1 6 Accounting for Merchandising Businesses - … a merchandising business. 4 ... Property, plant,...
Transcript of 1 6 Accounting for Merchandising Businesses - … a merchandising business. 4 ... Property, plant,...
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6
Accounting for Accounting for Merchandising Merchandising BusinessesBusinesses
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BusinessesBusinesses
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1. Distinguish between the activities and
financial statements of service and
merchandising businesses.
After studying this chapter, you should
be able to:
2
merchandising businesses.
2. Describe and illustrate the financial
statements of a merchandising
business.
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3. Describe and illustrate the accounting for
merchandise transactions including:� sale of merchandise
After studying this chapter, you should
be able to:
3
� sale of merchandise
� purchase of merchandise
� transportation costs, sales taxes, trade discounts
� dual nature of merchandising transactions.
4. Describe the adjusting and closing process
for a merchandising business.
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Distinguish between the
Objective 1Objective 1
6-1
4
activities and financial
statements of service and
merchandising businesses.
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Service Business
Fees earned $XXX
6-1
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Fees earned $XXX
Operating expenses –XXX
Net income $XXX
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Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
6-1
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Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
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When merchandise is sold, the
revenue is reported as sales, and
its cost is recognized as an
6-1
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its cost is recognized as an
expense called cost of
merchandise sold.
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The cost of merchandise sold is
subtracted from sales to arrive at
gross profit. This amount is
called gross profit because it is
6-1
8
called gross profit because it is
the profit before deducting the
operating expenses.
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Merchandise on hand (not
sold) at the end of an
accounting period is called
6-1
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accounting period is called
merchandise inventory.
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On August 25, Gallatin Repair Service extended an offer of
$125,000 for land that had been priced for sale at $150,000. On
September 3, Gallatin Repair Service accepted the seller’s
counteroffer of $137,000. On October 20, the land was assessed
at a value of $98,000 for property tax purposes. On December 4,
1-2
During the current year, merchandise is sold for $250,000
cash and for $975,000 on account. The cost of the
merchandise sold is $735,000. What is the amount of the
gross profit?
6-1
Example Exercise 6-1
10
at a value of $98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the land by a
national retail chain. At what value should the land be recorded
in Gallatin Repair Service’s records?
Follow My Example 1-1
$137,000. Under the cost concept, the land should be recorded at
the cost to Gallatin Repair Service.31
gross profit?
Follow My Example 6-1
The gross profit is $490,000 ($250,000 + $975,000 –
$735,000).
10For Practice: PE 6-1A, PE 6-1B
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6-1
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Describe and illustrate the
Objective 2Objective 2
6-2
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financial statements of a
merchandising business.
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The multiple-step
income statement
contains several sections,
6-2Multiple-Step Income Statement
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contains several sections,
subsections, and
subtotals.
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The Sales account
provides the total amount
charged to customers for
6-2
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charged to customers for
merchandise sold,
including cash sales and
sales on account.
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Sales returns and
allowances are granted by
the seller to customers for
6-2
15
the seller to customers for
damaged or defective
merchandise.
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Sales discounts are granted
by the seller to customers
for early payment of
6-2
16
for early payment of
amounts owed.
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Net sales is determined by
subtracting sales returns
and allowances and sales
6-2
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and allowances and sales
discounts from sales.
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Revenue from sales:Sales $720,185
NetSolutionsNetSolutionsIncome StatementIncome Statement
For the Year Ended December 31, 2009For the Year Ended December 31, 2009
6-2Multiple-Step Income Statement
1818(Continued)
Sales $720,185Less: Sales returns and allowances $ 6,140
Sales discounts 5,790 11,930Net sales $708,255
Cost of merchandise sold 525,305
Gross profit $182,950
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Operating expenses:Selling expenses:
Sales salaries expense $53,430Advertising expense 10,860Depr. Expense–store equipment 3,100Delivery Expense 2,800Miscellaneous selling expense 630
Total selling expenses $ 70,820Administrative expenses:
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Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equipment 2,490Insurance expense 1,910Office supplies expense 610Misc. administrative expense 760
Total admin. expenses 34,890Total operating expenses 105,710
Income from operations $ 77,24019
(Continued)
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Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)
Net income $75,400
6-2
20(Concluded) 20
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Cost of merchandise sold
was discussed earlier. It is
the cost of the merchandise
6-2
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the cost of the merchandise
sold to customers.
