Question

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: $43,200 a. Sold merchandise for cash (cost of merchandise $24,797). b. Received merchandise returned by customers as unsatisfactory (but in perfect condition) for cash refund (original cost of merchandise $300 ). c. Sold merchandise (costing $4,275 ) to a customer on account with terms n/60. d. Collected half of the balance owed by the customer in (c). e. Granted a partial allowance relating to credit sales the customer in (c) had not yet paid. 500 9,000 4,500 144 Required: 1. Compute Net Sales and Gross Profit for Hair World. Net Sales Gross Profit

• 2 Record the cost of goods sold of $24,797.
• 3 Record the return by a customer of unsatisfactory merchandise that was in perfect condition. A cash refund of $500 was given to the customer.
• 4 Record the merchandise returned by the customer back into inventory. The original cost of the merchandise was $300.
• 5 Record the sales on account of $9,000 on terms n/60.
• 6 Record the cost of goods sold of $4,275.
• 7 Record the collection of half of the balance of $4,500 owed by the customer within the discount period.
• 8 Record the allowance of $144 granted to the customer.

Answer 1

1.

Net sales	$51,556
Gross profit	$22,784

Calculations:

Sales revenue (43,200+9,000)	$52,200
Less: Sales returns and allowance (500+144)	($644)
Net sales	$51,556
less: Cost of goods sold [24797-300+4275]	($28,772)
Gross profit	$22,7842

2. Gross profit percentage = 22784/51,556 x 100 = 44.2%

3.

Transaction	Account title and explanation	Debit	Credit
a(1)	Cash	$43,200
	Sales revenue		$43,200
	[Cash sales]
a(2)	Cost of goods sold	$24,797
	Merchandise inventory		$24,797
	[Cost of goods sold]
b (1)	Sales returns and allowance	$500
	Cash		$500
	[Sales returns]
b (2)	Merchandise inventory	$300
	Cost of goods sold		$300
	[Cost of sales returns]
c (1)	Accounts receivable	$9,000
	Sales revenue		$9,000
	[Sales on account]
c (2)	Cost of goods sold	$4,275
	Merchandise inventory		$4,275
	[Cost of goods sold]
d	Cash [9,000 x 1/2]	$4,500
	Accounts receivable		$4,500
	[Cash collected from customer]
e	Sales returns and allowance	$144
	Accounts receivable		$144
	[Allowance given to customer]

4.

Gross profit Increased by $4,480

Gross profit percentage decreased to 41.6%

Calculations:

Increase in sales	$14,000
Increase in cost of goods sold	($9,520)
Increase in gross profit	$4,480

Total gross profit = (22,784+4,480)/(51,556+14,000) = 27,264/65,556 x 100 = 41.6%