1. Which of the following is an example of a contra revenue account?

A. sales
B. merchandise inventory
C. sales discounts
D. accounts payable

2. What accounts are used to recognize a retailer’s purchase from a manufacturer on credit?

A. accounts receivable, merchandise inventory

B. accounts payable, merchandise inventory
C. accounts payable, cash
D. sales, accounts receivable

3. If a customer purchases merchandise on credit and returns the defective merchandise before
payment, what accounts would recognize this transaction?

A. sales discount, cash

B. sales returns and allowances, cash
C. accounts receivable, sales discount
D. accounts receivable, sales returns and allowances

4. Which of the following is a disadvantage of the perpetual inventory system?

A. Inventory information is in real-time.

B. Inventory is automatically updated.
C. It allows managers to make current decisions about purchases, stock, and sales.
D. It is cost-prohibitive.

5. Which of the following is not a reason for the physical inventory count to differ from what is
recognized on the company’s books?

A. mismanagement
B. shrinkage
C. damage
D. sale of services to customers

6. Which of the following is not included when computing Net Purchases?

A. purchase discounts
B. beginning inventory
C. purchase returns
D. purchase allowances

7. Which of the following accounts are used when recording a purchase?

 A. cash, merchandise inventory
B. accounts payable, merchandise inventory
C. A or B
D. cash, accounts payable

8. A retailer obtains a purchase allowance from the manufacturer in the amount of $600 for
faulty inventory parts. Which of the following represents the journal entry for this transaction if
the retailer has already remitted payment?

A. Accounts Payable debit of $600 and Merchandise Inventory credit of $600.

B. Cash credit of $600 and Merchandise Inventory credit of $600.

C. Accounts Payable debit of $600 and credits to Merchandise Inventory of $10 and Cash of
$590.

9. Which of the following accounts are used when recording the sales entry of a sale on credit?

A. merchandise inventory, cash

B. accounts receivable, merchandise inventory
C. accounts receivable, sales
D. sales, cost of goods sold

10. Which of the following is not a characteristic of FOB Destination?

A. The seller pays for shipping.

B. The seller owns goods in transit.
C. The point of transfer is when the goods leave the seller’s place of business.
D. The point of transfer is when the goods arrive at the buyer’s place of business.

11. Which of the following is not a characteristic of FOB Shipping Point?

A. The buyer pays for shipping.

B. The buyer owns goods in transit.
C. The point of transfer is when the goods leave the seller’s place of business.
D. The point of transfer is when the goods arrive at the buyer’s place of business.

12. Which of the following accounts would be reported under operating expenses on a multi-step
income statement?

A. sales
B. advertising expense
C. sales returns and allowances
D. interest expense
13. A retailer obtains a purchase allowance from the manufacturer in the amount of $600 for
faulty inventory parts. Which of the following represents the journal entry for this transaction,
assuming the retailer has already remitted payment?

A. Accounts Payable debit of $600 and Merchandise Inventory credit of $600.

B. Cash debit of $600 and Purchase Returns and Allowances credit of $600.

C. Accounts payable debit of $600 and credits to Purchase Discounts of $10 and to Cash of
$590.

14. A customer returns $690 worth of merchandise and receives a full refund. What accounts
recognize this sales return, assuming the customer has not yet remitted payment to the retailer?

A. accounts receivable, sales returns and allowances

B. accounts receivable, cash
C. sales returns and allowances, purchases
D. sales discounts, cost of goods sold

15. A company has sales of $763,000 and cost of goods sold of $306,000. Its gross profit equals:

A. $(457,000).

B. $763,000.

C. $306,000.

D. $457,000.

E. $1,069,000.

16. A company purchased $3,100 of merchandise on July 5 with terms 3/10, n/30. On July 7, it
returned $340 worth of merchandise. On July 8, it paid the full amount due. The amount of the
cash paid on July 8 equals:

A. $340.

B. $2,667.

C. $2,677.

D. $2,760.

not
15usiness
business?
Which
a difference
one
E. $3,100.
15. andofathe
service
between
following
a retail
is
17. A company purchased $3,700 of merchandise on July 5 with terms 2/10, n/30. On July 7, it
returned $850 worth of merchandise. On July 12, it paid the full amount due. Assuming the
company uses a perpetual inventory system, and records purchases using the gross method, the
correct journal entry to record the payment on July 12 is:

