Chapter 6, Problem 3PB

1.

To determine

Calculate the sales revenue and gross profit of Incorporation L.

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:

Particulars	Amount($)
Sales Revenue (1)	505,000
Less: Sales Returns and Allowances(2)	(3,950)
Net Sales	501,050
Less: Cost of Goods Sold (3)	225,450
Gross Profit	275,600

Table (1)

Working note 1:

Calculate the value of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue=}\left(\begin{array}{l}\text{Sale}\text{of}\text{merchandise}\text{for}\text{cash+}\\ \text{Sale}\text{of}\text{merchandise}\text{on}\text{account}\end{array}\right)\\ \text{=\$505,000 + \$5,000}\\ \text{=\$505,000}\end{array}$

Working note 2:

Calculate the sales returns and allowances:

$\begin{array}{c}\text{Sales}\text{returns}\text{and}\text{allowances=}\left(\text{Merchandise}\text{returned + Partial}\text{allowance}\right)\\ \text{=\$3,000 + \$950}\\ \text{=\$3,950}\end{array}$

Working note 3:

Calculate the cost of goods sold:

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold=}\left(\begin{array}{l}\left[\begin{array}{l}\text{Cost}\text{of}\text{merchandise}-\text{Original}\\ \text{cost}\text{of}\text{returned}\text{merchandise}\end{array}\right]+\\ \text{Original}\text{cost}\text{of}\text{merchandise}\text{sold}\end{array}\right)\\ \text{=}\left(\text{\$224,350}-\text{\$1,900}\right)\text{+\$3,000}\\ \text{=\$225,450}\end{array}$

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.

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:

$\begin{array}{c}\text{Gross}\text{profit}\text{percentage=}\frac{\text{Gross}\text{profit}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$275,600}}{\text{\$501,050}}\text{×100}\\ \text{=55}\text{.0\%}\end{array}$

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).

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:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	500,000
	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.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	224,350
	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.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales revenue	3,000
	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.

.Date	Account Title and Explanation	Debit ($)	Credit ($)
	Inventory	1,900
	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:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts Receivable	5,000
	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.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	3,000
	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.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	2,500
	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:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales revenue	950
	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.

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.

$\begin{array}{c}\text{Gross}\text{profit}\text{for}\text{sale}\text{of}\text{contract=}\left(\begin{array}{l}\text{Original}\text{cost}\text{of}\text{merchandise}-\\ \text{Selling}\text{price}\text{of}\text{merchandise}\end{array}\right)\\ \text{=\$20,000}-\text{\$16,000}\\ \text{=\$4,000}\end{array}$

Working note 5:

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

$\begin{array}{c}\text{Gross}\text{profit}\text{percentage=}\frac{\text{Gross}\text{profit + Gross profit of sales of contract}}{\text{Net}\text{sales + Book value of contract}}\text{×100}\\ \text{=}\frac{\text{\$275,600 + \$4,000 (refer working note 4)}}{\text{\$501,050 + \$20,000}}\text{×100}\\ \text{=}\frac{\$279,600}{\$521,050}\text{×100}\\ \text{=53}\text{.7\%}\end{array}$