Accounting (2)

Chapter (5)
Part (1)

Part
Level (1)
1
 Chapter (5)
Accounting for Merchandising Operations
Learning Goals
1. Describe merchandising operations and inventory systems.
2. Record purchases under a perpetual inventory system.
3. Record sales under a perpetual inventory system.
4. Apply the steps in the accounting cycle to a merchandising company.
5. Compare a multiple-step with a single-step income statement.

Introduction
 A merchandising company is an enterprise that buys and sells merchandise
as their primary source of revenue.

 A Servisce company is a business that generates income by providing

services instead of selling physical products.
 Inventory: Goods Purchased in order to resale it.

 Companies use either a perpetual inventory system or a periodic inventory

system to account for inventory.

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 Perpetual inventory system Vs. periodic inventory system
Perpetual system Periodic system
Maintain detailed records of the cost Do not keep detailed records of the
of each inventory purchase and sale goods on hand.
It Shows the cost and Quantity of It Shows the cost and Quantity of
inventory at any time inventory at end of accounting period
Used by Large Companies Used by Small Companies
The purchases are recorded in the Purchases Account is used to record
inventory account purchasing of inventory

1- Purchases of Merchandise

Purchase of Merchandise On Credit

Nada purchased $49,000 of merchandise on account
Ex(1) Merchandise Inventory 49,000
49,000
Accounts Payable
X Company Purchased 6 motors at a cost of $44 each from Y Company, The motors
Ex(2)
cost Y Company $25 each.
Merchandise Inventory ( 6 Motors X $44) 264
264
Accounts Payable

 Freight Costs: The cost incurred in moving goods.

Freight costs incurred by
1- Perpetual inventory system (Purchases)
the seller are an
Free on board operating expense.

2- FreightShipping
Costs (Transportation Cost ) Destination
(buyer will pay the freight cost ) (seller will pay the freight cost)

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 Freight Costs
A Company Paid Freight Costs of LE 5,000 on merchandise purchased from B
Ex(1)
Company (FOB Shipping)
Merchandise Inventory 5,000
5,000
Cash
A Company Paid Freight Costs of LE 5,000 on merchandise purchased from B
Ex(2) Company (FOB Destination)
No Entry

Purchase Return Purchase Allowance

Return goods for credit if the sale was May choose to keep the merchandise if
made on credit, or for a cash refund if the seller will grant a reduction of the
the purchase was for cash. purchase price.
 Purchaser may be dissatisfied because goods are damaged or defective, of inferior
quality, or do not meet specifications.

3- Purchase Returns and Allowances

Purchase Returns and Allowances

X Company Returned $4,000 of damaged merchandise for credit
Ex(1) Accounts Payable 4,000
4,000
Merchandise Inventory
4. Purchase Discount Returned 1 defective motor to Ord ( Cost $44 )
Ex(2) Accounts Payable 44
Merchandise Inventory 44
 Purchase discount is an offer from the supplier to the purchaser, to reduce the payment amount
if the payment is made within a certain period of time. 

Example: Credit terms may

read 2/10, n/30.

Purchase Discount
Purchase Discount is calculated as percentage of (NET purchase).
NET purchase = Purchase – purchase return and allowance

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 (Payment Within Discount period)
Ex(1) Accounts Payable 5,000
Merchandise Inventory 1,000
Cash 4,000
(Payment after Discount period)
Ex(2) Accounts Payable 5,000
Cash 5,000

1- Prepare the necessary journal entries on the books of Tri-State Carpet Company to
record the following transactions, assuming a perpetual inventory system (you may omit
explanations):
(a) Tri-State purchased $40,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $4,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days
(General Exercises and Problems)
PerpetualSolution
inventory system

2- Waller Brothers Supply uses a Perpetual inventory system. During May, the
following transactions and events occurred

Instructions
Journalize the May transactions for Waller Brothers. You may omit explanations.