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As we discussed in Slide 16,
sellers may offer customers
sales discounts for early
payment of their bills. From
6-2
22
payment of their bills. From
the buyer’s perspective, such
discounts are referred to as
purchase discounts.
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The buyer may return merchandise
to the seller (a purchase return),
or the buyer may receive a
6-2
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or the buyer may receive a
reduction in the initial price at
which the merchandise was
purchased (a purchase allowance).
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Cost of Merchandise
Sold
6-2
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6-2Single-Step Income Statement
An alternative form of income
statement is the single-step
income statement. As shown in
the next slide, the income
25
the next slide, the income
statement for NetSolutions
deducts the total of all expenses
in one step from the total of all
revenues.
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Revenues:Net sales $708,255Rent revenue 600
NetSolutionsNetSolutions
Income Statement Income Statement For the Year Ended December 31, 2009For the Year Ended December 31, 2009
6-2Exhibit 3: Single-Step Income Statement
2626
Rent revenue 600
Total revenues $708,855Expenses:
Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
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6-2Exhibit 4: Statement of Owner’s Equity
NetSolutionsNetSolutionsStatement of Owner’s EquityStatement of Owner’s Equity
For the Year Ended December 31, 2009For the Year Ended December 31, 2009
2727
Chris Clark, capital, 1/1/09 $153,800Net income for year $75,400Less withdrawals 18,000Increase in owner’s equity 57,400Chris Clark, capital, 12/31/09 $211,200
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NetSolutionsNetSolutionsBalance SheetBalance Sheet
December 31, 2009December 31, 2009
Assets
Current assets:
6-2Exhibit 5: Report Form of Balance Sheet
2828
Current assets:Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650
Total current assets $209,310
(Continued)
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Property, plant, and equip.: Land $20,000Store equipment $27,100
Less accumulated
depreciation 5,700 21,400
6-2Exhibit 5: Report Form of Balance Sheet
29
Office equipment $15,570Less accumulated
depreciation 4,720 10,850Total property, plant, and equipment 52,250
Total assets $261,560
29(Continued)
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LiabilitiesCurrent liabilities:
Accounts payable $22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800
6-2Exhibit 5: Report Form of Balance Sheet
3030
Unearned rent 1,800Total current liabilities $ 30,360
Long-term liabilities:Note payable (final pmt. due 2017) 20,000
Total liabilities $ 50,360Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560
(Concluded)
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6-2
Example Exercise 6-2
Based upon the following data, determine the cost of
merchandise sold for May. Use the format seen in
Exhibit 2.
31
Merchandise Inventory, May 1 $121,200
Merchandise Inventory, May 31 142,000
Purchases 985,000
Purchases Returns and Allowances 23,500
Purchases Discounts 21,000
Transportation In 11,30031
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Follow My Example 6-2
Merchandise Inventory, May 1 $ 121,200
Purchases $985,000
Less: Purchases returns and allowances $23,500
Purchases discounts 21,000 44,500
Net purchases $940,500
6-2
3232
Net purchases $940,500
Add transportation in 11,300
Cost of merchandise purchased 951,800
Merchandise available for sale $1,073,000
Less merchandise inventory, May 31 142,000
Cost of merchandise sold $ 931,000
For Practice: PE 6-2A, PE 6-2B
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Describe and illustrate the accounting
for merchandise transactions including:
Objective 3Objective 3
6-3
33
for merchandise transactions including:
sale of merchandise; purchase of
merchandise; transportation costs, sales
taxes, trade discounts; dual nature of
merchandise transactions.
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6-3Cash Sales
3434
On January 3, NetSolutions sold
$1,800 of merchandise for cash.
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6-3Cash Sales (continued)
3535
Using a perpetual inventory, the $1,200
cost of the inventory must be recorded.
