Chapter 5 - (3)

Question 1

Sales revenues

Answer 1

is recorded when there is an increase in assets

• -> Merchandising companies: sales revenue is recorded when the ownership of the goods is transferred from the seller to the buyer.
• -> In which goods have been sold and delivered

Question 2

Sales of merchandise

Answer 2

May be made on credit or for cash

–> Every sales transaction should be supported by a business document that gives written evidence of the sale.

Question 3

Sales invoice

Answer 3

Provides support for a credit or cash sale

–>The seller prepares the invoice and gives a copy to the buyer.

Question 4

The (2) Entries made for each sale in a Perpetual Inventory System:

Answer 4

1. The first entry records the sales revenue.

2. The second entry records the cost of the merchandise sold.

Question 5

The first entry records the sales revenue:

Answer 5

Cash (or Accounts Receivable, if it is a credit sale) is increased by a debit

–>And the revenue account Sales (sales revenue) is increased by a credit for the selling (invoice) price of the goods. b/c increased OE!

Question 6

The second entry records the cost of the merchandise sold:

Answer 6

the expense account Cost of Goods Sold is increased by a debit

–> and the asset account Merchandise Inventory is decreased by a credit for the cost of the goods

Question 7

Freight Costs

Answer 7

Freight costs paid by the seller on merchandise sold are an operating expense to the seller –> and are debited to a Freight Out account (Delivery expense)

–>Costs incurred to earn revenue are recorded as expenses

Question 8

Sales Returns and Allowances

Answer 8

the opposite of purchase returns and allowances

–>the seller will either return cash to the buyer or reduce the buyer’s accounts receivable if the goods were originally purchased on credit.

–>the seller will need to record the reduction in cash or accounts receivable as well as the reduction in sales.

–> If the merchandise is not damaged and can be sold again –> the seller will also need to record the second entry when goods are returned.

–> If the goods are damaged or defective and can no longer be sold, the second entry is not prepared.
The second entry is also not required when the seller gives the buyer an allowance.

Question 9

Discounts

Answer 9

Sales are recorded at invoice price—whether it is the full retail price, a sales price, or a volume discount price.

–>No separate entry is made to record a volume discount, or to show that the goods were sold at a special sales price.

Question 10

Sales discount

Answer 10

is a reduction in the selling price that a customer may or may not take advantage of.

–>At the point of sale, it is not known if the customer will use the discount, so the revenue recorded at the point of sale is the full invoice price

–> If the customer subsequently decides to take advantage of the discount, then the seller must record the fact that revenue has been reduced.

–> If the discount is not taken, and Chelsea Electronics instead pays the full amount