to shipping charges. EB13. LO 6.5 Review the following situations and record any necessary journal entries for Clubs Unlimited. Jun. 12 | Clubs Unlimited purchases $3,540 worth of merchandise on credit from a manufacturer. Shipping charges are an extra $150 cash. Terms of the purchase are 2/10, n/45, FOB Shipping Point, invoice dated June 12. Jun. 18 | Clubs Unlimited sells $8,200 worth of merchandise to a customer who pays on credit. The merchandise has a cost to Clubs Unlimited of $3,280. Shipping charges are an extra $150 cash. Terms of the sale are 3/15, n/30, FOB Shipping Point, invoice dated June 18. Solution Jun. 12 Merchandise Inventory 3,540 Accounts Payable 3,540 To recognize purchase, FOB Shipping Point, 2/10, n/45 Note: Clubs is the buyer in this case. Jun. 12 Merchandise Inventory 150 Cash 150 To recognize shipping charges, FOB Shipping Point Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Students may choose to make these as one entry. Jun. 18 Accounts Receivable 8,200 Sales 8,200 To recognize sale on credit, FOB Shipping Point, 3/15, n/30 Jun. 18 Cost of Goods Sold 3,280 Merchandise Inventory 3,280 To recognize cost of sale Note: Clubs does not recognize shipping charges because this is FOB Shipping Point and Clubs is the seller in this case, not the buyer. EB14. LO 6.5 Review the following situations and record any necessary journal entries for Wall World. Dec. 6 Wall World purchases $5,510 worth of merchandise on credit from a manufacturer. Shipping charges are an extra $146 cash. Terms of the purchase are 2/15, n/40, FOB Page 26 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Shipping Point, invoice dated December 6. Dec. 10 | Wall World sells $3,590 worth of merchandise to a customer, who pays on credit. The merchandise has a cost to Wall World of $1,400. Shipping charges are an extra $115 cash. Terms of the sale are 4/10, n/30, FOB Destination, invoice dated December 10. Solution Dec. 6 Merchandise Inventory 5,510 Accounts Payable 5,510 To recognize purchase, FOB Shipping Point, 2/15, n/40 Note: Wall World is the buyer in this case. Dec. 6 Merchandise Inventory 146 Cash 146 To recognize shipping charges, FOB Shipping Point Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Dec. 10 Accounts Receivable 3,590 Sales 3,590 To recognize sale on credit, FOB Destination, 4/10, n/30 Dec. 10 Cost of Goods Sold 1,400 Merchandise Inventory 1,400 To recognize cost of sale Dec. 10 Delivery Expense 115 Cash 115 To recognize shipping charges, FOB Destination Note: Wall World is the seller in this scenario, so they pay shipping since it is FOB Destination. EB15. LO 6.6 The following select account data is taken from the records of Carnival Express for 2019. Page 27 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions B. Prepare a simple income statement for the year ended December 31, 2019. C. Compute the gross margin for 2019. D. Prepare a multi-step income statement for the year ended December 31, 2019. Solution A. Net sales: $628,073 B. Carnival Express Simple Income Statement For Year Ended December 31, 2019 Revenues: Net sales $628,073 Rent Revenue 42,900 Interest Revenue 12,321 Total Revenues 683,294 Expenses: Cost of Goods Sold $295,840 Total Selling Expenses 105,400 Total General and Administrative Expenses 21,200 Interest Expense 5,444 Total Expenses 427,884 Net Income $255,410 C. Gross margin: $332,233 D. Carnival Express Multi-step Income Statement For Year Ended December 31, 2019 Sales $790,866 Sales Discounts $(62,750) Sales Returns and Allowances (100,043) 162,793 Net sales 628,073 Cost of Goods Sold 295,840 Gross Margin: 332,233 Operating Expenses: Selling Expenses Advertising Expense 14,650 Marketing Expense 25,450 Sales Salaries Expense 65,300 Total Selling Expenses 105,400 General and Administrative Expenses Depreciation Expense-Office Equipment 4,210 Office Supplies Expense 2,312 Rent Expense 12,678 Page 28 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Insurance Expense 2,000 Total General and Administrative Expenses 21,200 Total Operating Expenses 126,600 Income from Operations: 205,633 Other Revenue and Expenses: Interest Revenue 12,321 Rent Revenue 42,900 Interest Expense (5.444) Total other revenue and expenses 49,777 Net Income $255,410 EB16. LO 6.7 Canary Lawnmowers purchased 300 lawnmower parts at $3.50 per part from a supplier on December 4. Terms of the purchase are 4/10, n/25, invoice dated December 4. Canary Lawnmowers pays their account in full on December 16. On December 21, Canary discovers 34 of the parts are the wrong size, but decides to keep them after the supplier gives Canary an allowance of $1.00 per part. Record the journal entries to recognize these transactions for Canary Lawnmowers. Solution Dec. 4 Purchases 1,050 Accounts Payable 1,050 To recognize inventory purchase on credit, 4/10, n/25, 300 x $3.50 Dec. 16 Accounts Payable 1,050 Cash 1,050 To recognize payment, no discount Dec.21 Cash 34 Purchase Returns and Allowances 34 To recognize allowance after payment, 34 x $1.00 EB17. LO 6.7 Record journal entries for the following purchase transactions of Balloon Depot. Feb. 8 Purchased 3,000 balloon bundles on credit for $25 per bundle. Terms of the purchase are 2/10, n/30, invoice dated February 8. Feb. 11 | Returned 450 defective bundles for a full refund from the manufacturer. Feb. 18 | Paid account in full from the February 8 purchase. Solution Feb. 8 Purchases 75,000 Accounts Payable 75,000 To recognize inventory purchase on credit, 2/10, n/30, 3,000 x $25 Feb. 11 Accounts Payable 11,250 Purchase Returns and Allowances 11,250 To recognize return 450 bundles, full refund, 450 % $25 Page 29 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Feb. 18 Accounts Payable 63,750 Purchase Discounts 1,275 Cash 62,475 To recognize payment, less return and discount, $75,000 — $11,250; $63,750 x 2% EB18. LO 6.7 Canary Lawnmowers sold 75 lawnmower parts at $5.00 per part to a customer on December 4. The cost to Canary is $3.00 per part. Terms of the sale are 4/10, n/25, invoice dated December 4. The customer pays their account in full on December 16. On December 21, the customer discovers 22 of the parts are the wrong size, but decides to keep them after Canary gives them an allowance of $1.00 per part. Record the journal entries to recognize these transactions for Canary Lawnmowers. Solution Dec. 4 Accounts Receivable 375 Sales 375 To recognize sale on credit, 4/10, n/25, 75 x $5.00 Dec. 16 Cash 375 Accounts Receivable 375 To recognize customer payment, no discount Dec. 21 Sales Returns and Allowances 22 Cash 22 To recognize sales allowance after payment, 22 x $1.00 EB19. LO 6.7 Record journal entries for the following sales transactions of Balloon Depot. Mar. 8 Sold 570 balloon bundles to a customer on credit for $38 per bundle. The cost to Balloon Depot is $25 per bundle. Terms of the sale are 3/10, n/30, invoice dated March 8. Mar. 11 | The customer returned 70 bundles for a full refund from Balloon Depot. Mar. 18 | The customer paid their account in full from the March 8 purchase. Solution Mar. 8 Accounts Receivable 21,660 Sales 21,660 To recognize sale on credit, 3/10, n/30, 570 % $38 Mar. 11 Sales Returns and Allowances 2,660 Accounts Receivable 2,660 To recognize return 70 bundles, full refund, 70 x $38 Mar. 18 Cash 18,430 Sales Discounts 570 Accounts Receivable 19,000 To recognize payment, less return and discount, $21,660 — $2,660; $19,000 x 3% Page 30 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Problem Set A PA1. L.O 6.1 Record journal entries for the following transactions of Furniture Warehouse. A. Aug. 3: Sold 15 couches at $500 each to a customer, credit terms 2/15, n/30, invoice date August 3; the couches cost Furniture Warehouse $150 each. B. Aug. 8: Customer returned 2 couches for a full refund. The merchandise was in sellable condition at the original cost. C. Aug. 15: Customer found 4 defective couches but kept the merchandise for an allowance of $1,000. D. Aug. 18: Customer paid their account in full with cash. Solution A. Aug.3 Accounts Receivable 7,500 Sales 7,500 To recognize sale of couches, terms 2/15, n/30, $500 % 15 Aug.3 Cost of Goods Sold 2,250 Merchandise Inventory 2,250 To recognize cost of sale, $150 x 15 B. Aug. 8 Sales Returns and Allowances 1,000 Accounts Receivable 1,000 To recognize 2 couches returned for full refund, $500 % 2 Aug. 8 Merchandise Inventory 300 Cost of Goods Sold 300 To return 2 couches to inventory, 2 x $150 C. Aug. 15 Sales Returns and Allowances 1,000 Accounts Receivable 1,000 To recognize allowance for 4 couches D. Aug. 18 Cash 5,390 Sales Discounts 110 Accounts Receivable 5,500 To recognize customer payment, less discount, $7500 — $1,000 — $1,000; 5,500 % 2% PA2. LLO 6.1 Record journal entries for the following transactions of Barrera Suppliers. A. May 12: Sold 32 deluxe