Question

Junker’s Stash started the Year 2 accounting period with the balances given in the financial statements model shown below. During Year 2, Junker’s Stash experienced the following business events:

1. Paid cash to purchase $80,000 of merchandise inventory.
2. The goods that were purchased in Event 1 were delivered FOB destination. Freight costs of $1,600 were paid in cash by the responsible party.
3a. Sold merchandise for $87,000 under terms 1/10, n/30.
3b. Recognized $46,900 of cost of goods sold.
4a. Junker’s Stash customers returned merchandise that was sold for $2,300.
4b. The merchandise returned in Event 4a had cost Junker’s Stash $1,350.
5. The merchandise in Event 3a was sold to customers FOB destination. Freight costs of $1,750 were paid in cash by the responsible party.
6a. The customers paid for the merchandise sold in Event 3a within the discount period. Recognized the sales discount.
6b. Collected the balance in the accounts receivable account.
7. Paid cash of $7,100 for selling and administrative expenses.
8. Sold the land for $9,600 cash.

Required
a. Record the above transactions in a financial statements model. The first event is recorded as an example.
b. Determine the amount of net sales.
c. Prepare a multistep income statement. Include common size percentages on the income statement.
d. The return-on-sales ratio for Junker’s Stash during the prior year was 12 percent. Based on the common size data in the income statement, did the expenses for Junker’s Stash increase or decrease in Year 2?

Answer 1

Date	Account Details	Debit	Credit
1	Inventory	80000
	Cash		80000
	(To record cash purchase)
2	NO entry since the goods were purchased at FOB price
3a	Account Receivables	87000
	Sales		87000
	(To record purchase of sales)
3b	Cost of goods sold	46900
	Inventory		46900
	(To record the cost of goods sold)
4a	Sales returns	2300
	Account Receivables		2300
	(To record return of sales)
4b	Inventory	1350
	Cost of goods sold		1350
	(To record cost of goods returned)
5	Carriage outward	1750
	Cash		1750
	(To record the Fob charges paid)
6a	Discount(87000*1%)	870
	Account Receivables		870
	(To record the discount given on payment within 10 days)
6b	Cash	86130
	Account Receivables		86130
	(To record collection from debtors)
7	Selling and administrative expense	7100
	Cash		7100
	(To record selling expense)
8	Cash	9600
	land		9600
	(To record sale of land)

b) Net sales = 87000 - 2300 = $ 85,700

c)

	Income Statement:
	Sales	87000
	Less: Returns	2300
	Net Sales	84700
	Less: Cost of goods sold ( 46900-1350)	45550
	Less: Carriage outward	1750
	Less: Sales discount	870
	Less: Selling and Administrative expense	7100
	Net income	29430

Return on sales = 29430/84700 = 34.75%

The expense to sales = 100-34.75 % = 63.25%

d) Return on sale for previous year = 12%

Expense ration for previous year = 100- 12% = 88%

Since the expense ratio for the current year is less than the previous year, it decreased the expense.