Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q4-3BTN

Expert-verified
Financial & Managerial Accounting
Found in: Page 222
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

BTN 4-3 Amy Martin is a student who plans to attend approximately four professional events a year at her college. Each event necessitates a financial outlay of $100 to $200 for a new suit and accessories. After incurring a major hit to her savings for the first event, Amy developed a different approach. She buys the suit on credit the week before the event, wears it to the event, and returns it the next week to the store for a full refund on her charge card.

Required

1. Comment on the ethics exhibited by Amy and possible consequences of her actions.

2. How does the merchandising company account for the suits that Amy returns?

Answer

  1. The action of Amy is unethical.
  2. The company would account for returns by reducing the accounts receivable first and then increasing the inventory.
See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of Purchase Returns

The goods returned by the buyer to the supplier due to the wrong product or any defect are reported as purchase returns.

Step 2: Ethics exhibited

The actions adopted by Amy are unethical because she is returning the suit to get a full refund from the company. Also, she is returning well after using it once. Therefore, such a practice is unethical and unfair.

Such action of Amy might hurt the company because of excessive sales return. Such action might reduce the future sales of the business entity and thereby reducing the future sales revenue.

Step 3: Accounting for merchandise returned

Date

Accounts and Explanation

Debit $

Credit $

1

Sales return and allowance

Accounts receivable

2

Merchandise inventory

Cost of goods sold

Most popular questions for Business-studies Textbooks

SP 4 Santana Rey created Business Solutions on October 1, 2017. The company has been successful, and its list of customers has grown. To accommodate the growth, the accounting system is modified to set up separate accounts for each customer. The following chart of accounts includes the account number used for each account and any balance as of December 31, 2017. Santana Rey decided to add a fourth digit with a decimal point to the 106 account number that had been used for the single Accounts Receivable account. This change allows the company to continue using the existing chart of accounts.

No

Account title

Dr.

Cr.

101

Cash

$48,372

106.1

Alex’s Engineering Co

0

106.2

Wildcat Services

0

106.3

Easy leasing

0

106.4

IFM Co

3,000

106.5

Liu Corp

0

106.6

Gomez Co

2,668

106.7

Delta Co

0

106.8

Kc Inc

0

106.9

Dream Inc

0

119

Merchandise inventory

0

126

Computer supplies

580

128

Prepaid insurance

1,665

131

Prepaid rent

825

163

Office equipment

8,000

164

Accumulated depreciation – office equipment

$400

167

Computer equipment

20,000

168

Accumulated depreciation – computer equipment

1,250

201

Accounts payable

1,100

210

Wages payable

500

236

Unearned computer service revenue

1,500

307

Common stock

73,000

318

Retained earnings

7,360

319

Dividend

0

403

Computer service revenue

0

413

Sales

0

414

Sales return and allowances

0

415

Sales discount

0

502

Cost of goods sold

0

612

Depreciation expenses – office equipment

0

613

Depreciation expenses – computer equipment

0

623

Wages expenses

0

637

Insurance expenses

0

640

Rent expenses

0

652

Computer supplies expenses

0

655

Advertising expenses

0

676

Mileage expenses

0

677

Miscellaneous expenses

0

684

Repair expenses - computer

0

In response to requests from customers, S. Rey will begin selling computer software. The company will extend credit terms of 1∕10, n∕30, FOB shipping point, to all customers who purchase this merchandise. However, no cash discount is available on consulting fees. Additional accounts (Nos. 119, 413, 414, 415, and 502) are added to its general ledger to accommodate the company’s new merchandising activities. Also, Business Solutions does not use reversing entries and, therefore, all revenue and expense accounts have zero beginning balances as of January 1, 2018. Its transactions for January through March follow:

Jan. 4 The company paid cash to Lyn Addie for five days’ work at the rate of $125 per day. Four of the five days relate to wages payable that were accrued in the prior year.

5 Santana Rey invested an additional $25,000 cash in the company in exchange for more common stock.

7 The company purchased $5,800 of merchandise from Kansas Corp. with terms of 1∕10, n∕30, FOB shipping point, invoice dated January 7.

9 The company received $2,668 cash from Gomez Co. as full payment on its account.

11 The company completed a five-day project for Alex’s Engineering Co. and billed it $5,500, which is the total price of $7,000 less the advance payment of $1,500.

