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Chapter 6: Merchandising Transactions

Every problem in the chapter beside the book’s answer, a chapter at a time as you scroll.

Chapter 6: Merchandising Transactions

27 problems · 2 figures

Multiple Choice 6.1 §6.1 source ↗

Which of the following is an example of a contra revenue account?
  1. a.
    sales
  2. b.
    merchandise inventory
  3. c.
    sales discounts
  4. d.
    accounts payable

Answer

C. sales discounts

Multiple Choice 6.3 §6.1 source ↗

Which of the following numbers represents the discount percentage applied if a customer pays within a discount window and credit terms are 3/15, n/60?
  1. a.
    3
  2. b.
    15
  3. c.
    60
  4. d.
    3 and 15

Answer

A. 3

Multiple Choice 6.5 §6.2 source ↗

Which of the following is a disadvantage of the perpetual inventory system?
  1. a.
    Inventory information is in real-time.
  2. b.
    Inventory is automatically updated.
  3. c.
    It allows managers to make current decisions about purchases, stock, and sales.
  4. d.
    It is cost-prohibitive.

Answer

D. It is cost-prohibitive.

Multiple Choice 6.7 §6.2 source ↗

Which of the following is not a reason for the physical inventory count to differ from what is recognized on the company’s books?
  1. a.
    mismanagement
  2. b.
    shrinkage
  3. c.
    damage
  4. d.
    sale of services to customers

Answer

D. sale of services to customers

Multiple Choice 6.9 §6.3 source ↗

Which of the following accounts are used when recording a purchase?
  1. a.
    cash, merchandise inventory
  2. b.
    accounts payable, merchandise inventory
  3. c.
    A or B
  4. d.
    cash, accounts payable

Answer

C. A or B

Multiple Choice 6.11 §6.3 source ↗

A retailer returns $400 worth of inventory to a manufacturer and receives a full refund. What accounts recognize this return before the retailer remits payment to the manufacturer?
  1. a.
    accounts payable, merchandise inventory
  2. b.
    accounts payable, cash
  3. c.
    cash, merchandise inventory
  4. d.
    merchandise inventory, cost of goods sold

Answer

A. accounts payable, merchandise inventory

Multiple Choice 6.13 §6.4 source ↗

Which of the following accounts are used when recording the sales entry of a sale on credit?
  1. a.
    merchandise inventory, cash
  2. b.
    accounts receivable, merchandise inventory
  3. c.
    accounts receivable, sales
  4. d.
    sales, cost of goods sold

Answer

C. accounts receivable, sales

Multiple Choice 6.15 §6.4 source ↗

A customer returns $870 worth of merchandise and receives a full refund. What accounts recognize this sales return (disregarding the merchandise condition entry) if the return occurs before the customer remits payment to the retailer?
  1. a.
    accounts receivable, sales returns and allowances
  2. b.
    accounts receivable, cash
  3. c.
    sales returns and allowances, merchandise inventory
  4. d.
    accounts receivable, cost of goods sold

Answer

A. accounts receivable, sales returns and allowances

Multiple Choice 6.17 §6.5 source ↗

Which of the following is not a characteristic of FOB Destination?
  1. a.
    The seller pays for shipping.
  2. b.
    The seller owns goods in transit.
  3. c.
    The point of transfer is when the goods leave the seller’s place of business.
  4. d.
    The point of transfer is when the goods arrive at the buyer’s place of business.

Answer

C. The point of transfer is when the goods leave the seller’s place of business.

Multiple Choice 6.19 §6.5 source ↗

Which of the following is not a characteristic of FOB Shipping Point?
  1. a.
    The buyer pays for shipping.
  2. b.
    The buyer owns goods in transit.
  3. c.
    The point of transfer is when the goods leave the seller’s place of business.
  4. d.
    The point of transfer is when the goods arrive at the buyer’s place of business.

Answer

D. The point of transfer is when the goods arrive at the buyer’s place of business.

Multiple Choice 6.21 §6.6 source ↗

Which of the following accounts would be reported under operating expenses on a multi-step income statement?
  1. a.
    sales
  2. b.
    advertising expense
  3. c.
    sales returns and allowances
  4. d.
    interest expense

Answer

B. advertising expense

Multiple Choice 6.23 §6.6 source ↗

Which of the following accounts would not be reported under revenue on a simple income statement?
  1. a.
    interest revenue
  2. b.
    net sales
  3. c.
    rent revenue
  4. d.
    operating expenses

Answer

D. operating expenses

Multiple Choice 6.25 §6.7 source ↗

A retailer obtains a purchase allowance from the manufacturer in the amount of $600 for faulty inventory parts. Which of the following represents the journal entry for this transaction, assuming the retailer has already remitted payment?
  1. a.
    Accounts Payable debit of $600 and Merchandise Inventory credit of $600.
  2. b.
    Cash debit of $600 and Purchase Returns and Allowances credit of $600.
  3. c.
    Accounts payable debit of $600 and credits to Purchase Discounts of $10 and to Cash of $590.

Answer

B. Cash debit of $600 and Purchase Returns and Allowances credit of $600.

Multiple Choice 6.27 §6.7 source ↗

A customer obtains an allowance from the retailer in the amount of $450 for damaged merchandise. Which of the following represents the journal entry for this transaction, assuming the customer has not remitted payment?
  1. a.
    Sales Returns and Allowances debit of $450 and Cash credit of $450.
  2. b.
    Sales Returns and Allowances debit of $450 and Accounts Receivable credit of $450.
  3. c.
    Debits to Cash of $400 and Sales Returns and Allowances of $50, and Accounts Receivable credit of $450.

Answer

B. Sales Returns and Allowances debit of $450 and Accounts Receivable credit of $450.

Question 6.1 §6.1 source ↗

What are some benefits to a retailer for offering a discount to a customer?

Answer

It helps solidify a long-term relationship with the customer, encourages the customer to purchase more, and decreases the time it takes for the company to see a liquid asset (cash). Cash can be used for other purposes immediately, such as reinvesting the business, paying down loans quicker, and distributing dividends to shareholders.

Question 6.3 §6.1 source ↗

What is the difference between a sales return and a sales allowance?

Answer

A sales return occurs when a customer returns merchandise for a full refund. A sales allowance occurs when a customer keeps the merchandise and is issued a partial refund.

Question 6.5 §6.2 source ↗

What are two advantages and disadvantages of the perpetual inventory system?

Answer

Advantages could include real-time data and more robust information. Disadvantages could include fewer inventory counts with opportunity for mismanagement of inventory. It is also costly, and time consuming.

Question 6.7 §6.2 source ↗

Sunrise Flowers sells flowers to a customer on credit for $130 on October 18, with a cost of sale to Sunrise of $50. What entry to recognize this sale is required if Sunrise Flowers uses a periodic inventory system?

Answer

Oct 18 Accounts Receivable 130  
  Sales   130
  To recognize sale under periodic inventory system    
Note: No cost of sale entry is required currently, only at the end of the period under periodic.

Question 6.9 §6.3 source ↗

Name two situations where cash would be remitted to a retailer from a manufacturer after purchase.

Answer

Cash would be remitted to a retainer if the retailer returns merchandise to a manufacturer after payment, or if the retailer receives an allowance for damaged merchandise after payment.

Question 6.11 §6.3 source ↗

A retailer discovers that 50% of the total inventory items delivered from the manufacturer are damaged. The original purchase for all inventory was $1,100. The retailer decides to return 20% of the damaged inventory for a full refund and keep the remaining 80% of damaged inventory. What is the value of the merchandise returned?

Answer

$110; $1,100 × 50% = $550, $550 × 20% = $110

Question 6.13 §6.4 source ↗

If a customer purchased merchandise in the amount of $340, terms 3/10, n/30, returned $70 of the inventory for a full refund, and received an allowance for $65, how much discount would be applied if the customer remitted payment within the discount window?

Answer

$6.15; $205 × 3%

Question 6.15 §6.5 source ↗

What are the main differences between FOB Destination and FOB Shipping Point?

Answer

With FOB Destination, the seller is responsible for goods in transit, the seller pays for shipping, and the point of transfer is when the goods reach the buyer’s place of business. With FOB Shipping Point, the buyer is responsible for goods in transit, the buyer pays for shipping, and the point of transfer is when the goods leave the seller’s place of business.

Question 6.17 §6.5 source ↗

A seller sells $800 worth of goods on credit to a customer, with a cost to the seller of $300. Shipping charges are $100. The terms of the sale are 2/10, n/30, FOB Destination. What, if any, journal entry or entries will the seller record for these transactions?

Answer

Accounts Receivable 800  
Sales   800
To recognize sale on credit, 2/10, n/30, FOB Destination    
COGS 300  
Merchandise Inventory   300
To recognize cost of sale    
Delivery Expense 100  
Cash   100
To recognize shipping charge, FOB Destination    

Question 6.19 §6.6 source ↗

The following is select account information for Sunrise Motors. Sales: $256,400; Sales Returns and Allowances: $34,890; COGS: $120,470; Sales Discounts: $44,760. Given this information, what is the Gross Profit Margin Ratio for Sunrise Motors? (Round to the nearest whole percentage.)

Answer

32% or $.32; ($176,750 – 120,470) / $176,750

Question 6.21 §6.6 source ↗

How can an investor or lender use the Gross Profit Margin Ratio to make financial contribution decisions?

Answer

The gross profit margin ratio shows the company’s margin over costs of sales to cover operating expenses and profit. If margin continue to increase over time, an investor or lender might consider the financial contribution less risky. If the ratio decreases, the stakeholder may perceive an increased risk that the company may not have enough revenue to service debt.

Question 6.23 §6.7 source ↗

If a retailer purchased inventory in the amount of $680, terms 3/10, n/60, returned $120 of the inventory for a full refund, and received an allowance for $70, how much would the discount be if the retailer remitted payment within the discount window?

Answer

$14.70; $490 × 3%

Question 6.25 §6.7 source ↗

What is the difference in reporting requirements for customer-returned merchandise in sellable condition under a perpetual inventory system versus a periodic inventory system?

Answer

Recognizing the return of merchandise to inventory occurs under the perpetual inventory system but not under the periodic inventory system.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.