Question

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On October 1, the Business Students’ Society (BSS) placed an order for 150 golf shirts at a unit cost of $30, under terms 2/10, n/30.

The order was received on October 10, but some golf shirts differed from what had been ordered. Uncertain whether the shirts would be returned or kept, BSS decided to record any purchase discount only when taken (using the gross method).

On October 11, 50 golf shirts were returned to the supplier.

On October 12, BSS complained the remaining golf shirts were slightly defective so the supplier granted a $100 allowance.

BSS paid for the golf shirts on October 13.

During the first week of October, BSS received student and faculty orders for 130 golf shirts, at a unit price of $65, on terms 2/10, n/30.

The golf shirts were delivered to these customers on October 18. Unfortunately, customers were unhappy with the golf shirts, so BSS permitted them to be returned or given an allowance (see h and i).

Uncertain whether customers would keep or return the shirts, BSS decided to record any sales discount only when taken (using the gross method).

On October 19, one-half of the golf shirts were returned by customers to BSS.

On October 20, an allowance was given on account equal to $17.00 per shirt for the remaining 65 shirts.

The customers paid their remaining balances on the last day of the month, October 31.

Required:

For each of the events (a) through (j), indicate the amount and direction of the effect (+ for increase, – for decrease).

event inventory - net sales - cost of good sold - gross profit

a

b

c

d

e

f

g

h

i

j

Answer 1

Answer:
Requirement 1	For each event the increase or decrease to the account balance would be calculated as follows:
Event	Inventory	Net Sales	Cost of goods sold	Gross Profit
	As on Oct 1, BSS has only placed order to purchase 150 golf shirts, it is not qualified as accounting transaction. Therefore would not affect any balance
a	0	0	0	0
	Treceipt of purchase order would increase inventory by $4,500 (150 shirts*$30)
b	4500	0	0	0
	Purchase return of 50 shirts would decrease inventory by $1,500 (50 shirts * $30)
c	-1500	0	0	0
	Allowance on purchases would decrease inventory by $100.
d	-100
	Payment made to supplier would not affect any of the given four account
e	58	0	0	0
	Sales order received would not affect any account
f
	Delivery of sales order 130 shirts @ $65 each would increase Net sales by $12,600 cost of goods sold by $5,400 (180*$30) and decrease inventory by $5,400 and increase gross profit by $7,200 (12,600-5,400)
g	-2563.6	8450	2563.6	5886.4
	Half of the goods returned would increase inventory and cost of goods sold by $1,281.80 (2563.60/2) and gross profit by $2,943.20 ($5,886.40/2)
h	1281.8	0	-1281.8	-2943.2
	Sales allowance given would decrease gross profit by $1,105 ($17*65 units)
i				-1105
	As the payment is made after 10 days Cash discount would not be given.
j	0	0	0	0