Question

5. If the buyer of merchandise agrees to pay shipping costs, how is the cost recorded?
6. If the seller of merchandise agrees to pay shipping costs, how is the cost recorded?
7. Why would the seller of merchandise offer a discount for early payment?
8. Payment terms are: 4/10, n/50. What does this mean?
9. If the buyer takes advantage of the discount offered, what will happen to the cost of his/her merchandise?
10. When would the contra revenue account Sales Returns & Allowances be used?
11. When would the contra revenue account Sales Discount be used?
12. How will the two contra revenue accounts (in #10 and #11) affect sales?
13. What kind of account is inventory?
14. How is the inventory account adjusted?
15. For each account below, indicate whether it is a permanent account or temporary account:

a. Cost of Goods Sold
b. Sales Revenue
c. Sales Discount
d. Sales Returns & Allowances
e. Inventory

Answer 1

• Answer 5

If the shipping cost is paid by the buyer, the same is added to the cost of net purchases.

Inventory account is debited (if perpetual method) or Freight In account is debited (if periodic method) and Cash account is credited.

• Answer 6

Shipping cost paid by the seller is a selling expenses.

Freight out/Transportation cost/Shipping cost is debited and Cash is credited.

This shipping cost forms part of Operating Expenses in Income Statement.

• Answer 7

The seller of merchandise offer a discount for early payment to mitigate the possibility of payment being lost or over due or becoming uncollectible.

By doing so, the seller provides an incentive so that the payment can be received as soon as possible.

• Answer 8

This means that if the payment is made within 10 days, a 4% cash discount will be given. The term of credit extended is 50 days.

• Answer 9

Cost of merchandise will decrease, as the cash discount received reduces the net cost of purchases.

• Answer 10

This account is used when merchandise sold by a seller to a buyer and buyer returns some of those back due to any reasons like defects.

• Answer 11

This account is used, when seller offers a cash discount to buyer, and the buyer avails the discount within discount term.

• Answer 12

Both the accounts (in #10 and #11) reduces the Gross Sales, as they are deducted from it to reflect the NET SALES.

• Answer 13

Inventory is an ASSET nature account having a normal DEBIT balance.

• Answer 14

Inventory account is adjusted to the Cost of Goods Sold, by crediting Inventory account and debiting Cost of Goods Sold account.

• Answer 15

Temporary accounts = Cost of Goods Sold, Sales revenue, Sales Discount and Sales Returns and Allowances, BECAUSE these are closed at the period end by transferring them to Income Statement.

Permanent account = Inventory account, as this is not closed and always presented at the period end Balance Sheet as a Current Asset item.