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Chapter 5: Q1EI (page 324)

Dobbs Wholesale Antiques makes all sales under terms of FOB shipping point. The company usually ships inventory to customers approximately one week after receiving the order. For orders received late in December, Kathy Dobbs, the owner, decides when to ship the goods. If profits are already at an acceptable level, Dobbs delays shipment until January. If profits for the current year are lagging behind expectations, Dobbs ships the goods during December.

Requirements

1. Under Dobbs鈥檚 FOB policy, when should the company record a sale?

2. Do you approve or disapprove of Dobbs鈥檚 manner of deciding when to ship goods to customers and record the sales revenue? If you approve, give your reason. If you disapprove, identify a better way to decide when to ship goods. (There is no accounting rule against Dobbs鈥檚 practice.)

Short Answer

Expert verified
  1. The sale should be recorded in the books when goods leave the shipping place.
  2. The decision of the owner is inappropriate.

Step by step solution

01

Meaning of Ethics

In accounting, the term ethics refers to specific rules and guidelines that must be followed by each person/business associated with the accounting profession because the adherence to such ethics prevents the misuse of financial information.

02

Recording of sales in the books

As per the given situation, Dobb is following the FOB policy under which sales should be recognized when goods leave theshipping dock of Dobb.

Under this policy, theownership of the goods is transferred to the buyerwhen such goods leave the seller's place.

03

Comment on the manner decided by the business

According to the second scenario, the manner of shipping the goods by Dobb seems unethical because the owner is shipping it according to the business's financial position. Such a practice may lead to manipulations in the books of accounts.

Also, there must be transparencywhile performing business activities as it may be possible that the buyer requires the goods within a limited time for its business.

Hence, Dobbs should not consider its books as the basis of shipping the goods to the customers; rather, it should follow the business's policies, such as shippingthe goods after a week of receiving orders.

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Most popular questions from this chapter

Click Computers has the following transactions in July related to purchasing and sale of merchandise inventory.

July 1 Purchase of \(20,500 worth of computers on account, terms of 2/10, n/30.

3 Return of \)4,000 of the computers to the vendor.

9 Payment made on the account.

12 Sold computers on account for $8,000 to a customer, terms 3/15, n/30.

26 Received payment from customer on balance due.

Journalize the transactions for Click Computers assuming that the company uses the periodic inventory system.

Journalize the following transactions that occurred in September 2018 for Cardinal. Assume Cardinal uses the gross method to record sales revenue. No explanations are needed. Identify each accounts payable and accounts receivable with the vendor or customer name.

Sep. 3 Purchased merchandise inventory on account from Sherry Wholesalers, \(4,000. Terms 1/15, n/EOM, FOB shipping point.

4 Paid freight bill of \)75 on September 3 purchase.

4 Purchased merchandise inventory for cash of \(1,900.

6 Returned \)1,100 of inventory from September 3 purchase.

8 Sold merchandise inventory to Houston Company, \(5,500, on account. Terms 3/15, n/35. Cost of goods, \)2,365.

9 Purchased merchandise inventory on account from Tarin Wholesalers, \(12,000. Terms 3/10, n/30, FOB destination.

10 Made payment to Sherry Wholesalers for goods purchased on September 3, less return and discount.

13 After negotiations, received a \)200 allowance from Tarin Wholesalers.

15 Sold merchandise inventory to Java Company, \(3,300, on account. Terms 2/10, n/EOM. Cost of goods, \)1,320.

22 Made payment, less allowance, to Tarin Wholesalers for goods purchased on September 9.

25 Sold merchandise inventory to Smecker for \(1,900 on account that cost \)722. Terms of 1/10, n/30 were offered, FOB shipping point. As a courtesy to Smecker, $85 of freight was added to the invoice for which cash was paid by Cardinal.

28 Received payment from Houston Company.

29 Received payment from Smecker, less discount.

30 Received payment from Java Company.

Consider the following transactions for Toys and More:

May 8 Toys and More buys \(113,300 worth of MegoBlock toys on account with credit terms of 2/10, n/60.

12 Toys and More returns \)11,250 of the merchandise to MegoBlock due to damage during shipment.

15 Toys and More paid the amount due, less the return and discount.

Requirements

1. Journalize the purchase transactions. Explanations are not required.

2. In the final analysis, how much did the inventory cost Toys and More?

Howie Jewelers had the following purchase transactions. Journalize all necessary transactions. Explanations are not required.

Jun. 20 Purchased inventory of \(5,100 on account from Sanders Diamonds, a jewelry importer. Terms were 2/15, n/45, FOB shipping point.

20 Paid freight charges, \)400.

Jul. 4 Returned \(600 of inventory to Sanders.

14 Paid Sanders Diamonds, less return.

16 Purchased inventory of \)3,500 on account from Southboro Diamonds, a jewelry importer. Terms were 2/10, n/EOM, FOB destination.

18 Received a $300 allowance from Southboro Diamonds for damaged but usable goods.

24 Paid Southboro Diamonds, less allowance, and discount.

Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first year of operations, and the shareholders are generally pleased with operating results as shown by the following income statement:

PARTY-TIME T-SHIRTS

Income Statement

Year Ended December 31, 2017

Net Sales Revenue \(350,000

Cost of Goods Sold 210,000

Gross Profit 140,000

Operating Expenses:

Selling Expense 40,000

Administrative Expense 25,000

Net Income \)75,000

Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to increase profits to \(100,000 during 2018.

a. Hildebrand believes he should advertise more heavily. He believes additional advertising costing \)20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales increase in 2018, Cost of Goods Sold will increase proportionately.

b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to the existing product line. An importer can supply a minimum of 1,000 dresses for \(40 each; Party-Time can mark these dresses up 100% and sell them for \)80. Hildebrand realizes he will have to advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell only 80% of these dresses during the coming year.

Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to show the expected net income under each plan.
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