Question 1

A company sells goods at a selling price of $20,000.The cost of the goods is $15,000.Under a perpetual inventory system,the journal entries prepared to record the credit sale will include one with a debit to:
A)Inventory and a credit to Sales Revenue for $15,000.
B)Cost of Goods Sold and a credit to Inventory for $15,000.
C)Inventory and credit to Sales Revenue for $20,000.
D)Cost of Goods Sold and a credit to Sales Revenue for $15,000.

Accepted Answer

When a perpetual inventory system is in use,the entries to record the sale when the perpetual inventory system.first,a debit to Accounts Receivable and a credit to Sales Revenue for $20,000,the selling price,and,second,a debit to Cost of Goods Sold and a credit to Inventory for $15,000,the cost of the inventory that was sold.

Question 2

The five-step revenue model requires:
A)sales revenue to be reported at the amount the seller expects to be entitled to receive from customers.
B)recording sales returns and allowances at the time of the sale.
C)a sales return that results in issuing store credit to be accounted for with a credit to Cash.
D)only actual sales allowances to be accounted for with an adjustment.

Accepted Answer

The five-step revenue model requires revenue to be reported at the amount the seller expects to be entitled to receive.It's impractical to record sales returns and allowances at the time of sale.When a return is issued for store credit,Deferred Revenue is credited rather than Cash.Expected returns and allowances are accounted for through an adjustment at the end of the period (month).

Question 3

Which one of the following statements regarding sales discounts is correct?
A)If a company offers a discount to encourage prompt payment and the discount is taken,the discount reduces the amount of net sales.
B)Credit terms of "2/10,n/30" means that if payment is made in two days,a 10% discount may be taken;if not paid within two days,the full invoice price will be due in thirty days.
C)The terms "sales discounts" and "purchase discounts" are used interchangeably by a company.
D)A sales discount is subtracted from Sales Revenue whereas a purchase discount is added to Cost of Goods Sold.

Accepted Answer

Sales discounts are subtracted in calculating net sales.Credit terms of "2/10,n/30" mean that a 2% discount is offered if payment is made within 10 days;otherwise the full amount is due in 30 days.Sales discounts are from a seller's perspective;purchase discounts are from a purchaser's perspective.

Question 4

Clarendon Corp.sold $1,000 of merchandise to a customer on terms of 1/10,n/30.Its customer paid within the discount period.As a result of its customer making the payment within the discount period,Clarendon's total assets will:
A)increase by $990.
B)increase by $1,000.
C)decrease by $10.
D)remain the same.

Accepted Answer

As a result of the customer's making payment within the discount period,Clarendon's cash will increase by $990 (or $1,000 × 0.99)and its accounts receivable will decrease by $1,000.Thus,total assets will decrease by $10 (or increase of $1,000 − decrease of $990).

Question 5

On June 15,Oakley Inc.sells inventory on account to Sunglass Hut (SH)for $1,000,terms 2/10,n/30.On June 20,SH returns to Oakley inventory that SH had purchased for $300.On June 24,SH completely fulfills its obligation to Oakley by making a cash payment.What is the amount of cash paid by SH to Oakley?
A)$680
B)$686
C)$700
D)$1,000

Accepted Answer

Sales discount = (Sale − Sales return)× Discount %
= ($1,000 − $300)× 2% = $14
Cash paid by customer = Sales revenue − Sales return − Sales discount
= $1,000 − $300 − $14 = $686

Question 6

Which of the following statements is correct about accounting for expected sales returns?
A)Expected returns are disclosed in the notes to the financial statements,but journal entries are not required.
B)Since no inventory has yet been received,a liability,Inventory-Estimated Returns,is credited for the cost of the expected returned items.
C)Since no cash has yet been paid,a liability,Refund Liability,is credited for the sales price of expected returns.
D)Sales Revenue will be debited and Cost of Goods Sold will be credited for the sales price of expected returns.

Accepted Answer

For month-end adjustments for expected returns,cash has not been received so a liability called Refund Liability is credited.Also,inventory has not yet been returned,it is only expected to be returned.An account called Inventory-Estimated Returns is used.Cost of Goods Sold will be credited for the cost of items expected to be returned.

Question 7

Devonshire,Inc.sold merchandise inventory on account at a price of $16,000 with payment terms of 1/10,n/30.The merchandise cost Devonshire $11,000.If the customer paid for the merchandise 5 days after receiving the invoice,how much cash was collected by Devonshire?
A)$11,000
B)$15,840
C)$10,890
D)$16,000

Accepted Answer

The customer paid within the 10-day discount period and,as such,will take advantage of the 1% discount.The amount of cash paid by the customer and received by Devonshire is $15,840 [$16,000 − ($16,000 × 0.01)].

Question 8

If a company that uses a perpetual inventory system sold inventory which cost $1,000 for a selling price of $3,000,the accounting equation would show a net:
A)increase in assets and net increase in stockholders' equity.
B)increase in assets and net decrease in liabilities.
C)decrease in assets and net increase in liabilities.
D)decrease in assets and net decrease in stockholders' equity.