hammers at $195 each to a customer, credit terms 10/10, n/45, invoice date May 12; the deluxe hammers cost Barrera Suppliers $88 each. B. May 15: Customer returned 6 hammers for a full refund. The merchandise was in sellable condition at the original cost. Page 31 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions C. May 20: Customer found 2 defective hammers but kept the merchandise for an allowance of $200. D. May 22: Customer paid their account in full with cash. Solution A. May 12 Accounts Receivable 6,240 Sales 6,240 To recognize sale of deluxe hammers, terms 10/10, n/45, $195 x 32 May 12 Cost of Goods Sold 2,816 Merchandise Inventory 2,816 To recognize cost of sale, $88 x 32 B. May 15 Sales Returns and Allowances 1,170 Accounts Receivable 1,170 To recognize 6 hammers returned for full refund, $195 % 6 May 15 Merchandise Inventory 528 Cost of Goods Sold 528 To return 6 hammers to inventory, 6 x $88 C. May 20 Sales Returns and Allowances 200 Accounts Receivable 200 To recognize allowance for 2 hammers D. May 22 Cash 4,383 Sales Discounts 487 Accounts Receivable 4,870 To recognize customer payment, less discount, $6240 — $1,170 — $200; 4,870 x 10% PA3. LO 6.2 Costume Warehouse sells costumes and accessories. Review the following transactions and prepare the journal entry or entries if Costume Warehouse uses: A. the perpetual inventory system B. the periodic inventory system May 3 A customer purchases 45 costumes at a sales price of $35 per costume. The cost to Costume Warehouse per costume is $15. The terms of the sale are 3/15, n/60, with an invoice date of May 3. May 10 | The customer who made the May 3 purchase returns 5 of the costumes to the store for a full refund, claiming they were the wrong size. The costumes were returned to Costume Warehouse’s inventory at $15 per costume. May 16 | The customer pays in full for the remaining costumes, less the return. Solution A. Perpetual | May 3 Accounts Receivable 1,575 Page 32 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Sales 1,575 To recognize sale under perpetual inventory system, 3/15, n/60, 45 x $35 May 3 Cost of Goods Sold 675 Merchandise Inventory 675 To recognize cost of sale, 45 x $15 May 10 Sales Returns and Allowances 175 Accounts Receivable 175 To recognize sales return, 5 x $35 May 10 Merchandise Inventory 75 Cost of Goods Sold 75 To restore merchandise to inventory, 5 x $15 May 16 Sales Discount 42 Cash 1,358 Accounts Receivable 1,400 To recognize payment, less discount, $1,575 — $175; $1,400% 3% B. Periodic May 3 Accounts Receivable 1,575 Sales 1,575 To recognize sale under periodic inventory system, 3/15, n/60, 45 x $35 May 10 Sales Returns and Allowances 175 Accounts Receivable 175 To recognize sales return, 5 x $35 May 16 Sales Discount 42 Cash 1,358 Accounts Receivable 1,400 To recognize payment, less discount, $1,575 — $175; discount = $1,400% 3% PA4. .O 6.2 Pharmaceutical Supplies sells medical supplies to customers. Review the following transactions and prepare the journal entry or entries if Pharmaceutical Supplies uses: A. the perpetual inventory system B. the periodic inventory system Jul. 9 A customer purchases 50 pairs of crutches at a sales price of $20 per pair. The cost to Pharmaceutical Supplies per pair is $8.00. The terms of the sale are 5/10, n/30, with an invoice date of July 9. Jul. 12 The customer who made the July 9 purchase returns 9 of the pairs to the store for a full refund, claiming they were the wrong size. The crutch pairs were returned to the Page 33 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions store’s inventory at $8.00 per pair. Jul. 18 The customer pays in full for the remaining crutches, less the return. Solution A. Perpetual Jul. 9 Accounts Receivable 1,000 Sales 1,000 To recognize sale under perpetual inventory system, 5/10, n/30, 50 x $20 Jul. 9 Cost of Goods Sold 400 Merchandise Inventory 400 To recognize cost of sale, 50 x $8 Jul. 12 Sales Returns and Allowances 180 Accounts Receivable 180 To recognize sales return, 9 x $20 Jul. 12 Merchandise Inventory 72 Cost of Goods Sold 72 To restore merchandise to inventory, 9 x $8 Jul. 18 Sales Discount 41 Cash 779 Accounts Receivable 820 To recognize payment, less discount, $1,000 — $180; $820 % 5% B. Periodic Jul. 9 Accounts Receivable 1,000 Sales 1,000 To recognize sale under periodic inventory system, 5/10, n/30, 50 x $20 Jul. 12 Sales Returns and Allowances 180 Accounts Receivable 180 To recognize sales return, 9 x $20 Jul. 18 Sales Discount 41 Cash 779 Accounts Receivable 820 To recognize payment, less discount, $1,000 — $180; $820 x 5% PAS5. LO 6.3 Review the following transactions for Birdy Birdhouses and record any required journal entries. Sep. 6 Birdy Birdhouses purchases 55 birdhouses at $40 each with cash. Sep. 8 Birdy Birdhouses purchases 80 birdhouses at $45 each on credit. Terms of the Page 34 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions purchase are 2/10, n/30, invoice date September 8. Sep. 10 Birdy discovers 10 of the birdhouses are damaged from the Sep. 6 purchase and returns them to the supplier for a full refund. Birdy also discovers that 10 of the birdhouses from the Sep. 8 purchase are painted the wrong color but keeps them since the supplier granted an allowance of $20 per birdhouse. Sep. 18 Birdy pays their account in full from the September 8 purchase, less any returns, allowances, and/or discounts. Solution Sep. 6 Sep. 8 Sep. 10 Sep. 10 Sep. 18 Merchandise Inventory 2,200 Cash 2,200 To recognize inventory purchase with cash, 55 x $40 Merchandise Inventory 3,600 Accounts Payable 3,600 To recognize purchase on credit, 2/10, n/30, 80 x $45 Cash 400 Merchandise Inventory 400 To recognize return 10 birdhouses, Sep. 6 purchase, full refund, 10 x $40 Accounts Payable 200 Merchandise Inventory 200 To recognize allowance for 10 birdhouses from Sep. 8 purchase, 10 x $20 Accounts Payable 3,400 Merchandise Inventory 68 Cash 3,332 To recognize payment, less allowance and discount, $3,600 — $200; $3,400 % 2% PAG6. LO 6.3 Review the following transactions for Dish Mart and record any required journal entries. Note that all purchase transactions are with the same supplier. Nov. 5 Dish Mart purchases 26 sets of dishes for $460 per set with cash. Nov. 9 Dish Mart purchases 30 sets of dishes for $430 per set on credit. Terms of the purchase are 10/15, n/60, invoice date November 9. Nov. 13 | Dish Mart discovers 5 of the dish sets are damaged from the November 9 purchase and returns them to the supplier for a full refund. Nov. 14 | Dish Mart purchases 10 sets of dishes for $450 per set, on credit. Terms of the purchase are 10/10, n/60, invoice date November 14. Nov. 15 | Dish Mart discovers that 2 of the dish sets from the November 14 purchase and 4 of the dish sets from the November 5 purchase are missing a few dishes but keeps them since the supplier granted an allowance of $50 per set for the November 14 dish sets and $75 per set for the November 5 dish sets. Dish Mart and the supplier have agreed to reduce the amount Dish Mart has outstanding debt, instead of Page 35 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions sending a separate check for the November 5 allowance in cash. Nov. 24 Dish Mart pays their account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Nov. 5 Nov. 9 Nowv. 13 Nov. 14 Nov. 15 Nov. 24 Merchandise Inventory 11,960 Cash 11,960 To recognize inventory purchase with cash, 26 x $460 Merchandise Inventory 12,900 Accounts Payable 12,900 To recognize purchase on credit, 10/15, n/60, 30 x $430 Accounts Payable 2,150 Merchandise Inventory 2,150 To recognize return 5 dish sets, Nov. 9 purchase, full refund, 5 x $430 Merchandise Inventory 4,500 Accounts Payable 4,500 To recognize purchase on credit, 10/10, n/60, 10 x $450 Accounts Payable 400 Merchandise Inventory 400 To recognize allowance for 2 Nov. 14 dish sets, and 4 Nov. 5 dish sets, 2 x $50, 4 x $75 Accounts Payable 14,850 Merchandise Inventory 1,485 Cash 13,365 To recognize payment, less allowance, return, and discount, $12,900 + 4,500 — $400 — $2,150; $14,850 % 10% PA7. LO 6.4 Review the following sales transactions for Birdy Birdhouses and record any required journal entries. Aug. 10 Birdy Birdhouses sells 20 birdhouses to customer Julia Brand at a price of $70 each in exchange for cash. The cost to Birdy is $46 per birdhouse. Aug. 12 Birdy Birdhouses sells 30 birdhouses to customer Julia Brand at a price of $68 each on credit. The cost of sale for Birdy is $44 per birdhouse. Terms of the sale are 2/10, n/30, invoice date August 12. Aug. 14 Julia discovers 6 of the birdhouses are slightly damaged from the August 10 purchase and returns them to Birdy for a full refund. Julia also discovers that 10 of the birdhouses from the August 12 purchase are painted the wrong color but keeps them since Birdy granted an allowance of $24 per birdhouse. Aug. 20 Julia pays her account in full from the August 12 purchase, less any returns, allowances, and/or discounts. Page 36 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution Aug. 10 Aug. 10 Aug. 12 Aug. 12 Aug. 14 Aug. 14 Aug. 20 Cash Sales To recognize sale with cash Cost of Goods Sold Merchandise Inventory To recognize cost of sale, 20 x $70; 20 x $46 Accounts Receivable Sales To recognize sale on credit, 2/10, n/30 Cost of Goods Sold Merchandise Inventory To recognize cost of sale, 30 x $68; 30 x $44 Sales Returns and Allowances Cash To recognize return 6 birdhouses, Aug. 10 sale, full refund Merchandise Inventory Cost of Goods Sold To return birdhouses to inventory, 6 X $70; 6 x $46 Sales Returns and Allowances Accounts Receivable To recognize allowance for 10 birdhouses from Aug. 12 sale, 10 x $24 Cash Sales Discounts Accounts Receivable To recognize payment, less allowance and discount, $2,040 — $240; $1,800 % 2% 1,400 920 2,040 1,320 420 276 240 1,764 36 1,400 920 2,040 1,320 420 276 240 1,800 PA8. L.O 6.4 Review the following sales transactions for Dish Mart and record any required journal entries. Note that all sales transactions are with the same customer, Emma Purcell. Mar. 5 Dish Mart made a cash sale of 13 sets of dishes at a price of $700 per set to customer Emma Purcell. The cost per set is $460 to Dish Mart. Mar. 9 Dish Mart sold 23 sets of dishes to Emma for $650 per set on credit, at a cost to Dish Mart of $435 per set. Terms of the sale are 5/15, n/60, invoice date March 9. Mar. 13 | Emma returns eight of the dish sets from the March 9 sale to Dish Mart for a full refund. Dish Mart returns the dish sets to inventory at their original cost of $435 per set. Mar. 14 | Dish Mart sells 6 sets of dishes to Emma for $670 per set on credit, at a cost to Page 37 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Dish Mart of $450 per set. Terms of the sale are 5/10, n/60, invoice date March 14. Mar. 15 Emma discovers that 3 of the dish sets from the March 14 purchase, and 7 of the dish sets from the March 5 sale are missing a few dishes, but keeps them since Dish Mart granted an allowance of $2,670 for all 10 dish sets. Dish Mart and Emma have agreed to reduce the amount Dish Mart has outstanding instead of sending a separate check for the March 5 allowance in cash. Mar. 24 Emma Purcell pays her account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Mar. 5 Mar. 5 Mar. 9 Mar. 9 Mar. 13 Mar. 13 Mar. 14 Mar. 14 Mar. 15 Cash 9,100 Sales 9,100 To recognize sale with cash Cost of Goods Sold 5,980 Merchandise Inventory 5,980 To recognize cost of sale, 13 x $700; 13 x $460 Accounts Receivable 14,950 Sales 14,950 To recognize sale on credit, 5/15, n/60 Cost of Goods Sold 10,005 Merchandise Inventory 10,005 To recognize cost of sale, 23 % $650; 23 x $435 Sales Returns and Allowances 5,200 Accounts Receivable 5,200 To recognize return 8 dish sets, Mar. 9 sale, full refund Merchandise Inventory 3,480 Cost of Goods Sold 3,480 To recognize return 8 dish sets to inventory, 8 x $650; 8 x $435 Accounts Receivable 4,020 Sales 4,020 To recognize sale on credit, 5/10, n/60 Cost of Goods Sold 2,700 Merchandise Inventory 2,700 To recognize cost of sale, 6 x $670, 6 x $450 Sales Returns and Allowances 2,670 Accounts Receivable 2,670 To recognize allowance for 10 dish sets Page 38 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Mar. 24 Cash 10,545 Sales Discounts 555 Accounts Receivable 11,100 To recognize payment, less any allowance, return, and/or discount, $14,950 + $4,020 — $5,200 — $2,670; $11,100 X 5% PA9. L.O 6.5 Record the following purchase transactions of Money Office Supplies. Aug. 3 Purchased 45 chairs on credit, at a cost of $55 per chair. Shipping charges are an extra $3 cash per chair and are not subject to discount. Terms of the purchase are 4/10, n/60, FOB Shipping Point, invoice dated August 3. Aug. 7 Purchased 30 chairs with cash, at a cost of $50 per chair. Shipping charges are an extra $4.50 cash per chair and are not subject to discount. Terms of the purchase are FOB Destination. Aug. 12 | Money Office Supplies pays in full for their purchase on August 3. Solution Aug.3 Merchandise Inventory 2,475 Accounts Payable 2,475 To recognize purchase, 4/10, n/60, FOB Shipping Point, 45 x $55 Aug.3 Merchandise Inventory 135 Cash 135 To recognize shipping charges, FOB Shipping Point, 45 x $3 Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Aug.7 Merchandise Inventory 1,500 Cash 1,500 To recognize purchase with cash, FOB Destination, 30 x $50 Note: Money Office Supplies does not recognize shipping charges; because this is FOB Destination, the seller pays for shipping, not the buyer. Aug. 12 Accounts Payable 2,475 Cash 2,376 Merchandise Inventory 99 To recognize payment, less discount, $2,475 % 4% PA10. LO 6.6 The following is the adjusted trial balance data for Nino’s Pizzeria as of December 31, 2019. Page 39 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Use the data provided to compute net sales for 2019. Compute the gross margin for 2019. Compute the gross profit margin ratio (rounded to nearest hundredth). Prepare a simple income statement for the year ended December 31, 2019. Prepare a multi-step income statement for the year ended December 31, 2019. Solutlon A. Net sales: $346,952. B. Gross profit: $224,099. C. Gross profit margin ratio: 0.65, ($346,952 — $122,853) / $346,952. D. Nino’s Pizzeria Simple Income Statement For Year Ended December 31, 2019 Revenues: Net sales $346,952 Rent Revenue 86,900 Interest Revenue 84,652 Total Revenues 518,504 Expenses: Cost of Goods Sold $122,853 Total Selling Expenses 42,135 Total General and Administrative Expenses 39,605 Interest Expense 4,577 Total Expenses 209,170 Page 40 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions | Net Income $309,334 E. Nino’s Pizzeria Multi-step Income Statement For Year Ended December 31, 2019 Sales $555,696 Sales Discounts $(102,890) Sales Returns and Allowances (105,854) 208,744 Net sales 346,952 Cost of Goods Sold 122,853 Gross Margin 224,099 Operating Expenses: Selling Expenses Advertising Expense 17,635 Sales Salaries Expense 24.500 Total Selling Expenses 42,135 General and Administrative Expenses Depreciation Expense-Office Equipment 10,555 Office Supplies Expense 6,270 Rent Expense 20,000 Insurance Expense 2,780 Total General and Administrative Expenses 39,605 Total Operating Expenses 81,740 Income from Operations 142,359 Other Revenue and Expenses: Interest Revenue 84,652 Rent Revenue 86,900 Interest Expense (4.577) Total other revenue and expenses 166.975 Net Income $309,334 PA11. LO 6.6 The following is the adjusted trial balance data for Emma’s Alterations as of December 31, 2019. Page 41 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Use the data provided to compute net sales for 2019. Compute the gross margin for 2019. Compute the gross profit margin ratio (rounded to nearest hundredth). Prepare a simple income statement for the year ended December 31, 2019. Prepare a multi-step income statement for the year ended December 31, 2019. SolutlonA Net sales: $276,647 ($393,426 — 61,347 — 55,432); B. Gross profit: $186,314 ($276,647 — 90,333); C. Gross profit margin ratio: 0.67, $186,314 / $276,647; D. moowE Emma’s Alterations Simple Income Statement For Year Ended December 31, 2019 Revenues: Net sales $276,647 Rent Revenue 65,500 Interest Revenue 100,976 Total Revenues 443,123 Expenses: Cost of Goods Sold $90,333 Total Selling Expenses 38,628 Total General and Administrative Expenses 27,284 Interest Expense 3.570 Total Expenses 159,815 Net Income $283,308 Page 42 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions E. Emma’s Alterations Multi-step Income Statement For Year Ended December 31, 2019 Sales $393,426 Sales Discounts $(61,347) Sales Returns and Allowances (55,432) 116,779 Net sales 276,647 Cost of Goods Sold 90,333 Gross Margin: 186,314 Operating Expenses: Selling Expenses Advertising Expense 11,878 Sales Salaries Expense 26,750 Total Selling Expenses 38,628 General and Administrative Expenses Depreciation Expense-Office Equipment 8,560 Office Supplies Expense 4,903 Rent Expense 10,400 Insurance Expense 3.421 Total General and Administrative Expenses 27,284 Total Operating Expenses 65,912 Income from Operations: 120,402 Other Revenue and Expenses: Interest Revenue 100,976 Rent Revenue 65,500 Interest Expense (3,570) Total other revenue and expenses 162,906 Net Income $283,308 PA12. LO 6.7 Review the following transactions for Birdy Birdhouses and record any required journal entries. Sep. 6 Birdy Birdhouses purchases 57 birdhouses at $46 each with cash. Sep. 8 Birdy Birdhouses purchases 94 birdhouses at $44 each on credit. Terms of the purchase are 2/10, n/30, invoice date September 8. Sep. 10 | Birdy discovers 12 of the birdhouses are damaged