Question

1. How are purchase returns and purchase discounts recorded by a company using the periodic inventory system?

a. as a reduction to the sales

b. in contra-accounts to the purchases account

c. as operating expenses

d. as miscellaneous expenses

2. Information for Year 2 and Year 1 is presented below for Fireworks City, which uses the straight-line depreciation method.

Year 2 Year 1

Property, plant, and equipment $250,000 $190,000

Accumulated depreciation 100,000 85,000

Depreciation expense 62,500 47,500

Net sales 1,000,000 900,000

Total assets 625,000 475,000

Refer to Fireworks City. During Year 2, the company sold some equipment that had an original cost of $60,000. Which of the following transactions must also have occurred during the period?

a. The company purchased additional equipment.

b. The selling price of the equipment sold was reported with net sales.

c. The company did not purchase additional equipment.

d. The company wrote-down equipment due to impairment.

3. Under the periodic system, which of the following occurs when a company must pay freight charges on merchandise it purchases for resale?

a. Transportation-in is added to the inventory account.

b. Transportation-in is subtracted from purchases.

c. Freight charges are paid by the buyer.

d. Transportation-in is included in the total cost of purchases used to determine cost of goods sold.

Answer 1

Q No. & Correct option
1	Purchase returns and purchase discounts
b)	in Contra- ccounts to purchase accounts
	Entry at the time of purchases
		Debit	Credit
	Purchase	xxx
	Accounts payable or cash		xxx
	On return or discount
	Cash/ Accounts payable	xxx
	Purchases		xxx
	This will effectively reduce purchases and reverse the effect on other account.
	option a) is not correct as it leads to decrease in profit but purchase decrease leads to increase in profit.
	c) is not correct as it is not an expense
	d) is incorrect because it is not an expense, rather its effect is increased profit
2		Year 2	Year1
	PPE	25000	190000
	Accumulated depreciation	100000	85000
	Dep. Expenses	62500	47500
	Net sales	1000000	900000
	Total assets	625000	475000
	As we can see the depreciation (SLM) in year 2 is increasing compared to year 1 even after sellin some asset that means company definitely purchased some asset which led to increased in depreciation. Also there is an increase in Total assets also. So this assumption seems appropriate.
a)	Company pruchased additional equipment.
	b) is not correct as it does not justify increase in depreciation and total assets.
	c) this again does not justify increase in depreciation and total assets.
	d) this would lead to decrease in assets and not increase.
3
d)	Transportation in is included in toal cost of purchases used to determine cost of goods sold.
	Any expenses relating to purchases of invenotry till the item is received in premise are made part of cost of purchases.
	a) Incorrect, same is done in perpetual inventory system.
	b) Incorrect, this will lead to reduction in purchase cost, which isn't the case
	c)This one is also correct as buyer needs to pay freight charges, but it does not state any treatment of such amount.