Introduction to Inventories Practice Problems

Demonstration problem

The following transactions occurred between Companies C and D in June 2010:

June 10 Company C purchased merchandise from Company D for USD 80,000; terms 2/10/EOM, n/60, FOB destination, freight prepaid.

11 Company D paid freight of USD 1,200.

14 Company C received an allowance of USD 4,000 from the gross selling price because of damaged goods.

23 Company C returned USD 8,000 of goods purchased because they were not the quality ordered.

30 Company D received payment in full from Company C.

Task:

a. Journalize the transactions for Company C.

b. Journalize the transactions for Company D.

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Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41219/mod_resource/content/3/AccountingPrinciples.pdf
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Solution to demonstration problem

a.

General Journal

Date		Account Titles and Explanation	Post Ref.	Debit	Credit
2010	1	Accounts Payable		4,000
June	4	Purchase Return and Allowances			4,000
		Received an allowance from Company D for damaged goods.
	2	Accounts Payable		8,000
	3	Purchase Returns and Allowances			8,000
		Returned merchandise to Company D because of improper quality
	3	Accounts Payable ($80,000 - $4,000 - $8,000)		68,000
	0	Purchase Discounts ($68,000 x 0.02)			1,360
		Cash ($68,000 - $1,360)			66,640
		Paid the amount due to Company D.

  

b.

General Journal

Date		Account Titles and Explanation	Post. Ref	Debit	Credit
2010	1	Company D
June	0	Accounts Receivable		8000
		Sales			8000
		Sold merchandise to Company C; terms 2/lO/EOM, n/60
	1	Delivery Expense		1200
	1	Cash			1200
		Paid freight on sale of merchandise shipped FOB destinaion, freight prepaid.
	1	Sales Returns and Allowances		4000
	4	Accounts Receivable			4000
		Granted an allowance to Company C for damaged goods.
	2	Sales Returns and Allowances		8,000
	3	Accounts Receivable			8,000
		Merchandise returned from Company C due to improper quality.
	30	Cash ($68,000 - $1,360)		66,640
		Sales Discounts ($68,000 x 0.02)		1,360
		Accounts Receivable ($80,000 - $4,000 - $8,000)			68,000
		Received the amount due from Company C.

Self-test

True-false

Indicate whether each of the following statements is true or false.

1. To compute net sales, sales discounts are added to, and sales returns and allowances are deducted from, gross sales.

2. Under perpetual inventory procedure, the Merchandise Inventory account is debited for each purchase and credited for each sale.

3. Purchase discounts and purchase returns and allowances are recorded in contra accounts to the Purchases account.

4. In taking a physical inventory, consigned goods delivered to another party who attempts to sell the goods are not included in the ending inventory of the company that sent the goods.

5. A classified income statement consists of only two categories of items, revenues,  and expenses.

Multiple-choice

Select the best answer for each of the following questions.

1. A seller sold merchandise which has a list price of USD 4,000 on account, giving a trade discount of 20 per cent. The entry on the books of the seller is:

a.	Accounts Receivable	3200
	Trade Discounts	800
	Sales		4000
b.	Accounts Receivable	4000
	Sales		4000
c.	Accounts Receivable	3200
	Trade Discounts	800
	Sales		4000
d.	Accounts Receivable	3200
	Sales		3200

 

2. X Company began the accounting period with USD 60,000 of merchandise, and net cost of purchases was USD 240,000. A physical inventory showed USD 72,000 of merchandise unsold at the end of the period. The cost of goods sold of Y Company for the period is:

a.  USD 300,000.

b.  USD 228,000.

c.  USD 252,000.

d.  USD 168,000.

e.  None of the above.

3. A business purchased merchandise for USD 12,000 on account; terms are 2/10, n/30. If USD 2,000 of the merchandise was returned and the remaining amount due was paid within the discount period, the purchase discount would be:

a.  USD 240.

b.  USD 200.

c.  USD 1,200.

d.  USD 1,000.

e.  USD 3,600.

4. A classified income statement consists of all of the following major sections except for: 

a. Operating revenues.

b.  Cost of goods sold.

c.  Operating expenses.

d.  Nonoperating revenues and expenses.

e.  Current assets.

5. (Appendix) Closing entries for merchandise-related accounts include all of the following except for:

a. A credit to Sales Discounts.

b.  A credit to Merchandise Inventory for the cost of ending inventory.

c.  A debit to Purchase Discounts.

d.  A credit to Transportation-In.

e.  A debit to Sales.

Self-test - Answers

True-false

1. False. Sales discounts, as well as sales returns and allowances, are deducted from gross sales.

2. True. Under perpetual inventory procedure, the Merchandise Inventory account is debited for each purchase and credited for each sale.

3. True. Purchase Discounts and Purchase Returns and Allowances are contra accounts to the Purchases account. The balances of those accounts are deducted from purchases to arrive at net purchases.

4. False. Consigned goods delivered to another party for attempted sale are included in the ending inventory of the company that sent the goods.

5. False. An unclassified income statement, not a classified income statement, has only two categories of items.

Multiple-choice

1. d. Trade discounts are not recorded on the books of either a buyer or a seller. In other words, the

invoice price of sales (purchases) is recorded: USD4,000X0.8=USD3,200

2. b. The cost of goods sold is computed as follows:

Beginning inventory	$60,000
Net cost of purchases	240,000
Cost of goods available for sale	$300,000
Ending inventory	72,000
Cost of goods sold	$228,000

 

3. b. Purchase discounts are based on invoice prices less purchase returns and allowances, if any.

4. e. All of the sections mentioned in (a-d) appear in a classified income statement. Current assets appear on a classified balance sheet.

5. b. Merchandise Inventory is debited for the cost of ending inventory.

You may close debit balanced accounts (in the income statement) before credit balanced accounts. This practice does not affect the balance of the Income Summary account or the amount of net income.