Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 6, Problem 3PB

1.

To determine

Calculate the sales revenue and gross profit of Incorporation L.

1.

Expert Solution
Check Mark

Explanation of Solution

Sales revenue:

Sales revenue is the amount received by the company from the sale of goods and services during day-to-day operations of the company within specified period of time.

Gross Profit:

Gross Profit is the difference between the net sales, and the cost of goods sold. Gross profit usually appears on the income statement of the company.

Calculate the sales revenue and gross profit of Incorporation L as follows:

ParticularsAmount($)
Sales Revenue (1)505,000
Less: Sales Returns and Allowances(2)(3,950)
    Net Sales501,050
Less: Cost of Goods Sold (3)225,450
     Gross Profit275,600

Table (1)

Working note 1:

Calculate the value of sales revenue:

Salesrevenue=(Saleofmerchandiseforcash+Saleofmerchandiseonaccount)=$505,000 + $5,000=$505,000

Working note 2:

Calculate the sales returns and allowances:

Salesreturnsandallowances=(Merchandisereturned + Partialallowance)=$3,000 + $950=$3,950

Working note 3:

Calculate the cost of goods sold:

Costofgoodssold=([CostofmerchandiseOriginalcostofreturnedmerchandise]+Originalcostofmerchandisesold)=($224,350$1,900)+$3,000=$225,450

Conclusion

Therefore, the net sales and gross profit of Incorporation L are $501,050 and $275,600 respectively.

2.

To determine

Calculate the gross profit percentage of Incorporation L.

2.

Expert Solution
Check Mark

Explanation of Solution

Gross Profit Percentage:

Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.

Calculate the gross profit percentage of Incorporation L as follows:

Grossprofitpercentage=GrossprofitNetsales×100=$275,600$501,050×100=55.0%

Conclusion

Therefore, the gross profit percentage of Incorporation L is 55.0%.

3.

To determine

Prepare journal entries to record the transaction from (a) to (e).

3.

Expert Solution
Check Mark

Explanation of Solution

Journal Entry:

Journal entry is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Prepare journal entries to record the transaction from (a) to (e) as follows:

a. Record the sales revenue and cost of goods sold:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cash500,000 
     Sales Revenue 500,000
 (To record the sales revenue received in cash )  

Table (2)

  • Cash is an asset and it increases the value of assets. Therefore, debit cash by $500,000.
  • Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $500,000.
DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cost of goods sold224,350 
 Inventory 224,350
 (To record the cost of goods sold incurred during the year)  

Table (3)

  • Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit cost of goods sold by $224,350.
  • Inventory is an asset and it decreases the value of asset. Therefore, credit inventory by $224,350.

b. Record the sales return and the cost of inventory used for production.

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Sales revenue3,000 
 Cash 3,000
 (To record the sales returns from customer)  

Table (4)

  • Sales revenue is a component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, debit sales revenue by $3,000.
  • Cash is an asset and it decreases the value of assets. Therefore, credit cash by $3,000.
.DateAccount Title and Explanation

Debit

($)

Credit

($)

 Inventory1,900 
 Cost of goods sold 1,900
 (To record the  cost of inventory return)  

Table (5)

  • Inventory is an asset and it increases the value of assets. Therefore, debit inventory by $1,900.
  • Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, credit cost of goods sold by $1,900.

c. Record the sale of merchandise on account:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Accounts Receivable5,000 
 Sales Revenue 5,000
 (To record the sales revenue received on account)  

Table (6)

  • Accounts receivable is an asset and it increases the value of assets. Therefore, debit accounts receivable by $5,000.
  • Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $5,000.
DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cost of goods sold3,000 
 Inventory 3,000
 (To record the  cost of inventory return)  

Table (7)

  • Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit cost of goods sold by $3,000.
  • Inventory is an asset and it decreases the value of asset. Therefore, credit inventory by $3,000.

d. Record the cash receipt from customer.

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Cash2,500 
 Accounts Receivable 2,500
 (To record the cash received from customers)  

Table (8)

  • Cash is an asset and it increases the value of assets. Therefore, debit cash by $2,500.
  • Accounts receivable is an asset and it decreases the value of assets. Therefore, credit accounts receivable by $2,500.

e. Record the sales return and allowances:

DateAccount Title and Explanation

Debit

($)

Credit

($)

 Sales revenue950 
 Accounts receivable 950
 (To record the sales returns from customer and allowances )  

Table (9)

  • Sales revenue is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit sales returns and allowances by $950.
  • Accounts receivable is an asset and it decreases the value of assets. Therefore, credit accounts receivable by $950.

4.

To determine

Describe whether the sale of given contract would increase (or decrease) the gross profit and gross profit percentage of Incorporation L.

4.

Expert Solution
Check Mark

Explanation of Solution

Describe whether the sales of given contract would increase (or decrease) the gross profit and gross profit percentage of Incorporation L as follows:

In this case, the gross profit percentage is decreased from 55.0% to 53.5% (5), because of the sale of contract.

Working note 4:

Calculate the gross profit from the sale of contract.

Grossprofitforsaleofcontract=(OriginalcostofmerchandiseSellingpriceofmerchandise)=$20,000$16,000=$4,000

Working note 5:

Calculate the gross profit percentage of Company after the sale of contract.

Grossprofitpercentage=Grossprofit + Gross profit of sales of contractNetsales + Book value of contract×100=$275,600 + $4,000 (refer working note 4)$501,050 + $20,000×100=$279,600$521,050×100=53.7%

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Chapter 6 Solutions

Fundamentals Of Financial Accounting

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