Chapter 4: 4-9DQ (page 205)
Does the sender (maker) of a debit memorandum record a debit or a credit in the recipient’s account? What entry (debit or credit) does the recipient record?
Yes, the sender (maker) records a debit in the recipient’s account. On the other hand, the recipient should record a Credit sender account.
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BTN 4-7 Refer to the opening feature about Sword & Plough. Assume that Emily and Betsy report current annual sales at approximately \(1 million and prepare the following income statement.
| Sword and Plough | |
| Income statement | |
| For year ended Jan 31, 2016 | |
Net sales | \)1,000,000 |
Cost of sales | 610,000 |
Expenses (Other than cost of sales) | 200,000 |
Net income | $190,000 |
Emily and Betsy sell to individuals and retailers, ranging from small shops to large chains. Assume that they currently offer credit terms of 1∕15, n∕60, and ship FOB destination. To improve their cash flow, they are considering changing credit terms to 3∕10, n∕30. In addition, they propose to change shipping terms to FOB shipping point. They expect that the increase in discount rate will increase net sales by 9%, but the gross margin ratio (and ratio of cost of sales divided by net sales) is expected to remain unchanged. They also expect that delivery expenses will be zero under this proposal; thus, expenses other than cost of sales are expected to increase only 6%.
Required
1. Prepare a forecasted income statement for the year ended January 31, 2017, based on the proposal.
2. Based on the forecasted income statement alone (from your part 1 solution), do you recommend that Emily and Betsy implement the new sales policies? Explain.
3. What else should Emily and Betsy consider before deciding whether or not to implement the new policies? Explain.
Piere Imports uses the perpetual system in accounting for merchandise inventory and had the following transactions during the month of October. Prepare entries to record these transactions assuming that Piere Imports records invoices (a) at gross amounts and (b) at net amounts.
Oct. 2 Purchased merchandise at a \(3,000 price (\)2,940 net), invoice dated October 2, terms 2∕10, n∕30.
10 Received a credit memorandum toward the return of \(500 (\)490 net) of merchandise that it purchased on October 2.
17 Purchased merchandise at a \(5,400 price (\)5,292 net), invoice dated October 17, terms 2∕10, n∕30.
27 Paid for the merchandise purchased on October 17, less the discount.
31 Paid for the merchandise purchased on October 2. (Payment was mistakenly delayed, which caused the discount to be lost.)
The operating cycle of a merchandiser with credit sales includes the following five activities. Starting with merchandise acquisition, identify the chronological order of these five activities.
a. Prepare merchandise for sale.
b. Collect cash from customers on account.
c. Make credit sales to customers.
d. Purchase merchandise.
e. Monitor and service accounts receivable.
Use the data for Valley Company in Problem 4-3A to complete the following requirements.
Required
1. Prepare closing entries as of August 31, 2017 (the perpetual inventory system is used).
Analysis Component
2. In prior years, the company experienced a 4% returns and allowance rate on its sales, which means approximately 4% of its gross sales were eventually returned outright or caused the company to grant allowances to customers. Compute the ratio of sales returns and allowances divided by gross sales. How does this year’s ratio compare to the 4% ratio in prior years?
Barkley Company’s adjusted trial balance on March 31, 2017, its fiscal year-end, follows.
Debit | Credit | |
Merchandise inventory | \(56,500 | |
Other (noninventory) assets | 202,600 | |
Total liabilities | \)42,500 | |
Common stock | 10,000 | |
Retained earnings | 154,425 | |
Dividends | 3,000 | |
Sales | 332,650 | |
Sales discount | 5,875 | |
Sales return and allowance | 20,000 | |
Cost of goods sold | 115,600 | |
Sales salaries expenses | 44,500 | |
Rent expenses – selling space | 16,000 | |
Store supplies expenses | 3,850 | |
Advertising expenses | 26,000 | |
Office salaries expenses | 40,750 | |
Rent expenses – office space | 3,800 | |
Office supplies expenses | 1,100 | |
Total | \(539,575 | \)539,575 |
On March 31, 2016, merchandise inventory was \(37,500. Supplementary records of merchandising activities for the year ended March 31, 2017, reveal the following itemized costs.
Invoice cost of merchandise purchases | \)138,500 |
Purchase discount received | 2,950 |
Purchase return and allowances | 6,700 |
Cost of transportation-in | 5,750 |
Required
1. Compute the company’s net sales for the year.
2. Compute the company’s total cost of merchandise purchased for the year.
3. Prepare a multiple-step income statement that includes separate categories for net sales, cost of goods sold, selling expenses, and general and administrative expenses.
4. Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses.
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