Chapier_6 Accounting for Merchandising Business. DISCUSSION QUESTIONS 1, What is a merchandising business? 2. What distinguishes a merchandising business from a service business? 3. What isa merchandise? Give examples. 4. Differentiate the income statement of a service from that of a merchandising one. 5. What is the meaning of (a) 2/10,n/30; (b) 1/EOM,n/60. 6. What are trade discounts? Cash discounts? Which is not reflected in the accounting records, 7. What are the two inventory systems? Explain each 8. Which inventory system is suitable for companies selling high-priced commodities? 9. What account is debited to record the cost of merchandise purchased under the Periodic Inventory System? Under the Perpetual Inventory System? 10. Give examples of cash discount terms. Explain each. 11. Name at least three accounts that would normally appear in the chart of accounts of a merchandising business but would not appear in the chart of accounts of a service business. 12. If the term is FOB destination- prepaid, who shoulders the freight charges? Who pays the shipper? 13. If the term is FOB destination-collect, who shoulders the freight charges? Who pays the shipper? 14. If the term is FOB shipping point- prepaid, who shoulders the freight charges? Who pays the shipper? 15. _ If the term is FOB shipping point- collect, who shoulders the freight charges? Who pays the shipper? 240jopter 6 A ting for Mercht sing Busines EXERCISES 6-1 In the table below, indicate in column 1, the classification of each account. In column 2, its normal balance. And in column 3, in what financial statement (Balance Sheet or Income Statement) the account is to be reported. Title of account Column i Columi 2 Column 3 Example: Cash asset debit Balance Sheet 1. Merchandise Inventory 2. Purchases 3. Freight-In 4, Purchase Returns &Allowances 5. Purchase Discount 6. Sales 7, Sales Retums & Allowances 8. Sales Discount 9, Accounts Payable 10. Accounts Receivable 62 On October 5, of the current year, Masagana Trading Company purchased merchandise with a list price of P 85,000. The merchandise is subject to a trade discount of 15%, 10%, 5%, with credit terms of 2/19, 0/30. (Masagana Trading is anon-VAT registered business). Required: Answer the following questions based from the above data. 1, How much is the invoice price? 2. At whai amount should Masagana debit Purchases? 3. How much is the trade discount? 4, How much is the cash discount?. 5. Up to what date is the discount period? 6. If Masagana make payment on October 15, how much should it pay in full settlement of its account? 7. If payment is made on October 20, how much should Masagana pay in full settlement of its October 5, account? 244ter_6 — Accounting for Merc! Busir 6-3 Determine the following: (1) Invoice price (2) amount of cash discount and (3) the amount paid by the buyer in full seitlement of the account for cach of the following invoices: Item (a) has been done for you. (Assume the company is a non-VAT registered business). 242 Invoice Date | List Price | Trade Discount Credit Terms | Date Paid a Aug. 16 P 70,000 10%, 20% 1/10/eom, 0/60 Aug. 31 by] fuly 2 [55,000 | 20%, 30% 3/10, n30 July 17 | © May 7 120,000 | 3%, 10%, 20% | 2/10, 1/15, n/30 May 19 d | Apai 5 [150,000 | 20%, 40% 2/10, a0 May 4 e| Jan. 4 30,000 | 5%, 8%, 10% | 2/10, 1/15, n/30 Tan. 19 £ Mar. 8 30,000 2%, 3%, 4% 2/10, 0/30 Mar. 31 g ‘Oct. 12 80,000 1%, 2%, 4% 3/10, 2/40 Oct. 22 h | June 13 100,000 10%, 15% 3/10, 2/15, 0/30 June 26 1. Computation of Invoice price List price P 70,000 Multiply by complements of trade discount —_x.90x.80 Invoice price £30,400 2. Computation of cash discount Invoice price P 50,400 Multiply by cash discount 1% Cash discount P__504 3. Computation of amount paid Invoice price P 50,400 Less: Cash disco 504 Amount paid P.49,896— Chapter 6 - Accounting for Merchandising Business 6-4 On December 1, 2015, X Company bought merchandise from Y Company costing P 50,000, terms 2/10, n/30, FOB shipping point. Y Co. prepaid the freight of P 6,000 on December 2, 2015. On December 4, Y Co. issued a credit memorandum for damaged merchandise returned by X Co, amounting to P2,000. X Co. paid in fall the balance due on December i, 2015. (Assume the company is a non-VAT registered business). Required: Journalize the above transactions on the books of X Company