True or False

1. The effect of a sales return and allowance is a reduction in sales revenue and a
decrease in cash or accounts receivable.
2. If the buyer is to absorb the transportation costs related to a purchase, the terms are
said to be FOB shipping point.
3. Purchase discounts are discounts given to the seller.
4. Under the periodic inventory system, an Ending inventory account must be taken in
order to determine the cost of goods sold.
5. The chart of accounts for a merchandising business would include an account called
Merchandise Inventory.
6. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after
the invoice date to take advantage of the cash discount.
7. Operating expenses are deducted from fees earned for a service business and from
gross profit for a merchandising business.
8. Because of VAT, the sales of an enterprise is recorded at a higher amount compared
to when there is no applicable VAT.
9. The term freight prepaid or freight collect will dictate who will pay the transportation
costs.
10. Cash purchase is both a purchase transaction and a cash payment transaction. Thus,
requires two separate entries.
Multiple Choice
1. Freight out is treated as
a. Addition to purchases
b. Selling expense
c. General and administrative expense
d. Deduction from purchases
2. The method used that determine the Cost of Goods Sold by conducting a physical
inventory count?
a. Allowance method
b. Perpetual inventory system
c. Direct write off method
d. Periodic inventory system
3. If the seller collects VAT at the time of sale, the seller record the VAT as
a. debit to Input Tax
b. debit to Output Tax
c. credit to Sales
d. credit to Output Tax
4. Revenue is normally entered in the accounting records when
a. a customer order goods
b. a customer pays the goods
c. goods are received
d. goods are sold
5. When a debit memorandum is issued by the buyer for merchandise returned, the buyer
should
a. debit Accounts Payable and credit Purchase Returns and Allowances
b. debit Cash and credit Accounts Payable
c. debit Sales Returns and Allowances and credit Accounts Receivable
d. debit Sales and credit Accounts Receivable
6. Gross profit is calculated as
a. Net sales less (goods available for sale – merchandise inventory, end)
b. Net sales less (purchases + freight in + purchases returns and discounts –
merchandise inventory, end)
c. Net sales less goods available for sale
d. Gross sales less sales returns and discounts less merchandise inventory, end
7. It is a deduction from gross invoice price that the buyer can take only if the invoice is
paid in full within a specified period of time.
a. Purchase returns and allowances
b. Purchase discount
c. Chain discount
d. Trade discount

8. The inventory system that is suitable for companies selling high-priced commodities
a. Perpetual inventory system
b. Periodic inventory system
c. FOB Destination system
d. FOB Shipping Point system
9. A customer returned some defective goods. The seller would
a. credit Sales
b. debit Sales Returns and Allowances
c. credit Sales Returns and Allowances
d. debit Sales

10. Power Company’s ending inventory is understated by P7,000. The effects of this error
in the current year’s cost of goods sold and net income, respectively are
a. overstated, overstated
b. understated, understated
c. understated, overstated
d. overstated, understated
11. Regarding one purchase of merchandise, the following entries were made by Z
Company: a) Debit Purchase 17,000 ; Credit Accounts Payable 17,000 b) Debit Freight
in 1,900; Credit Accounts Payable 1,900. What are the shipping terms regarding this
transaction?
a. FOB shipping point, freight collect
b. FOB destination, freight collect
c. FOB shipping point, freight prepaid
d. FOB destination, freight prepaid
12. When cost of sales and inventory at the end are added, their sum is called
a. Gross profit
b. Purchases
c. Total cost of goods available for sale
d. Freight in
13. The amount of Total Goods Available for Sale during the year depends on the amounts
of
a. Beginning merchandise inventory and net purchases
b. Beginning merchandise inventory, cost of goods sold, and ending merchandise
inventory
c. Beginning merchandise inventory, net purchases and ending merchandise
inventory
d. Beginning merchandise inventory, net purchases and net sales
14. Which of the following is not a contra account?
a. Freight in
b. Purchase returns and allowances
c. Accumulated depreciation
d. Sales discount
15. When the seller paid the transportation cost and the term of sale is FOB destination,
the seller records the payment of the transportation cost by debiting
a. Freight in
b. Freight out
c. Accounts Payable
d. Accounts Receivable
16. FOB shipping point means
a. title passes at shipping point, seller pays transportation cost
b. title passes at shipping point, buyer pays transportation cost
c. title does not pass at shipping point; however, buyer is responsible for
transportation cost
d. none of these
17. FOB shipping point means
a. title passes at shipping point, seller pays transportation cost
b. title passes at shipping point, buyer pays transportation cost
c. title does not pass at shipping point; however, buyer is responsible for
transportation cost
d. none of these
 18. Under the periodic inventory system, the value added tax on merchandise purchased
is debited to
a. Purchases account
b. Output Tax
c. Input Tax
d. Taxes expense account
19. In a merchandising operation, the Sales account should include
a. only credit sales of merchandise
b. only cash sales of merchandise
c. both cash and credit sales of merchandise
d. sales of both merchandise and other assets of the business
20. Which of the following is not considered in computing net cost of purchases?
a. transportation cost paid on purchased goods
b. transportation cost paid on goods shipped to customers
c. purchase returns and allowance
d. purchases

