Accounting for Merchandising Operations

Tutorial-2

Learning objectives
-Identify the differences between a service and merchandising companies.

-Explain the recording of purchases under a perpetual inventory system.

-Explain the recording of sales revenues under a perpetual inventory system.

-Explain the steps in the accounting cycle for a merchandising company.

-Distinguish between a multiple-step and a single-step income statement.

Q1) State True or False

1. If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10
days and the discount period is 60 days.
FALSE

2. Each sales transaction for a seller that uses a perpetual inventory system involves
recognizing both revenue and cost of merchandise sold.
TRUE

3. Sales discounts on credit sales can benefit a seller by decreasing the delay in
receiving cash and reducing future collections efforts.
TRUE

4. When a credit customer returns merchandise to the seller, under a perpetual

inventory system, the seller would debit Sales Returns and Allowances and credit
Accounts Receivable and also debit Merchandise Inventory and credit Cost of Goods
Sold.
TRUE

5. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and
a credit to Accounts Receivable of $1,000 means that a customer has taken a 10%
cash discount for early payment.
FALSE
$20/$1,000 = 2% discount

6. Sales of $350,000 and net sales of $323,000 could reflect sales discounts of
$27,000.
TRUE

$350,000 - $323,000 = $27,000

7. A perpetual inventory system is able to directly measure and monitor inventory

shrinkage and there is no need for a physical count of inventory.
FALSE

8. In a perpetual inventory system, the merchandise inventory account must be closed

at the end of the accounting period.
FALSE

9. A multiple-step income statement format shows detailed computations of net sales

and other costs and expenses, and reports subtotals for various classes of items.
TRUE
10. A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but
instead paid the invoice in full at the end of 60 days. By not taking advantage of the
cash discount, the buyer lost the equivalent of ____________ annual interest on the
amount of the purchase.

(365/[45-15]) x .02 = 24.3%

11. Herald Company had sales of $135,000, sales discounts of $2,000, and sales
returns of $3,200. Herald Company's net sales equals how much?

$135,000 - $2,000 - $3,200 = $129,800

12. On October 1, Robinson Company sold merchandise in the amount of $5,800 to
Rosser, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Robinson
uses the perpetual inventory system. The journal entry or entries that Robinson will
make on October 1 is:

Choice D

13. On October 1, Whaley Company sold merchandise in the amount of $5,800 to

Lee Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000.
Whaley uses the perpetual inventory system. Lee pays the invoice on October 8, and
takes the appropriate discount. The journal entry that Whaley makes on October 8 is:

Choice E

$5,800 x .02 = $116

$5,800 - $116 = $5,684
14. Brig Company had $800,000 in net sales, $350,000 in gross profit, and $200,000
in operating expenses. Cost of goods sold equals how much?

$800,000 - $350,000 = $450,000

15. Brig Company had $800,000 in sales, sales discounts of $12,000, sales returns and
allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating
expenses. Gross profit equals how much?

$800,000 - $12,000 - $18,000 - $380,000 = $390,000

16. Brig Company had $800,000 in sales, sales discounts of $12,000, sales returns
and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating
expenses. Net income equals how much?

$800,000 - $12,000 - $18,000 - $380,000 - $275,000 = $115,000

17. A company purchased $10,000 of merchandise on June 15 with terms of 3/10,

n/45. On June 20, it returned $800 of that merchandise. On June 24, it paid the
balance owed for the merchandise taking any discount it is entitled to. The cash paid
on June 24 equals how much?

$10,000 - $800 = $9,200 x .97 = $8,924

18. A company purchased $10,000 of merchandise on June 15 with terms of 3/10,

n/45, and FOB shipping point. The freight charge was $500. On June 20, it returned
$800 of that merchandise. On June 24, it paid the balance owed for the merchandise
taking any discount it is entitled to. The cash paid on June 24 equals how much?

$10,000 - $800 = $9,200 x .97 = $8,924 + $500 = $9,424

19. A company purchases merchandise with a catalog price of $20,000. The company
receives a 35% trade discount from the seller. The seller also offers credit terms of
2/10, n/30. Assuming no returns were made and that payment was made on time, what
is the net cost of the merchandise?

$20,000 x .65 = $13,000 x .98 = $12,740

20. A company has net sales and cost of goods sold of $825,000 and $547,000,
respectively. Its net income is $98,500. The company's gross margin and operating
expenses are ________ and ___________, respectively.
$825,000 - $547,000 = $278,000; $278,000 - $98,500 = $179,500
Information related to Star Co. is presented below.
1. On April 5, purchased merchandise from Comcast Co for $23,000,
terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased
from Comcast Co.
3. On April 7, purchased equipment on account for $26000.
4. On April 8, returned damaged merchandise to Comcast Co and
was given a $3,000 credit for returned merchandise.
5. On April 15, paid the amount due to Comcast Co in full.

Required
(a) Prepare the journal entries to record these transactions on the
books of Star Co. under a perpetual inventory system.
(b) Assume that Star Co. paid the balance due to Comcast Co on May
4 instead of April 15. Prepare the journal entry to record this
payment.

Solution
Date Accounts and Explanation Debit Credit
A
April 5 Inventory 23,000
Accounts Payable 23,000
April 6 Inventory 900
Cash 900
April 7 Equipment 26,000
Accounts Payable 26,000
April 8 Accounts Payable 3,000
Inventory 3,000
April 15 Accounts Payable 20,000
Inventory 400
Cash 19,600
B
May. 4 Accounts Payable 20,000
Cash 20,000