Accepted Answer

Net assets would increase by $2,000 because Accounts Receivable increases by $3,000 and Inventory decreases by $1,000.Sales Revenue increases by $3,000,which increases stockholders' equity by $3,000,and Cost of Goods Sold increases by $1,000,which decreases stockholders' equity by $1,000.As a result,stockholders' equity would increase by $2,000.

Question 9

Mitchell uses a perpetual inventory system.Mitchell sells a computer from inventory for $1,198 on credit.Mitchell originally bought the computer from IBM for $790.What journal entry (entries)will Mitchell prepare to record the sale?
A)Debit Cash and credit Sales Revenue for $1,198;debit Cost of Goods Sold and credit Inventory for $790.
B)Debit Accounts Receivable for $1,198,credit Inventory for $790,and credit Gross Profit for $408.
C)Debit Accounts Receivable and credit Sales Revenue for $1,198;debit Cost of Goods Sold and credit Inventory for $790.
D)Debit Inventory for $790,debit Cost of Goods Sold for $408,and credit Accounts Receivable for $1,198.

Accepted Answer

Two entries are required to record a sale when a perpetual inventory system is in use.The first entry includes a debit to Accounts Receivable and a credit to Sales Revenue for $1,198,the selling price of the goods sold.The second entry includes a debit to Cost of Goods Sold and a credit to Inventory for $790,the cost of the goods that were sold.

Question 10

If a company returns an item to a supplier,the supplier will record the return as:
A)a sales return.
B)shrinkage.
C)a sales discount.
D)a purchase return.

Accepted Answer

The supplier,who is the seller in this situation,would account for this transaction as a sales return.

Question 11

When goods are sold to a customer with credit terms of 2/15,n/30,the customer will receive a:
A)15% discount if they pay within 2 days.
B)2% discount if they pay 15% of the amount due within 30 days.
C)15% discount if they pay within 30 days.
D)2% discount if they pay within 15 days.

Accepted Answer

The credit terms,2/15,n/30,mean that 2% of the invoice amount may be deducted if the invoice is paid in 15 days.Otherwise,the full amount is due in 30 days.

Question 12

Cypress,Inc.sold merchandise for cash to a customer.The customer returned some of that merchandise because it was not satisfactory.What journal entry will Cypress use to record the return?
A)Debit Sales Revenue and credit Inventory.
B)Debit Cash and credit Sales Revenue.
C)Debit Cost of Goods Sold and credit Inventory.
D)Debit Sales Revenue and credit Cash.

Accepted Answer

The company will debit Sales Revenue (or Sales Returns & Allowances)and credit Cash for the selling price of the merchandise.In addition,because a perpetual inventory system updates these accounts,it will debit Inventory and credit Cost of Goods Sold for the cost of the merchandise.

Question 13

Missouri Company uses a perpetual inventory system.On October 1,Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company,terms 1/10,n/30.The items cost Missouri $4,200.On October 4,Montebello returns some of the inventory.This inventory had a selling price of $500 and a cost of $200.On October 8,Montebello Company paid Missouri Company the amount due on that date. What journal entry (entries)will Missouri Company make on October 4 to record the sales return?
A)Debit Sales Revenue and credit Accounts Receivable for $500;debit Inventory and credit Cost of Goods Sold for $200.
B)Debit Sales Revenue for $200 and credit Accounts Receivable for $200.
C)Debit Sales for $500 and credit Inventory for $500.
D)Debit Accounts Receivable and credit Sales Revenue for $500;debit Cost of Goods Sold and credit Inventory for $200.

Accepted Answer

To account for this transaction,Missouri would make two entries to basically reverse the entries recorded when the goods were sold.The first entry includes a debit to Sales Revenue (or Sales Returns & Allowances)and a credit to Accounts Receivable for $500.The second entry includes a debit to Inventory and a credit to Cost of Goods Sold for $200.

Question 14

When a customer returns for credit a defective product it had purchased,the seller would record the transaction by:
A)debiting Cash.
B)debiting Sales Revenue.
C)crediting Sales Revenue.
D)debiting Cost of Goods Sold.

Accepted Answer

A sales return is recorded by debiting Sales (or Sales Returns & Allowances)and crediting Cash.

Question 15

Missouri Company uses a perpetual inventory system.On October 1,Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company,terms 1/10,n/30.The items cost Missouri $4,200.On October 4,Montebello returns some of the inventory.This inventory had a selling price of $500 and a cost of $200.On October 8,Montebello Company paid Missouri Company the amount due on that date. What is the amount of cash received by Missouri Company on October 8 for the receipt of payment from Montebello?
A)$6,500
B)$5,940
C)$6,435
D)$6,300

Accepted Answer

The customer paid within the discount period,so the amount due is 99% of the net amount purchased of $6,000 ($6,500 − $500).The cash received is $6,000 × 0.99 = $5,940.

Question 16

Holly uses a perpetual inventory system.Holly sells $3,500 of blue jeans.The customer later brings $420 of blue jeans back to Holly because they are defective.Those blue jeans had a cost of $140.The customer agrees to keep the blue jeans and Holly agrees to a $140 allowance.Which of the following is one of the entries that Holly will use to record the return?
A)Debit Cash for $140 and credit Inventory for $140.
B)Debit Inventory for $140 and credit Cash for $140.
C)Debit Cash for $140 and credit Sales Revenue for $140.
D)Debit Sales Revenue for $140 and credit Cash for $140.

