Chapter 6, Problem 6.3PB

1.

To determine

The sales revenue, Net sales and gross profit of Company 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.

Net sales:

Net sales is the balance of remaining amount that is arrived after subtracting sales discounts, allowances for damaged goods and return of goods from sales.

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.

Following is the table representing sales revenue, net sales and gross profit of Company L:

Particulars	Amount($)
Sales Revenue(1)	505,000
Sales Discounts (2)	(50)
Sales Returns and Allowances(4)	(3,950)
Net Sales	501,000
Cost of Goods Sold (5)	225,450
Gross Profit	275,550

Table (1)

Thus, the sales revenue is $505,000, Net sales are $501,400 and the gross profit is $275,550 for Company L.

Working notes:

Calculate the sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue=}\left(\begin{array}{l}\text{Sale}\text{of}\text{merchandise}\text{for}\text{cash+}\\ \text{Sale}\text{of}\text{merchandise}\text{on}\text{account}\end{array}\right)\\ \text{=\$505,000+\$5,000}\\ \text{=\$505,000}\end{array}$ (1)

Calculate the sales discount

$\begin{array}{c}\text{Sales}\text{discount= }\left(\begin{array}{l}\text{Credit}s\text{ales×percentage}\text{of}\text{sales}\text{discount}\times \text{percentage}\text{of}\\ \text{amount}\text{collected}\text{within}\text{discount}\text{period}\end{array}\right)\\ \text{=\$5,000×}\frac{\text{2}}{\text{100}}\times \frac{50}{100}\\ \text{=\$50}\end{array}$ (2)

Calculate the sales returns and allowances

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

Calculate the cost of goods sold

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold=}\left(\text{Cost}\text{of}\text{merchandise-Original}\text{cost}\text{of}\text{returned}\text{merchandise}\right)\\ \text{+original}\text{cost}\text{of}\text{merchandise}\text{sold}\\ \text{=}\left(\text{\$224,350-\$1,900}\right)\text{+\$3,000}\\ \text{=\$225,450}\end{array}$ (4)

2.

To determine

To compute: The gross profit percentage of Company 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.

Following is the gross profit percentage

$\begin{array}{c}\text{Gross}\text{profit}\text{percentage=}\frac{\text{Gross}\text{profit}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$275,550}}{\text{\$501,000}}\text{×100}\\ \text{=55}\text{.0\%}\end{array}$

Thus, the gross profit percentage of Company L is 55.0%

3.

To determine

To prepare: The journal entries of Company L.

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 the journal entry at the time of sales:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	500,000
	Sales Revenue		500,000
	(To record the sales )

Table (1)

• Cash is an asset and it is increased. Therefore, debit cash by $500,000.
• Sales revenue is component of stockholders’ equity and it is increased. Therefore, credit sales revenue by $500,000.

Prepare the journal entry to record cost of goods sold:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	224,350
	Inventory		224,350
	(To record the cost of goods sold)

Table (2)

• Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is decreased. Therefore, debit cost of goods sold by $224,350.
• Inventory is an asset and it is decreased. Therefore, credit inventory by $224,350.

Prepare the journal entry at the time of sales return and allowances:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales returns and allowances	3,000
	Cash		3,000
	(To record the sales returns and allowances )

Table (3)

• Sales returns and allowances is a component of stockholders’ equity and it is decreased. Therefore, debit sales returns and allowances by $3,000
• Cash is an asset and it is increased. Therefore, debit cash by $3,000

Prepare the journal entry to record cost of goods sold:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Inventory	1,900
	Cost of goods sold		1,900
	(To record the cost of goods sold)

Table (4)

• Inventory is an asset and it is increased. Therefore, debit inventory by $1,900.
• Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is increased. Therefore, credit cost of goods sold by $1,900.

Prepare the journal entry at the time of sale:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts Receivable	5,000
	Sales Revenue		5,000
	(To record the sales on account)

Table (5)

• Accounts receivable is an asset and it is increased. Therefore, debit accounts receivable by $5,000.
• Sales revenue is component of stockholders’ equity and it is increased. Therefore, credit sales revenue by $5,000.

Prepare the journal entry to record cost of goods sold:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	3,000
	Inventory		3,000
	(To record the cost of goods sold)

Table (6)

• Cost of goods sold is an expense account, which is a component of stockholders’ equity and it is decreased. Therefore, debit cost of goods sold by $3,000.
• Inventory is an asset and it is decreased. Therefore, credit inventory by $3,000.

Prepare the journal entry to record receipt of payment for sales on account:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash(6)	2,450
	Sales Discounts(5)	50
	Accounts Receivable		2,500
	(To record receipt of payment for sales on account)

Table (7)

• Cash is an asset and it is increased. Therefore, debit cash by $2,450.
• Sales discount is a component of stockholders’ equity and it is decreased. Therefore, debit sales discounts by $50.
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable by $2,500.

Working note:

Calculate the sales discount:

$\begin{array}{c}\text{Sales discount =Sales×Percentage}\text{of sales}\text{discount}\\ \text{ =\$2,500 × }\frac{2}{\text{100}}\\ \text{= \$50}\end{array}$ (5)

Calculate the cost of goods sold

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold = Accounts receivable – Sales discount}\\ \text{= \$2,500 – \$50(5)}\\ \text{= \$2,450}\end{array}$ (6)

Prepare the journal entry at the time of sales return and allowances:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales returns and allowances	950
	Accounts receivable		950
	(To record the sales returns and allowances )

Table (8)

• Sales returns and allowances is a component of stockholders’ equity and it is decreased. Therefore, debit sales returns and allowances by $950
• Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable by $950

4.

To determine

  Whether the contract will increase the gross profit of Company L and to find out the gross profit percentage.

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.

The percentage of gross profit is decreased as the gross profit percentage on the contract is 20 %( 7). And it is less than the gross profit percentage without the contract (55%).

Working note:

Calculate the gross profit percentage on the contract

$\begin{array}{c}\text{The gross profit percentage on the contract=}\frac{\text{Gross}\text{profit}\text{on}\text{contract}}{\text{Net}\text{sales}\text{on}\text{contract}}\\ \text{=}\frac{\text{\$4,000(8)}}{\text{\$20,000}}\text{×100}\\ \text{=20\%}\end{array}$ (7)

Following is the gross profit percentage of Company after the sale of contract

$\begin{array}{c}\left(\begin{array}{l}\text{Gross}\text{profit}\text{percentage}\\ \text{after the sale of contract}\end{array}\right)\text{=}\frac{\text{Gross}\text{profit}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$275,550+\$4,000(8)}}{\text{\$501,000+\$20,000}}\text{×100}\\ \text{=}\frac{\$279,550}{\$521,000}\times 100\\ \text{=53}\text{.7\%}\end{array}$

Thus, the gross profit percentage of Company L is 53.7% after the sale of contract

Working note:

Calculate the gross profit for sale of contract

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

(8)