Question

Cycle Wholesaling sold merchandise on account, with terms n/60, to Sarah’s Cycles on February 1 for $950 (cost of goods sold of $575). On February 9, Sarah’s Cycles returned to Cycle Wholesaling one-quarter of the merchandise from February 1 (cost of goods returned was $150). Cycle Wholesaling uses a perpetual inventory system, and it allows returns only within 15 days of initial sale.

Required:

1. 1. to 3. Prepare the journal entry to record the sales, Goods returned on February 9 and Cash collected on March 2.

2. 4. Calculate the gross profit percentage for the sale to Sarah’s Cycles.

Answer 1

Solution 1 to 3:

Journal Entries - Cycle Wholesaling
S.No	Date	Particulars	Debit	Credit
1-a	01-Feb	Accounts Receivable Dr	$950.00
		To Sales		$950.00
		(To record sales)
1-b	01-Feb	Cost of goods sold Dr	$575.00
		To Merchandise Inventory		$575.00
		(To record cost of goods sold)
2-a	09-Feb	Sales Returns and allownaces Dr ($950*1/4)	$237.50
		To Accounts Receivable		$237.50
		(To record sales returns)
2-b	09-Feb	Merchandise Inventory Dr	$150.00
		To Cost of goods sold		$150.00
		(To reverse cost of goods returned)
3	02-Mar	Cash Dr (950- 237.50)	$712.50
		To Accounts Receivable		$712.50
		(To record cash collected)

Solution 4:

Net Sales = $950 - $237.5 = $712.50

Gross profit = Net Sales - cost of good sold = $712.50 - ($575-$150) = $712.50 - $425 = $287.50

Gross profit percentage = Gross profit / net sales = $287.50 / $712.50 = 40.35% (Rounded to 2 decimals)