Accounting for Merchandising Operations

1. Merchandise inventory refers to products that a company owns and plans to sell to
customers.

Answer: TRUE

2. Gross profit is also called gross margin.

Answer: TRUE

3. Cost of goods sold represents the expense of buying and preparing merchandise for sale.

Answer: TRUE

4. A company had sales of P350,000 and cost of goods sold of P200,000. Its gross profit equals
P150,000.

Answer: TRUE

5. A company had a gross profit of P300,000 based on sales of P400,000. Its cost of goods sold
equals P700,000.

Answer: FALSE

Sales 400,000
Less: Cost of Goods Sold ???????
Gross Profit 300,000

Sales 400,000
Less: Gross Profit 300,000
Cost of Goods Sold 100,000

6. Credit terms for a purchase include the amounts and timing of payments from a buyer to a
seller.

Answer: TRUE

7. Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.

Answer: FALSE
(Purchase Returns and Allowances correct account)
8. Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the
amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30
days.

Answer: TRUE

9. Purchase discounts are the same as trade discounts.

Answer: FALSE
(Trade Discounts are not record, while Purchase Discounts are recorded)

10. Under a perpetual inventory system, when a credit customer returns non-defective
merchandise to the seller, the seller debits Sales Returns and Allowances and credits
Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.

Answer: TRUE

11. A journal entry with a debit to cash of P980, a debit to Sales Discounts of P20, and a credit to
Accounts Receivable of P1,000 means that a customer has taken a 10% cash discount for
early payment.

Answer: FALSE
(P 20/P 1,000 = 0.02 or should be 2% not 10%)

12. Cost of Goods Sold is debited to close the account during the closing process.

Answer: FALSE
(No Entry related to COGS in a closing process)

13. In a periodic inventory system, cost of goods sold is recorded as each sale occurs.

Answer: FALSE
(Cost of Goods account is used only in a Perpetual Inventory System)
14. The items to be considered in the computation for the amount of merchandise inventory
include all of the following except:
A) Purchase discounts.
B) Returns and allowances.
C) Freight costs paid by the buyer.
D) Freight costs paid by the seller.
E) Trade discounts.

Answer: D
(Review the computation of COGS)
Merchandise Inventory, Beginning xxx
Add: Gross Purchases xxx
Freight In xxx
Less: Purchase Discounts (xxx)
Purchase Returns and Allowances (xxx)
Net Purchases xxx
Cost of Goods Available for Sale xxx
Less: Merchandise Inventory, Ending xxx
Cost of Goods Sold xxx

15. A company uses the perpetual inventory system and recorded the following entry:

Accounts Payable 2,500

Merchandise Inventory 50
Cash 2,450

This entry reflects a:

A) Purchase of merchandise on credit.
FALSE (Cash is used)

B) Return of merchandise.
FALSE (Merchandise Inventory and Accounts Payable not same in amount)

C) Sale of merchandise on credit.

FALSE (No Sales Account is used)

D) Payment of the account payable less a 2% cash discount taken.

E) Payment of the account payable less a 1% cash discount taken.

Answer: D
(P 50/P 2,500 = 0.02 or 2%)
16. S sold merchandise on account to B Company for P13,440 (inclusive of 12% VAT).
Journalize the transaction.

Answer:

Computation:
Gross Amount (inclusive of VAT) P 13,440
Divide by 1.12
Sales/Purchases* P 12,000

Sales/Purchases P 12,000
VAT Rate 12%
Output/Input VAT P 1,440

*Always remember that Sales Account or Purchases Account should be recorded NET of
VAT

Seller’s Records Buyer’s Records

Dr. Accounts Receivable 13,440 Dr.Purchases 12,000

Cr. Sales 12,000 Dr. Input VAT 1,440

Cr. Output VAT 1,440 Cr. Accounts Payable 13,440

17-18.
Daphne Co., a VAT-registered company sold merchandise at invoice price of P185,000,
inclusive of 12% VAT, to James Co., another VAT-registered company on credit. Trade
discounts granted are 5% and 10%. Credit terms are 2/10, n/30; shipment terms FOB seller,
freight collect. Freight charge is P2,500. In Daphne’s books, Sales amounts to:

A. P185,000
B. P165,179
C. P158,175
D. P141,228
E. P139,194

Answer: B
The difference between List Price and Trade Discount is Invoice Price. Meaning if we use the
term Invoice Price this is less of Trade Discount already. The buyer records purchases and the
seller record sales at Invoice Price.

Invoice Price 185,000

Divided by VAT 1.12
Sales Amount 165,179
19-20.
On April 8, 2015, Eliza Trading purchased goods from a supplier for an invoice price of
P113,600 with credit terms 2/10, 1/15, n/30; shipment terms FOB shipping point, freight
prepaid. Freight charges amounted to P1,530. On April 21, Eliza settled its account in full. On
Eliza’s cash payments journal, how much should appear as credit to “Cash” relating to the
transaction?

A. P113,600
B. P115,130
C. P113,978.30
D. P112,464
E. P113,994

Answer: E

For 2% Purchase discount to take effect should have paid in April 18.
For 1% Purchase discount to take effect should have paid in April 23.
FOB Shipping point buyer agreed to should all the transportation cost.

Invoice Price 113,600

Less: Purchase Discount
(1% * 113,600) 1,136
Purchase Price 112,464
Add: Freight Charges 1,530
Total Cash relate to the
transaction 113,994

Journal Entry:
April 08, 2015 Purchases 113,600
Freight In 1,530
Accounts Payable 115,130

April 21, 2021 Accounts Payable 115,130

Purchase Discount 1,136
Cash 113,994