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6-3Credit Card Sales
3636
At the end of the month, $48 was
sent to pay the service charge on
credit card sales.
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6-3Sales on Account Using a Perpetual
Inventory
Jan. 12 Accounts Receivable—Sims Co. 510 00
Sales 510 00
Invoice No. 7172
12 Cost of Merchandise Sold 280 00
3737
On January 12, NetSolutions sold Sims Company
merchandise on account, $510. The cost of the
merchandise to the seller was $280.
12 Cost of Merchandise Sold 280 00
Merchandise Inventory 280 00
Cost of merchandise sold on
Invoice No. 7172.
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The terms for when payments for
merchandise are to be made, agreed
on by the buyer and the seller, are
6-3Sales Discounts
38
on by the buyer and the seller, are
called credit terms. If buyer is
allowed an amount of time to pay, it
is known as the credit period.
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If invoice is
paid within
10 days of
Invoice for
$1,500
Terms:
6-3Credit Terms
3939
invoice dateTerms:
2/10, n/30
$1,470 paid
($1,500 less a
2% discount)
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If invoice is
NOT paid
within 10 Invoice for
$1,500
6-3
4040
within 10
days of
invoice date
$1,500
Terms:
2/10, n/30
Full amount ($1,500)
is due within 30 days
of invoice date
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Sales Discounts 6-3
Jan. 22 Cash 1 470 00
Accounts Receivable–Omega Tech. 1 500 00
Sales Discounts 30 00
Collection of Invoice No.
4141
On January 22, NetSolutions receives the
amount due, less the 2 percent discount.
106-8, less 2% discount.
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Jan. 13 Sales Returns and Allowances 225 00
Accounts Receivable—Krier Co. 225 00
Credit Memo No. 32
13 Merchandise Inventory 140 00
6-3
42
13 Merchandise Inventory 140 00
Cost of Goods Sold 140 00
Cost of merchandise returned.
Credit Memo No. 32.
42
On January 13, issued Credit Memo 32 to Krier
Company for merchandise returned to
NetSolutions. Selling price, $225; cost to
NetSolutions, $140.
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1-2
Journalize the following merchandise transactions:
a. Sold merchandise on account, $7,500 with terms of
2/10, n/30. The cost of the merchandise sold was
$5,625.
6-3
Example Exercise 6-3
43
$5,625.
b. Received payment less the discount.
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Follow My Example 6-3
a. Accounts Receivable 7,500
Sales 7,500
Cost of Merchandise Sold 5,625
Merchandise Inventory 5,625
6-3
4444
Merchandise Inventory 5,625
b. Cash 7,350
Sales Discounts 150
Accounts Receivable 7,500
For Practice: PE 6-3A, PE 6-3B
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45
Purchase Transactions (Perpetual
Inventory)
6-3
JOURNAL
Date DescriptionPost.
Ref. Dr Cr.
PAGE 24
Jan. 3 Merchandise Inventory 2 510 002009
Cash 2 510 00
4545
On January 3, NetSolutions purchased merchandise
for cash from Alden Company, $2,510.
Purchased inventory from
Bowen Co.
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46
6-3
Jan. 4 Merchandise Inventory 9 250 00
Accounts Payable—Thomas Corp. 9 250 00
Purchased inventory on
account.
4646
account.
On January 4, NetSolutions purchased
merchandise on account from Thomas
Corporation, $9,250.
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47
Alpha Technologies issues
an invoice for $3,000 to
Purchases Discounts 6-3
47
an invoice for $3,000 to
NetSolutions dated March
12, with terms 2/10, n/30.
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48
NetSolutions borrows cash at an annual interest
rate of 6%. Should the firm borrow cash to pay
the invoice within the discount period?
6-3
YES
48
Discount of 2% on $3,000 $60.00
Interest for 20 days at the rate
of 6% on $2,940 – 9.80
Savings from borrowing $50.20
YES
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49
Mar. 12 Merchandise Inventory 3 000 00
Accounts Payable—Alpha Tech. 3 000 00
Purchased inventory on
account.
