Question 1

A debit to Sales Returns and Allowances and a credit to Accounts Receivable:

Accepted Answer

A debit to Sales Returns and Allowances and a credit to Accounts Receivable recognizes that a customer returned merchandise and/or received an allowance. Option A is incorrect as it reflects an increase in amount due from a customer, which is not the case of sales returns and allowances. Option B is incorrect as a customer taking a discount would be recorded through a debit to Sales Discount and a credit to Accounts Receivable. Option C is incorrect as it records the cost side of a sales return, but does not reflect the actual return by the customer. Option D is incorrect as it reflects a decrease in amount due to a supplier, which is not related to sales returns and allowances.

Question 2

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise.
- On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is:

Accepted Answer

The correct journal entry to record the merchandise return on July 7 is to debit Accounts Payable $200 and credit Merchandise Inventory $200. This is because the company is returning merchandise to the supplier, therefore the Accounts Payable balance will be reduced, and the Merchandise Inventory (an asset account) will also be reduced.

Question 3

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals:

Accepted Answer

The company purchased $1,800 and returned $200, leaving a balance of $1,600. Since the payment was made after the discount period, no discount is applied, so the full amount of $1,600 is paid.

Question 4

Sales returns:

Accepted Answer

Sales returns refer to merchandise that customers return to the seller after the sale. The other choices are not accurate definitions of sales returns.

Question 5

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise.
- On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 28 is:

Accepted Answer

The company purchased $1,800 of merchandise on credit with terms 2/10, n/30. This means that if the company pays within 10 days, they will receive a 2% discount, otherwise the full amount is due within 30 days. The company returned $200 worth of merchandise, so the net amount due is $1,800 - $200 = $1,600.

The company paid the full amount due on July 28, which is within the discount period, so they are entitled to a 2% discount. Therefore, the total payment amount is $1,600 x 98% = $1,568.

The correct journal entry to record the payment is to debit Accounts Payable for $1,600 and credit Cash for $1,568. The discount of $32 is not recorded separately, but is included in the credit to Cash. Therefore, the correct answer is D.

Question 6

Jasper Company is a wholesaler that buys merchandise in large quantities. Its supplier's catalog indicates a list price of $500 per unit on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper's total purchase price per unit will be:

Accepted Answer

The answer of Jasper Company is a wholesaler that buys...

Question 7

A debit memorandum is:

Accepted Answer

A debit memorandum is a document issued by a buyer to inform a seller of a debit made to the seller's account payable in the buyer's records. It is typically used to correct errors or dispute charges on an invoice. Therefore, option (E) is the correct answer as it is the definition of the term.

Question 8

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise.
- On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

Accepted Answer

The correct journal entry to record the payment on July 12 would be to debit Accounts Payable for the amount owed after the return and the discount, and credit Cash for the amount paid.

Step 1: Calculate the amount owed after the return and the discount:

Amount of merchandise purchased = $1,800
Return = $200
Net amount = $1,800 - $200 = $1,600

Discount = 2% x $1,600 = $32

Amount owed = $1,600 - $32 = $1,568

Step 2: Record the journal entry:

Debit Accounts Payable $1,600
Credit Merchandise Inventory $32
Credit Cash $1,568

Note that the Merchandise Inventory account is credited for the amount of the discount, since the company did not actually pay for that portion of the purchase.

Question 9

The amount recorded for merchandise inventory includes all of the following except:

Accepted Answer

Freight costs paid by the seller are not included in the merchandise inventory cost; they are considered a selling expense.

Question 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 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

Accepted Answer

The credit terms of 2/15, n/45 mean that the buyer can take a 2% discount if the payment is made within 15 days, otherwise, the full amount is due in 45 days.

If the buyer chooses not to take the discount, they are essentially borrowing the money for an additional 30 days (from day 16 to day 45).

To calculate the equivalent annual interest rate, we can use the following formula:

Equivalent annual interest rate = (Discount % / (100% - Discount %)) x (365 / (Days credit is extended - Discount period))

Plugging in the values, we get:

Equivalent annual interest rate = (2% / (100% - 2%)) x (365 / (45 - 15))
= 2.05% x (365 / 30)
= 24.33%

Therefore, the equivalent annual interest lost on the amount of the purchase is 24.33%. The closest option is C.