and Y Company, Books of K Company Genera Journal Page 1 . Post Date Description Ref | Debit | Credit 243Chapter 6 ~ Accounting for Mei isit f Books of Y Company General Journal Page 1 Post Dab Description Rf | Debit_|_ Credit 244r_§ — Accountin rchandisir it 1 PROBLEMS The following are transactions of Juan Arellano Company for the month of August, 2015. The company uses Periodic Inventory System. (Assume the company is anon VAT registered business). Angust 1 AuURwW Boo 13 14 18 21 22 23 31 Juan Arellano invested the following assets in his business: P 400,000 cash; P 50,000 worth of desks and chairs and a store equipment valued at 20,000. Mr. Arellano’s accounts payable to Mr. Cruz amounting to P 12,000 is to be assumed by his business. Mr. Arellano bought a computer for his business worth P 60,000 giving a P 10,000 down payment and the balance payable at the end of the month. - Purchased merchandise for cash, P 12,000. Purchased merchandise from SM, P 18,000. Terms 2/10,1/30, Purchased office supplies on account, P 3,000. Sold merchandise to Mr. Allen on account, P 40,000, terms, 2/10, n/30, FOB destination. Paid advertising for the month, P 15,000. Purchased merchandise from PX Company, P 20,000, terms 1/1 5,n/30. Cash sales, P 18,000. Received a credit for P 2,000 from PX Company as an allowance for a slight defect on merchandise purchased. Sold merchandise to Ms. Railyn on account, P 40,000, terms, 2/10, 1/30, FOR destination. Paid freight on sale made to Ms. Railyn P 1,000. Issued check to SM in full payment for the August 4, account. Sold merchandise to Mr. TJ, P 25,000, terms 60-day, a 6% note was received from Mr. TJ. Collected the amount due from Mr. Allen for his August 6, account, Received payment from Ms. Railyn. Paid the amount due to PX Company. Paid the August 2, invoice, Required: Journalize the transactions on the books of Juan Arellano Company. Show supporting computations. 245Chapter §~ Accounting for Merchandising Business. 62 Jan. 1 wv The foliowing selected transactions were completed during the month of January, between S Company and B Company. Both are using periodic Inventory method and ate non-VAT registered business. S Company sold merchandise on account to B Company, P 23,500, terms FOB destination, 2/15, n/eom. S Company paid shipping costs of P 1,700 for delivery of merchandise to B Company. S Company sold merchandise on account to B Company, P 35,000, terms FOB shipping point, n/eom. B Company retumed P 4,000 of merchandise purchased on account on Jan. 1. B Company paid shipping charges of P 1,400 for the Jan. 5 purchases from S Company. S Company sold merchandise on account to B Company, P 40,000, terms FOB shipping point, 1/10, 1/30. S Company paid transportation cost of 3,500 which was added to the invoice. B Company paid in full § Company for purchase of Jan. 1. B Company paid in full S Company for purchase of Jan. 15. B Company paid in full S Company for purchases of Jan. 5. Required: Joumalize the January transactions for both S Company and B Company. Show supporting computations. 246Chapter § ~ Accounting for Merchandising Business 6-3 Sel Company sold merchandise to Bun Company on October 1, 2015 at a list price of P 100,000, trade discount of 5% and 10%, FOB destination. Cash discount terms: 3/eom, n/60, Bun Co. paid the freight on October 5, 2015 amounting to P 5,000, Because defective merchandise amounting to P 3,000 was erroneously delivered, Sel Co. issued a credit memorandum to Bun Co. on October 7, 2015. Bun Co. paid in full the balance due on October 31, 2015. (Both companies are using periodic inventory system and are non-VAT registered business). Required: Journalize the above transactions on the books of Sel Company and Bun Company. Show computations. Books of Sel Company General Journal Page 1 Date Description | Post Debit Credit 247Chapter §— Accounting for Merchandising Busin ess. Books of Bun Company General Journal Page 1 jo Description Post Re Debit Credit 248Chapter 6 — Accounting for lisir ir 64 The following transactions were completed by Valle Verde Company during, July, 2015. (Assume the company is a non VAT registered business), Jaly 1 Bought merchandise from City Trading, P 21,160, terms 3/20, 0/40. 2 Paid freight cost of merchandise purchased from City Trading, P 1,000. 