Solution

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 Date Explanation Debit Credit
Merchandise Inventory (6 Motors X $44) 264
May 13,
Accounts Payable 264
Accounts Payable 44
May 16,
Merchandise Inventory 44
Accounts Payable 220
May 23, Merchandise Inventory ($220 X 10%) 2
Cash 218

3- Information related to Kerber Co. is presented below.

1. On April 5, purchased merchandise from Wilkes Company for $23,000, terms 2/10,
net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from Wilkes.
3. On April 7, purchased equipment on account for $26,000.
4. On April 8, returned damaged merchandise to Wilkes Company and was granted a
$3,000 credit for returned merchandise.
5. On April 15, paid the amount due to Wilkes Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Kerber Co. under a
perpetual inventory system.
(b) Assume that Kerber Co. paid the balance due to Wilkes Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.

Solution

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 2- Perpetual inventory system (Sales)

1- Sales of Merchandise and Sales Discount

Sales of Merchandise On Credit or Cash
Accounts Receivables ( Or Cash) Price
(2) Sales Revenue
Entry Cost of Goods sold Cost
Merchandise Inventory
Sales Discount
(Payment Within Discount period) (Payment after Discount period)
Cash
Cash
Sales Discount
Accounts Receivables
Accounts Receivables
Example 
On march 1, X Company sold merchandise for $10,000 with the terms 2/10,n/30
Required:
Prepare the journal entries, using the Gross method to:
A) Record the above transaction
B) Record the payment under the following cases:
1- Payment made on March 6
2- Payment made on March 21
Accounts Receivables 10,000
A)
Sales Revenue 10,000
Cash 9,800
B)1 Sales Discount 200
Accounts Receivables 10,000
Cash 10,000
B)2
Accounts Receivables 10,000

Sales Returns and Allowances

X Company Returned damaged merchandise
(Cost = 100 / Price = 150)
Sales Return and allowance 150
Ex(1) 150
Accounts Receivables
Cost of Goods sold 100
Merchandise Inventory 100
Ex(2) Returned 1 defective motor to B Company (Cost = 50 / Price = 70)

2. Sales Returns and Allowances 7

Sales Return and allowance 50
Accounts Receivables 50
Cost of Goods sold 70
Merchandise Inventory 70

Summary of journal entries

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 (General Exercises and Problems)
Perpetual inventory system

Problem (1) (Lecture): A company starts its operations on January. A Company uses perpetual inventory
system. The following transactions occurred during Jan. 2015:
January 1: Sold merchandise costing $15,000 for $20,000 in cash to F.
January 5: Sold merchandise costing $25,000 for $30,000 on credit to B Terms 2/10, n/30.
January 7: Sold merchandise cost $15,000 for $18,000 on credit to C Terms FOB-shipping
point.
January 10: Received back merchandise cost $4,000 and sale value of $4,500 from C.
January 15: Received the amount due from B.
January 18: Sold merchandise cost $30,000 for $32,000 to D on credit Terms n/30.
January 20: Received $4,000 interest revenue on saving account in cash.
January 25: Collected the amount due from D.
January 30: Received the amount due from C in cash.
Required:
Prepare journal entries to record the above transactions.

Date Explanation Debit Credit

Cash 20,000
Sales Revenue 20,000
Jan 1,
Cost of Goods sold 15,000
Merchandise Inventory 15,000
A/R – B company 30,000
Sales Revenue 30,000
Jan 5,
Cost of Goods sold 25,000
Merchandise Inventory 25,000
A/R – C company 30,000
Sales Revenue 30,000
Jan 7,
Cost of Goods sold 25,000
Merchandise Inventory 25,000
Sales Return and allowance 4,500
A/R – C company 4,500
Jan 10,
Cost of Goods sold 4,000
Merchandise Inventory 4,000
Cash (30,000 –600) 29,400
Jan 15, Sales Discount (2% x 30,000) 600
      A/R - B company 30,000
A/R – D company 32,000
Sales Revenue 32,000
Jan 18,
Cost of Goods sold 30,000
Merchandise Inventory 30,000
Cash 4,000
Jan 20,
      Interest Revenues 4,000
Cash 32,000
Jan 25,
      A/R - D company  32,000
Cash  13,500
Jan 30,
      A/R - C company (18,000 – 4,500) 13,500