A. Debit Merchandise Inventory $2,850; credit Cash $2,850.

B. Debit Cash $2,850; credit Accounts Payable $2,850.

C. Debit Accounts Payable $2,850; credit Merchandise Inventory $57; credit Cash $2,793.

D. Debit Accounts Payable $3,700; credit Cash $3,700.

E. Debit Accounts Payable $2,850; credit Cash $2,850.

18. A company purchased $3,300 worth of merchandise. Transportation costs were an additional
$290. The company returned $230 worth of merchandise and then paid the invoice within the 3%
cash discount period. The total cost of this merchandise is:
A. $3,240.00.
B. $3,093.00.
C. $3,261.00.
D. $3,267.90.
E. $3,360.00.
20. On September 12, Ryan Company sold merchandise in the amount of $7,200 to Johnson
Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,700. Johnson uses the
periodic inventory system and the net method of accounting for purchases. Johnson pays the
invoice on September 18, and takes the appropriate discount. The journal entry that Johnson
makes on September 18 is:
A. Debit Purchases 7,056
Credit Cash 7,056
B. Debit Accounts payable 4,700
Credit Merchandise inventory 94
Credit Cash 4,606
C. Debit Accounts payable 7,200
Credit Purchases discounts 144
Credit Cash 7,056
D. Debit Accounts payable 7,056
Credit Cash 7,056
E. Debit Cash 7,056
Credit Purchases discounts 144
Credit Accounts payable 7,200
Exercise
Ex1. Marx Corp. purchases 135 fax machines on credit from a manufacturer on April 7 at a price
of $250 per machine. Terms of the purchase are 4/10, n/20 with an invoice date of April 7. Marx
Corp pays in full for the fax machines on April 17. Create the journal entries for Marx Corp. to
record:
1. the initial purchase
2. the subsequent payment on April 17
Ex2. Match each of the following terms with the best corresponding definition.

A. Sales allowance i. A customer returns merchandise for a full refund

B. Purchase return ii. A retailer receives a partial refund but keeps the defective merchandise

C. Sales discount iii. A customer receives a partial refund but keeps the defective merchandise

D. Purchase discount iv. A customer pays their account in full within the discount window

E. Sales return v. A type of purchase discount negotiated between a manufacturer and a retailer be
settlement on a final price

F. Trade discount vi. A retailer returns merchandise for a full refund

G. Purchase allowance vii. A retailer pays their account in full within the discount window

Ex3. Record journal entries for the following purchase transactions of Flower Company.
1. Oct. 13 Purchased 85 bushels of flowers with cash for $1,300.
2. Oct. 20 Purchased 240 bushels of flowers for $20 per bushel on credit. Terms of
the purchase are 5/10, n/30, invoice dated October 20.
3. Oct. 30 Paid account in full from the October 20 purchase.
Ex4. Record journal entries for the following sales transactions of Flower Company.
 1. Oct. 12 Sold 25 bushels of flowers to a customer for $1,000 cash; cost of sale $700.
2. Oct. 21 Sold 40 bushels of flowers for $30 per bushel on credit. Terms of the sale are
4/10, n/30, invoice dated October 21. Cost per bushel is $20 to Flower Company.
3. Oct. 31 Received payment in full from the October 21 sale.
Ex 5. Review the following situations and record any necessary journal entries for Nine Lives
Inc.
1. Jan. 15 Nine Lives Inc. purchases $8,770 worth of merchandise with cash from a
manufacturer. Shipping charges are an extra $345 cash. Terms of the purchase are FOB
Shipping Point.
2. Jan. 23 Nine Lives Inc. sells $4,520 worth of merchandise to a customer who pays with
cash. The merchandise has a cost to Nine Lives of $3,600. Shipping charges are an extra
$190 cash. Terms of the sale are FOB Destination.
Ex 6. The following select account data is taken from the records of Reese Industries for 2019.

A. Use the data provided to compute net sales for 2019.

B. Prepare a simple income statement for the year ended December 31, 2019.
C. Compute the gross margin for 2019.
D. Prepare a multi-step income statement for the year ended December 31, 2019.