Question

Required Information [The following information applies to the questions displayed below.) Hair World Inc. is a wholesaler of hair supplies. Hair World uses a perpetual inventory system. The following transactions (summarized) have been selected for analysis: $35,200 a. Sold merchandise for cash (cost of merchandise $20,797). b. Received merchandise returned by customers as unsatisfactory (but in perfect condition) for cash refund (original cost of merchandise $240). c. Sold merchandise (costing $3,800 to a customer on account with cerms /60. d. Collected half of the balance owed by the customer in (e). e. Cranted a partial allowance relating to credit sales the customer in (c) had not yet Pald. 400 8,000 4,000 129 4. Hair World is considering a contract to sell merchandise to a hair salon chain for $13,000. This merchandise will cost Hair World $9,040. What would be the increase or decrease) to Hair World's gross profit and gross profit percentage? (Round "Gross Profit Percentage" to 1 decimal place.) Gross Profit Gross Profit Percentage Superhe Percentao o A

Answer 1

Solution Journal entry to record the transactions: Credit Transaction a(1) Debit 35,200 General Journal Cash Sales Revenue (To record sale of merchandise for cash) 35,200 Credit Transaction a(2) Debit 20,797 General Journal Cost of Goods sold Merchandise Inventory (To record cost of goods sold) 20,797 Transaction Credit Debit 400 General Journal Sales returns and allowances Cash (To record sales return) 400 Credit Transaction b(2) Debit 240 General Journal Merchandise Inventory Cost of Goods sold (To record cost of merchandise returned) 240 Debit Credit Transaction c(1) 8,000 General Journal Accounts receivable Sales Revenue (To record sale of merchandise on account) 8,000 Credit Transaction c(2) Debit 3,800 General Journal Cost of Goods sold andice Inventory Merchandise Inventory (To record cost of goods sold) L 3,800 Credit Transaction d 1 General Journal Cash Accounts receivable 1 (To record collection from customer) Debit 4 ,000 4 ,000 Transaction Credit Debit 128 General Journal Sales returns and allowances Accounts receivable (To record allowance given to customer) 128

Required: Increase (decrease) in Gross profit Sales revenue from new contract Less: Cost of goods sold on new contract Gross profit (loss) on new contract $13,000 ($9,040) $3,960 Gross profit shall increase by $3,960. Computation of gross profit percentage (without considering new contract) Computation of net sales Cash sales Sales on account Less: Sales Returns Less: Sales allowance Net sales $35,200 $8,000 ($400) ($128) $42,672 Computation of Cost of Goods sold Cost of Goods sold (gross) ($20,797 +$3,800) Less: Cost of merchandise returned Cost of Goods sold (net) $24,597 ($240) $24,357 Computation of Gross profit Net sales Cost of goods sold Gross profit $42,672 ($ 24,357) $18,315 Gross profit Percentage = Gross profit/ net sales = $18,315 / $ 42,672 = 42.92%

Computation of revised gross profit percentage (considering new contract) Computation of net sales Cash sales Sales on account Sale from new contract Less: Sales Returns Less: Sales allowance Net sales $35,200 $8,000 $13,000 ($400) ($128) $55,672 Computation of Cost of Goods sold Cost of Goods sold (gross) ($20,797 + $3,800) Add: Cost of goods sold on new contract Less: Cost of merchandise returned Cost of Goods sold (net) $24,597 $9,040 ($240) $33,397 Computation of Gross profit Net sales Cost of goods sold Gross profit $55,672 ($33,397) $22,275 Gross profit Percentage = Gross profit/ net sales = $22,275 / $ 55,672 = 40.01% Gross profit percentage shall decrease to 40.01%. Gross Profit Gross Profit Percentage increase decrease by to $3,960 40.01%