Question 1

The net method of recording purchases refers to recording:

Accepted Answer

The net method records purchases at the invoice price minus any cash discounts, assuming the discounts will be taken.

Question 2

On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. 
-On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The amount that Klein receives from Babson on March 20 is:

Accepted Answer

The original invoice amount is $7,800. Babson returns merchandise worth $600, reducing the invoice to $7,200. Babson pays within the discount period, so they receive a 2% discount on $7,200, which is $144. Therefore, Klein receives $7,200 - $144 = $7,056.

Question 3

In its first year of business, Borden Corporation had sales of $2,000,000 and cost of goods sold of $1,200,000. Borden expects returns in the following year to equal 8% of sales. The adjusting entry or entries to record the expected sales returns is (are):

Accepted Answer

The correct adjusting entries are to debit Sales Returns and Allowances and credit Sales Refund Payable for the expected returns of $160,000 (8% of $2,000,000). Additionally, debit Inventory Returns Estimated and credit Cost of Goods Sold for the cost of the expected returns, which is $96,000 (8% of $1,200,000).

Question 4

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

Accepted Answer

The Inventory Returns Estimated account is not a current liability account, but rather a contra inventory account used to estimate the amount of inventory that will be returned or is likely to be defective. All other statements are true regarding sales returns and allowances.

Question 5

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000.
- Johnson uses the periodic inventory system and the net method of accounting for purchases. The journal entry that Johnson will make on September 12 is:

Accepted Answer

Under the net method, Johnson Company records the purchase at the net amount, considering the discount. The discount is 2% of $5,800, which is $116. Therefore, the net amount is $5,684 ($5,800 - $116). Since Johnson uses the periodic inventory system, the purchase is recorded in the Purchases account.

Question 6

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000.
- Ryan uses the periodic inventory system and the net method of accounting for sales. The journal entry or entries that Ryan will make on September 12 is (are):

Accepted Answer

Ryan Company uses the net method, which records sales at the net amount assuming the discount will be taken. The discount is 2% of $5,800, which is $116. Therefore, the net sales amount is $5,684.

Question 7

Match the following terms with the appropriate definition.
A. Debit memorandum
B. Credit period
C. Credit terms
D. Credit memorandum
E. Discount period
F. Gross profit
G. Periodic inventory system
H. Perpetual inventory system
I. Sales discount
J. Purchase discount

Accepted Answer

The answer of Match the following terms with the appropriate...

Question 8

On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the net method of accounting for sales. On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry(ies) that Klein must make on March 15 is (are):

Accepted Answer

Under the net method, the sales return is recorded at the net amount, which is $600 less the 2% discount ($600 * 0.02 = $12), resulting in $588. The cost of goods sold is reversed at the cost of the returned items, $350.

Question 9

In the current year, Borden Corporation had sales of $2,000,000 and cost of goods sold of $1,200,000. Borden expects returns in the following year to equal 8% of sales. The unadjusted balance in Inventory Returns Estimated is a debit of $6,000, and the unadjusted balance in Sales Refund Payable is a credit of $10,000. The adjusting entry or entries to record the expected sales returns is (are):

Accepted Answer

The expected sales returns are 8% of $2,000,000, which is $160,000. The adjusting entry should increase the Sales Refund Payable by $150,000 (since it already has a $10,000 credit balance) and increase the Inventory Returns Estimated by $90,000 (8% of $1,200,000 cost of goods sold).

Question 10

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. 
-Johnson uses the periodic inventory system and the net method of accounting for purchases. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Johnson makes on September 18 is:

Accepted Answer

The journal entry that Johnson makes on September 18 is:
Accounts payable $5,684.00
Inventory $4,000.00
Cash $5,566.32
Purchase discount $117.68

The cost of the items sold is $4,000. The credit terms offer a 2% discount if paid within 10 days (1/50, n/30). The amount of the discount is calculated as $5,800 x 0.02 = $116. Johnson takes the discount, so the net amount due is $5,800 - $116 = $5,684. Johnson records a credit of $5,684 to accounts payable to reduce the amount owed to Ryan Company. The debit to inventory records the cost of the items sold. The debit to purchase discount records the amount of the discount taken. The debit to cash records the amount paid, which is the net amount due after the discount is taken: $5,800 - $116 = $5,684.

Question 11

Netherland Corporation has the following unadjusted balances: Accounts Receivable, $80,000 (debit), and Allowance for Sales Discounts $300 (credit). Of the receivables, $50,000 of them are within the 2% discount period, and Netherland expects buyers to take $1,000 in future-period discounts ($50,000 × 2%) arising from this period's sales. The adjusting entry to estimate sales discounts is (are):

Accepted Answer

The adjusting entry to estimate the sales discounts is to recognize the expected future discounts arising from the current period's sales. The total amount of receivables within the discount period is $50,000, and Netherland expects that buyers will take $1,000 in future-period discounts ($50,000 x 2%). Therefore, the estimated sales discount should be $1,000.