13 The company sold merchandise with a retail value of $5,200 and a cost of $3,560 to Liu Corp., invoice dated January 13.

15 The company paid $600 cash for freight charges on the merchandise purchased on January 7.

16 The company received $4,000 cash from Delta Co. for computer services provided.

17 The company paid Kansas Corp. for the invoice dated January 7, net of the discount.

20 Liu Corp. returned $500 of defective merchandise from its invoice dated January 13. The returned merchandise, which had a $320 cost, is discarded. (The policy of Business Solutions is to leave the cost of defective products in Cost of Goods Sold.)

22 The company received the balance due from Liu Corp., net of both the discount and the credit for the returned merchandise.

24 The company returned defective merchandise to Kansas Corp. and accepted a credit against future purchases. The defective merchandise invoice cost, net of the discount, was $496.

26 The company purchased $9,000 of merchandise from Kansas Corp. with terms of 1∕10, n∕30, FOB destination, invoice dated January 26.

26 The company sold merchandise with a $4,640 cost for $5,800 on credit to KC, Inc., invoice dated January 26.

31 The company paid cash to Lyn Addie for 10 days’ work at $125 per day

Feb. 1 The company paid $2,475 cash to Hillside Mall for another three months’ rent in advance.

3 The company paid Kansas Corp. for the balance due, net of the cash discount, less the $496 amount in the credit memorandum.

5 The company paid $600 cash to the local newspaper for an advertising insert in today’s paper.

11 The company received the balance due from Alex’s Engineering Co. for fees billed on January 11.

15 The company paid $4,800 cash in dividends.

23 The company sold merchandise with a $2,660 cost for $3,220 on credit to Delta Co., invoice dated February 23.

26 The company paid cash to Lyn Addie for eight days’ work at $125 per day.

27 The company reimbursed Santana Rey for business automobile mileage (600 miles at $0.32 per mile).

Mar. 8 The company purchased $2,730 of computer supplies from Harris Office Products on credit, invoice dated March 8.

9 The company received the balance due from Delta Co. for merchandise sold on February 23.

11 The company paid $960 cash for minor repairs to the company’s computer.

16 The company received $5,260 cash from Dream, Inc., for computing services provided.

19 The company paid the full amount due to Harris Office Products, consisting of amounts created on December 15 (of $1,100) and March 8.

24 The company billed Easy Leasing for $9,047 of computing services provided.

25 The company sold merchandise with a $2,002 cost for $2,800 on credit to Wildcat Services, invoice dated March 25.

30 The company sold merchandise with a $1,048 cost for $2,220 on credit to IFM Company, invoice dated March 30.

31 The company reimbursed Santana Rey for business automobile mileage (400 miles at $0.32 per mile).

The following additional facts are available for preparing adjustments on March 31 prior to financial statement preparation:

a. The March 31 amount of computer supplies still available totals $2,005.

b. Three more months have expired since the company purchased its annual insurance policy at a $2,220 cost for 12 months of coverage.

c. Lyn Addie has not been paid for seven days of work at the rate of $125 per day.

d. Three months have passed since any prepaid rent has been transferred to expense. The monthly rent expense is $825.

e. Depreciation on the computer equipment for January 1 through March 31 is $1,250.

f. Depreciation on the office equipment for January 1 through March 31 is $400.

g. The March 31 amount of merchandise inventory still available totals $704.

Required

1. Prepare journal entries to record each of the January through March transactions.

2. Post the journal entries in part 1 to the accounts in the company’s general ledger. (Note: Begin with the ledger’s post-closing adjusted balances as of December 31, 2017.)

3. Prepare a partial work sheet consisting of the first six columns (similar to the one shown in Exhibit 4B.1) that includes the unadjusted trial balance, the March 31 adjustments (a) through (g), and the adjusted trial balance. Do not prepare closing entries and do not journalize the adjustments or post them to the ledger.

4. Prepare an income statement (from the adjusted trial balance in part 3) for the three months ended March 31, 2018. Use a single-step format. List all expenses without differentiating between selling expenses and general and administrative expenses.

5. Prepare a statement of retained earnings (from the adjusted trial balance in part 3) for the three months ended March 31, 2018.

6. Prepare a classified balance sheet (from the adjusted trial balance) as of March 31, 2018.

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.