Question

Cycle Wholesaling sold merchandise on account, with terms n/60, to Sarah’s Cycles on February 1 for $800 (cost of goods sold of $500).

On February 9, Sarah’s Cycles returned to Cycle Wholesaling one-quarter of the merchandise from February 1 (cost of goods returned was $125).

Cycle Wholesaling uses a perpetual inventory system, and it allows returns only within 15 days of initial sale.

Required: 1. to 3. Prepare the journal entry to record the sales, Goods returned on February 9 and Cash collected on March 2. 4. Calculate the gross profit percentage for the sale to Sarah’s Cycles.

Answer 1

Journal entry

Date	account and explanation	Debit	Credit
Feb 1	Account receivable	800
	Sales revenue		800
	Cost of goods sold	500
	Merchandise inventory		500
Feb 9	Sales return and allowance (800/4)	200
	Account receivable		200
	Merchandise inventory	125
	Cost of goods sold		125
Mar 2	Cash	600
	Account receivable		600

4) Gross profit percentage = (600-375)/600 = 37.50%