from the Sep. 6 purchase and returns them to the supplier for a full refund. Birdy also discovers that 11 of the birdhouses from the Sep. 8 purchase are painted the wrong color but keeps them since the supplier granted an allowance of $136. Sep. 18 | Birdy pays their account in full from the September 8 purchase, less any returns, allowances, and/or discounts. Page 43 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution Sep. 6 Sep. 8 Sep. 10 Sep. 10 Sep. 18 Purchases Cash To recognize inventory purchase with cash, 57 x $46 Purchases Accounts Payable To recognize purchase on credit, 2/10, n/30, 94 x $44 Cash Purchase Returns and Allowances To recognize return 12 birdhouses, Sep. 6 purchase, full refund, 12 x $46 Accounts Payable Purchase Returns and Allowances To recognize allowance for 11 birdhouses from Sep. 8 purchase Accounts Payable Purchase Discounts Cash To recognize payment, less allowance and discount, $4,136 — $242; $4,000 % 2% 2,622 4,136 552 136 4,000 2,622 4,136 552 136 80 3,920 PA13. LO 6.7 Review the following sales transactions for Dish Mart and record any required journal entries. Note that all sales transactions are with the same customer, Emma Purcell. Mar. 5 Dish Mart made a cash sale of 13 sets of dishes at a price of $700 per set to customer Emma Purcell. The cost per set is $460 to Dish Mart. Mar. 9 Dish Mart sold 23 sets of dishes to Emma for $650 per set on credit, at a cost to Dish Mart of $435 per set. Terms of the sale are 10/15, n/60, invoice date March 9. Mar. 13 | Emma discovers 8 of the dish sets are damaged from the March 9 sale and returns them to Dish Mart for a full refund. Mar. 14 | Dish Mart sells 6 sets of dishes to Emma for $670 per set on credit, at a cost to Dish Mart of $450 per set. Terms of the sale are 10/10, n/60, invoice date March 14, Mar. 15 | Emma discovers that 3 of the dish sets from the March 14 purchase and 7 of the dish sets from the March 5 sale are missing a few dishes but keeps them since Dish Mart granted an allowance of $200 per set for all 10 dish sets. Dish Mart and Emma have agreed to reduce the amount Dish Mart has outstanding instead of sending a separate check for the March 5 allowance in cash. Mar. 24 | Emma Purcell pays her account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Mar. 5 Cash 9,100 Sales Page 44 of 65 9,100
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions To recognize sale with cash, 13 x $700 Mar. 9 Accounts Receivable 14,950 Sales 14,950 To recognize sale on credit, 10/15, n/60, 23 x $650 Mar. 13 Sales Returns and Allowances 5,200 Accounts Receivable 5,200 To recognize return 8 dish sets, Mar. 9 sale, full refund, 8 x $650 Mar. 14 Accounts Receivable 4,020 Sales 4,020 To recognize sale on credit, 10/10, n/60, 6 x $670 Mar. 15 Sales Returns and Allowances 2,000 Accounts Receivable 2,000 To recognize allowance for 10 dish sets, 10 x $200 Mar. 24 Cash 10,593 Sales Discounts 1,177 Accounts Receivable 11,770 To recognize payment, less any allowance, return, and/or discount, $14,950 + $4,020 — $5,200 — $2,000; $11,770 x 10% Problem Set B PB1. LO 6.1 Record journal entries for the following transactions of Furniture Warehouse. A. July 5: Purchased 30 couches at a cost of $150 each from a manufacturer. Credit terms are 2/15, n/30, invoice date July 5. B. July 10: Furniture Warehouse returned 5 couches for a full refund. C. July 15: Furniture Warehouse found 6 defective couches, but kept the merchandise for an allowance of $500. D. July 20: Furniture Warehouse paid their account in full with cash. Solution A. Jul. 5 Merchandise Inventory 4,500 Accounts Payable 4,500 To recognize purchase of couches, terms 2/15, n/30, $150 x 30 B. Jul. 10 Accounts Payable 750 Merchandise Inventory 750 To recognize 5 couches returned for full refund, $150 % 5 C. Page 45 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Jul. 15 Accounts Payable 500 Merchandise Inventory 500 To recognize allowance for 6 couches D. Jul. 20 Accounts Payable 3,250 Cash 3,185 Merchandise Inventory 65 To recognize payment, less discount, $4,500 — $750 — $500; $3,250 x 2% PB2. L.O 6.1 Record journal entries for the following transactions of Mason Suppliers. A. Sep. 8: Purchased 50 deluxe hammers at a cost of $95 each from a manufacturer. Credit terms are 5/20, n/60, invoice date September 8. B. Sep. 12: Mason Suppliers returned 8 hammers for a full refund. C. Sep. 16: Mason Suppliers found 4 defective hammers, but kept the merchandise for an allowance of $250. D. Sep. 28: Mason Suppliers paid their account in full with cash. Solution A. Sep. 8 Merchandise Inventory 4,750 Accounts Payable 4,750 To recognize purchase of hammers, terms 5/20, n/60, $95 x 50 B. Sep. 12 Accounts Payable 760 Merchandise Inventory 760 To recognize 8 hammers returned for full refund C. Sep. 16 Accounts Payable 250 Merchandise Inventory 250 To recognize allowance for 4 hammers D. Sep. 28 Accounts Payable 3,740 Cash 3,553 Merchandise Inventory 187 To recognize payment, less discount, $4,750 — $760 — $250; $3,740 x 5% PB3. LO 6.2 Costume Warehouse sells costumes and accessories and purchases their merchandise from a manufacturer. Review the following transactions and prepare the journal entry or entries if Costume Warehouse uses A. the perpetual inventory system B. the periodic inventory system Jun. 4 Costume Warehouse purchases 88 costumes on credit at a purchase price of $15 per costume. The terms of the purchase are 5/15, n/30, with an invoice date of June 4. Jun. 12 Costume Warehouse returns 20 costumes to the manufacturer for a full refund. Jun. 19 | Costume Warehouse pays in full for the remaining costumes, less the return. Page 46 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution A. Perpetual: Jun. 4 Merchandise Inventory 1,320 Accounts Payable 1,320 To recognize purchase under perpetual inventory system, 5/15, n/30, 88 x $15 Jun. 12 Accounts Payable 300 Merchandise Inventory 300 To recognize purchase return, 20 x $15 Jun. 19 Accounts Payable 1,020 Merchandise Inventory 51 Cash 969 To recognize payment, less discount, 1,320 — 300; 1,020 x 5% B. Periodic: Jun. 4 Purchases 1,320 Accounts Payable 1,320 To recognize purchase under periodic inventory system, 5/15, n/30, 45 x $35 Jun. 12 Accounts Payable 300 Purchase Returns and Allowances 300 To recognize purchase return, 20 % $15 Jun. 19 Accounts Payable 1,020 Purchase Discounts 51 Cash 969 To recognize payment, less discount PB4. L.O 6.2 Pharmaceutical Supplies sells medical supplies and purchases their merchandise from a manufacturer. Review the following transactions and prepare the journal entry or entries if Pharmaceutical Supplies uses A. the perpetual inventory system B. the periodic inventory system Apr. 7 Pharmaceutical Supplies purchases 50 medical stands on credit at a purchase price of $15 per stand. The terms of the purchase are 5/10, n/45, with an invoice date of April 7. Apr. 11 | Pharmaceutical Supplies returns 18 stands to the manufacturer for a full refund. Apr. 17 | Pharmaceutical Supplies pays in full for the remaining stands, less the return. Solution A. Perpetual: Apr. 7 Merchandise Inventory 750 Accounts Payable 750 To recognize purchase under perpetual inventory system, 5/10, n/45, 50 x $15 Page 47 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Apr. 11 Accounts Payable Merchandise Inventory To recognize purchase return, 18 x $15 Apr. 17 Accounts Payable Merchandise Inventory Cash To recognize payment, less discount, 750 — 270; 480 x 5% 270 270 480 24 456 B. Periodic: Apr. 7 Purchases Accounts Payable To recognize purchase under periodic inventory system, 5/10, n/45, 50 x $15 Apr. 11 Accounts Payable Purchase Returns and Allowances To recognize purchase return, 18 x $15 Apr. 17 Accounts Payable Purchase Discounts Cash To recognize payment, less discount 750 750 270 270 480 24 456 PB5. L.O 6.3 Review the following transactions for April Anglers and record any required journal entries. Oct. 4 April Anglers purchases 82 fishing poles at $33 each with cash. Oct. 5 April Anglers purchases 116 fishing poles at $30 each on credit. Terms of the purchase are 3/15, n/30, invoice date October 5. Oct. 12 | April discovers 18 of the fishing poles are damaged from the October 4 purchase since the supplier granted an allowance of $15 per fishing pole. and returns them to the supplier for a full refund. April also discovers that 32 of the fishing poles from the October 5 purchase are the wrong length but keeps them Oct. 24 | April pays their account in full from the October 5 purchase, less any returns, allowances, and/or discounts. Solution Oct. 4 Merchandise Inventory 2,706 Cash 2,706 To recognize inventory purchase with cash, 82 x $33 Oct. 5 Merchandise Inventory 3,480 Accounts Payable 3,480 To recognize purchase on credit, 3/15, n/30, 116 x $30 Oct. 12 Cash 594 Merchandise Inventory 594 Page 