Merchandising Operations and the Accounting Cycle - Pearson

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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
sales. Therefore the GST paid on purchases does not really affect the cost of the purchase. For example, Austin Sound Centre Inc. paid the GST of 7 percent, or $4.90 ($70 × 0.07), on the LA100 purchased on Exhibit 5-3. The entry to record the purchase of the single CD player would have been: May 27 Inventory .................................................................... 70.00 GST Payable ............................................................... 4.90 Accounts Payable.................................................. 74.90 Purchased JVC LA100 CD player on account. Assume Austin Sound sold the JVC LA100 CD player for $110.00 to a customer; the GST on the sale would be $7.70 ($110.00 × 0.07). The entry to record the sale would be June 10 Cash ............................................................................. 117.70 GST Payable........................................................... 7.70 Sales ....................................................................... 110.00 Sold JVC LA100 CD player for cash. Subsequently, Austin Sound would have to remit to the Receiver General at the CCRA the difference between the GST paid and the GST collected, the net GST. The entry would be July 31 GST Payable ................................................................ 2.80 Cash ........................................................................ 2.80 Payment of GST collected net of GST paid on purchases ($7.70 – $4.90). The discussion of GST above is greatly simplified for the purposes of this text. The actual GST is more complicated than as presented for two major reasons: 1. Supplies and services are divided into three classes and each class is taxed differently. The three classes are (1) Taxable supplies and services; (2) Zero-rated supplies and services; (3) Exempt supplies and services. 2. Some provinces (Quebec, Nova Scotia, New Brunswick, and Newfoundland and Labrador) have harmonized, or combined, their provincial sales tax with the GST to some degree. Discussion of the GST beyond the level above is beyond the scope of this chapter. Mid-Chapter Summary Problem for Your Review Brun Sales Company Ltd. engaged in the following transactions during June of the current year: June 3 Purchased inventory on credit terms of 1/10 net eom, $1,610. 9 Returned 40 percent of the inventory purchased on June 3. It was defective. 12 Sold goods for cash, $920 (cost, $550). 15 Purchased goods of $5,100, less a $100 quantity discount. Credit terms were 3/15 n/30. 16 Paid a $260 freight bill on goods purchased. 18 Sold inventory for $2,000 on credit terms of 2/10 n/30 (cost, $1,180). Chapter Five Merchandising Operations and the Accounting Cycle 235
Page 1 and 2: C H 5A P T E R Merchandising Operat
Page 3 and 4: Before launching into merchandising
Page 5 and 6: Suppose FGL’s Sports Experts stor
Page 7 and 8: debiting the Inventory account. A $
Page 9 and 10: Austin paid within the discount per
Page 11 and 12: STOP & THINK Refer to the Accounts
Page 13: STOP & THINK Why is there no Januar
Page 17 and 18: Requirement 2 Inventory Cost of Goo
Page 19 and 20: Exhibit 5-5. All the new accounts
Page 21 and 22: EXHIBIT 5-7 Financial Statements of
Page 23 and 24: Journal Adjusting Entries a. Dec. 3
Page 25 and 26: Two Key Ratios for Decision Making
Page 27 and 28: Wal-Mart 1 2 3 4 5 6 Austin Sound C
Page 29 and 30: Decision Guidelines How do merchand
Page 31 and 32: 3. Prepare the company’s multi-st
Page 33 and 34: Requirement 3 JAN KING DISTRIBUTING
Page 35 and 36: c. Buying a large enough quantity o
Page 37 and 38: Date: ___________________________ T
Page 39 and 40: 2. The R39 truck tires were ordered
Page 41 and 42: Required 1. Prepare the business’
Page 43 and 44: $7,700, $12,160, and $10,180 thousa
Page 45 and 46: 2. The note payable signed on May 2
Page 47 and 48: Trial Balance Adjustments Account T
Page 49 and 50: Sales discounts....................
Page 51 and 52: e. Store supplies on hand at Decemb
Page 53 and 54: Required 1. Inventory on hand at Se
Page 55 and 56: c. The equipment is expected to las
Page 57 and 58: HEIGHTS PHARMACY LTD. Balance Sheet
Page 59 and 60: Supplement to Chapter 5 Accounting
Page 61 and 62: Panel A Panel B Beginning inventory
Page 63 and 64: AUSTIN SOUND CENTRE INC. Trial Bala
Page 65 and 66:
Assets Current assets: Cash .......
Page 67 and 68:
Journal Adjusting Entries a. Dec. 3
Page 69 and 70:
Summary Problem for Your Review The
Page 71 and 72:
Requirement 2 Adjusting Entries 200
Page 73 and 74:
Requirement 4 Inventory Cost of goo
Page 75 and 76:
Required Journalize these transacti
Page 77:
BLISS SALES COMPANY LTD. Trial Bala
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