4 Sold merchandise on account to Arrow Co, for P 15,355, terms 2/20, n/40. 6 Returned P 1, 285 worth of defective merchandise to City Trading. 8 Arrow Co. returned P 1,480 worth of defective merchandise. 10 Sold merchandise for cash, P 6,263. 13. Purchased supplies on account from National Bookstore, P 4,800, 14 Returned P 1,250 worth of defective supplies to National Bookstore. 16 Sold merchandise for cash to Emma, P 5,000. 18 Emma retuned P 800 worth of defective merchandise. A cash refund was given to her, 21 Paid City Trading in full. 22 Sold merchandise on account to Villar for P 9,500, terms 2/10, 1/30. 23 Paid in full National Bookstore. 24 Arrow Co. paid in full its July 4, account less the returned made on July 8, 26 Purchased office equipment for cash from San Pedro Company, P10,300. 27 Received an allowance for P 1,500 for a slight defect on equipment bought from San Pedro Company. 31 Received cash from Villar in fall payment of its July 22, account. Required: Journalize the transactions on the books of ‘Valle Verde Company assuming the company uses periodic inventory system. Show computations. 249Chapter 6 ~ Accounting for Merchandising Business &5 The following were selected from among the transactions completed by ‘The Green Meadow Company during March, 2015. (Assume the company isa non VAT registered business). Mar. 3 4 5 28 Purchased merchandise on account from Bell Company, list price, P 25,000, trade discount 5% and 10%, terms FOB destination, 2/10, 0/30. Sold merchandise for cash, P 7,550. Purchased merchandise on account from Royal Co. P 39,750, terms FOB shipping point, 2/10, n/30, with prepaid transportation costs of P 1,800 added to the invoice. Returned P 2,000 worth of merchandise purchased on March 3, from Bell Company. Purchased merchandise from Red. Company, P 7,000. Terms 2/10,0/30, Sold merchandise on account to Ivy Co., list price P 27,000, trade discount 5%, terms 1/10, 2/30. Sold merchandise on account to Brown Company P 30,000, terms 1/10, 0/30, Issued a credit memorandum to Brown Co. for merchandise return P 2,000. Paid Bell Company for the March 3, account, Cash sales, P 12,500, Paid Royal Company for the March 5, account. Received payment from Ivy Company for the March 10, account. Received a check from Brown Co. in full payment of its March 11, account. Paid Red Company for the March 7, account Required: Journalize the transactions on the books of Green Meadow Company. Assume the company is using periodic inventory system. Show supporting computations. 250Chapter 6—Accountina for Merchandising Business. &6 Speedo Store completed the following transactions for the month of March, 2015. At the beginning of March, the ledger of Speedo showed the following balances: Cash, P1,000,000; Samuel, Capital, P1,000,000. (Assume the sompany is a VAT registered business and assume 12% VAT is inclusive in the amounts in the transactions.) Mar 3 10 i 12 15 7 Purchased merchandise on account from Cargo Supply Co, P112,000, terms: 2/10, 0/30. Sold merchandise on account P100,352, terms: 2/10, n/30. Received credit from Cargo Supply Co. for merchandise retumed, 4,480. Received collections in full from customers billed on sales on Mar. 3. Paid Cargo Supply Co. in full. Purchased supplies for cash, P10,080. Purchased merchandise for cash, P56,000. Received refund for poor quality merchandise from supplier on cash purchases, P5,376. Purchased merchandise ftom Eagle Distributors, P53,760, FOB shipping Point, terms: 2/10, n/30. Paid freight on Jan. 17 purchase P5,600. Sold merchandise for cash, P138,880. Purchased merchandise from Harley, Inc., P22,400, FOB destination, terms 2/10, 1/30. Paid Eagle Distributors in full. Made refunds to cash customers for defective merchandise. P2,688. Sold merchandise on account, P35,840, terms 0/30. Required: 1. Journalize the transactions in the books of. Speedo Store. 2. Post the transactions. 3. Prepare a trial balance dated March 31, 2015. 