Concept explainers
Accounting for Inventory Orders, Purchases, Sales, Returns, and Discounts (Chapters 5 and 6)
(1) On October 1, the Business Students’ Society (BSS) placed an order for 100 golf shirts at a unit cost of $20, under terms 2/10, n/30. (2) The order was received on October 10, but 20 golf shirts had been damaged in shipment. (3) On October 11, the damaged golf shirts were returned. (4) On October 12, BSS complained that the remaining golf shins were slightly defective so the supplier granted a $100 allowance. (5) BSS paid for the golf .shirts on October 13. (6) During the first week of October, BSS received student and faculty orders for 80 golf shirts, at a unit price of $37.50, on terms 2/10, n/30. (7) The golf shirts were delivered to these customers on October 18. Unfortunately, customers were unhappy with the golf shirts, so BSS permitted them to be returned or gave an allowance of $12.50 per shirt. (8) On October 21, one-half of the golf shirts were returned by customers to BSS.
(9) On October 22, the remaining 40 customers were granted the allowance on account. (10) The customers paid their remaining balances during the week of October 25.
Required:
- 1. Prepare journal entries for the transactions described above, using the date of each transaction as its reference. Assume BSS uses perpetual inventory accounts. If you complete this problem in Connect, these journal entries will be summarized for you in T-accounts and a
trial balance . - 2. Report the financial effects of the above transactions in a multistep income statement for the month ended October 31 prepared for internal use. Assume operating expenses, other than cost of soods sold, are $100 and income tax expense is $45.
- 3. Determine the percentage of net sales that is available to cover operating expenses other than cost of goods sold. By what name is this percentage commonly known?
- 4. As of October 31, the check dated October 13 had not cleared the bank. How should BSS report this on its October 31 bank reconciliation? Give the
journal entry , if any, needed as a result of including this item in the bank reconciliation.
1.
To prepare: The journal entries of Company B.
Explanation of Solution
Journal Entry:
Journal entry is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Perpetual Inventory System:
It refers to an inventory system that maintains the detailed records of every inventory transactions related to purchases and sales on a continuous basis.
There is no journal entry for the transaction occurred on October 1 because the payment is made in future and the delivery for the order is done in future. Similarly, the sales of orders to faculty and students during the October first week are not transactions and they do not require journal entry.
Prepare the journal entry to record the purchase of golf shirts on account:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 10 | Inventory | 2,000 | |
Accounts Payable | 2,000 | ||
(To record the purchase of golf shirtson account) |
Table (1)
- Inventory is an asset and it increased . Therefore, debit inventory by $2,000.
- Accounts payable is a liability and it is increased. Therefore, credit accounts payable by $2,000.
Prepare the journal entry to record the return of golf shirts:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 11 | Accounts Payable | 400 | |
Inventory | 400 | ||
(To record the return of golf shirts ) |
Table (2)
- Accounts payable is a liability and it is decreased. Therefore, debit accounts payable by $400.
- Inventory is an asset and it decreased . Therefore, credit inventory by $400.
Prepare the journal entry to record the payment of allowances:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 12 | Accounts Payable | 100 | |
Inventory | 100 | ||
(To record the payment of allowances ) |
Table (3)
- Accounts payable is a liability and it is decreased. Therefore, debit accounts payable by $100.
- Inventory is an asset and it decreased . Therefore, credit inventory by $100.
Prepare the journal entry to record receipt of payment for purchase on account:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 13 | Accounts payable | 1,500(2) | |
Cash | 1,470(3) | ||
Inventory | 30(1) | ||
(To record receipt of payment for purchase on account) |
Table (4)
- Accounts payable is a liability and it is decreased. Therefore, debit accounts payable by $1,500
- Cash is an asset and it is decreased. Therefore, credit cash by $1,470
- Inventory is an asset and it decreased . Therefore, credit inventory by $30.
Working note:
Calculate the purchase discount:
Calculate the value of accounts payable:
Calculate the cash paid:
Prepare the journal entry at the time of sale:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 18 | Accounts Receivable | 3,000(4) | |
Sales revenue | 3,000(4) | ||
(To record the sales ) |
Table (5)
- Accounts receivable is an asset and it is increased. Therefore, debit accounts receivable by $3,000.