6-3Purchase Transactions (Perpetual
Inventory)
4949
account.
On March 12, NetSolutions purchased
merchandise on account from Alpha
Technologies, $3,000.
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50
Mar. 22 Accounts Payable—Alpha Technol. 3 000 00
Cash 2 940 00
Merchandise Inventory 60 00Paid Alpha Technologies for
March 12 purchase.
6-3
50
March 12 purchase.
If payment is made by March 22, NetSolutions
records the discount as a reduction in cost. Notice
that Merchandise Inventory is credited because
NetSolutions maintains a perpetual inventory.50
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51
Apr. 11 Accounts Payable—Alpha Technol. 3 000 00
Cash 3 000 00
Paid Alpha Technologies for
March 12 purchase.
6-3
51
March 12 purchase.
51
If NetSolutions does not pay the invoice until
April 11, it would pay the full amount.
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52
A purchases return involves actually
returning merchandise that is
Purchases Return 6-3
52
returning merchandise that is
damaged or does not meet the
specifications of the order.
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53
When the defective or incorrect
merchandise is kept by the
buyer and the vendor makes a
6-3Purchases Allowance
53
buyer and the vendor makes a
price adjustment, this is a
purchases allowance.
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54
NetSolutions receives the delivery
from Maxim Systems and
determines that $900 of the items
6-3
54
determines that $900 of the items
are not the merchandise ordered.
Debit memorandum #18 (also
called a debit memo) is issued to
Maxim Systems.
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55
Mar. 7 Accounts Payable—Maxim Systems 900 00
Debit Memo No. 18
Merchandise Inventory 900 00
6-3
5555
On March 7, NetSolutions records the
return of the merchandise indicated in
Debit Memorandum No. 18.
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56
On May 2, NetSolutions purchased
$5,000 of merchandise from Delta Data
Link, subject to terms 2/10, n/30.
May 2 Merchandise Inventory 5 000 00
6-3
5656
May 2 Merchandise Inventory 5 000 00
Purchased merchandise.
Accounts Payable—Delta Data 5 000 00
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57
On May 4, NetSolutions returns
$3,000 of the merchandise.
6-3
4 Accounts Payable—Delta Data Link 3 000 00
5757
4 Accounts Payable—Delta Data Link 3 000 00
Returned portion of the
merchandise purchased.
Merchandise Inventory 3 000 00
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58
On May 12, NetSolutions pays the amount due,
$1,960 [$2,000 – ($5,000 –$3,000) x 2%)].
12 Accounts Payable—Delta Data Links 2 000 00
6-3
5858
12 Accounts Payable—Delta Data Links 2 000 00
Paid invoice [($5,000 –
$3,000) x 2% = $40;
$2,000 – $40 = $1,960]
Cash 1 960 00
Merchandise Inventory 40 00
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59
6-3
Rofles Company purchased merchandise on account from a
supplier for $11,500, terms 2/10, n/30. Rofles Company
returned $3,000 of the merchandise and received full credit.
Example Exercise 6-4
59
a. If Rofles Company pays the invoice within the
discount period, what is the amount of cash required
for the payment?
b. Under a perpetual inventory system, what account is
credited by Rofles Company to record the return?
59
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60
Follow My Example 6-4
a. $8,330. Purchase of $11,500 less the return of
$3,000 less the discount of $170 [($11,500 –
$3,000) x 2%].
6-3
6060
b. Merchandise Inventory.
For Practice: PE 6-4A, PE 6-4B
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61
If ownership of the merchandise
passes to the buyer when the seller
delivers the merchandise to the
6-3Transportation Costs
61
delivers the merchandise to the
freight carrier, it is said to be FOB
(free on board) shipping point.
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62
June 10 Merchandise Inventory 900 00
Purchased merchandise,
terms FOB shipping point.
Accounts Payable—Magna Data 900 00
10 Merchandise Inventory 50 00
6-3
6262
On June 10, NetSolutions buys merchandise from
Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.
10 Merchandise Inventory 50 00
Cash 50 00
Paid shipping cost .
