Connect Financial Accounting Chapter 4

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Connect Financial Accounting Chapter 4

Q1. Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products.

  • May 3 – Allied made its first and only purchase of inventory for the period on May 3 for 3,000 units at a price of $10 cash per unit (for a total cost of $30,000).
  • May 5 – Allied sold 1,500 of the units in inventory for $14 per unit (invoice total: $21,000) to Macy Co. under credit terms 2/10, n/60. The goods cost Allied $15,000.
  • May 7 – Macy returns 150 units because they did not fit the customer’s needs (invoice amount: $2,100). Allied restores the units, which cost $1,500, to its inventory.
  • May 8 – Macy discovers that 150 units are scuffed but are still of use and, therefore, keeps the units. Allied sends Macy a credit memorandum for $900 toward the original invoice amount to compensate for the damage.
  • May 15 – Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount.

Prepare journal entries to record the following transactions for Allied assuming it uses a perpetual inventory system and the gross method. (Allied estimates returns using an adjusting entry at each year-end.)

connect financial accounting ch4q1

Q2. Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products.

  • May 3 – Allied made its first and only purchase of inventory for the period on May 3 for 3,000 units at a price of $11 cash per unit (for a total cost of $33,000).
  • May 5 – Allied sold 1,500 of the units in inventory for $15 per unit (invoice total: $22,500) to Macy Co. under credit terms 2/10, n/60. The goods cost Allied $16,500.
  • May 7 – Macy returns 150 units because they did not fit the customer’s needs (invoice amount: $2,250). Allied restores the units, which cost $1,650, to its inventory.
  • May 8 – Macy discovers that 150 units are scuffed but are still of use and, therefore, keeps the units. Allied sends Macy a credit memorandum for $1,050 toward the original invoice amount to compensate for the damage.
  • May 15 – Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount.

Prepare the appropriate journal entries for Macy Co. to record each of the May transactions. Macy is a retailer that uses the gross method and a perpetual inventory system, and purchases these units for resale. (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)

connect financial accounting ch4q2

Q3. Sydney Retailing (buyer) and Troy Wholesalers (seller) enter into the following transactions.

  • May 11 – Sydney accepts delivery of $33,500 of merchandise it purchases for resale from Troy: invoice dated May 11; terms 3/10, n/90; FOB shipping point. The goods cost Troy $22,445. Sydney pays $455 cash to Express Shipping for delivery charges on the merchandise
  • May 12 – Sydney returns $1,200 of the $33,500 of goods to Troy, who receives them the same day and restores them to its inventory. The returned goods had cost Troy $804.
  • May 20 – Sydney pays Troy for the amount owed. Troy receives the cash immediately.

(Both Sydney and Troy use a perpetual inventory system and the gross method.)

1. Prepare journal entries that Sydney Retailing (buyer) records for these three transactions.

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2. Prepare journal entries that Troy Wholesalers (seller) records for these three transactions.

connect financial accounting chapter 4

Q4. Following are the merchandising transactions for Dollar Store.

  • Nov 1 – Dollar Store purchases merchandise for $2,100 on terms of 2/5, n/30, FOB shipping point, invoice dated November 1.
  • Nov 5 – Dollar Store pays cash for the November 1 purchase.
  • Nov 7 – Dollar Store discovers and returns $250 of defective merchandise purchased on November 1, and paid for on November 5, for a cash refund.
  • Nov 10 – Dollar Store pays $105 cash for transportation costs for the November 1 purchase.
  • Nov 13 – Dollar Store sells merchandise for $2,268 with terms n/30. The cost of the merchandise is $1,134.
  • Nov 16 – Merchandise is returned to the Dollar Store from the November 13 transaction. The returned items are priced at $285 and cost $143; the items were not damaged and were returned to inventory.

Journalize the above merchandising transactions for the Dollar Store assuming it uses a perpetual inventory system and the gross method.

connect financial accounting chapter 4

Connect Financial Accounting Chapter 4 Quiz

Q1. Multiple-step income statements:

  • Are required by the FASB and IASB.
  • Contain more detail than a simple listing of revenues and expenses.
  • Are required for the periodic inventory system.
  • List cost of goods sold as an operating expense.
  • Are only used in perpetual inventory systems.

Q2. All of the following statements regarding sales returns and allowances are true except:

  • A reduction in the selling price because of damaged merchandise is included in sales returns and allowances.
  • There is no relationship between sales returns and allowances and the possibility of lost future sales.
  • Sales returns and allowances are recorded in a separate contra-revenue account.
  • Sales returns and allowances are rarely disclosed in published financial statements.
  • Sales returns and allowances are closed to the Income Summary account.

Q3. All of the following statements related to U.S. GAAP and IFRS are true except:

  • Accounting for basic inventory transactions is the same under the two systems.
  • The closing process for merchandisers is the same under both systems.
  • U.S. GAAP offers little guidance about the presentation order of expenses.
  • Neither system requires separate disclosure of items when their size, nature, or frequency are important.
  • Neither system defines operating income.

Q4. Liquidity problems are likely to exist when a company’s acid-test ratio:

  • Is less than the current ratio.
  • Equals 1.
  • Is higher than 1.
  • Is substantially lower than 1.
  • Is higher than the current ratio.

Q5. A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:

  • Debit Merchandise Inventory $1,600; credit Cash $1,600.
  • Debit Cash $1,600; credit Accounts Payable $1,600.
  • Debit Accounts Payable $1,600; credit Merchandise Inventory $32; credit Cash $1,568.
  • Debit Accounts Payable $1,800; credit Cash $1,800.
  • Debit Accounts Payable $1,600; credit Cash $1,600.

Q6. A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made within the discount period, what is the net cost of the merchandise?

  • $13,720.
  • $19,600.
  • $6,860.
  • $13,000.
  • $12,740.

Q7. The amount recorded for merchandise inventory includes all of the following except:

  • Purchase discounts.
  • Returns and allowances.
  • Freight costs paid by the buyer.
  • Freight costs paid by the seller.
  • Trade discounts.

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