Question 11

Fragment Company is a wholesaler that sells merchandise in large quantities. Its catalog indicates a list price of $300 per unit on a particular product and a 40% trade discount is offered for quantity purchases of 50 units or more. The cost of shipping the merchandise is $7 per unit under terms FOB shipping point. If a customer purchases 100 units of this product, what is the amount of sales revenue that Fragment will record from this sale?

Accepted Answer

The sales revenue is calculated as the list price minus the trade discount. The list price is $300 per unit, and with a 40% trade discount, the price per unit becomes $180 ($300 - $120). For 100 units, the sales revenue is $18,000 (100 units x $180). Shipping costs are not included in sales revenue.

Question 12

All of the following statements regarding sales returns and allowances are true except:

Accepted Answer

Sales returns and allowances can have a relationship with the possibility of lost future sales as dissatisfied customers may choose to not purchase from the company in the future. The other statements are true: sales returns and allowances are typically recorded in a contra-revenue account, reductions in selling prices due to damaged merchandise are included in returns and allowances, and they are closed to the Income Summary account at the end of the period. Additionally, while some companies may not disclose the specific amount of returns and allowances, they are required to report them in the financial statements.

Question 13

Sales less sales discounts less sales returns and allowances equals:

Accepted Answer

The equation given represents the calculation of net sales, which is the total amount of sales revenue earned after accounting for discounts and returns. Therefore, D (Net sales) is the correct answer.

Question 14

On May 1, Shilling Company sold merchandise in the amount of $5,800 to Anders, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Shilling uses the perpetual inventory system and the gross method table. The journal entry or entries that Shilling will make on May 1 is:

Accepted Answer

The correct journal entries for a sale using the perpetual inventory system and the gross method are to debit Accounts Receivable and credit Sales for the sale amount, and to debit Cost of Goods Sold and credit Merchandise Inventory for the cost of the items sold.

Question 15

A company purchased $4,000 worth of merchandise. Transportation costs were an additional $350. The company returned $275 worth of merchandise and then paid the invoice within the 2% cash discount period. The total cost of this merchandise is:

Accepted Answer

The answer of A company purchased $4,000 worth of merchandise....

Question 16

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:

Accepted Answer

The company purchased $1,800 of merchandise on July 5 with terms of 2/10, net 30. This means they can take a 2% discount if they pay within 10 days, otherwise, they have 30 days to pay the full amount.

On July 7, the company returned $200 worth of merchandise, bringing the total amount owed down to $1,600.

Since the company paid the full amount due on July 8, they did not take advantage of the discount, but they did pay within the 10-day period. Therefore, the amount they paid is $1,600 minus 2% of $1,600, which is $32.

$1,600 - $32 = $1,568

Therefore, the amount of cash paid on July 8 is $1,568, choice C.

Question 17

A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. 
-On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, The correct journal entry to record the purchase on July 5 is:

Accepted Answer

The purchase is initially recorded at the gross amount of $1,800, debiting Merchandise Inventory and crediting Accounts Payable.

Question 18

A trade discount is:

Accepted Answer

A trade discount is a reduction in the selling price below the list price, typically offered by sellers to buyers in the same trade or industry, and is not related to payment terms.

Question 19

A company uses the perpetual inventory system and recorded the following entry: $$\begin{array} { | l | r | r | } 
\hline \text { Accounts Payable } & 2,500 & \
\hline \text { Merchandise Inventory } & & 50 \
\hline \text { Cash } & & 2,450 \
\hline
\end{array}$$ This entry reflects a:

Accepted Answer

The entry reflects a payment of the account payable of $2,500 with a 2% cash discount taken, which is $50. The remaining $2,450 is paid in cash.

Question 20

Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Garza Company's net sales equals:

Accepted Answer

The formula for calculating net sales is: 
Net Sales = Sales - Sales Discounts - Sales Returns 
Plugging in the values from the question, we get: 
Net Sales = $135,000 - $2,000 - $3,200 
Net Sales = $129,800 
Therefore, the correct answer is C.

Quiz 5: Accounting for Merchandising Operations