| Debit | Credit | |
| Merchandise Inventory | 50,000 | |
| Accounts Payable | 50,000 |
|
Answer
Explanation
Argon Company will debit the asset account Merchandise Inventory and credit the liability account Accounts Payable for $50,000. The discount will be recorded if Argon pays the invoice within the discount period.
|
On March 1, Monterrey Company purchased merchandise inventory on account with a list price of $20,000 and credit terms of 2/10, n/30. On August 4 (before the invoice was paid), Monterrey Company returned some of the inventory. The list price of the returned merchandise was $2,500. Which of the following is the correct general journal entry to record the payment of the invoice assuming that Monterrey Company pays the amount due within the discount period?
Answer
| Accounts Payable | 350 | |
| Merchandise Inventory | 350 | |
| Accounts Payable | 17,150 | |
| Cash | 17,150 |
Explanation
The term 2/10, n/30 means the seller will allow a 2% discount if the purchaser pays cash for the merchandise within 10 days from the date of purchase. Because the invoice is paid within the cash discount period, Galin will first debit the liability account Accounts Payable for the cash discount of $350 [($20,000 − $2,500) × 2%] and credit the asset Merchandise Inventory for the same amount. The second part of the entry records the payment to the supplier with a debit to Accounts Payable for $17,150 ($20,000 − $2,500 − $350) and a credit to Cash.
Markham Company incurred $200 of freight costs on inventory sold and shipped to customers FOB destination. Which of the following is an effect on Markham Company’s financial statements?
Answer
Net income decreased by $200.
Explanation
Freight costs on sales to customers are shown as the operating expense Transportation-out and reduce net income. Sales Revenue and gross margin are not affected by this event.
| Yowell Company had the following transactions during March 2016: |
| • Purchased merchandise inventory of $12,500 from Rochester Company with freight terms FOB destination. |
| • Freight costs on the Rochester Company purchase were $400. |
| • Purchased merchandise inventory of $21,500 from Trenton Company with freight terms FOB shipping point. |
| • Freight costs on the Trenton Company purchase were $600. |
| What is the total amount Yowell Company recorded to the Merchandise Inventory account as a result of these transactions? |
Answer
Explanation
Yowell Company is responsible for the cost of freight on the inventory purchased from Trenton Company, FOB shipping point. Yowell Company is not responsible for the freight costs related to the purchases from Rochester Company. The seller is responsible for goods shipped FOB destination. The total amount debited to the Merchandise Inventory account is $34,600 ($12,500 + $21,500 + $600).
Eller Company sold inventory that cost $22,500 for $48,000 cash. Which of the following is the correct journal entry to record this sale?
Answer
| Cash | 48,000 | |
| Sales Revenue | 48,000 | |
| Cost of Goods Sold | 22,500 | |
| Merchandise Inventory | 22,500 |
Explanation
The sale increases Cash (debit) and Sales Revenue (credit) by the $48,000 selling price. When the inventory is sold, the $22,500 product cost is transferred from the Merchandise Inventory account (credit) to the expense account Cost of Goods Sold (debit).
In 2016, Merritt Company purchased land for $60,000 to use as a future site for its new office building. At the end of 2016, the land was worth $67,500. The company decided not to build the new office and sold the land for $66,000 cash in 2017. How does Merritt Company’s sale of the land affect its 2017 income statement?
Answer
Gain on the sale of land $6,000.
Explanation
Land is carried in the accounting records at historical cost. The asset account Cash increased by $66,000 and the asset account Land decreased by $60,000, resulting in a net increase to assets of $6,000 and a gain on the sale of $6,000. Gains and losses result from peripheral rather than ordinary operating activities of the company (e.g., Merritt Company is not in the business of buying and selling land).
In 2016, Chavez Company purchased land for $120,000 to use as a future site for its new office building. At the end of 2016, the land was worth $135,000. The company decided not to build the new office and sold the land for $132,000 cash in 2017. How does Chavez Company’s sale of land affect its 2017 statement of cash flows?
rev: 06_05_2015_QC_CS-16867
Answer
$132,000 cash inflow from investing activities.
Explanation
The $132,000 cash received from the sale of land appears as a cash inflow in the investing activities section of the statement of cash flows.
Powell Company had following account balances for 2016:
| Debit | Credit | |
| Sales Revenue | $ 47,500 | |
| Cost of Goods Sold | $ 26,000 | |
| Transportation-out | 750 | |
| Selling Expenses | 4,400 | |
| Interest Expense | 900 |
| What is Powell Company’s operating income for 2016? |
Answer
Explanation
Operating income = Sales Revenue − Cost of Goods Sold − Transportation-out − Selling Expenses ($47,500 − $26,000 − $750 − $4,400 = $16,350). Interest Expense is shown as a nonoperating item.
Dayton Company maintains perpetual inventory records. Dayton determined through a physical count that it had $20,600 of merchandise inventory on hand at the end of the accounting period. The balance in the Merchandise Inventory account was $21,400. The impact of the adjusting entry on the financial statements is
Answer
Cost of goods sold increased $800.
Explanation
The inventory shrinkage results in a decrease in Merchandise Inventory, an increase in Cost of Goods Sold, and a decrease in gross margin (if costs increase, gross margin decreases). Cash flow is not affected.
Carver Company, Minton Company, and Cooper Company are all retail companies that sell the same products. These companies have the following selected financial information for 2016:
| Carver Co. | Minton Co. | Cooper Co. | |
| Net sales | $200,000 | $240,000 | $375,000 |
| Cost of goods sold | $110,000 | $120,000 | $225,000 |
| Net income | $20,000 | $12,000 | $30,000 |
| Which retail company is doing the best job of controlling expenses (i.e., has the highest return on sales)? |
Answer
Explanation
Return on sales is equal to net income divided by net sales. Carver Company’s return on sales is 10% ($20,000 ÷ $200,000). Minton Company’s return on sales is 5% ($12,000 ÷ $240,000). Cooper Company’s return on sales is 8% ($30,000 ÷ $375,000). All other things equal, the company with the higher return on sales (net income percentage) is doing a better job of controlling expenses.
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