Merchandising Operations and the Accounting Cycle - Pearson

WORKING IT OUT
Best Company Ltd. sold $2,000 of
merchandise to Super Sales Co.
on March 1, 2003, and granted a
5% quantity discount off that list
price. Super Sales returned
merchandise on March 4, and Best
granted Super Sales a sales
allowance of $200. Best Company
Ltd. collected the balance on
March 9, after subtracting a 2%
sales discount. Record Best’s
collection of cash on March 9.
A:
Cash 1,666 1
Sales Discounts 34 2
Accounts Receivable 1,700 3
1 $2,000 0.05($2,000) $1,900
$1,900 $200 = $1,700
$1,700 0.02($1,700) $1,666
2 $1,700 0.02 = $34
3 $2,000 0.05 ($2000)200$1,700
234 Part One The Basic Structure of Accounting
Suppose JVC grants to the buyer a $100 sales allowance for damaged goods.
Austin Sound then subtracts $100 from the amount it will pay JVC. JVC journalizes
this transaction by debiting Sales Returns and Allowances and crediting
Accounts Receivable as follows:
July 15 Sales Returns and Allowances.................................. 100
Accounts Receivable............................................. 100
Granted a sales allowance for damaged goods.
No inventory entry is needed for a sales allowance transaction because the seller, JVC,
receives no returned goods from the customer. Instead, JVC will simply receive less
cash from the customer.
After the preceding entries are posted, all the accounts have up-to-date balances.
JVC’s Accounts Receivable has a $6,500 debit balance, as follows:
Accounts Receivable
(Sale) July 7 7,200 July 12 600 (Return)
July 15 100 (Allowance)
Bal. 6,500
On July 22, the last day of the discount period, JVC collects $4,000 of this accounts
receivable. Assume JVC allows customers to take discounts on all amounts
JVC receives within the discount period. JVC’s cash receipt is $3,880 [calculated as
$4,000 – (0.03 × $4,000)], and the collection entry is
July 22 Cash.............................................................................. 3,880
Sales Discounts. .......................................................... 120
Accounts Receivable............................................. 4,000
Cash collection within the discount period.
Sales discount is $120 (0.03 $4,000).
Suppose JVC collects the remainder of $2,500 on July 28. That date is after the discount
period, so there is no sales discount. To record this collection on account, JVC
debits Cash and credits Accounts Receivable for the same amount, as follows:
July 28 Cash.............................................................................. 2,500
Accounts Receivable............................................. 2,500
Cash collection after the discount period.
In Exhibit 5-1, The Forzani Group Ltd.—like most other businesses—reports to the
public only the net sales figure. But FGL managers use the return and allowance
data to track customer satisfaction and product quality.
Goods and Services Tax
This topic is introduced here to make you aware of the goods and services tax because
most goods and services sold today in Canada have the Goods and Services Tax (GST)
levied on them by the federal government at the time of sale. However, it was decided
to omit consideration of the GST from the discussion and examples in the early
chapters to avoid making the material overly complicated. The following discussion
provides a brief introduction to the topic; GST is dealt with more fully in Chapter 11.
The manufacturer, wholesaler, and retailer pay the GST on the cost of their purchases,
and then pass it on to the next link in the economic chain by charging and
collecting it on their respective sales. The consumer, the last link in the chain, pays
the final tax. Each entity that collects the GST remits the tax collected to the Receiver
General at the Canada Customs and Revenue Agency (CCRA).
The GST is designed to be a consumption tax and, as was suggested above, the
entity ultimately paying the tax is the final purchaser of the product or service.
Earlier links in the chain (for example, the retailer) pay tax on their purchases, but
are then allowed to deduct that tax from the tax they themselves collect on their