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Chapter 6: Problem 16

Merchandise is sold on account to a customer for \(\$ 18,000\), terms FOB shipping point, \(3 / 10, \mathrm{n} / 30\). The seller paid the transportation costs of \(\$ 375\). Determine the following: (a) amount of the sale, (b) amount debited to Accounts Receivable, (c) amount of the discount for early payment, and (d) amount due within the discount period.

Short Answer

Expert verified
(a) $18,000; (b) $18,000; (c) $540; (d) $17,460.

Step by step solution

01

Understanding Sale Terms

The terms FOB shipping point mean the buyer accepts ownership when the goods leave the seller's premises. The buyer is responsible for the transportation costs. The terms \(3/10, \mathrm{n}/30\) indicate a 3% discount is available if the payment is made within 10 days; otherwise, the full amount is due in 30 days.
02

Calculate Amount of the Sale

The amount of the sale is the agreed price of the merchandise sold on account, which is \(\$18,000\).
03

Calculate Amount Debited to Accounts Receivable

Since the goods are sold on account, the amount debited to Accounts Receivable is the total sale amount of \(\$18,000\).
04

Determine Early Payment Discount

To find the discount for early payment, calculate 3% of the sale amount. Thus, the discount is \(0.03 \times 18,000 = \$540\).
05

Calculate Amount Due with Discount

If the payment is made within the discount period, the amount due is the sale amount minus the discount. So, \(18,000 - 540 = \$17,460\).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Merchandise Sale
When a business sells merchandise, it essentially transfers ownership of its products to another party in exchange for payment. Merchandise sale transactions are the backbone of retail businesses, determining revenue and impacting inventory levels. They are recorded in the company's accounting records to reflect the income generated from selling goods.
  • Merchandise sales are typically noted with specific terms like the sale amount, payment schedules, and conditions for discounts.
  • In this example, the merchandise is sold for \(\$18,000\), reflecting the price the buyer needs to pay.
A key part is understanding who bears the risk once the goods are shipped, often dictated by terms like "FOB shipping point." These conditions influence how the sale is recorded and who is responsible for any incidental costs like shipping.
Accounts Receivable
Accounts Receivable represents the money owed to a business by its customers for sales made on credit. Instead of immediately receiving cash, the seller records this in their books as "Accounts Receivable."
  • This account is essential as it monitors pending payments from buyers, ensuring businesses keep track of expected revenue.
  • In this transaction, \(\$18,000\) is the amount recorded in Accounts Receivable, as it is the total value of the merchandise sold on credit to the customer.
It's important to manage Accounts Receivable effectively to maintain healthy cash flow. Businesses may offer discounts to encourage early payment and reduce the outstanding receivables quickly.
Early Payment Discount
Businesses often provide an early payment discount to encourage customers to settle their accounts more quickly. This discount is a reduction in the invoice amount if the payment is made within a specified period.
  • The terms \(3/10, \mathrm{n}/30\) indicate that the buyer can take a 3% discount if they pay within 10 days; otherwise, they must settle the full amount within 30 days.
  • Calculating the discount involves figuring out 3% of the total sale. In this case, it's calculated as \(0.03 \times 18,000 = \$540\).
Offering discounts not only speeds up the receipt of cash but also builds goodwill with customers by providing them a financial incentive to pay promptly.
FOB Shipping Terms
FOB, or Free on Board, shipping terms determine who is liable for goods during transit. "FOB shipping point" indicates that the buyer assumes responsibility once the goods leave the seller's premises.
  • The buyer pays for freight and bears all risks during transportation.
  • Even though the seller paid the shipping cost of \(\$375\), it's usually the buyer's responsibility under FOB shipping point terms.
Understanding FOB terms is crucial as they affect when ownership is officially transferred, which in turn impacts when sales revenue is recognized and who bears additional shipping costs.

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Most popular questions from this chapter

During the year, sales returns and allowances totaled \(\$ 235,750\). The cost of the merchandise returned was \(\$ 141,450\). The accountant recorded all the returns and allowances by debiting the sales account and crediting Cost of Merchandise Sold for \(\$ 235,750\). Was the accountant's method of recording returns acceptable? Explain. In your explanation, include the advantages of using a sales returns and allowances account.

What is the normal balance of the following accounts: (a) Cost of Merchandise Sold, (b) Merchandise Inventory, (c) Sales, (d) Sales Discounts, (e) Sales Returns and Allowances, (f) Transportation Out?

Enid Co., a women's clothing store, purchased \(\$ 7,500\) of merchandise from a supplier on account, terms FOB destination, \(2 / 10, \mathrm{n} / 30\). Enid Co. returned \(\$ 1,200\) of the merchandise, receiving a credit memorandum, and then paid the amount due within the discount period. Journalize Enid Co.'s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.

Journalize entries for the following related transactions of Regius Company: a. Purchased \(\$ 12,000\) of merchandise from Loew Co. on account, terms \(2 / 10, \mathrm{n} / 30\). b. Paid the amount owed on the invoice within the discount period. c. Discovered that \(\$ 3,000\) of the merchandise was defective and returned items, receiving credit. d. Purchased \(\$ 2,000\) of merchandise from Loew Co. on account, terms \(\mathrm{n} / 30\). e. Received a check for the balance owed from the return in (c), after deducting for the purchase in (d).

Two items are omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them by letter. \(\begin{array}{lcccc}\text { Sales } & \$ 393,000 & \$ 500,000 & \$ 930,000 & \$(\mathrm{~g}) \\ \text { Sales returns and allowances } & \text { (a) } & 15,000 & (\mathrm{e}) & 30,500 \\ \text { Sales discounts } & 18,000 & 8,000 & 30,000 & 37,000 \\ \text { Net sales } & 350,000 & \text { (c) } & 860,000 & \text { (h) } \\ \text { Cost of merchandise sold } & \text { (b) } & 285,000 & \text { (f) } & 540,000 \\ \text { Gross profit } & 140,000 & \text { (d) } & 340,000 & 150,000\end{array}\)
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