Question

Larry’s Building Supplies (LBS) is a local hardware store. LBS uses a perpetual inventory system. The following transactions (summarized) have been selected for analysis:

a.	Sold merchandise for cash (cost of merchandise $361,350).	$	755,000
b.	Received merchandise returned by customers as unsatisfactory (but in perfect condition) for cash refund (original cost of merchandise $5,300).		8,100
c.	Sold merchandise (costing $11,160) to a customer on account with terms n/30.		18,600
d.	Collected half of the balance owed by the customer in (c).		9,300
e.	Granted a partial allowance relating to credit sales the customer in (c) had not yet paid.		2,650

Required:

1. Compute Net Sales and Gross Profit for LBS.

2. Compute the gross profit percentage. (Round your answer to 1 decimal place.)

3. Prepare journal entries to record transactions (a)–(e). (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

4. LBS is considering a contract to sell building supplies to a local home builder for $37,000. These materials will cost LBS $26,200. Would this contract increase (or decrease) LBS’s dollars of gross profit and its gross profit percentage? (Round "Gross Profit Percentage" to 1 decimal place.)

Answer 1

SOLUTION

1. Sales revenue = Cash sales + Credit sales

= $755,000 + $18,600 = $773,600

Net sales= Sales revenue - (Returns + Allowances)

= $773,600 - (8,100 + 2,650)

= $773,600 - 10,750 = $762,850

Gross profit = Net sales - Cost of goods sold

= $762,850- (361,350-5,300+11,160)

=  $762,850- 367,210 = 395,640

2. Gross profit percentage = Gross profit / Net sales * 100

= $395,640 / 762,850 *100 = 51.8%

3. Journal entries-

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
A.	Cash	755,000
	Sales		755,000
	(To record revenue received)
	Cost of goods sold	361,350
	Merchandise inventory		361,350
	(To record cost of inventory)
B.	Sales return	8,100
	Cash		8,100
	(To record thhe sales return)
	Merchandise inventory	5,300
	Cost of goods sold		5,300
	(To record the returns from the inventory)
C.	Accounts receivable	18,600
	Cash		18,600
	(To record the sales on account)
	Cost of goods sold	11,160
	Merchandise inventory		11,160
	(To record the cost of inventory)
D.	Cash	9,300
	Accounts receivable		9,300
	(To record the cash received on sales)
E.	Sales return	2,650
	Accounts receivable		2,650
	(To record sales return)

4.If the contract is executed Gross profit will increase by $10,800 (37,000-26,200).

Gross profit percentage = Gross profit / Net sales *100

= ($395,640 + 10,800) / (762,850 + 37,000) *100

= 406,440 / 799,850 *100

= 50.8%

There is decline in gross profit percentage.