Question

Multiple Choice Questions:

Regarding Sales Discount & Sales Returns & Allowances, which of the following is true?

Question 1 options:

	For the potential sales returns occurring in the near future, we created the account "Refunds Payable" to capture the estimated amount of cost of inventory that will be returned in the near future.
	When the actual return happens, we Debit "Refunds Payable" to decrease it in one journal entry, and in another journal entry we Credit "Estimated Returns Inventory" to increase it.
	If a customer comes back within the discount period to pay for a sale we did to them few days ago, we need to record a journal entry that has "Sales Discounts Forfeited" account in it.
	We capture the sales discount upfront in the journal entry we recorded the day we made the sale, and we captured the estimated sales returns at the end of the year.

In the Perpetual Inventory system, the Merchandise Inventory account is used in which journal entries?

Question 2 options:

	When we buy the inventory, get a discount on the inventory from vendor, return the inventory to vendor, and ship the inventory to us FOB Destination.
	When we buy the inventory, get a discount on the inventory from vendor, return the inventory to vendor, and ship the inventory to us FOB Shipping point.
	When we buy the inventory, give a discount on the inventory to our customer, return the inventory to vendor, and ship the inventory to us FOB Shipping point.
	When we buy the inventory, get a discount on the inventory from vendor, return of inventory from our customer, and ship the inventory to us FOB Destination.

What did we learn about COGS & Merchandise Inventory accounts?

Question 3 options:

	We record COGS in a journal entry when we sell inventory, and that's for moving the cost of inventory from assets to income statement which will result in reducing the net income.
	In perpetual inventory system, COGS & Merchandise Inventory accounts are both income statement accounts, and they both decrease the net income once recorded in journal entries.
	When we sell, we will record COGS in a journal entry to capture the amount of selling price so that it shows in the Income Statement eventually.
	In perpetual inventory system, we always have to record two journal entries when we sell, one journal to capture the amount of revenue which could've been received in cash or on account, and the other journal is to transfer the amount we paid (for purchasing the inventory) from COGS to the Merchandise Inventory account.

Which of the following is FALSE regarding purchase discount, purchase returns, and transportation cost?

Question 4 options:

	The term 2/10, n/30 means that the we get 2% discount if we pay within 10 days, or we have to pay full amount if we pay between day 11 and day 30.
	If we pay the vendor within the discount period, the Cash will be credited by the discounted amount & Accounts Payable will be debited by the discounted amount.
	In the Perpetual Inventory System, we capitalize the cost of transportation. We do that by Debiting the "Merchandise Inventory" account instead of Debiting an expense account.
	As a buyer, when we return inventory back, we Debit Cash to increase it, and Credit Merchandise Inventory to decrease it.

Answer 1

Answer-1:

Option 2 is the correct answer.

When the actual return happens, we Debit "Refunds Payable" to decrease it in one journal entry, and in another journal entry we Credit "Estimated Returns Inventory" to increase it.

The journal entry for above is as follows:-

Customer refund payable	XXX
Cash		XXX
Inventory	XXX
Estimated return inventory		XXX

Answer-2:

Option 2 is the correct answer.

When we buy the inventory, get a discount on the inventory from vendor, return the inventory to vendor, and ship the inventory to us FOB Shipping point.

Under the perpetual inventory system, remember we only use 3 accounts: Cash, Inventory and Accounts Payable.

Journal entry are as follows:-

Inventory purchase:
Merchandise inventory	XXX
Account payable/Cash		XXX
FOB shipping point purchase:
Merchandise inventory (shipping charges)	XXX
Cash		XXX
Purchase return & allowances:
Account payable/Cash	XXX
Merchandise inventory		XXX
Paying with discount:
Account payable	XXX
Merchandise inventory (discount)		XXX
Cash		XXX

Answer-3:

Option 1 is the correct answer.

We record COGS in a journal entry when we sell inventory, and that's for moving the cost of inventory from assets to income statement which will result in reducing the net income.

Answer-4:

Option 2 is the correct answer.

Paying with discount:
Account payable (gross amount)	XXX
Merchandise inventory (discount)		XXX
Cash (net amount)		XXX