- Sales revenue is component of stockholders’ equity and it is increased. Therefore, credit sales revenue by $3,000.
Working note:
Calculate the sales revenue:
Prepare the journal entry to record cost of goods sold:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 18 | Cost of goods sold | 1,470 | |
Inventory | 1,470 | ||
(To record the cost of goods sold) |
Table (6)
- Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is decreased. Therefore, debit cost of goods sold by $1,470.
- Inventory is an asset and it is decreased. Therefore, credit inventory by $1,470.
Working note:
Calculate the cost of goods sold:
Prepare the journal entry at the time of sales return and allowances:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 21 | Sales returns and Allowances | 1,500 | |
Accounts receivable | 1,500 | ||
(To record the sales returns and allowances ) |
Table (7)
- Sales returns and allowances is contra revenue account equity and it is increased. Therefore, debit sales returns and allowances by $1,500.
- Accounts receivable is an asset and it is decreased. Therefore, credit cash by $1,500.
Working note:
Calculate the sales returns and allowances:
Prepare the journal entry to record cost of goods sold:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 21 | Inventory | 735 | |
Cost of goods sold | 735 | ||
(To record the cost of goods sold) |
Table (8)
- Inventory is an asset and it is increased. Therefore, debit inventory by $735.
- Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is decreased. Therefore, credit cost of goods sold by $735.
Working note:
Calculate the cost of goods sold:
Prepare the journal entry at the time of sales return and allowances:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
October 22 | Sales returns and Allowances | 500 | |
Accounts receivable | 500 | ||
(To record the sales returns and allowances ) |
Table (9)
- Sales returns and allowances is contra-revenue account equity and it is increased. Therefore, debit sales returns and allowances by $500
- Accounts payable is a liability and it is increased. Therefore, credit cash by $500
Working note:
Calculate the sales returns and allowances:
Prepare the journal entry to record receipt of payment for sales on account:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Cash | 980(10) | ||
Sales Discounts | 20(9) | ||
Accounts Receivable | 1,000(11) | ||
(To record receipt of payment for sales on account) |
Table (10)
- Cash is an asset and it is increased. Therefore, debit cash by $980.
- Sales discount is a contra-revenue account and it is increased. Therefore, debit sales discounts by $20.
- Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable by $1,000.
Working note:
Calculate the sales discount:
Calculate the cost of goods sold
Calculate the accounts receivable:
2.
To prepare: The multi-step income statement of Company B.
Explanation of Solution
Multi-Step Income Statement:
This is a financial statement which shows income and subtotals of expenses in detail for a given period of time. Multi-step income statement reports gross profit, operating income, and net income.
Prepare the Multi-step income statement of Company B.
Company B | |
Multi-step Income Statement | |
For the Year Ended December 31 | |
Particulars | Amount($) |
Sales Revenue | 3,000 |
Sales Returns and Allowances | (2,000) |
Net Sales | (20) |
Cost of Goods Sold | 980 |
Gross Profit | 735 |
Office Expense | 245 |
Salaries and Wages Expense | 100 |
Income from Operations | 145 |
Income Tax Expense | 45 |
Net Income | 100 |
Table (1)
Note: Sales returns and allowances includes the balance of returns ($1,500) on October 21 and the balance of returns ($500) on October 22.
3.
Explanation of Solution
Gross Profit Percentage:
Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.
The name of percentage of net sales that is available to cover operating expenses other than cost of goods sold is stated as gross profit percentage because operating expenses are covered by net sales after the cost of goods sold.
Following is the gross profit percentage of Company B:
4.
Explanation of Solution
Bank Reconciliation Statement:
Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.
On the bank reconciliation statement dated October 31 the Company B should deduct the check from the bank balance. There is no need of preparing journal entry as these items require only adjustments to be made in the books of bank reconciliation statement.
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Chapter 6 Solutions
FUND OF FIN ACCTG W/ CONNECT (LL) >BI<
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