48 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions To recognize return 18 fishing poles, Oct. 4 purchase, full refund, 18 x $33 Oct. 12 Accounts Payable 480 Merchandise Inventory 480 To recognize allowance for 32 fishing poles from Oct. 5 purchase, 32 x $15 Oct. 24 Accounts Payable 3,000 Cash 3,000 To recognize payment, less allowance, no discount, $3,480 — $480 PB6. LO 6.3 Review the following transactions for Dish Mart and record any required journal entries. Note that all purchase transactions are with the same supplier. Nov. 5 Dish Mart purchases 45 sets of cutlery for $100 per set with cash. Nov. 9 Dish Mart purchases 50 sets of cutlery for $120 per set on credit. Terms of the purchase are 5/15, n/60, invoice date November 9. Nov. 13 | Dish Mart discovers 15 of the cutlery sets are damaged from the November 9 purchase and returns them to the supplier for a full refund. Nov. 14 | Dish Mart purchases 30 sets of cutlery for $130 per set on credit. Terms of the purchase are 5/10, n/60, invoice date November 14. Nov. 15 | Dish Mart discovers that 10 of the cutlery sets from the November 14 purchase and 20 of the cutlery sets from the November 5 purchase are missing a few spoons but keeps them since the supplier granted an allowance of $30 per set for the November 14 cutlery sets and $35 per set for the November 5 cutlery sets. Dish Mart and the supplier have agreed to reduce the amount of debt Dish Mart has outstanding instead of sending a separate check for the November 5 allowance in cash. Nov. 24 | Dish Mart pays their account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Nov. 5 Merchandise Inventory 4,500 Cash 4,500 To recognize inventory purchase with cash, 45 x $100 Nov. 9 Merchandise Inventory 6,000 Accounts Payable 6,000 To recognize purchase on credit, 5/15, n/60, 50 x $120 Nov. 13 Accounts Payable 1,800 Merchandise Inventory 1,800 To recognize return 15 cutlery sets, Nov. 9 purchase, full refund, 15 x $120 Nov. 14 Merchandise Inventory 3,900 Page 49 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Accounts Payable 3,900 To recognize purchase on credit, 5/10, n/60, 30 x $130 Nov. 15 Accounts Payable 1,000 Merchandise Inventory 1,000 To recognize allowance for 10 Nov. 14 cutlery sets, and 20 Nov. 5 cutlery sets, 10 x $30, 20 x $35 Nov. 24 Accounts Payable 7,100 Merchandise Inventory 355 Cash 6,745 To recognize payment, less allowance, return, and discount, $6,000 + 3,900 — $1,800 — $1,000; $7,100 % 5% PB7. LO 6.4 Review the following sales transactions for April Anglers and record any required journal entries. Oct. 4 April Anglers made a cash sale of 40 fishing poles to customer Billie Dyer at a price of $55 per pole. The cost to April is $33 per pole. Oct. 5 April Anglers sells 24 fishing poles to customer Billie Dyer at a price of $52 per pole on credit. The cost to April is $30 per pole. Terms of the sale are 2/10, n/30, invoice date October 5. Oct. 12 | Billie returns seven of the fishing poles from the October 4 purchase to April Anglers for a full refund. April returns these poles to their inventory at the original cost per pole. Billie also discovers that 6 of the fishing poles from the October 5 purchase are the wrong color but keeps them since April granted an allowance of $18 per fishing pole. Oct. 24 | April pays their account in full from the October 5 purchase, less any returns, allowances, and/or discounts. Solution Oct. 4 Cash 2,200 Sales 2,200 To recognize sale with cash Oct. 4 Cost of Goods Sold 1,320 Merchandise Inventory 1,320 To recognize cost of sale, 40 x $55; 40 x $33 Oct. 5 Accounts Receivable 1,248 Sales 1,248 To recognize sale on credit, 2/10, n/30 Oct. 5 Cost of Goods Sold 720 Merchandise Inventory 720 To recognize cost of sale, 24 x $52; 24 x $30 Oct. 12 Sales Returns and Allowances 385 Page 50 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Oct. 12 Oct. 12 Oct. 24 Cash 385 To recognize return 7 fishing poles, Oct. 4 sale, full refund Merchandise Inventory 231 Cost of Goods Sold 231 To return fishing poles to inventory, 7 x $55; 7 x $33 Sales Returns and Allowances 108 Accounts Receivable 108 To recognize allowance for 6 fishing poles from Oct. 5 sale, $18 x 6 Cash 1,140 Accounts Receivable 1,140 To recognize payment, less allowance, $1,248 — $108 PB8. LO 6.4 Review the following sales transactions for Dish Mart and record any required journal entries. Note that all sales transactions are with the same customer, Bella Davies. Apr. 5 Dish Mart made a cash sale of 22 sets of cutlery to Bella Davies for $330 per set. The cost per set to Dish Mart is $125 per set. Apr. 9 Dish Mart sells 14 sets of cutlery to Bella Davies on credit for $345 per set. The cost per set to Dish Mart is $120 per set. Terms of the sale are 2/15, n/60, invoice date April 9. Apr. 13 | Bella returns nine of the cutlery sets from the April 9 sale to Dish Mart for a full refund. Dish Mart restores the cutlery to its inventory at the original cost of $120 per set. Apr. 14 | Bella purchases 18 sets of cutlery for $275 per set on credit, at a cost to Dish Mart of $124 per set. Terms of the sale are 2/10, n/60, invoice date April 14. Apr. 15 | Bella discovers that 5 of the cutlery sets from the April 14 purchase and 10 of the cutlery sets from the April 5 purchase are missing a few spoons but keeps them since Dish Mart granted an allowance of $175 per set for all dish sets. Dish Mart and Bella have agreed to reduce the amount Bella has outstanding instead of sending a separate check for the April 5 allowance in cash. Apr. 28 | Bella Davies pays her account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Apr. 5 Cash 7,260 Sales 7,260 To recognize sale with cash Apr. 5 Cost of Goods Sold 2,750 Merchandise Inventory 2,750 To recognize cost of sale, 22 x $330; 22 x $125 Apr. 9 Accounts Receivable 4,830 Page 51 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Apr. 9 Apr. 13 Apr. 13 Apr. 14 Apr. 14 Apr. 15 Apr. 28 Sales To recognize sale on credit, 2/15, n/60 Cost of Goods Sold Merchandise Inventory To recognize cost of sale, 14 x $345; 14 x $120 Sales Returns and Allowances Accounts Receivable To recognize return 9 dish sets, April 9 sale, full refund Merchandise Inventory Cost of Goods Sold To recognize return 9 dish sets to inventory, 9 X $345; 9 x $120 Accounts Receivable Sales To recognize sale on credit, 2/10, n/60 Cost of Goods Sold Merchandise Inventory To recognize cost of sale, 18 x $275, 18 x $124 Sales Returns and Allowances Accounts Receivable To recognize allowance for 15 dish sets, 15 x $175 Cash Accounts Receivable To recognize payment, less any allowance or return, no discount, $4,830 + $4,950 — $3,105 — $2,625 1,680 3,105 1,080 4,950 2,232 2,625 4,050 4,830 1,680 3,105 1,080 4,950 2,232 2,625 4,050 PB9. L.O 6.5 Record the following purchase transactions of Custom Kitchens Inc. Oct. 6 Purchased 230 cabinet doors on credit at a cost of $46 per door. Shipping charges are an extra $2 cash per door and are not subject to discount. Terms of the purchase are 5/15, n/35, FOB Shipping Point, invoice dated October 6. Oct. 9 Purchased 100 cabinet doors with cash at cost of $40 per door. Shipping charges are an extra $3.25 cash per door and are not subject to discount. Terms of the purchase are FOB Destination. Oct. 20 | Custom Kitchens Inc. pays in full for their purchase from October 6. Solution Oct. 6 Merchandise Inventory 10,580 Accounts Payable 10,580 To recognize purchase, 5/15, n/35, FOB Shipping Point, 230 % $46 Page 52 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Oct. 6 Merchandise Inventory 460 Cash 460 To recognize shipping charges, FOB Shipping Point, 230 x $2 Note: Recording shipping charges in a separate entry can reduce confusion with purchase discounts later on since the discount does not apply to shipping charges. Oct. 9 Merchandise Inventory 4,000 Cash 4,000 To recognize purchase with cash, FOB Destination, 100 x $40 Note: Custom Kitchen Inc. does not recognize shipping charges; because this is FOB Destination, the seller pays for shipping, not the buyer. Oct. 20 Accounts Payable 10,580 Cash 10,051 Merchandise Inventory 529 To recognize payment, less discount, $10,580 x 5% PB10. LO 6.5 Record the following sales transactions of Money Office Supplies. Apr. 4 Made a cash sale to a customer for 15 chairs at a sales price of $80 per chair. The cost to Money Office Supplies is $55 per chair. Shipping charges are an extra $4 cash per chair and are not subject to discount. Terms of the sale are FOB Shipping Point. Apr. 9 Sold 20 chairs on credit for $85 per chair to a customer. The cost per chair to Money Office Supplies is $50 per chair. Shipping charges are an extra $4.50 cash per chair and are not subject to discount. Terms of the sale are 3/10, n/30, FOB Destination, invoice dated April 9. Apr. 19 | The customer pays in full for their purchase