Chapter 5

What is a purchase return?

A purchase return refers to merchandise a buyer purchases, but then returns to the seller.

Describe good cash management practices involving inventory purchases. (Check all that apply.)

Invoices should be paid on the last day of the discount period. Buyers should take advantage of early payment discounts.

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below. (Check all that apply.)

Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination. Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. Terms FOB destination means that the seller is responsible for shipping costs.

A purchase return refers to merchandise a ___________(buyer/seller/creditor) purchased, but then returns to the _________________(buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

Blank 1: buyer Blank 2: seller

A_______(periodic/perpetual) inventory system can be described as an inventory system that updates the inventory account only at the end of the__________(purchase/period).

Blank 1: periodic Blank 2: period

The discount period is the time between the invoice date and a specified date on which the payment amount owed can be ___________(increased/reduced) because of early payment.

Blank 1: reduced

Sales Discounts is a contra__________ (expense/revenue/asset) account and is increased with a __________(debit/credit).

Blank 1: revenue Blank 2: debit

Sales is a(n)__________ (expense/revenue/asset) account and is reported on the ___________(income/balance) _______________(statement/sheet).

Blank 1: revenue Blank 2: income Blank 3: statement

Gross profit is computed as net _____________minus cost of goods sold.

Blank 1: sales

A__________discount benefits a seller through earlier cash receipts and reduced collection efforts.

Blank 1: sales or cash

Calculate the total cost of merchandise purchased using the information in the following table:

$37,400

Gross profit is computed as net_______minus cost of goods sold.

Blank 1: sales

Which of the following costs are included in merchandise inventory? (Check all that apply.)

Purchase costs Costs necessary to ready the merchandise for sale Taxes assessed on the merchandise Shipping fees charged by the vendor

Which of the statements below summarize why a buyer would desire a purchase allowance? (Check all that apply.)

Purchased merchandise was defective or unacceptable. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price.

Sales is a(n) ______ account.

Revenue

Explain what the credit terms of 2/10, n/30 mean. (Check all that apply.)

The full payment is due within a 30-day credit period. The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date.

Sales Discounts is a ______ account.

contra revenue

On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart.

$8

Jerry's Flowers had the following cost information related to its purchases of merchandise. Calculate the total cost of merchandise purchased using the information below:

$91,100

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the __________(Merchandise Inventory/Accounts Payable/Cash) account and credit the _____________(Cash/Merchandise Inventory/Accounts Payable) account.

Blank 1: Merchandise Inventory Blank 2: Cash

A cash discount can be summarized as a discount given to______(buyers/creditors/sellers) to encourage them to pay __________(earlier/later/less/more).

Blank 1: buyers Blank 2: earlier

Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges.

Debit Delivery Expense; credit Cash.

Which of the statements below explain why perpetual inventory systems are becoming more popular? (Check all that apply.)

Managers have immediate access to detailed information on sales and inventory levels. Technological advances have made it easier to use.

Merchandise inventory can be described as: (Check all that apply.)

Products that a company owns and intends to sell. An asset account. An account appearing on a balance sheet of a merchandiser. An account increased with a debit.

Credit terms of 1/10, n/30 means.

The buyer will receive a 1% discount if they pay within 10 days of the date of the invoice.

Credit terms of n/60 were printed on an invoice. Explain what this means.

The credit terms stand for net 60 days.

Review the following statements and select the one that best describes a discount period.

The discount period is the time period in which a discount may be taken by the buyer.

Review the statements below and select the one that explains the purpose of a sales discount.

They decrease the time that the seller has to wait for payment.

A purchase allowance can be described as:

a reduction in the cost of defective or unacceptable merchandise that a buyer acquires

Explain how to determine gross profit on an income statement by selecting the correct statement below.

Cost of goods sold is subtracted from net sales.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit with terms of 1/10, n/40. Demonstrate the required journal entry to record the receipt of payment on May 25 by selecting all of the correct actions below. (Check all that apply.)

Credit Accounts Receivable $1,400. Debit Cash $1,400.

Which of the statements below summarize why a seller would give a sales allowance? (Check all that apply.)

