Acct1110 Ch05 Solutions Douglas College

Topics: Revenue, Generally Accepted Accounting Principles, Inventory Pages: 69 (10371 words) Published: June 19, 2013
Chapter 5

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Merchandising Operations and the Accounting Cycle

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Questions
1. Gross margin measures the entity’s ability to buy inventory at one price and sell it at a higher price. This process is important because it is fundamental to the profit motive of business. The flow of resources for the purchase and cash sale of inventory is from cash to inventory and back to cash. For the purchase and sale of inventory on account, the flow is from cash to inventory to accounts receivable and back to cash. Ten items on the invoice are (1) seller name, (2) invoice date, (3) purchaser name, (4) credit terms of the transaction, such as 3/10 n/30, (5) items ordered by the purchaser, (6) items shipped by the seller and invoiced to the purchaser, (7) quantity discount, if any, (8) total invoice amount in dollars, (9) date of payment, and (10) dollar amount paid by the purchaser. Note: Items (9) and (10) appear once payment has been received. They are not part of the original invoice data. a. Credit purchase Inventory ................................. XXX of inventory: Accounts Payable ........... XXX Subsequent cash payment: b. Credit sale of inventory: Accounts Payable .................... XXX Cash ................................ Accounts Receivable .............. XXX Sales Revenue ................. Cost of Goods Sold ................. XXX Inventory ......................... XXX XXX XXX

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Subsequent Cash ......................................... XXX cash receipt: Accounts Receivable ...... XXX On August 6, within the discount period, the payment would be $3,880 ($4,000 – 3% of $4,000, or $4,000 – $120). On August 9, which is after the discount period, payment would be the full amount of $4,000. The three-day difference is crucial: August 6 is within the discount period, but August 9 is too late to earn the 3 percent discount. The latest acceptable payment date under the sale terms would be August 27, which is 30 days after the invoice date of July 28.

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Net sales revenue if the purchaser pays within the discount period is $72,520 ($80,000 – $6,000 = $74,000; $74,000 – 2% of $74,000, or $74,000 – $1,480 = $72,520). The new contra accounts introduced in this chapter are Sales Discounts, Sales Returns and Allowances, Purchase Discounts, and Purchase Returns and Allowances. Both supplies expense and cost of goods sold are computed by adding the beginning amount of the asset (supplies or inventory) to purchases of the asset during the period and subtracting the asset’s ending balance based on a physical count. Cost of goods sold’s title is especially descriptive because this expense represents the cost of the inventory that the entity sold during the period. Beginning inventory ........................................ $10,000 + Net purchases ................................................... 55,000 + Freight in .......................................................... 2,000 = Cost of goods available for sale ...................... 67,000 – Ending inventory ............................................. 14,000 = Cost of goods sold ........................................... $53,000 You can identify the merchandiser from the balance sheet by the presence of the asset inventory, and from the income statement by the presence of the expense cost of goods sold. A service entity reports neither of these two items. At the end of the period, the adjusting and closing process starts with the trial balance that, under the perpetual inventory system, carries the ending amount of inventory. However, inventory shrinkage or accounting errors can cause the final ending balance obtained through a physical count to differ from the amount of inventory shown on the trial balance. The adjusting entry for inventory is: Cost of Goods Sold ................................. 11,000 Inventory ......................................... 11,000 Other revenues and expenses...
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