Merchandising Operations and the Accounting Cycle - Pearson

STOP & THINK
Refer to the Accounts Payable account on page 229 (Purchase Returns and Allowances).
After all returns, allowances, and transportation charges, what amount of discount can
Austin Sound take if it pays JVC on June 9 (within the discount period)? How much
should Austin Sound pay JVC on June 9? What is Austin Sound’s net cost of this inventory?
Answer:
3% Discount = $18.81 [($707.00 – $70.00 – $10.00) ×0.03]
Payment to JVC = $608.19 ($627.00 – $18.81)
Net cost of inventory = $668.19 ($608.19 + $60.00 transportation charge)
The freight charge increases the cost of the inventory to $687.00 as follows:
Inventory
(Purchase) May 27 707.00 June 3 70.00 (Return)
(Freight) June 1 60.00 June 4 10.00 (Allowance)
(Net cost) Bal. 687.00
Any discounts would be computed only on the account payable to the seller, not on
the transportation costs, because the freight company usually offers no discount.
Under FOB shipping point terms, the seller sometimes prepays the transportation
cost as a convenience, and adds this cost on the invoice. The buyer can debit
Inventory for the combined cost of the inventory and the shipping cost because
both costs apply to the merchandise. A $5,000 purchase of goods, coupled with a related
freight charge of $400, would be recorded as follows:
March 12 Inventory .................................................................... 5,400
Accounts Payable ................................................. 5,400
Purchased inventory on account, including
freight of $400.
If the buyer pays within the discount period, the discount will be computed on the
$5,000 merchandise cost, not on the $5,400. No discount is offered on transportation
cost.
Freight Out The cost of freight charges paid to ship goods sold to customers is
called freight out. Freight out is a delivery expense, which is paid by the seller, not
the purchaser. Delivery expense is an operating expense for the seller. It is debited
to the Delivery Expense account.
Selling Inventory and Recording Cost of
Goods Sold
After a company buys inventory, the next step in the operating cycle is to sell the
goods. We shift now to the selling side and follow Austin Sound Centre Inc. through
a sequence of selling transactions. A sale earns a reward, Sales Revenue. A sale also
requires a sacrifice in the form of an expense, Cost of Goods Sold, as the seller gives
up the asset Inventory.
After making a sale on account, Austin Sound Centre Inc. may experience any of
the following:
•Asales return: The customer may return goods to Austin Sound.
•Asales allowance: For one reason or another, Austin Sound may grant a sales
allowance to reduce the amount of cash collected from the customer.
Chapter Five Merchandising Operations and the Accounting Cycle 231