Solution

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2-On October 1, Taylor Bicycle Store had an inventory of 20 ten speed bicycles at a cost
of $200 each. During the month of October, the following transactions occurred.

Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.

Solution

3-On September 1, Snow Supply had an inventory of 15 backpacks at a cost of $25 each. The
company uses a perpetual inventory system. During September, the following transactions and
events occurred.

Instructions
prepare the journal entries

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 Solution

3-Prepare
Date the necessary journal entries to record the following transactions,Debit
Explanation assumingCredit
Moran
Company uses a perpetual inventory system.
(a) Moran sells $50,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
A, customer in (a) returned $5,000 of merchandise to Moran. The merchandise returned
(b) The
cost $3,000.
(c) Moran received the balance due within the discount period
B,

C,

Solution

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 4- Prepare the journal entries to record these transactions on S Company’s books under
a perpetual inventory system
(a) On March 2, K Company sold $900,000 of merchandise to S Company,
terms 2/10, n/30. The cost of the merchandise sold was $620,000.
(b) On March 6, S Company returned $90,000 of the merchandise purchased on
March 2. The cost of the returned merchandise was $62,000.
(c) On March 12, K Company received the balance due from S Company.

Date Explanation Debit Credit

Merchandise Inventory 900,000
May 2,
Accounts Payable 900,000
Accounts Payable 90,000
May 6,
Merchandise Inventory 90,000
Accounts Payable 810,000
May 12, Merchandise Inventory ( $810,000 X 2%) 16,200
Cash 793,800

Solution

S Company

1. Detailed records of the cost of each inventory purchase and sale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
2. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.
3. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis. MCQs
c. on an annual basis.
d. with each sale.
4.If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
5. under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.

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 d. Cost of Goods Sold account.
6.The journal entry to record a return of merchandise purchased on account under a perpetual inventory
system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales.
d. Inventory.
7.The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.
8.A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.
9.If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
10. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
11.Hicks Company purchased merchandise from Beyer Company with freight terms of FOB shipping point.
The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
12.Geran Company purchased merchandise inventory with an invoice price of €15,000 and credit terms of
2/10, n/30. What is the net cost of the goods if Geran Company pays within the discount period?
a. €15,000
b. €14,700
c. €13,500
d. €13,800
13.In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased
within the discount period is credited by the buyer to
a. Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.
14.Tony’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for €90,000, terms 2/10, n/30.
Returned €1,800 of the shipment for credit.
Paid €450 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by €86,436.
b. increased by €88,650.
c. increased by €86,877.

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 d. increased by €86,886.

Problem (Assignment): A Company uses the perpetual inventory system and gross method. The
following transactions took place during March 2004
March 1: Purchased merchandise for $20,000 in cash.
4: Purchased merchandise for $25,000 on credit. Terms 5/15, n/30, FOB Shipping

point
5: Paid $400 transportation expense.
6: Returned merchandise $5,000 from purchases on March 4.
8: Sold merchandise $10,000 in cash. Cost $9,500.
15: Sold merchandise $18,000 on credit. Terms 4/15, n/30, FOB destination.
Cost $16,000.
16: Paid the amount due to suppliers.
17: Paid $300 transportation expense.
20: Received back merchandise for $4,000. Cost $3,500.
31: Received the amount due from customers in cash.
Required:
Date Explanation
a. Prepare journal entries to record the above transactions.
Debit Credit
March 1,

4,

5,

6,

8,

15,

16,

17,

20,

31,

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