ACG Ch. 5

On the first of the month, a company sells $100 of merchandise on account with terms of 2/10, n/30. On the third day of the same month, the customer returns merchandise with an invoice price of $20. On the tenth day of the same month, the customer pays the company. What journal entry will the company record it receives the customer's payment?

$78.40 debit to Cash, $1.60 debit to Sales Discounts, and $80.00 credit to Accounts Receivable The original sale is reduced from $100 by the $20 return to a $80 balance due. The 2% discount is based on the $80 balance due, which is $80 times 2%, or $1.60. The retailer collects $78.40 (i.e., $80 - $1.60). The retailer also reduces its Accounts Receivable by $80 because the customer is paying and owes nothing more to the retailer. Finally, the retailer also records this discount as a debit to Sales Discounts.

A company reports net income of $120,000 and cost of goods sold of $630,000. The company's gross profit rate is 30%. Compute its net sales.

$900,000 Gross profit rate = Gross profit/Net sales Gross profit = Net sales - Cost of goods sold 0.30 = (Net sales - $630,000)/Net sales0.30 x Net sales = Net sales - $630,000Net sales - 0.30 x Net sales = $630,0000.7 x Net sales = $630,000 Net sales = $630,000/0.7 = $900,000

A company has net sales of $400,000, cost of goods sold of $300,000, and operating expenses of $20,000. What is its gross profit rate?

25% Gross profit = Net sales - Cost of goods sold Gross profit = $400,000 - 300,000 = $100,000 Gross profit rate = Gross profit/Net sales Gross profit rate = $100,000/$400,000 = 0.25 or 25%

A company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

36% The company buying merchandise can wait 10 days and still receive a 2% discount. Otherwise, it can wait an additional 20 days and pay the full invoice amount without being overdue. In other words, a 20-day difference produces 2% interest. An interest rate of 2% in 20 days is equivalent to an interest rate of 36% in 360 days (i.e., 2% x 360/20). Alternatively: The company must pay the invoice no later than 30 days after the sale. If it pays no later than 10 days after the invoice date, the company gets a 1% discount (i.e., 2% x $3,000 = $60). So, the company can save $60 if it pays 20 days before the due date. Interest = Principal x Interest rate x Time $60 = $3,000 x Interest rate x (30-10)/360 Interest rate = [360/(30-10)] x $60/$3,000 = 0.36 (i.e., 36%)

A corporation has the following: Cost of goods sold, $85,000 Operating income, $10,000 Sales discounts, $3,000 Sales returns and allowances, $12,000 Sales revenue, $140,000 Net income, $5,000 Which of the following is closest to this company's profit margin?

4% Net sales = Sales revenue minus sales returns and allowances minus sales discounts Net sales = 140,000 - 12,000 - 3,000 = 125,000 Profit margin = Net income divided by net sales Profit margin = 5,000/125,000 = 0.04 (or 4%).

A company uses a perpetual inventory system. It purchased $10,000 of merchandise with terms 2/10, n/30. It must also pay a $250 shipping charge. The company paid for the merchandise and the shipping charge nine days after their invoice date. Which of the following is part of the required journal entry the company records when it pays the shipping charge of $250?

A debit to Inventory for $250 uppliers sometimes offer discounts (such as 2/10, n/30). However, discounts are offered by suppliers of merchandise and not by shippers. The journal entry for paying the shipping charges includes a debit to inventory for $250 and a credit to cash for $250.

Which of the following is not a component or step of the operating cycle for a service company?

Buy inventory to be resold to customers.

A corporation uses the perpetual inventory system. It sells merchandise on account for $15,000 with terms 1/15, n/30. It pays a shipping company $250 to transport the merchandise to the buyer. How would the corporation record its payment of the transportation charge?

Debit freight-out for $250; credit cash for $250

A company uses the perpetual inventory system. Which of the following transactions neither increases nor decreases its inventory account?

Granting a customer an allowance by reducing the purchasing price

Under what inventory system is cost of goods sold determined after each sale?

Perpetual inventory system

Which of the following is a component of the operating cycle of a merchandising company?

Selling inventory to a customer

A company's gross profit rate increased in the current year relative to the prior year. Which of the following would be a possible explanation for this change?

The company's global sourcing efforts at the beginning of the current year resulted in a lower cost of merchandise sold.

Under a perpetual inventory system

accounting records continuously show the amount of inventory

The Sales Returns and Allowances account is classified as a(n)

contra revenue account contra revenue accounts include: 1. Sales discounts 2. Sales returns and allowances - are used to compute net sales. Both normally have debit balances while revenue normally has a credit balance.

The operating expenses section of an income statement for a merchandising company would not include

cost of goods sold

The journal entry to record a sale of $700 on account with terms of 2/10, n/30 will include a

credit to Sales Revenue for $700 Debit: Accounts Receivable for $1,200 Credit Sales Revenue for $1,200

A company uses a perpetual inventory system to record the following events involving a recent purchase of inventory: On June 1, it purchased merchandise for $90,000, terms 2/10, n/30. On June 3, it paid freight costs of $1,800 on merchandise purchased. On June 6, it returned $450 of merchandise to the supplier. On June 9, it paid the amount due to the supplier. As a result of these events, the company's inventory

increased by $89,559 [(Purchase - purchase returns & allowance) x (100% - discount percentage) + freight-in [(90,000 - 450) x 98% + 1,800 = $89,559

If a purchaser uses a perpetual inventory system and pays the freight cost associated with acquiring its inventory from a supplier then the purchaser's

inventory account is increased by the freight costs