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63
If ownership of the merchandise
passes to the buyer when the
buyer receives the merchandise,
6-3Transportation Costs
63
buyer receives the merchandise,
the terms are said to be FOB
(free on board) destination.
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64
On June 15, NetSolutions sells
merchandise to Kranz Company on
6-3FOB Destination
64
merchandise to Kranz Company on
account, $700, terms FOB
destination. The cost of the
merchandise sold is $480.
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65
6-3
June 15 Accounts Receivable—Kranz Co. 700 00
Sold merchandise, terms
FOB destination.
Sales 700 00
6565
15 Cost of Merchandise Sold 480 00
Merchandise Inventory 480 00
Record cost of merchandise
sold to Kranz Company.
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66
6-3
June 15 Delivery Expense 40 00
Cash 40 00
Paid shipping cost on
6666
On June 15, NetSolutions pays the
transportation cost of $40.
merchandise sold.
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67
On June 20, NetSolutions sells
merchandise to Planter Company
on account, $800, terms FOB
6-3FOB Shipping Point
67
on account, $800, terms FOB
shipping point. The cost of the
merchandise sold is $360.
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68
6-3
June 20 Accounts Receivable—Planter Co. 800 00
Sold merchandise, terms
FOB shipping point.
Sales 800 00
6868
20 Cost of Merchandise Sold 360 00
Merchandise Inventory 360 00
Record cost of merchandise
sold to Planter Company.
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69
6-3
June 20 Accounts Receivable—Planter Co. 45 00
Cash 45 00
Prepaid shipping cost on
6969
NetSolutions pays the transportation
cost of $45 and adds it to the invoice.
merchandise sold.
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70
6-3
Determine the amount to be paid in full settlement of each
of invoices (a) and (b), assuming that credit for returns and
allowances was received prior to payment and that all
invoices were paid within the discount period.
Example Exercise 6-5
70
invoices were paid within the discount period.
70
Transportation Returns and
Merchandise Paid by Seller Transportation Terms Allowances
a. $4,500 $200 FOB shipping point, $800
1/10, n/30
b. $5,000 $60 FOB destination, $2,500
2/10, n/30
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71
Follow My Example 6-5
a. $3,863. Purchase of $4,500 less return of $800
less the discount of $37 [($4,500 – $800) x 1%]
plus $200 of shipping.
6-3
7171
b. $2,450. Purchase of $5,000 less return of
$2,500 less the discount of $50 [($5,000 –
$2,500) x 2%].
For Practice: PE 6-5A, PE 6-5B
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72
6-3
721872
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73
Aug. 12 Accounts Receivable—Lemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00
Invoice No. 339
Sales Taxes 6-3
731873
On August 12, merchandise is sold
on account to Lemon Company,
$100. The state has a 6% sales tax.
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74
Sept. 15 Sales Tax Payable 2 900 00
Cash 2 900 00
Payment for sales taxes
collected during August.
6-3
741874
On September 15, the seller sends in a
payment of $2,900 to the taxing unit for
the August taxes collected.
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75
When wholesalers offer special
discounts to certain classes of buyers
Trade Discounts 6-3
75
discounts to certain classes of buyers
that order large quantities, these
discounts are called trade discounts.
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76
Dual Nature of Merchandise
Transactions6-3
Each merchandising transaction affects a buyer
and a seller. In the following illustrations, we
show how the same transactions would be
recorded by both the seller and the buyer.
76
recorded by both the seller and the buyer.
July 1. Scully Company sold merchandise on
account to Burton Co., $7,500, terms
FOB shipping point, n/45. The cost of
the merchandise sold was $4,500.
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77
Scully Company (Seller)
Accounts Receivable—Burton Co. 7,500Sales 7,500
Cost of Merchandise Sold 4,500Merchandise Inventory 4,500
6-3
771877
Merchandise Inventory 4,500
Burton Company (Buyer)
Merchandise Inventory. 7,500Accounts Payable—Scully Co. 7,500
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78
July 2 Burton Company paid
transportation charges of $150 on
July 1 purchase from Scully
6-3
78
July 1 purchase from Scully
Company.
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79
Scully Company (Seller)
No entry.
