Question

The School District’s fiscal year ends June 30. At the end of the fiscal year, campus bookstores frequently return to the publishers as many unsold textbooks as they can, provided they know they are not going to be able to sell them in future semesters. Textbook publishers provide the bookstores with credit towards future purchases in the form of credit memos. Bookstores frequently do this at the last minute, in June.

On June 30, 2018, the CAMPUS bookstore informed me that, during the month of June, they had returned $323,000 in textbooks and expected credit memos from vendors for that amount. The credit memos were in-transit at year-end, meaning they had not been received prior to June 30. As a result:

1. accrued $323,000 in-transit credit memos on June 30, 2018 to recognize the returns in fiscal year ending June 30, 2018.
2. reversed those accruals on July 1, 2018, in the next fiscal year.

When the fiscal year ended the following year on June 30, 2019, the following problems with the CAMPUS bookstore occurred:

1. Purchases expensed for the textbooks in fiscal year 2019 was approximately $200,000 higher than expected
2. Bookstore operating margin was reduced almost 10%, where it had been consistent for the past 10 years (clarification - cost of goods sold percentage went up and gross margin percentage went down unexpectedly)

When bookstore vendor invoices are recorded, the district will

Debit new textbook purchases (expense)

Credit Accounts Payable

When vendor invoices are paid, the district will

• Debit Accounts Payable
• Credit Cash

When bookstore vendor credit memos are received, the District will

• Debit Accounts Payable
• Credit new textbook purchases (expense)

Please answer the following questions:

1. What was the journal entry to accrue the in-transit credit memos?
2. What was the journal entry to reverse the accrual?
3. What was net the balance sheet effect of the accrual and subsequent reversal?
4. What was the effect on net income of the accrual in fiscal year 2018?
5. What was the effect on net income of the reversal in fiscal year 2019?
6. What could have happened to cause the $200,000 in unexpected purchases expense in 2019?

Answer 1

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