Chapter 6, Problem 3CP

Recording Cash Sales, Credit Sales, Sales Returns, and Sales Allowances and Analyzing Gross Profit Percentage

Campus Stop, Inc., is a student co-op. Campus Stop uses a perpetual inventory system. The following transactions (summarized) have been selected for analysis:

Required:

1. 1. Compute Net Sales and Gross Profit for Campus Stop. No additional sales returns/allowances are expected.
2. 2. Compute the gross profit percentage (using the formula shown in this chapter and rounding to one decimal place).
3. 3. Prepare journal entries to record transactions (a)–(e).
4. 4. Campus Stop is considering a contract to sell merchandise to a campus organization for $15,000. This merchandise will cost Campus Stop $12,000. Would this contract increase (or decrease) Campus Stop’s dollars of gross profit and its gross profit percentage (round to one decimal place)?

   TIP: The impact on gross profit dollars may differ from the impact on gross profit percentage.

To determine

Calculate the net sales and gross profit of Company C.

Explanation of Solution

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.

Calculate the net sales and gross profit of Company C as follows:

Particulars	Amount($)
Sales Revenue (1)	295,000
Less: Sales Returns and Allowances(2)	(3,400)
Net Sales	291,400
Less: Cost of Goods Sold (3)	160,270
Gross Profit	131,130

Table (1)

Working note 1:

Calculate the value of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue=}\left(\begin{array}{l}\text{Sale}\text{of}\text{merchandise}\text{for}\text{cash +}\\ \text{Sale}\text{of}\text{merchandise}\text{on}\text{account}\end{array}\right)\\ \text{=\$275,000 + \$20,000}\\ \text{=\$290,000}\end{array}$

Working note 2:

Calculate the sales returns and allowances

$\begin{array}{c}\text{Sales}\text{returns}\text{and}\text{allowances=}\left(\text{Merchandise}\text{returned + Partial}\text{allowance}\right)\\ \text{=\$1,600+\$1,800}\\ \text{=\$3,400}\end{array}$

Working note 3:

Calculate the cost of goods sold

$\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold=}\left(\begin{array}{l}\text{Cost}\text{of}\text{merchandise}-\\ \text{Original}\text{cost}\text{of}\text{returned}\text{merchandise }\\ +\text{Original}\text{cost}\text{of}\text{merchandise}\text{sold}\end{array}\right)\\ \text{=}\left(\text{\$152,070}-\text{\$800}\right)\text{+\$9,000}\\ \text{=\$160,270}\end{array}$

Conclusion

Therefore, the net sales and gross profit of Company C are $291,600 and $131,330 respectively.

To determine

Compute the gross profit percentage of Company C.

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.

Compute the gross profit percentage of Company C as follows:

$\begin{array}{c}\text{Gross}\text{profit}\text{percentage=}\frac{\text{Gross}\text{profit}}{\text{Net}\text{sales}}\text{×100}\\ \text{=}\frac{\text{\$131,130}}{\text{\$291,400}}\text{×100}\\ \text{=45}\text{.0\%}\end{array}$

Conclusion

Thus, the gross profit percentage of Company C is 45.0%

To determine

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

Explanation of Solution

Prepare the journal entries to record 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	275,000
	Sales Revenue		275,000
	(To record the sales revenue recognized in cash )

Table (1)

• Cash is an asset and it increases the value of assets. Therefore, debit cash by $275,000
• Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $275,000

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	152,070
	Inventory		152,070
	(To record the cost of goods sold incurred during the year)

Table (2)

• Cost of goods sold is a component of stockholders’ equity and it is decreases the value of stockholder’s equity. Therefore, debit cost of goods sold by $152,070.
• Inventory is an asset and it decreases the value of asset. Therefore, credit inventory account by $152,070.

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

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales revenue	1,600
	Cash		1,600
	(To record the sales returns from customer)

Table (3)

• Sales revenue is a component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, debit sales revenue by $1,600
• Cash is an asset and it decreases the value of assets. Therefore, credit cash by $1,600

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Inventory	800
	Cost of goods sold		800
	(To record the cost of inventory used for production)

Table (4)

• Inventory is an asset and it increases the value of assets. Therefore, debit inventory by $800.
• 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 $800.

c. Record the sale of merchandise on account and put back of inventory from production:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts Receivable	20,000
	Sales Revenue		20,000
	(To record the sales made on account)

Table (5)

• Accounts receivable is an asset and it increases the value of assets. Therefore, debit accounts receivable by $20,000.
• Sales revenue is component of stockholders’ equity and it increases the value of stockholder’s equity. Therefore, credit sales revenue by $20,000.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cost of goods sold	9,000
	Inventory		9,000
	(To record the cost of inventory return)

Table (6)

• 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 $9,000.
• Inventory is an asset and it decreases the value of asset. Therefore, credit inventory by $9,000.

d. Record the cash received from credit customer.

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	10,000
	Accounts Receivable		10,000
	(To record the cash received from the credit customer)

Table (7)

• Cash is an asset and it increases the value of assets. Therefore, debit cash by $10,000.
• Accounts receivable is an asset and it decreases the value of assets. Therefore, credit accounts receivable by $10,000.

e. Record the sales return and allowances:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Sales revenue	1,800
	Accounts receivable		1,800
	(To record the sales returns and allowances )

Table (8)

• Sales revenue is a component of stockholders’ equity and it decreases the value of stockholder’s equity. Therefore, debit sales returns and allowances by $1,800
• Accounts receivable is an asset and it decreases the value of assets. Therefore, credit accounts receivable by $1,800

To determine

Describe whether the given contract would increase the gross profit and gross profit percentage of Company C.

Explanation of Solution

Describe whether the given contract would increase the gross profit and gross profit percentage of Company C as follows:

In this case, the gross profit percentage is decreased from 45% to 43.8% (refer working note 5), because of the sale of contract.

Working note 4:

Calculate the gross profit for sale of contract:

$\begin{array}{c}\text{Gross}\text{profit}\text{for}\text{sale}\text{of}\text{contract=}\left(\begin{array}{l}\text{Original}\text{cost}\text{of}\text{merchandise}-\\ \text{Selling}\text{price}\text{of}\text{merchandise}\end{array}\right)\\ \text{=\$15,000}-\text{\$12,000}\\ \text{=\$3,000}\end{array}$

Working note 5:

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

$\begin{array}{c}\text{Gross}\text{profit}\text{percentage=}\frac{\text{Gross}\text{profit + Gross profit of sales of contract}}{\text{Net}\text{sales + Book value of contract}}\text{×100}\\ \text{=}\frac{\text{\$134,130 + \$3,000 (working note 4)}}{\text{\$306,400 + \$15,000}}\text{×100}\\ \text{=43}\text{.8\%}\end{array}$