6-3
791879
Burton Company (Buyer)
Merchandise Inventory 150Cash 150
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80
July 5 Scully Company sold merchandise
on account to Burton Co., $5,000,
terms FOB destination, n/30. The
6-3
80
terms FOB destination, n/30. The
cost of the merchandise sold was
$3,500.
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81
Scully Company (Seller)
Accounts Receivable—Burton Co. 5,000Sales 5,000
Cost of Merchandise Sold 3,500Merchandise Inventory 3,500
6-3
811881
Merchandise Inventory 3,500
Burton Company (Buyer)
Merchandise Inventory. 5,000Accounts Payable—Scully Co. 5,000
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82
July 7. Scully Company paid
transportation costs of $250 for
delivery of merchandise sold to
6-3
82
delivery of merchandise sold to
Burton Company on July 5.
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83
Scully Company (Seller)
Delivery Expense 250Cash 250
6-3
831883
Burton Company (Buyer)
No entry.
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84
July 13. Scully Company issued Burton
Company a credit memorandum
for $1,000 of merchandise
6-3
84
for $1,000 of merchandise
returned from a July 5 purchase
on account. The cost of the
merchandise was $700.
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85
Scully Company (Seller)
Sales Returns and Allowances 1,000Accounts Receivable—Burton Co. 1,000
Merchandise Inventory 700Cost of Merchandise Sold 700
6-3
851885
Cost of Merchandise Sold 700
Burton Company (Buyer)
Accounts Payable—Scully Co. 1,000Merchandise Inventory 1,000
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86
July 15. Scully Company received
payment from Burton Company
6-3
86
payment from Burton Company
for purchase of July 5.
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87
Scully Company (Seller)
Cash 4,000Accounts Receivable—Burton Co. 4,000
6-3
871887
Burton Company (Buyer)
Accounts Payable—Scully Co. 4,000Cash 4,000
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88
July 18. Scully Company sold
merchandise on account to
Burton Company, $12,000, terms
FOB shipping point, 2/10, n/eom.
6-3
88
FOB shipping point, 2/10, n/eom.
Scully prepaid transportation
costs of $500, which were added
to the invoice. The cost of the
merchandise sold was $7,200.
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Scully Company (Seller)
Accounts Receivable—Burton Co. 12,000Sales 12,000
Accounts Receivable—Burton Co. 500Cash 500
Cost of Merchandise Sold 7,200
6-3
891889
Cost of Merchandise Sold 7,200Merchandise Inventory 7,200
Burton Company (Buyer)
Merchandise Inventory 12,500Accounts Payable—Scully Co. 12,500
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July 28. Scully Company received payment
from Burton Company for purchase
of July 18, less discount (2% x
6-3
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$12,000).
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Scully Company (Seller)
Cash 12,260Sales Discounts 240
Accounts Receivable—Burton Co. 12,500
6-3
911891
Burton Company (Buyer)
Accounts Payable—Scully Co. 12,500Merchandise Inventory 240Cash 12,260
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1-2
Sievert Co. sold merchandise to Bray Co. on account,
$11,500, terms 2/15, n/30. The cost of the merchandise sold
is $6,900. Sievert Co. issued a credit memorandum for
$900 for merchandise returned and later received the
6-3
Example Exercise 6-6
92
$900 for merchandise returned and later received the
amount due within the discount period. The cost of the
merchandise returned was $540. Journalize Sievert Co.’s
and Bray Co.’s entries for the receipt of the check for the
amount due from Bray Co.
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Follow My Example 6-6
6-3
Sievert Company Journal Entries:
Cash ($11,500 – $900 – $212) 10,388Sales Discounts [($11,500 – $900) x 2%] 212
Accounts Receivable—Bray Co.($11,500 – $900) 10,600
9393For Practice: PE 6-6A, PE 6-6B
Bray Company Journal Entries:
Accounts Payable—Sievert Co. ($11,500 –$900) 10,600
Merchandise Inventory [($11,500 – $900)x 2%] 212
Cash ($11,500 – $900 – $212) 10,388
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Describe the adjusting and
Objective 4Objective 4
6-4
94
Describe the adjusting and
closing process for a
merchandising business.