In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price. The seller wants to keep a customer happy. Sold merchandise was defective or unacceptable.

An invoice is referred to as a ____________invoice for a buyer and as a ___________invoice for the seller.

Blank 1: purchase Blank 2: sales

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

Gross profit is calculated by taking the net __________(sales/costs) of a product and __________(adding/subtracting) the cost of the goods sold.

Blank 1: sales Blank 2: subtracting

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

$500 x 0.3= 15$

Click and drag on elements in order. The components of a merchandiser's income statement are shown below. In which order would they appear on the statement?

1)Net sales 2)Costs of goods sold 3)Gross profit 4)Expenses 5)Net income

Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date.

3/15, n/45

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the ________(Merchandise Inventory/Accounts Payable/Cash) account and credit the_____________ (Cash/Merchandise Inventory/Accounts Payable) account.

Blank 1: Merchandise Inventory Blank 2: Cash

Merchandise inventory that is available for sale is a(n) __________(asset/expense/revenue) and reported on the _________(balance sheet/income statement). Merchandise that is sold during the period is a(n) ___________(asset/expense/liability) and reported on the ____________(balance sheet/income statement).

Blank 1: asset Blank 2: balance sheet Blank 3: expense Blank 4: income statement

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on December 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Credit Cash $1,000. Debit Accounts Payable $1,000.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Credit Sales $7,000. Debit Cash $7,000. Debit Cost of Goods Sold $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms of 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $7. Credit Cash $343. Debit Accounts Payable $350.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Sales $1,400. Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500. Debit Cash $1,400.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Sales $1,400. Debit Accounts Receivable $1,400. Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Sales $7,000. Credit Merchandise Inventory $500. Debit Cash $7,000. Debit Cost of Goods Sold $500.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 30, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $1,000.

Dogs R US uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merchandise due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry to record the return by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $50. Credit Merchandise Inventory $50.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Sales $1,400. Debit Accounts Receivable $1,400. Credit Merchandise Inventory $500.

ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges.

Debit Merchandise Inventory $20; credit Cash $20.

X-Mart purchased $300 of merchandise on account. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Accounts Payable $300.

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below. (Check all that apply.)

Debit Sales Discounts $14. Credit Accounts Receivable $700. Debit Cash $686.

A journal entry for a sale of merchandise on account will result in all of the following: (Check all that apply).

Debit to Accounts Receivable Credit to Sales Credit to Merchandise Inventory Debit to Cost of Goods Sold

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

Jello's Market purchased $1,000 of goods on account with terms of 2/10,n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would:

debit Accounts Payable $800; credit Merchandise Inventory $16; and credit Cash $784

Jo's Market makes a credit sale for $1,000 with terms of 2/10,n/30. The cost of the merchandise is $400. The required journal entry to record the sale and cost of the sale is:

debit Accounts Receivable $1,000; credit Sales $1,000; debit Cost of Goods Sold $400; and credit Merchandise Inventory $400

Jan's Jams makes a credit sale for $300 with terms of 2/10,n/30. The cost of the merchandise is $200. The required journal entry to record the sale and the cost of the sale is:

debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10, n/30. The required journal entry to record Jo's Market customer's payment on July 6 would be:

debit Cash $1,000; credit Accounts Receivable $1,000

On Jan 5, a customer returned merchandise that had been purchased earlier on credit. The original sale was for $500, and the cost to the seller was $150. Demonstrate the required journal entry to record the return on the books of the seller, assuming the goods can be sold to another customer.

Debit Sales Returns and Allowances $500; debit Merchandise Inventory $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150.

Identify the statements below which summarize what cash discounts are. (Check all that apply.)

A buyer views a cash discount as a purchase discount. Cash discounts are described in credit terms. Sellers can grant a cash discount to encourage buyers to pay earlier. A seller views a cash discount as a sales discount. A reduced payment applies to the discount period.

On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased on account, earlier in the month, was of poor quality. Demonstrate the required journal entry on X-Mart's books for the allowance assuming the perpetual inventory method.

Debit Accounts Payable $100; credit Merchandise Inventory $100.