on April 9. Solution Apr. 4 Cash 1,200 1,200 Sales To recognize sale with cash, FOB Shipping Point, $80 % 15 Note: Money Office Supplies does not recognize shipping charges; because this is FOB Shipping Point, the buyer pays for shipping, not the seller. Apr. 4 Cost of Goods Sold 825 Merchandise Inventory 825 To recognize cost of sale, 15 x $55 Apr. 9 Accounts Receivable 1,700 Sales 1,700 To recognize sale on credit, 3/10, n/30, FOB Destination, 20 x $85 Apr. 9 Cost of Goods Sold 1,000 Merchandise Inventory 1,000 To recognize cost of sale, 20 x $50 Page 53 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Apr. 9 Delivery Expense 90 Cash 90 To recognize shipping charges, FOB Destination, 20 x $4.50 Note: Recording shipping charges in a separate entry can reduce confusion with sales discounts later on since the discount does not apply to shipping charges. Apr. 19 Cash 1,649 Sales Discounts 51 Accounts Receivable 1,700 To recognize payment, less discount, 1,700 % 3% PB11. LO 6.5 Record the following sales transactions of Custom Kitchens Inc. Nov. 12 | Made a cash sale to a customer for 34 cabinet doors at a sales price of $72 per door. The cost to Custom Kitchens Inc. is $46 per door. Shipping charges are an extra $3.15 cash per door and are not subject to discount. Terms of the sale are FOB Shipping Point. Nov. 16 | Sold 22 doors on credit for $80 per door to a customer. The cost per door to Custom Kitchens Inc. is $40 per door. Shipping charges are an extra $4.00 cash per door and are not subject to discount. Terms of the sale are 5/15, n/40, FOB Destination, invoice dated November 12. Nov. 24 | The customer pays in full for their purchase on November 16. Solution Nov. 12 Cash 2,448 Sales 2,448 To recognize sale with cash, FOB Shipping Point, $72 % 34 Note: Custom Kitchens Inc. does not recognize shipping charges; because this is FOB Shipping Point, the buyer pays for shipping, not the seller. Nov. 12 Cost of Goods Sold 1,564 Merchandise Inventory 1,564 To recognize cost of sale, 34 x $46 Nov. 16 Accounts Receivable 1,760 Sales 1,760 To recognize sale on credit, 5/15, n/40, FOB Destination, 22 x $80 Nov. 16 Cost of Goods Sold 880 Merchandise Inventory 880 To recognize cost of sale, 22 x $40 Nov. 16 Delivery Expense 88 Cash 88 To recognize shipping charges, FOB Destination, 22 x $4 Note: Recording shipping charges in a separate entry can reduce confusion with sales discounts later on since the discount does not apply to shipping charges. | Nov. 24 Cash 1,672 Page 54 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Sales Discounts 88 Accounts Receivable 1,760 To recognize payment, less discount, $1,760 % 5% PB12. LO 6.6 The following is the adjusted trial balance data for Elm Connections as of December 31, 2019. Use the data provided to compute net sales for 2019. Compute the gross margin for 2019. Compute the gross profit margin ratio (rounded to nearest hundredth) Prepare a simple income statement for the year ended December 31, 2019. Prepare a multi-step income statement for the year ended December 31, 2019. SolutlonA Net sales: $393,491; B. Gross margin: $212,861; C. Gross profit margin ratio: 0.54, ($393,491 — $180,630) / $393,491; moowE D. Elm Connections Simple Income Statement For Year Ended December 31, 2019 Revenues: Net sales $393,491 Rent Revenue 90,000 Interest Revenue 94,568 Total Revenues 578,059 Expenses: Page 55 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Cost of Goods Sold $180,630 Total Selling Expenses 44,373 Total General and Administrative Expenses 39,751 Interest Expense 3,566 Total Expenses 268,320 Net Income $309,739 3 Elm Connections Multi-step Income Statement For Year Ended December 31, 2019 Sales: $603,427 Sales Discounts $(99,651) Sales Returns and Allowances (110,285) 209,936 Net sales 393,491 Cost of Goods Sold 180,630 Gross Margin: 212,861 Operating Expenses: Selling Expenses Advertising Expense 19,193 Sales Salaries Expense 25,180 Total Selling Expenses 44,373 General and Administrative Expenses Depreciation Expense-Office Equipment 9,000 Office Supplies Expense 5,942 Rent Expense 15,485 Insurance Expense 9.324 Total General and Administrative Expenses 39,751 Total Operating Expenses 84,124 Income from Operations: 128,737 Other Revenue and Expenses: Interest Revenue 94,568 Rent Revenue 90,000 Interest Expense (3.566) Total other revenue and expenses 181,002 Net Income $309,739 PB13. LO 6.6 Following is the adjusted trial balance data for Garage Parts Unlimited as of December 31, 2019. Page 56 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Use the data provided to compute net sales for 2019. Compute the gross margin or 2019. Compute the gross profit margin ratio (rounded to nearest hundredth) Prepare a simple income statement for the year ended December 31, 2019. Prepare a multi-step income statement for the year ended December 31, 2019. SolutlonA Net sales: $610,501 (885,244 — 112,431 — 162,312). B. Gross margin: $402,485 (610,501 — 208,016). C. Gross profit margin ratio: 0.66, $402,485 / 610,501. D. moowE Garage Parts Unlimited Simple Income Statement For Year Ended December 31, 2019 Revenues Net sales $610,501 Rent Revenue 101,600 Interest Revenue 216,745 Total Revenues 928,846 Expenses Cost of Goods Sold $208,016 Total Selling Expenses 52,267 Total General and Administrative Expenses 44,024 Interest Expense 9,560 Total Expenses 313,867 Net Income $614,979 Page 57 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions E. Garage Parts Unlimited Multi-step Income Statement For Year Ended December 31, 2019 Sales: $885,244 Sales Discounts $(112,431) Sales Returns and Allowances (162,312) 274,743 Net sales 610,501 Cost of Goods Sold 208.016 Gross Margin: 402,485 Operating Expenses: Selling Expenses Advertising Expense 22,389 Sales Salaries Expense 29,878 Total Selling Expenses 52,267 General and Administrative Expenses Depreciation Expense-Office Equipment 8,657 Office Supplies Expense 5,942 Rent Expense 19,191 Insurance Expense 10,234 Total General and Administrative Expenses 44,024 Total Operating Expenses 96,291 Income from Operations: 306,194 Other Revenue and Expenses: Interest Revenue 216,745 Rent Revenue 101,600 Interest Expense (9,560) Total other revenue and expenses 308,785 Net Income $614,979 PB14. LO 6.7 Review the following transactions for April Anglers and record any required journal entries. Oct. 4 April Anglers purchases 82 fishing poles at $33 each with cash. Oct. 5 April Anglers purchases 116 fishing poles at $30 each on credit. Terms of the purchase are 3/15, n/30, invoice date October 5. Oct. 12 | April discovers 18 of the fishing poles are damaged from the October 4 purchase and returns them to the supplier for a full refund. April also discovers that 32 of the fishing poles from the October 5 purchase are the wrong length but keeps them since the supplier granted an allowance of $15 per fishing pole. Oct. 24 | April pays their account in full from the October 5 purchase, less any returns, allowances, and/or discounts. Page 58 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Solution Oct. 4 Oct. 5 Oct. 12 Oct. 12 Oct. 24 Purchases Cash To recognize inventory purchase with cash, 82 x $33 Purchases Accounts Payable To recognize purchase on credit, 3/15, n/30, 116 x $30 Cash Purchase Returns and Allowances To recognize return 18 fishing poles, Oct. 4 purchase, full refund, 18 x $33 Accounts Payable Purchase Returns and Allowances To recognize allowance for 32 fishing poles from Oct. 5 purchase, 32 x $15 Accounts Payable Cash To recognize payment, less allowance, no discount, $3,480 — $480 2,706 3,480 594 480 3,000 2,706 3,480 594 480 3,000 PB15. LO 6.7 Review the following sales transactions for Dish Mart and record any required journal entries. Note that all sales transactions are with the same customer, Bella Davies. Apr. 5 Dish Mart made a cash sale of 22 sets of cutlery to Bella Davies for $330 per set. The cost per set to Dish Mart is $125 per set. Apr. 9 Dish Mart sells 14 sets of cutlery to Bella Davies on credit for $345 per set, with a cost to Dish Mart of $120 per set. Terms of the sale are 2/15, n/60, invoice date April 9. Apr. 13 | Bella discovers 9 of the cutlery sets are damaged from the April 9 sale and returns them to Dish Mart for a full refund. Apr. 14 | Bella purchases 18 sets of cutlery for $275 per set on credit, at a cost to Dish Mart of $124 per set. Terms of the sale are 2/10, n/60, invoice date April 14. Apr. 15 | Bella discovers that 5 of the cutlery sets from the April 14 purchase and 10 of the cutlery sets from the April 5 purchase are missing a few spoons but keeps them since Dish Mart granted an allowance of $175 per set for all dish sets. Dish Mart and Bella have agreed to reduce the amount Bella has outstanding instead of sending a separate check for the April 5 allowance in cash. Apr. 28 | Bella Davies pays her account in full for all outstanding purchases, less any returns, allowances, and/or discounts. Solution Apr. 5 Cash 7,260 Sales To recognize sale with cash, 22 x $330 Page 59 of 65 7,260