251Chapter 6 — Accounting for Merchandising Business 6-7 The transactions for the RST Company for the month of May, 2015 are shown below. (Assume the company is a vat registered business and assume 12% VAT is inclusive in the amounts in the transactions.) May 2 & Required: RST sold and shipped merchandise worth P280,000 to AT Company, terms: 1/15, /30. AJ Company reported P5,600 of merchandise damaged in shipment, and a credit meme was issued for this. Purchased office supplies for P3,248 cash. Sold P112,000 of merchandise to Ivy Company, terms: 2/10, 0/30. Purchased merchandise for P224,000 cash. Cash sales for the first 15 days is P168,000. Purchased merchandise worth P280,000, terms: 20% down payment, balance 2/10, /30. Returned defective merchandise worth P28,000 purchased on May 12. Received full payment from AJ Company for sale of May 2. Received full payment from Ivy Company. Paid commission of salesmen, P50,000. Paid in full the purchase dated May 12. Cash sales for the last 15 days, P224,000. 1. Journalize the transactions in the books of RST Company. 2. Post the transactions. 3. Prepare a trial balance at May 31, 2015. 252Chanter _6 — Accounting for Me sine ir 6-8 The transactions for ABC Company for the month of April, 2015 are shown below. (Assume the company is a vat registered business and assume 12% VAT is inclusive in the amounts in the transactions.) April 3 4 wr 22 23 26 30 Sold merchandise to Mr. Santos on account, P280,000, FOB shipping point, terms: 2/10, n/30. Purchased merchandise from Jordan Company on account, P252,000, FOB shipping point, terms: 2/10,1/15, n/30. Paid shipping charges of P28,000 for merchandise purchased on April 4. Purchased office equipment for P50,400 from Best Equipment on. account, FOB destination, terms: n/30. Received P28,000 worth of merchandise returned by Mr. Santos . The goods were slightly damaged while in transit. A credit memo was issued to Mr. Santos. Retumed damaged merchandise worth P5,600 to Jordan Company, the amount was deducted from the April 4 account. Received fuil payment from Mr.Santos for the April 3 account less the retums made on April 9. Purchased merchandise from King Company on account for P22,400, FOB shipping point, terms: 2/10, n/30. Paid shipping charges of P2,240 on merchandise purchased from King Company. Sold merchandise to Evans Company for P89,600 on account, FOB shipping point, terms; 2/15, 1/30. Defective merchandise was returned by Evans Company and a credit memorandum was issued for P3,360. Paid in full Jordan Company. ‘The owner, Mr. ABC, withdrew P5,000 cash for personal use. Required: 1, Journalize the transactions in the books of ABC Company. 2. Post the transactions. 3. Prepare a trial balance dated April 30, 2015. 253Chapter 6=) ating for Merchandisin 6-9 The following are transactions of Bluegreen Company for the month of November, 2015. The company is using the perpetual inventory method. All sales are made at a gross profit of 50% of sales. Assume the company is a non-VAT registered business. Nov. 1 Mr Dy, the owner, opens a merchandising business with the following investment: cash, P400,000; furniture and fixtures with a fair market value of P40,000 and a store equipment with a fair market value of 25,000. Also, Mr. Dy had an open account with Mr. Co. for P10,000 which will be assumed by his business. 5 Bought a cash register for store use from Best Machines, P30,000 giving a P6,000 down payment and the balance payable in monthly installment of P4,000. 10 Paid rent for the month, P24,000 and insurance of P48,000 for one year. 15 Received the following invoices for merchandise purchased by Bluegreen Company: Invoice from Al Supply, P33,600, terms: n/15 and invoice from Demy Company, P11,200, terms: n/30. Both are dated Nov. 15. 18 Cash sales, P17,920. 18 Sold merchandise to Mr. David, P11,200, terms: 2/10, /30. 20 Paid the account due to Mr, Co, 21 Received a credit for P2,240 from Al Supply as an aliowance on the poor quality of merchandise. 25 Sold merchandise to Mr Andres for P18,960, receiving a P4,480 down Payment, balance, terms: 2/10, n/30, 27 Issued a credit memo to Mr. Andres for defective merchandise delivered, 1,500. 28 Collected in full the account of Mr. David. 30 Paid in full Al Supply. 30 Cash sales, P103,040, Required: Journalize the transactions in the books of Bluegreen Company. 254Chapter 6 — Accounting for Merchandisi is END OF CHAPTER TEST IDENTIFICATION 1. It is a business activity of buying and selling products. 2. A document prepared by the seller of merchandise and sent to the buyer that contain the details of the sale, such as the number of uaits, amount due and the credit terms. 