Concept explainers
1.
Prepare journal entries for the given transactions.
1.
Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entries for the given transactions.
Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
August 2 | Cash | 450 | |
Sales revenue (3) | 90 | ||
Deferred revenue (4) | 360 | ||
(To record the cash received from person V for future sales and services) | |||
Cost of goods sold | 80 | ||
Inventory | 80 | ||
(To record cost of goods sold incurred) | |||
August 3 | 500 | ||
Sales Revenue | 500 | ||
(To record the goods sold to R cosmetics on account) | |||
Cost of goods sold | 400 | ||
Inventory | 400 | ||
(To record cost of goods sold incurred) | |||
August 6 | Sales revenue | 100 | |
Accounts receivable (5) | 100 | ||
(To record the goods returned from R cosmetics) | |||
Inventory | 80 | ||
Cost of goods sold | 80 | ||
(To record the cost of inventory returned) | |||
August 10 | Deferred revenue (6) | 120 | |
Service revenue | 120 | ||
(To record the service revenue recognized during the year) | |||
August 20 | Cash | 300 | |
Sales Revenue | 300 | ||
(To record the goods sold to person M in cash) | |||
Cost of goods sold | 96 | ||
Inventory | 96 | ||
(To record cost of goods sold incurred) | |||
August 22 | Cash (7) | 400 | |
Accounts receivable | 400 | ||
(To record the cash received from R cosmetics) |
Table (1)
Justification:
For August 2:
- Cash is an asset and it increases the value of assets. Therefore, debit cash by $450
- Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $90.
- Deferred revenue is a liability and it increases the value of liability. Therefore, credit deferred revenue by $390.
- Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Hence, debit cost of goods sold by $80.
- Inventory is an asset and it decreases the value of assets. Hence, credit inventory by $80.
For August 3:
- Accounts receivable is an asset and it increases the value of asset. Hence, debit the accounts receivable by $500.
- Sales revenue is a component of stock holders’ equity and it increases the value of stockholder’s equity. Hence, credit the sales revenue by $500.
- Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Hence, debit cost of goods sold by $400.
- Inventory is an asset and it decreases the value of assets. Hence, credit inventory by $400.
For August 6:
- Sales revenue is a component of stock holders’ equity and it decreases the value of stockholder’s equity. Hence, debit the sales revenue by $100.
- Accounts receivable is an asset and it decreases the value of asset. Hence, credit the accounts receivable by $100.
- Inventory is an asset and it increases the value of assets. Hence, debit inventory by $80.
- Cost of goods sold is a component of stockholders’ equity and it increases the value of stockholder’s equity. Hence, credit cost of goods sold by $80.
For August 10:
- Deferred revenue is a liability and it increases the value of liability. Therefore, credit deferred revenue by $120.
- Service revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit service revenue by $120.
For August 20:
- Cash is an asset and it increases the value of asset. Hence, debit the accounts receivable by $300.
- Sales revenue is a component of stock holders’ equity and it increases the value of stockholder’s equity. Hence, credit the sales revenue by $300.
- Cost of goods sold is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Hence, debit cost of goods sold by $96.
- Inventory is an asset and it decreases the value of assets. Hence, credit inventory by $96.
For August 22:
- Cash is an asset and it increases the value of asset. Hence, debit the cash account by $400.
- Accounts receivable is an asset and it decreases the value of asset. Hence, credit the accounts receivable by $400.
Working note 1:
Calculate the total amount of selling price:
Working note 2:
Calculate the allocation percentage of transaction price.
Allocate the transaction price to the performance obligation | |||
Item | Selling price ($) (A) |
Total amount ($) (B) (refer working note 1) |
Allocation percentage |
Basket | $100 | $500 | 20% |
Services | $400 | $500 | 80% |
Total | $500 | 100% |
Table (2)
Working note (3):
Revenue earned from the basket sale:
Working note (4):
Revenue earned from the services:
Working note (5):
Calculate the value of sales return.
Working note (6):
Calculate the value of recognized revenue.
Working note (7):
Calculate the value of cash received from R cosmetics.
2.
Calculate the sales revenue, cost of goods sold and gross profit percentage. Explain the meaning of gross profit percentage.
2.
Explanation of Solution
Sales revenue: The amount of price of merchandise sold during a certain period is referred to as sales revenue. Net sales are the sales revenue, net of sales returns, sales allowances, and sales discounts.
Formula to compute net sales:
Sales returns and allowances: Sometimes, customers either return goods due to manufacturing defects, or accept to keep the defective goods for a reduction in sale price. That amount of goods returned, or reduced amount in sale price, is referred to as sales returns and allowances. These are recorded as contra-revenue accounts.
Sales discounts: The merchandisers offer a reduction in sales price on initial sales, to accelerate the sale on account payments, by their customers within the sale terms promptly. Such a reduction in sales price is referred to as sales discount. This is recorded as contra-revenue account.
Cost of goods sold: The amount of cost of merchandise sold during a certain period is referred to as cost of goods sold.
Calculate the value of net sales.
Details | Amount ($) |
Sales revenue from person V | 90 |
Sales revenue from R Cosmetics | 500 |
Sales revenue from person M | 300 |
Less: Sales return | 100 |
Sales revenue, net | $790 |
Table (3)
Calculate the cost of goods sold, net.
Details | Amount ($) |
Cost of goods sold from person V | $80 |
Cost of goods sold from R Cosmetics | 400 |
Less: Cost of goods sold returned | (80) |
Cost of goods sold from person M | 96 |
Cost of goods sold | $496 |
Table (4)
Calculate the gross profit percentage, and explain the meaning of gross profit percentage as follows:
Working note (8):
Calculate the value of gross profit:
Details | Amount ($) |
Sales revenue | 790 |
Less: Cost of goods sold | 496 |
Gross profit | $294 |
Table (5)
Gross profit represents the business profit earned from purchase and sale of merchandise. Gross profit percentage of 37.2% denotes that $0.372
The percentage of gross profit generated by every dollar of net sales is referred to as gross profit percentage. The higher the ratio, the more ability to cover operating expenses.
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Chapter 6 Solutions
FUNDAMENTALS OF FINANCIAL ACCOUNTING
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