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6-4
Merchandising businesses may experience
some loss of inventory due to shoplifting,
employee theft, or errors in recording or
counting inventory. If the balance of the
Inventory Shrinkage
95
counting inventory. If the balance of the
Merchandise Inventory account is larger than
the total amount of merchandise count, the
difference is often called inventory shrinkage
or inventory shortage.
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NetSolutions inventory records
indicate that $63,950 of
merchandise should be
6-4
96
merchandise should be
available for sale on December
31, 2009. The physical count
reveals that only $62,150 is
actually available.
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Dec. 31 Cost of Merchandise Sold 1 800 00
Merchandise Inventory 1 800 00
Adjusting Entry
Inventory shrinkage (63,950
6-4
971897
Inventory records $63,950
Inventory count 62,150
Inventory shortage $ 1,800
Inventory shrinkage (63,950
– $62,150).
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6-4Step 1: Closing Entries
Close the temporary accounts with credit
balances to Income Summary.
Date Item PR Debit Credit
Closing Entries
98
2009
Closing Entries
Dec. 31 Sales 410 720 185 00
Rent Revenue 610 600 00
Income Summary 312 720 785 00
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6-4
Close the temporary accounts
with debit balances to
6-4Step 2: Closing Entries
9999
with debit balances to
Income Summary.
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6-46-4Step 2: Closing Entries
31 Income Summary 312 645 385 00Sales Returns and Allow. 411 6 140 00Sales Discounts 412 5 790 00Cost of Merchandise Sold 510 525 305 00Sales Salaries Expense 520 53 430 00Advertising Expense 521 10 860 00Depr. Exp.—Store Equip. 522 3 100 00Delivery Expense 523 2 800 00
100
100
Delivery Expense 523 2 800 00Misc. Selling Expense 529 630 00Office Salaries Expense 530 21 020 00Rent Expense 531 8 100 00Depr. Exp.—Office Equip. 532 2 490 00Insurance Expense 533 1 910 00Office Supplies Expense 534 610 00Misc. Administrative Exp. 539 760 00Interest Expense 710 2 440 00
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6-4Step 3: Closing Entries
Close Income Summary (the balance represents
a $75,400 profit for NetSolutions in 2009) to
Chris Clark, Capital.
101101
31 Income Summary 312 75 400 00
Chris Clark, Capital 310 75 400 00
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6-4
Close Chris Clark, Drawing to Chris
Clark, Capital.
Step 4: Closing Entries
102102
31 Chris Clark, Capital 310 18 000 00
Chris Clark, Drawing 311 18 000 00
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1-2
Pulmonary Company’s perpetual inventory records indicate
that $382,800 of merchandise should be on hand on March
31, 2008. The physical inventory indicates that $371,250 of
merchandise is actually on hand. Journalize the adjusting
entry for the inventory shrinkage for Pulmonary Company
6-4
Example Exercise 6-7
103
entry for the inventory shrinkage for Pulmonary Company
for the year ended March 31, 2008.
103
Follow My Example 6-7
For Practice: PE 6-7A, PE 6-7B
Mar. 31 Cost of Merchandise Sold ($382,800 –
($371,250) 11,550
Merchandise Inventory 11,550
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The ratio of net sales to assets
measures how effectively a business is
using its assets to generate sales.
Financial Analysis 6-4
104
using its assets to generate sales.
Net sales
Average total assets
Ratio of Net
Sales to Assets =
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Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Sears J. C. PenneyTotal revenue (net sales) $19,701* $18,424*
Total assets:
6-4
105105
Total assets:
Beginning of year $6,074 $18,300
End of year $8,651 $14,127
Average $7,362.5 $16,213.5
Ratio of net sales to assetsRatio of net sales to assets 2.68 to 12.68 to 1 1.14 to 11.14 to 1
*in millions
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6-4Interpretation
Based on these ratios, Sears
appears better than J. C.
106
appears better than J. C.
Penney in utilizing its assets to
generate sales.