Question 1: Indicate whether the following are debit or credit accounts:

a. Sales
b. Cost of goods sold
c. Sales discount
d. Sales returns and allowances
e. Merchandise inventory

Question 2:
Enter the letter for each term of the definition that it most closely matches.
A. Cash discount
B. Credit period
C. Discount period
D. FOB destination
E. FOB shipping point
F. Gross profit
G. Merchandise inventory
H. Purchase discount
I. Sales discount
J. Trade discount

1. Ownership of goods is transferred when delivered to the buyer’s place of business.

2. Time period in which a cash discount is available.
3. Difference between net sales and the cost of goods sold.
4. Reduction in a receivable or payable if it is paid within the discount period.
5. Purchaser’s description of a cash discount received from a supplier of goods.
6. Ownership of goods is transferred when the seller delivers goods to the carrier.
7. Reduction below list or catalog price that is negotiated in setting the price of goods.
8. Seller’s description of a cash discount granted to buyers in return for early payment.
9. Time period that can pass before a customer’s payment is due.

10. Goods a company owns and expects to sell to its customers.

Exercise 1. The following supplementary records summarize Titus Company’s merchandising activities
for year 2011. Set up T-accounts for Merchandise Inventory and Cost of Goods Sold. Then record the
activities in those T-accounts and compute account balances at the end of 2011.
Cost of merchandise sold to customers in sales transactions . . . . . . . . . . . . . . . . . . . $186,000
Merchandise inventory, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000
Invoice cost of merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,500
Cost of transportation of merchandise purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900
Cost of merchandise returned by customers and restored to inventory . . . . . . . . . . . . . . . 2,200
Purchase discounts received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600
Purchase returns and allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,100

Exercise 2. Taos Company purchased merchandise for resale from Tuscon Company with an invoice
price of $22,000 and credit terms of 3/10, n/60. The merchandise had cost Tuscon $15,000. Taos paid
within the discount period.
1. Prepare entries that the buyer should record for (a) the purchase and (b) the cash payment.
2. Prepare entries that the seller should record for (a) the sale and (b) the cash collection.

Exercise 3. Prepare journal entries to record the following transactions for a retail store.
 Apr. 2 Purchased merchandise from Blue Company under the following terms: $3,600 price,
invoice dated April 2, credit terms of 2/15, n/60, and FOB shipping point.
 Apr.3 Paid $200 for shipping charges on the April 2 purchase.
 Apr.4 Returned to Blue Company unacceptable merchandise that had an invoice price of $600.
 Apr.17 Sent a check to Blue Company for the April 2 purchase, net of the discount and the
returned merchandise.
  Apr. 18 Purchased merchandise from Fox Corp. under the following terms: $7,500 price, invoice
dated April 18, credit terms of 2/10, n/30, and FOB destination.
 Apr. 21 After negotiations, received from Fox a $2,100 allowance on the April 18 purchase.
 Apr. 28 Sent check to Fox paying for the April 18 purchase, net of the discount and allowance.

Exercise 4:

Prepare journal entries to record the following merchandising transactions of Stone Company, which
applies the perpetual inventory system. (Hint: It will help to identify each receivable and payable; for
example, record the purchase on August 1 in Accounts Payable — Abilene.)

Aug. 1 Purchased merchandise on credit from Abilene Company for $6,000 under credit terms of 1/10,
n/30, FOB destination, invoice dated August 1.
Aug. 4 At Abilene’s request, Stone paid $100 cash for freight charges on the August 1 purchase, reducing
the amount owed to Abilene.
Aug. 5 Sold merchandise to Lux Corp. for $4,200 under credit terms of 2/10, n/60, FOB destination,
invoice dated August 5. The merchandise had cost $3,000.
Aug. 8 Purchased merchandise from Welch Corporation for $5,300 under credit terms of 1/10, n/45, FOB
shipping point, invoice dated August 8. The invoice showed that at Stone’s request, Welch paid the $240
shipping charges and added that amount to the bill. (Hint: Discounts are not applied to freight and
shipping charges.)
Aug. 9 Paid $120 cash for shipping charges related to the August 5 sale to Lux Corp.
Aug. 10 Lux returned merchandise from the August 5 sale that had cost Stone $500 and been sold for
$700. The merchandise was restored to inventory.
Aug. 12 After negotiations with Welch Corporation concerning problems with the merchandise purchased
on August 8, Stone received a credit memorandum from Welch granting a price reduction of $800.
Aug. 15 Received balance due from Lux Corp. for the August 5 sale less the return on August 10.
Aug. 18 Paid the amount due Welch Corporation for the August 8 purchase less the price reduction
granted.
Aug. 19 Sold merchandise to Trax Co. for $3,600 under credit terms of 1/10, n/30, FOB shipping point,
invoice dated August 19. The merchandise had cost $2,500.
Aug. 22 Stone agreed on a price reduction of $600 for Trax on the August 19 sale because the
merchandise did not meet specifications.
Aug. 29 Received Trax’s cash payment for the amount due from the August 19 sale.
Aug. 30 Paid Abilene Company the amount due from the August 1 purchase.