To record this adjustment, we need to increase the Allowance for Sales Discounts account by $700 to bring the balance to $1,000 ($300 + $700 = $1,000). The journal entry for this adjustment is:

Debit: Sales Discounts $700
Credit: Allowance for Sales Discounts $700

Therefore, the best choice is B.

Question 12

Zenith Company's Merchandise Inventory account at year-end has a balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The adjusting entry to record this $1,370 of inventory shrinkage is:

Accepted Answer

The correct entry is to debit Cost of Goods Sold and credit Merchandise Inventory for the amount of the shrinkage, $1,370, to reflect the loss in inventory.

Question 13

A company that uses the net method of recording purchases and a perpetual inventory system 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 correct journal entry to record the payment on July 28 is:

Accepted Answer

Under the net method, the company records the purchase at the net amount to be paid (i.e. after deducting the discount). Therefore, the original purchase of $1,800 is recorded as follows: Debit Merchandise Inventory $1,764; credit Accounts Payable $1,764 [$1,800 - ($1,800 x 2%)]. 
When the company returns $200 worth of merchandise, it reduces the amount owed to the vendor by $200 x 98% (since the discount is no longer applicable). Therefore, the entry for the return is: Debit Accounts Payable $196; credit Merchandise Inventory $196. 
On July 28, when the company pays the full amount due, it has to pay the net amount of $1,568 [$1,764 - $196]. This is recorded as follows: Debit Accounts Payable $1,568; debit Discounts Lost $32 (since the company did not take advantage of the discount); credit Cash $1,600 (i.e. net amount paid).

Question 14

Match the following definitions and terms by placing the letter for the terms A through J in the blank space next to the best definition.
A. Trade discount F. Acid-test ratio
B. General and administrative expenses G. Merchandise inventory
C. FOB shipping point H. Selling expenses
D. Single-step income statement I. Multiple-step income statement
E. FOB destination J. Inventory shrinkage

Accepted Answer

The answer of Match the following definitions and terms by...

Question 15

Morgan, Inc. uses a perpetual inventory system and the net method of recording purchases. On May 12, a merchandise purchase of $15,000 was made on credit, 2/10, n/30. The journal entry to record this purchase is:

Accepted Answer

Under the net method, purchases are recorded at the net amount after deducting any available discounts. The discount is 2% of $15,000, which is $300. Therefore, the purchase is recorded at $14,700 ($15,000 - $300).

Question 16

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000.
- Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ryan must make on September 14 is (are):

Accepted Answer

The answer of On September 12, Ryan Company sold merchandise...

Question 17

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. 
-Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

Accepted Answer

The answer of On September 12, Ryan Company sold merchandise...

Question 18

On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000.
- Ryan uses the periodic inventory system and the net method of accounting for sales. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:

Accepted Answer

The journal entry that Ryan makes on September 18 is to record the receipt of cash from Johnson, and to remove the liability for the discount, as follows: 
Debit: Cash $5,664 [$5,800 - ($5,800 x 2%)] 
Debit: Sales Discount Forfeited $136 [($5,800 x 2%)] 
Credit: Accounts Receivable $5,800 
Credit: Sales $4,000 
Credit: Cost of Goods Sold $4,000 
The correct journal entry is B.

Question 19

An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called:

Accepted Answer

Failing to take advantage of cash discounts when using the net method of recording purchases is commonly referred to as "discounts lost". It represents an expense incurred by the buyer, as they are now required to pay the full amount owed to the seller without receiving any discount. It is important for businesses to keep track of discounts lost, as it can have a significant impact on their overall profitability.

Question 20

On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales.
- On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry that Klein makes on March 20 is:

Accepted Answer

The original sale was $7,800, and after the return of $600, the adjusted amount is $7,200. Babson pays within the discount period, so a 2% discount is applied to $7,200, resulting in a discount of $144. Therefore, the cash received is $7,056 ($7,200 - $144).

Quiz 5: Accounting for Merchandising Operations

The net method of recording purchases refers to recording:

In its first year of business, Borden Corporation had sales of $2,000,000 and cost of goods sold of $1,200,000. Borden expects returns in the following year to equal 8% of sales. The adjusting entry or entries to record the expected sales returns is (are) :

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

Match the following terms with the appropriate definition. A. Debit memorandum B. Credit period C. Credit terms D. Credit memorandum E. Discount period F. Gross profit G. Periodic inventory system H. Perpetual inventory system I. Sales discount J. Purchase discount

Zenith Company's Merchandise Inventory account at year-end has a balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The adjusting entry to record this $1,370 of inventory shrinkage is:

Morgan, Inc. uses a perpetual inventory system and the net method of recording purchases. On May 12, a merchandise purchase of $15,000 was made on credit, 2/10, n/30. The journal entry to record this purchase is:

An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called: