Problem 26 - Accounting

Question

Sellers Co., a furniture wholesaler, sells merchandise to Beyer Co. on account, \(\$ 14,500\), terms \(2 / 10, \mathrm{n} / 30\). The cost of the merchandise sold is \(\$ 8,800\). Sellers Co. issues a credit memorandum for \(\$ 3,750\) for merchandise returned and subsequently receives the amount due within the discount period. The cost of the merchandise returned is \(\$ 2,100\). Journalize Sellers Co.'s entries for (a) the sale, including the cost of the merchandise sold, (b) the credit memorandum, including the cost of the returned merchandise, and (c) the receipt of the check for the amount due from Beyer Co.

Step-by-Step Solution

Answer

Sellers Co. records the initial sale, adjusts for the returned merchandise, and accounts for the early payment discount totalled as a received amount of $10,535.

Step 1: Journalize the Sale

When Sellers Co. sells merchandise to Beyer Co. on account, we need to record both the sales revenue and the cost of goods sold (COGS). The sales revenue is recorded at the sale price, and COGS is recorded at the cost of the merchandise sold.**Journal Entries:**1. Debit Accounts Receivable for the sale amount: \[ \text{Debit: Accounts Receivable} \quad \\(14,500 \] 2. Credit Sales Revenue for the sale amount: \[ \text{Credit: Sales Revenue} \quad \\)14,500 \] 3. Debit COGS for the cost of the merchandise sold: \[ \text{Debit: Cost of Goods Sold} \quad \\(8,800 \] 4. Credit Inventory for the cost of the merchandise: \[ \text{Credit: Inventory} \quad \\)8,800 \]

Step 2: Journalize the Credit Memorandum

A credit memorandum is issued for merchandise that is returned. We must adjust both accounts receivable and sales revenue for the returned merchandise, and also adjust the cost of goods sold and inventory for the returned goods.**Journal Entries:**1. Debit Sales Returns and Allowances for the return value: \[ \text{Debit: Sales Returns and Allowances} \quad \\(3,750 \]2. Credit Accounts Receivable for the return value: \[ \text{Credit: Accounts Receivable} \quad \\)3,750 \]3. Debit Inventory for the cost of the returned goods: \[ \text{Debit: Inventory} \quad \\(2,100 \] 4. Credit Cost of Goods Sold for the cost of the returned goods: \[ \text{Credit: Cost of Goods Sold} \quad \\)2,100 \]

Step 3: Journalize the Receipt of Payment

Beyer Co. pays within the discount period, so Sellers Co. must account for the sales discount in the payment received.**Calculate Net Amount to be Paid:**1. Compute the net sales after the return: \[ \text{Net Sales} = \\(14,500 - \\)3,750 = \\(10,750 \]2. Calculate the discount amount (2% of net sales): \[ \text{Discount} = 0.02 \times \\)10,750 = \\(215 \]3. Determine the payment amount after discount: \[ \text{Amount Paid} = \\)10,750 - \\(215 = \\)10,535 \]**Journal Entries:**1. Debit Cash for the amount received: \[ \text{Debit: Cash} \quad \\(10,535 \]2. Debit Sales Discounts for the discount amount: \[ \text{Debit: Sales Discounts} \quad \\)215 \]3. Credit Accounts Receivable for the net sales amount: \[ \text{Credit: Accounts Receivable} \quad \$10,750 \]

Key Concepts

Sales Revenue

Sales Revenue refers to the income that a company earns from the sale of goods or services. It is the primary source of revenue for many businesses. In this exercise, Sellers Co. sells merchandise to Beyer Co. on account, generating a sales revenue of $14,500. Recording sales revenue in journal entries involves crediting the Sales Revenue account for the total value of goods sold.

• Accounts Receivable: When goods are sold on account, the seller records the amount owed by the customer as an increase in Accounts Receivable. This entry is a debit to the Accounts Receivable account.
• Recognizing Revenue: This sale is recognized immediately upon delivery, reflecting the revenue even if the cash hasn't been received yet.

Calculating and recording sales revenue accurately is crucial, as this figure has a direct impact on a company's financial performance. This is the first step in understanding the company’s financial health and evaluating its growth over time.

Cost of Goods Sold

Cost of Goods Sold (COGS) represents the direct costs attributable to the production of the goods sold by a company. This includes the cost of the materials and labor directly used to create the product. In our scenario, COGS is $8,800 for the merchandise sold by Sellers Co. to Beyer Co.

• Recording COGS: In journal entries, COGS is debited, and it reflects the expense incurred in producing or purchasing the goods sold during the period.
• Impact on Inventory: To balance the accounts, the same amount is credited to Inventory, reducing the overall stock value to reflect the goods that have been sold.

Accurately calculating COGS is crucial because it directly affects the gross profit of a business. By closely managing COGS, and thus the profit margin, businesses can make more informed pricing and production decisions.

Sales Returns and Allowances

Sales Returns and Allowances account is used to record the value of the merchandise returned by the customer and any allowances given, often due to product defects or other reasons. In this case, Sellers Co. issued a credit memorandum for $3,750 due to the returned merchandise.

• Credit Memorandum: It acknowledges a reduction in the amount the buyer owes, due to returns or other adjustments.
• Adjusting Accounts Receivable: The amount of $3,750 is debited to Sales Returns and Allowances and credited to Accounts Receivable, reducing the balance owed by Beyer Co.

Managing Sales Returns and Allowances is vital for businesses, as it helps in maintaining accurate records of sales and understanding customer satisfaction levels, both of which are fundamental to long-term success.

Sales Discounts

Sales Discounts are reductions in the amount due from a customer, offered by a seller to encourage early payment. In our example, Sellers Co. offers a 2% discount to Beyer Co. if payment is made within ten days, resulting in a discount amount of $215.

• Encouraging Early Payment: The terms (2/10, n/30) mean a 2% discount if paid within 10 days, otherwise, the full amount is due in 30 days.
• Journal Entries for Discounts: When Beyer Co. pays within the discount period, Sellers Co. debits the Sales Discounts account for $215 and reduces the Accounts Receivable balance by the net sales amount of $10,750.

Offering Sales Discounts not only accelerates cash flow but also reduces the risk of defaults on accounts receivable. This can be a strategic tool for managing cash and encouraging positive customer relationships.