Prepared by Michailo Kosiakov 2389

1.YOUR TURN

Recording a Retailer’s Sales Transactions

Record the journal entries for the following sales transactions of a retailer.

May 1 Sold $8,600 of merchandise on credit (cost of $2,650), with terms 5/10, n/30, and invoice dated May
0 10.

May 1 The customer returned $1,250 worth of slightly damaged merchandise to the retailer and received a
3 full refund. The retailer returned the merchandise to its inventory at a cost of $380.

May 1 The customer discovered some merchandise were the wrong color and received an allowance from
5 the retailer of $230.

May 2 The customer paid the account in full, less the return and allowance.
0

Journal
Date Account Debit Credit
Accounts receivable 8,600
May 10 Sales 8,600
To recognize sale on credit 5/10, n/30
GOGS 2,650
May 10 Merchandise inventory 2,650
To recognize cost of sale
Sales returns and allowances 1,250
May 13 Accounts receivable 1,250
To recognize customer return
Merchandise inventory 380
May 13 GOGS 380
To recognize merchandise return to inventory
Sales returns and allowances 230
May 15 Accounts receivable 230
To recognize customer allowance
Cash 6,835.2
Sales discounts 0
May 20
Accounts receivable 284.80 7,120
To recognize payment less discount, allowance and return

2. Recording a Retailer’s Purchase Transactions using a Periodic Inventory System

Record the journal entries for the following purchase transactions of a retailer, using the periodic
inventory system.
 Prepared by Michailo Kosiakov 2389

Dec. 3 Purchased $500 worth of inventory on credit with terms 2/10, n/30, and invoice dated December 3.

Dec. 6 Returned $150 worth of damaged inventory to the manufacturer and received a full refund.

Dec. 9 Customer paid the account in full, less the return.

Journal
Date Account Debit Credit
Purchases 500
Dec. 3 Accounts payable 500
To recognize inventory purchase 2/10, n/30
Accounts payable 150
Dec. 6 Purchase returns and allowances 150
To recognize inventory return
Accounts payable 350
Purchase discounts 7
Dec. 9
Cash 343
To recognize payment less discount and return

3. Recording a Retailer’s Sales Transactions using a Periodic Inventory System

Record the journal entries for the following sales transactions of a retailer using the periodic inventory
system.

Jan.  Sold $2,450 of merchandise on credit (cost of $1,000), with terms 2/10, n/30, and
5 invoice dated January 5.

Jan.  The customer returned $500 worth of slightly damaged merchandise to the retailer and
9 received a full refund.

Jan.  Customer paid the account in full, less the return.

14
Journal
Date Account Debit Credit
Accounts receivable 2,450
Jan. 5 Sales 2,450
To recognize sale on credit 2/10, n/30
Sales returns and allowances 500
Jan. 9 Accounts receivable 500
To recognize customer return
Jan. 14 Cash 1,911
Sales discounts 39
Accounts receivable 1,950
 Prepared by Michailo Kosiakov 2389

To recognize payment less discount and return

4. Answer the following questions:

12.Name two situations where cash would be remitted to a customer from a retailer after purchase.

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

13. 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?

$70 + $65 = 135

$340 – 135 = $205

$205 * 0,03 = $6,15

14. 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?

$3,600 × 0,6 = $2,160

$2,160 × 0,35 = $756

15. What are the main differences between FOB Destination and FOB Shipping Point?

The FOB Destination states that, 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. 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?

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.
 Prepared by Michailo Kosiakov 2389

17. 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?

Accounts Receivable 800

Sales 800
To recognize sale on credit, 2/10, n/30, FOB Destination
COGS 300
Merchandise Inventory 300
To recognize cost of sale
Delivery Expense 100
Cash 100
To recognize shipping charge, FOB Destination

18. Which statement and where on the statement is freight-out recorded? Why is it recorded there?

Freight-out is located on the income statement as a sales and administrative expense. Unlike freight-in,
which is a component of the COGS calculation, freight-out is not a component of COGS.

19. The following is select account information for Sunrise Motors. Sales: $256,400; Sales Returns and
Allowances: $34,890; COGS: $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.)

$250,400 – (34,890 + 44,760) = $176,750

($176,750 – 120,470) / $176,750 = 0,32 - 32%

20. What is the difference between a multi-step and simple income statement?

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. How can an investor or lender use the Gross Profit Margin Ratio to make financial contribution
decisions?

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. The following is select account information for August Sundries. Sales: $850,360; Sales Returns and
Allowances: $148,550; COGS: $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?

$850,360 – (148,550 + 231,820) = 469,990

 Prepared by Michailo Kosiakov 2389

($469,990 - $300,840) / $469,990 = 0,35 – 35%

$469,990 - $300,840 = $169,150

23. 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?

$680 - $190 = $490

$490 × 0,03 = $14.70

24. 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?

$5,950 × 0,5 = $2,975

$2,975 × 0,40 = $1,190

25. What is the difference in reporting requirements for customer-returned merchandise in sellable

condition under a perpetual inventory system versus a periodic inventory system?

Recognizing the return of merchandise to inventory occurs under the perpetual inventory system but
not under the periodic inventory system.