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Apr. 9 Accounts Receivable 4,830 Sales 4,830 To recognize sale on credit, 2/15, n/60, 14 x $345 Apr. 13 Sales Returns and Allowances 3,105 Accounts Receivable 3,105 To recognize return 9 dish sets, April 9 sale, full refund, 9 x $345 Apr. 14 Accounts Receivable 4,950 Sales 4,950 To recognize sale on credit, 2/10, n/60, 18 x $275 Apr. 15 Sales Returns and Allowances 2,625 Accounts Receivable 2,625 To recognize allowance for 15 dish sets, 15 %X $175 Apr. 28 Cash 4,050 Accounts Receivable 4,050 To recognize payment, less any allowance or return, no discount, 4,830 + 4,950 — $3,105 — $2,625 Thought Provokers TP1. LO 6.1 Conduct research on a real-world retailer’s trade discounts and policies, and discuss the following questions. ¢ Which company did you choose? What do they sell? What is a trade discount? What products are subject to a trade discount? Describe the discount terms/program in detail. Give examples. Are there any restrictions? What incentive does this company have to give a trade discount? How does this discount benefit the buyer? If the buyer had to choose between receiving a trade discount or regular cash purchase discount, which would benefit them more? Why? Solution Answers will vary. Responses should include a discussion of trade discounts with specific examples from the company chosen. Benefits to the seller and buyer and some limitations to the discount (such as bulk buying) should be discussed. For example, Williams Sonoma has public information about their trade discount program. TP2. L.O 6.2 You have decided to open up a small convenience store in your hometown. As part of the initial set-up process, you need to determine whether to use a perpetual inventory system or a periodic inventory system. Write an evaluation paper comparing the perpetual and periodic inventory systems. Describe the benefits and challenges of each system as it relates to your Page 60 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions industry and to your business size. Compare at least one example transaction using the perpetual and periodic inventory systems (a purchase transaction, for example). Research and describe the impact each system has on your financial statements. Decide which system would be the best fit for your business, and support your decision with research. Solution Answers will vary. Responses should give a detailed comparison between perpetual and periodic inventory systems and the reporting requirements and inventory counts. Since this is a small business with a lot of products, there may not be enough resources to do many inventory counts, which could sway the decision on which system to use. Responses should include at least one comparative transaction example and describe the differences in detail. Responses should discuss the differences in financial statement reporting and any adjusting entries and closing processes required. TP3. LO 6.5 You own your own outdoor recreation supply store. You are in the process of drafting a standard invoice agreement for customer sales conducted on credit. Create a sample sales invoice with the following minimum information listed: ® Your company information e Date of sale ¢ Your customer’s information e An example product you sell with name, description, price per unit, and number of units sold e Terms of sale including credit terms and shipping charges, with numerical figures for shipping charges e Any contract language necessary to further establish the terms of sale (for example, warranties, limitations on shipping, and returns) Write a reflection about your invoice choice, as it relates to format, terms, contract language, and pricing strategies. Conduct a comparison study to others in your industry (such as REI) to evaluate your choices. Make sure to support your decisions with concrete examples and research. Solution Answers will vary. Responses should cover shipping term choices and include contract language that explains any limitations to shipping, such as insurance requirements, returns, exchanges, and allowances. Responses should provide a comparison to a real-world company and an example invoice. TP4. LO 6.6 Review the most recent yearly (or quarterly) income statement for a publicly-traded company and answer the following questions. ¢ What company did you choose, and which income statement format do they use (multi- step, simple, or combination)? What information is included on the statement? Do you agree with the format presentation? Why or why not? What are the benefits and limitations with the income statement format choice? Compute the Gross Profit Margin Ratio. Discuss the results. Solution Answers will vary based on company choice. Information included should discuss the benefits and challenges of each statement format, justification of agreement or disagreement with statement choice, computation of Gross Profit Margin Ratio, and production of a multi-step and/or simple income statement for the company. Page 61 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions TP5. LO 6.7 You own a clothing store and use a periodic inventory system. Research like companies in the clothing industry and answer the following questions. ¢ Which inventory system is most used in clothing stores, periodic or perpetual? ¢ Why can periodic inventory reporting be a better approach to use than perpetual inventory reporting for this type of industry? ¢ What are some of the advantages and disadvantages to the periodic inventory method? What other types of businesses may use the periodic inventory method rather than the perpetual method? Solution Answers will vary. Responses may include conclusion that the periodic inventory system is used more often than the perpetual inventory system in the clothing industry. This occurs because such companies usually sell a lot of items, and it would be inefficient to count inventory each time something was sold. They also deal with high volume returns, which can change the cost of sales every day. Periodic inventory systems allow resources on a day-to-day basis to be focused on sales, and inventory counts are scheduled as required by the business. Other businesses that may use periodic inventory systems include grocery stores and convenience stores. Feature Boxes Think It Through: Comparing Inventory Systems Solution Answers will vary. A discussion comparing and contrasting perpetual and periodic inventory systems is appropriate. Responses can discuss more oversight of inventory, decreasing the time between physical counts, or better security. Make sure to include a discussion of the constraints of time and money. Your Turn: Recording a Retailer’s Purchase Transactions Solution Your Turn: Recording a Retailer’s Sales Transactions Solution Page 62 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Your Turn: Recording a Retailer’s Sales Transactions Solution Page 63 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions Think It Through: Choosing Suitable Shipping Terms Solution Answers will vary. Responses should include a discussion of FOB Shipping Point and FOB Destination. Responses should consider the financial and nonfinancial impact of changing the terms versus not changing the terms (e.g., customer may leave if the shipping terms are not changed, other customers may find out if shipping terms are changed, decrease in customer satisfaction if the terms are changed, increase in costs if the terms are changed, etc.). Responses should consider how they could restrict the new terms without negatively impacting their business. Think It Through: Which Income Statement Format Do I Choose? Solution Answers will vary. Responses should discuss the differences between the multi-step and simple income statement formats, and include thoughts on the information needed by the end users and an explanation of which format is more useful for each user. Based on this analysis, students can choose an income statement format to use and explain their choice. Your Turn: Recording a Retailer’s Purchase Transactions Using a Periodic Inventory System Solution Your Turn: Recording a Retailer’s Sales Transactions Using a Periodic Inventory System Solution Page 64 of 65
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OpenStax Principles of Accounting, Volume 1: Financial Accounting Chapter 6: Merchandising Transactions This resource file is copyright 2019, Rice University. All Rights Reserved. Page 65 of 65
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Related Questions
1: ________ is shown on a multiple-step but not on a single-step income statement.