Problem Solving
1. At the beginning of the period, Kevin Company has Inventory of P40,000. During the
year, Kevin Company purchased P100,000 of merchandise on credit terms of 3/10,
n/30. Defective merchandise of P3,000 was returned to supplier. Kevin Company takes
all purchase discounts. At the end of the period a physical inventory revealed P15,000
of merchandise on hand. Freight in showed a balance of P 5,000. How much is the
cost of goods available for sale for the period? (Ignore VAT)
2. Paco Company had the following data for the period just ended. Sales return and
allowances, P26,750; Cash Sales, P320,000; Credit Sales is 80% of cash sales;
Freight out, P10,400; Sales discount, P20,300. How much would be the amount of
gross sales that must be shown in the income statement?
3. Gross profit of Prada Company for the year 2020 is P45,000 which is 18% of net sales.
Sales returns and allowances amounted to P40,275 and sales discount is 2% of net
sales. How much would be the cost of goods sold for the year 2020?
4. Data for Gucci Company: Beginning inventory, P180,000; Net purchases is 120% of
beginning inventory; Ending inventory is 40% of net purchases. How much is the
amount of the Ending Inventory?
5. Using data in number 4, how much is the cost of goods sold?
6. Marc Company sold merchandise to Jacobs Company on July 7, 2020, at a list price of
P150,000, trade discounts of 8% and 5%, FOB shipping point. Cash discount terms:
2/eom, n/60. Because defective merchandise with an invoice price of P7,000 was
erroneously delivered, Marc Company issued a credit memorandum to the buyer on
 July 9, 2020. Jacobs Company paid in full the balance due on July 29, 2020. The
invoice price of goods sold on July 7, 2020, is_______. (Ignore VAT)
7. The following information were taken from the books of YSL Company for the year
2020: Sales P530,000; Cost of goods sold is 65% of Sales; Selling expenses
P114,000; General and administrative expenses P53,200; Interest income P80,000;
Interest expense P36,000. How much is the net income?
8. On April 5, 2020, Clippers Company purchased merchandise with a list price of P
125,000. The merchandise is subject to a trade discount of 5%, 7% and with credit
terms of 2/10; n/30. How much is the amount to be debited to Purchases?
9. Using data in no. 8, how much is the 5% trade discount?
10. Using data in no. 8, how much is the 7% trade discount?
11. If Clippers make payment on April 12, how much is the cash discount?
12. If Clippers make payment on April 25, how much is the amount due?
13. Isabel’s RTW regularly buys merchandise from a wholesale outlet and is allowed trade
discounts of 25% and 15%. Isabel made a purchase and received an invoice with a list
price of P 900,000 and a freight cost of P 50,000, FOB destination, freight collect, and
payment terms of n/30. How much is the amount due from Isabel?
14. AA Company sold merchandise to BB Company on March 7, 2020, at a list price of
P150,000, trade discounts of 5% and 8%, FOB shipping point. Cash discount terms:
2/eom, n/60. Because defective merchandise with an invoice price of P10,000 was
erroneously delivered, AA Company issued a credit memorandum to the buyer on
March 11, 2020. BB Company paid in full the balance due on March 25, 2020. How
much is the invoice price subject to cash discount?. (IGNORE VAT)
15. Compute for the company's purchase returns and allowances given the following: Cost
of Goods sold P9,000; Beginning Inventory P6,000; Ending inventory P10,000 and
Gross Purchases P14,500.
16. Sam Company started its business operation on January 1, 2020. The company's trial
balance as of January 31, 2020, included the following: Purchases P60,000; Purchase
returns and allowances P3,000; Freight in P4,500; Freight out P5,000; Ending
inventory P12,000. Compute the Cost of Goods Sold.
17. Chanel Company sold merchandise to Dior Company on October 7, 2020, at a list
price of P150,000, trade discounts of 8% and 5%, FOB shipping point. Cash discount
terms: 2/eom, n/60. Because defective merchandise with an invoice price of P10,000
(VAT exclusive) was erroneously delivered, Chanel Company issued a credit
memorandum to the buyer on October 11, 2020. Dior Company paid in full the balance
due on October 25, 2020. Both companies are using the periodic inventory method
and are VAT registered. The invoice price (VAT inclusive) of goods purchased on
October 7, 2020, is____.
18. Using data in no. 17, how much is the input VAT of Dior Company that will be recorded
on the date of purchase?
19. If Dior Company paid the amount due within the discount period, how much is the cash
discount exclusive of VAT?
20. If Chanel Company collected the amount due after the discount period, how much will
be credited to Accounts Receivable?