1 A company that uses the net method of recording purchases

1. A company that uses the net method of recording purchases and a perpetual inventory system purchased $3,700 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $850 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:

Multiple Choice

A. Debit Merchandise Inventory $2,850; credit Cash $2,850.

B. Debit Cash $2,850; credit Accounts Payable $2,850.

C. Debit Accounts Payable $2,850; credit Merchandise Inventory $57; credit Cash $2,793.

D. Debit Accounts Payable $3,700; credit Cash $3,700.

E. Debit Accounts Payable $2,793; debit Discounts Lost $57; credit Cash $2,850

2. A buyer failed to take advantage of the vendor\'s credit terms of 1/10, n/45, but instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

Multiple Choice

A. 9.0%

B. 10.6%

C. 13.4%

D. 10.4%

E. 6.6%

3. A company had net sales of $776,600 and cost of goods sold of $556,100. Its net income was $22,960. The company\'s gross margin ratio equals:

Multiple Choice

A. 20.8%

B. 25.4%

C. 28.4%

D. 35.5%

E. 39.7%

Solution

Question - 1

The Answer is “ C. Debit Accounts Payable $2,850; credit Merchandise Inventory $57; credit Cash $2,793 “

Debit Accounts Payable = $3,700 – 850 = $2,850

Credit Merchandise Inventory = $2,850 x 0.02 = $57

Credit Cash = $2,850 – 57 = $2,793

Question – 2

Equivalent annual interest lost

= [ 365 Days / (Normal Credit Period – Discount period)] * Discount Rate

= [ 365 Days / (45 Days – 10 Days)] * 0.01

= 10.4%

The Answer is “ D. 10.4% “

Question - 3

Gross Margin Ratio = [ Gross Profit / Sales ] x 100

Gross Profit = Sales – Cost of goods sold

= $776,600 – 556,100

= $220,500

Gross Margin Ratio

= [$220,500 / 776,600 ] x 100

= 28.4%

The Answer is “ C. 28.4% “