Accepted Answer

The allowance granted to the customer will be recorded by a debit to Sales Revenue (or Sales Returns & Allowances)and a credit to Cash for $140,the amount of the allowance granted.

Question 17

Which of the following is a correct statement?
A)Sales discounts are offered to compensate customers for unsatisfactory merchandise.
B)Sales discounts are offered to encourage prompt payment by customers.
C)Sales discounts may result in creating a liability Deferred Revenue.
D)Sales discounts may result in creating an account Inventory-Estimated Returns.

Accepted Answer

A company offers its customers a discount to promote early collection of its accounts receivable.The Deferred Revenue and Inventory-Estimated Returns accounts are used in accounting for expected returns,not sales discounts.

Question 18

Missouri Company uses a perpetual inventory system.On October 1,Missouri Company sold inventory on account in the amount of $6,500 to Montebello Company,terms 1/10,n/30.The items cost Missouri $4,200.On October 4,Montebello returns some of the inventory.This inventory had a selling price of $500 and a cost of $200.On October 8,Montebello Company paid Missouri Company the amount due on that date. What journal entry (entries)will Missouri prepare on October 1 to record this sale?
A)Debit Accounts Receivable and credit Sales Revenue for $6,500.
B)Debit Sales Revenue for $6,500 and credit Accounts Receivable and credit for $6,500;debit Cost of Goods Sold and credit Inventory for $4,200.
C)Debit Cost of Goods Sold for $4,200,debit Gross Profit for $2,300,and credit Sales Revenue for $6,500.
D)Debit Accounts Receivable and credit Sales Revenue for $6,500;debit Cost of Goods Sold and credit Inventory for $4,200.

Accepted Answer

Two entries are required to record a sale when the perpetual inventory method is used;one to record the sales revenue and one to record the cost of goods sold.

Question 19

If merchandise costing $500 that was sold for cash at a price of $620 is returned by the customer,how would this transaction recorded when using a perpetual inventory system?
A)Debit Cash and credit Sales Revenue for $620.
B)Debit Inventory and credit Cost of Goods Sold for $620.
C)Debit Sales Revenue and credit Cash for $620;debit Cost of Goods Sold and credit Inventory for $500.
D)Debit Sales Revenue and credit Cash for $620;debit Inventory and credit Cost of Goods Sold for $500.

Accepted Answer

The company will debit Sales Revenue (or Sales Returns & Allowances)and credit Cash for $620.In addition,because a perpetual inventory system updates these accounts,it will debit Inventory and credit Cost of Goods Sold for $500.

Question 20

Juan sells $75,000 of TVs to a customer.The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8-14 days.The customer pays in 12 days.How much cash does Juan receive?
A)$75,000
B)$73,500
C)$74,250
D)$1,500

Accepted Answer

The customer paid in the 8-14 day discount period and,as such,is entitled to a 1% discount in the amount of $750 (or $75,000 × 0.01).The debit to Cash equals $74,250 (or $75,000 − $750).

Quiz 6: Merchandising Operations and the Multistep Income Statement

A company sells goods at a selling price of $20,000.The cost of the goods is $15,000.Under a perpetual inventory system,the journal entries prepared to record the credit sale will include one with a debit to:

The five-step revenue model requires:

Which one of the following statements regarding sales discounts is correct?

Clarendon Corp.sold $1,000 of merchandise to a customer on terms of 1/10,n/30.Its customer paid within the discount period.As a result of its customer making the payment within the discount period,Clarendon's total assets will:

Which of the following statements is correct about accounting for expected sales returns?

Devonshire,Inc.sold merchandise inventory on account at a price of $16,000 with payment terms of 1/10,n/30.The merchandise cost Devonshire $11,000.If the customer paid for the merchandise 5 days after receiving the invoice,how much cash was collected by Devonshire?

If a company that uses a perpetual inventory system sold inventory which cost $1,000 for a selling price of $3,000,the accounting equation would show a net:

Mitchell uses a perpetual inventory system.Mitchell sells a computer from inventory for $1,198 on credit.Mitchell originally bought the computer from IBM for $790.What journal entry (entries) will Mitchell prepare to record the sale?

If a company returns an item to a supplier,the supplier will record the return as:

When goods are sold to a customer with credit terms of 2/15,n/30,the customer will receive a:

Cypress,Inc.sold merchandise for cash to a customer.The customer returned some of that merchandise because it was not satisfactory.What journal entry will Cypress use to record the return?

When a customer returns for credit a defective product it had purchased,the seller would record the transaction by:

Which of the following is a correct statement?

If merchandise costing $500 that was sold for cash at a price of $620 is returned by the customer,how would this transaction recorded when using a perpetual inventory system?

Juan sells $75,000 of TVs to a customer.The credit terms state a 2% discount if paid in 7 days and a 1% discount if paid in 8-14 days.The customer pays in 12 days.How much cash does Juan receive?