Concept explainers
Recording Sales with Discounts and Returns and Analyzing Gross Profit Percentage
Hair World Inc. is a wholesaler of hair supplies. Hair World uses a perpetual inventory system. The following transactions (summarized) have been selected for analysis:
a. | Sold merchandise for cash (cost of merchandise $28,797), | $51,200 |
b. | Received merchandise returned by customers as unsatisfactory (but in perfect condition) for cash refund (original cost of merchandise $360). | 600 |
c. | Sold merchandise (costing $4,750) to a customer on account with terms 2/10, n/30. | 10,000 |
d. | Collected half of the balance owed by the customer in (c) within the discount period. | 4,900 |
e. | Granted a partial allowance relating to credit sales that the customer in (c) had not yet paid. | 160 |
Required:
- 1. Compute Sales Revenue, Net Sales, and Gross Profit for Hair World.
- 2. Compute the gross profit percentage (using the formula shown in this chapter and rounding to one decimal place).
- 3. Prepare
journal entries to record transactions (a)–(e). - 4. Hair World is considering a contract to sell merchandise to a hair salon chain for $15,000. This merchandise will cost Hair World $10,000. Would this contract increase (or decrease) Hair World’s gross profit and gross profit percentage?
1.
Explanation of Solution
Sales revenue:
Sales revenue is the amount received by the company from the sale of goods and services during day-to-day operations of the company within specified period of time.
Net sales:
Net sales is the balance of remaining amount that is arrived after subtracting sales discounts, allowances for damaged goods and return of goods from sales.
Gross Profit:
Gross Profit is the difference between the net sales, and the cost of goods sold. Gross profit usually appears on the income statement of the company.
Following is the table representing sales revenue, net sales and gross profit of Incorporation H:
Particulars | Amount($) |
Sales Revenue(1) | 61,200 |
Sales Discounts (2) | (100) |
Sales Returns and Allowances(4) | (760) |
Net Sales | 60,340 |
Cost of Goods Sold (5) | 33,187 |
Gross Profit | 27,153 |
Table (1)
Thus, the sales revenue is $61,200, Net sales are $60,340 and the gross profit is $27,153 for Incorporation H.
Working notes:
Calculate the sales revenue:
Calculate the sales discount
Calculate the sales returns and allowances
Calculate the cost of goods sold
2.
To compute: The gross profit percentage of Incorporation H.
Explanation of Solution
Gross Profit Percentage:
Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.
Following is the gross profit percentage
Thus, the gross profit percentage of Incorporation H is 45.0%.
3.
To prepare: The journal entries of Incorporation H.
Explanation of Solution
Journal Entry:
Journal entry is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.
Prepare the journal entry at the time of sales:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Cash | 51,200 | ||
Sales Revenue | 51,200 | ||
(To record the sales ) |
Table (1)
- Cash is an asset and it is increased. Therefore, debit cash by $51,200
- Sales revenue is component of stockholders’ equity and it is increased. Therefore, credit sales revenue by $51,200
Prepare the journal entry to record cost of goods sold:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Cost of goods sold | 28,797 | ||
Inventory | 28,797 | ||
(To record the cost of goods sold) |
Table (2)
- Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is increased. Therefore, debit cost of goods sold by $28,797.
- Inventory is an asset and it is decreased. Therefore, credit inventory by $28,797.
Prepare the journal entry at the time of sales return and allowances:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Sales returns and allowances | 600 | ||
Cash | 600 | ||
(To record the sales returns and allowances ) |
Table (3)
- Sales returns and allowances is a component of stockholders’ equity and it is decreased. Therefore, debit sales returns and allowances by $600
- Cash is an asset and it is increased. Therefore, debit cash by $600
Prepare the journal entry to record cost of goods sold:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Inventory | 360 | ||
Cost of goods sold | 360 | ||
(To record the cost of goods sold) |
Table (4)
- Inventory is an asset and it is increased. Therefore, debit inventory by $360.
- 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 $360.
Prepare the journal entry at the time of sale:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Accounts Receivable | 10,000 | ||
Sales Revenue | 10,000 | ||
(To record the sales on account) |
Table (5)
- Accounts receivable is an asset and it is increased. Therefore, debit accounts receivable by $10,000.
- Sales revenue is component of stockholders’ equity and it is decreased. Therefore, credit sales revenue by $10,000.
Prepare the journal entry to record cost of goods sold:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
July 15 | Cost of goods sold | 4,750 | |
Inventory | 4,750 | ||
(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 $4,750.
- Inventory is an asset and it is decreased. Therefore, credit inventory by $4,750.
Prepare the journal entry to record receipt of payment for sales on account:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
July 23 | Cash(6) | 4,900 | |
Sales Discounts(5) | 100 | ||
Accounts Receivable | 5,000 | ||
(To record receipt of payment for sales on account) |
Table (7)
- Cash is an asset and it is increased. Therefore, debit cash by $4,900.
- Sales discount is a component of stockholders’ equity and it is decreased. Therefore, debit sales discounts by $100.
- Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable by $5,000.
Working note:
Calculate the sales discount:
Calculate the cost of goods sold
Prepare the journal entry at the time of sales return and allowances:
Date | Account Title and Explanation | Debit ($) |
Credit ($) |
Sales returns and allowances | 160 | ||
Accounts receivable | 160 | ||
(To record the sales returns and allowances ) |
Table (8)
- Sales returns and allowances is a component of stockholders’ equity and it is decreased. Therefore, debit sales returns and allowances by $160
- Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable by $160
4.
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 percentage of gross profit is decreased as the gross profit percentage on the contract is 33.3 %( 7). And it is less than the gross profit percentage without the contract (45%).
Working note:
Calculate the gross profit percentage on the contract
Following is the gross profit percentage of Company after the sale of contract
Thus, the gross profit percentage of Incorporation H is 42.7% after the sale of contract
Working note:
Calculate the gross profit for sale of contract
(8)
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Chapter 6 Solutions
Connect 1 Semester Access Card for Fundamentals of Financial Accounting
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