A. Credited to Inventory
B. A customer utilizes a prompt payment incentive.
C. Debited to the Inventory account
D. Gross profit
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Match the accounting terminology to the definitions.
A(Click the icon to view the definitions.)
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- X
Term
Definition
1.
Cost of Goods Sold
2.
Perpetual inventory system
An inventory system that requires businesses to obtain a physical count of inventory to
а.
3.
Vendor
determine quantities on hand.
4.
Periodic inventory system
Expenses, other than Cost of Goods Sold, that are incurred in the entity's major
b.
5.
Operating expenses
ongoing operations.
6.
Gross profit
Excess of Net Sales Revenue over Cost of Goods Sold
C.
d.
The cost of merchandise inventory that the business has sold to customers.
The individual or business from whom a company purchases goods.
е.
f.
An inventory system that keeps a running computerized record of merchandise inventory
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Question:When recording a purchase of inventory on credit, which accounts are typically affected?
A) Debit Accounts Payable, Credit CashB) Debit Inventory, Credit Accounts PayableC) Debit Accounts Receivable, Credit SalesD) Debit Cash, Credit Inventory
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Multiple choice
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Which of the following journal entries is appropiate when a credit sales is made under a perpetual inventory
(a) Dr. Account receivable Cost of good sold
Cr. Sales Merchandise inventory
(b) Dr. Account receivable Merchandise inventory
Cr. Sales Cost of good sold
(c) Dr. Account receivable
Cr. Sales
(d) Dr. Accounts receivable
Cr. Merchandise inventory
arrow_forward
Match each defınition with the term that best describes it.
An income measure that includes gains and
[ Choose ]
[Choose ]
Sales revenue (Sales)
Expenses incurred in the process of earning sales revenue.
losses that are excluded from the
determination of net income.
An account that is offset against a revenue
Contra revenue account
account on the income statement.
Cost of goods sold
Periodic inventory system
FOB destination
The total cost of merchandise sold during the
Comprehensive income
FOB shipping point
Perpetual inventory system
period.
An inventory system under which the
[ Choose ]
company does not keep detailed inventory
records throughout the accounting period
but determines the cost of goods sold only at
the end of an accounting period.
An inventory system under which the
[ Choose ]
company keeps detailed records of the cost
of each inventory purchase and sale, and the
records continuously show the inventory that
should be on hand.
The primary source of revenue in a
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The journal entry for the purchase of inventory on account using the perpetual inventory system is
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Accounting problem 4.9
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Which of the following entries would be made to record the purchase of inventory on account, if a company uses the perpetual inventory system?
A.
a debit to Purchases and a credit to Accounts Payable
B.
a debit to Accounts Payable and a credit to Merchandise Inventory
C.
a debit to Merchandise Inventory and a credit to Accounts Payable
D.
a debit to Accounts Payable and a credit to Purchases
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The journal entry for the purchase of inventory on account using the periodic inventory system is
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Which term is applied to the excess of revenue from sales over the cost of merchandise sold?
a.net income
b.gross sales
c.income from operations
d.gross profit
the inventory system employing accounting records that continuously disclose the amount of inventory is called
a.retail
b.periodic
c.physical
d.perpetual
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- 1: ________ is shown on a multiple-step but not on a single-step income statement. A. Credited to Inventory B. A customer utilizes a prompt payment incentive. C. Debited to the Inventory account D. Gross profitarrow_forwardMatch the accounting terminology to the definitions. A(Click the icon to view the definitions.) More Info - X Term Definition 1. Cost of Goods Sold 2. Perpetual inventory system An inventory system that requires businesses to obtain a physical count of inventory to а. 3. Vendor determine quantities on hand. 4. Periodic inventory system Expenses, other than Cost of Goods Sold, that are incurred in the entity's major b. 5. Operating expenses ongoing operations. 6. Gross profit Excess of Net Sales Revenue over Cost of Goods Sold C. d. The cost of merchandise inventory that the business has sold to customers. The individual or business from whom a company purchases goods. е. f. An inventory system that keeps a running computerized record of merchandise inventory Print Donearrow_forwardQuestion:When recording a purchase of inventory on credit, which accounts are typically affected? A) Debit Accounts Payable, Credit CashB) Debit Inventory, Credit Accounts PayableC) Debit Accounts Receivable, Credit SalesD) Debit Cash, Credit Inventoryarrow_forward
- Multiple choicearrow_forwardWhich of the following journal entries is appropiate when a credit sales is made under a perpetual inventory (a) Dr. Account receivable Cost of good sold Cr. Sales Merchandise inventory (b) Dr. Account receivable Merchandise inventory Cr. Sales Cost of good sold (c) Dr. Account receivable Cr. Sales (d) Dr. Accounts receivable Cr. Merchandise inventoryarrow_forwardMatch each defınition with the term that best describes it. An income measure that includes gains and [ Choose ] [Choose ] Sales revenue (Sales) Expenses incurred in the process of earning sales revenue. losses that are excluded from the determination of net income. An account that is offset against a revenue Contra revenue account account on the income statement. Cost of goods sold Periodic inventory system FOB destination The total cost of merchandise sold during the Comprehensive income FOB shipping point Perpetual inventory system period. An inventory system under which the [ Choose ] company does not keep detailed inventory records throughout the accounting period but determines the cost of goods sold only at the end of an accounting period. An inventory system under which the [ Choose ] company keeps detailed records of the cost of each inventory purchase and sale, and the records continuously show the inventory that should be on hand. The primary source of revenue in a [ Choose…arrow_forward
- The journal entry for the purchase of inventory on account using the perpetual inventory system isarrow_forwardAccounting problem 4.9arrow_forwardWhich of the following entries would be made to record the purchase of inventory on account, if a company uses the perpetual inventory system? A. a debit to Purchases and a credit to Accounts Payable B. a debit to Accounts Payable and a credit to Merchandise Inventory C. a debit to Merchandise Inventory and a credit to Accounts Payable D. a debit to Accounts Payable and a credit to Purchasesarrow_forward
- The journal entry for the purchase of inventory on account using the periodic inventory system isarrow_forwardWhich term is applied to the excess of revenue from sales over the cost of merchandise sold? a.net income b.gross sales c.income from operations d.gross profit the inventory system employing accounting records that continuously disclose the amount of inventory is called a.retail b.periodic c.physical d.perpetualarrow_forward
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