3. It is a deduction from the gross invoice price that the buyer can take only if the invoice is paid within a specified period of time 4. The term of shipment wherein the seller ships the goods te their destination without charge to the buyer. 5. It is an account whose normal balance is opposite the balance of the account it reduces, 6. Freight terms where in the seller pays the freight at the time of shipment. 7. Itis the cost to the seller of the goods sold to customer. 8. It is the quantity of goods on hand and are available for sale. 9. When the buyer pays the freight bill upon the arrival of the goods 16. The account debited under perpetual inventory system io record the cost of goods purchased. 11. The account used to record freight costs incurred in the acquisition of goods. 12, The inventory system that uses the account Purchases to record the cost of merchandise purchased. 13. The inventory system that requires the maintenance of stock card. 14. The inventory systezn that is suitable for companies selling high-priced goods. 15. A note issued by the seller to the buyer indicating the amount and the reason for which the customer’s account is to be credited. 16. Discounts from the list prices in published catalogs or special discounts offered to certain classes of buyers. 17. From the buyer’s perspective, returned merchandise or an adjustment for defective merchandise, 18. An account that is added to the balance of a related account. 19. The inventory system which provides a continuous record of inventory inflows and outflows. 20. Discount taken by the buyer for early payment of account. 255Chapter 6—. unting for Merchandisi ines: MULTIPLE CHOICE. Encircle the letter of your answer 1. Under the periodic inventory system, the account debited to record the cost of merchandise purchased is a, Merchandise Inventory c. Purchase retums and allowances b. Purchases d, Purchase Discount 2. The inventory system that requires the maintenance of stock card is a, Perpetual system c. FOB destination b, Periodic system d. FOR shipping point w The seller bears the transportation cost of merchandise sold if the terms of shipment is 2. FOB shipping point ¢. Freight prepaid b. FOB destination d. Freight collect 4. The terms of shipment wherein title or ownership to goods is transferred from the seller to the buyer only upon the buyer’s receipt of merchandise. a. FOB shipping point c. Freight prepaid b. FOB destination d. Freight collect 5. The following are contra accounts except a. Sales discount c. Purchase returns and allowances b, Allowance for bad debts d. Sales 6. An account that is deducted from its related account a. Adjunct account ¢. Transportation-In b. Contra account d. Purchases 7. Which is classified as adjunct account a. Sales returns and allowances ¢. Merchandise Inventory b. Purchase discount d. Freight-In 8. Which is not reflected in the accounting books. a. Trade discount ¢. Sales discount b. Sales return d. Purchase discount 256Chapter_6 — Accounting for Merchandising Business 9. An account that is added to its related account a. Sales discount ©. Purchase discount b. Adjunct account d. Contra account 10. A discount offered to encourage the early payment of account, a. Trade discount ¢. Cash discount b, Sales discount d, Purchase discount 11. The major expense of a merchandising business is a, Rent Expense c. Depreciation Expense b. Cost of goods sold d. Uncollectible accounts expense 12, A purchase discount results from a, Returning goods to the seller b. Buying large quantity of merchandise c. Receiving a purchase allowance 4. Paying within a discount period 13. Noy Company purchased merchandise, the invoice for P 84,500 includes P 4,500 for freight and terms 3/15,2/30. Merchandise in the amount of P 12,000 was returned, and the balance of the invoice was paid within the discount period. How much cash was disbursed by Noy in full settlement of the account? a. P 84,500 c. P 72,500 b. P 70,460 4. P 7,000 14, If merchandise purchased on account is returned, the buyer may inform the seller of the details by issuing: a. a debit memorandum ¢, an invoice b, a credit memorandum da bill 15. Ifmerchandise is sold on account to a customer for P 10,000, terms FOB shipping point, 1/10, 1/30, and the seller Prepays the transportation costs of P 500, the amount of the discount for early payment would be: a PO c. P 100 b.P 50 4. P 105 257