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5 - 12
Test Bank for Accounting Principles, Eleventh Edition
5 - 13
Accounting for Merchandising Operations
CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
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True-False Statements
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Multiple Choice Questions
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
Brief Exercises
190.
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Exercises
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
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TF
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MC
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Learning Objective 2
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Learning Objective 3
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TF
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MC
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TF
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TF
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C
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TF
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TF
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Ex
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MC
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Ex
SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE
Learning Objective 4
13.
TF
15.
TF
108.
MC
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MC
170.
MC
211.
Ex
213.
Ex
14.
TF
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TF
109.
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195.
BE
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Ex
Learning Objective 5
16.
TF
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TF
117.
MC
127.
MC
137.
MC
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C
17.
TF
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C
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BE
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TF
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BE
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SA
20.
TF
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TF
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Ex
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TF
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TF
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TF
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TF
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TF
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Ex
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TF
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MC
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MC
171.
MC
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Ex
Learning Objective a6
a34.
TF
175.
MC
178.
MC
181.
MC
184.
MC
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MC
a225.
Ex
a146.
MC
176.
MC
179.
MC
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MC
185.
MC
188.
MC
a147.
MC
177.
MC
180.
MC
183.
MC
186.
MC
189.
MC
Learning Objective a7
a30.
TF
a149.
MC
a154.
MC
a159.
MC
a164.
MC
a201.
BE
a225.
Ex
a31.
TF
a150.
MC
a155.
MC
a160.
MC
a174.
MC
a221.
Ex
a226.
Ex
a32.
TF
a151.
MC
a156.
MC
a161.
MC
a198.
BE
a222.
Ex
a33.
TF
a152.
MC
a157.
MC
a162.
MC
a199.
BE
a223.
Ex
a148.
MC
a153.
MC
a158.
MC
a163.
MC
a200.
BE
a224.
Ex
Learning Objective 8
175.
MC
177.
MC
179.
MC
181.
MC
183.
MC
185.
MC
176.
MC
178.
MC
180.
MC
182.
MC
184.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer
MA = Matching
CHAPTER LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.
3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.
4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.
5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.
a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.
a7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.
TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2. The steps in the accounting cycle are different for a merchandising company than for a service company.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Sales minus operating expenses equals gross profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
5. A periodic inventory system requires a detailed inventory record of inventory items.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
6. Freight terms of FOB Destination means that the seller pays the freight costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8. Sales revenues are earned during the period cash is collected from the buyer.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10. The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13. A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15. A merchandising company has different types of adjusting entries than a service company.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17. Operating expenses are different for merchandising and service enterprises.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
18. Net sales appears on both the multiple-step and single-step forms of an income statement.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19. A multiple-step income statement provides users with more information about a company’s income performance.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20. The multiple-step form of income statement is easier to read than the single-step form.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21. Inventory is classified as a current asset in a classified balance sheet.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27. Gross profit represents the merchandising profit of a company.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28. Gross profit is a measure of the overall profitability of a company.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29. Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35. Inventory is reported as a long-term asset on the balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
38. Sales revenue should be recorded in accordance with the matching principle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42. The major difference between the balance sheets of a service company and a merchandising company is inventory.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements
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26.
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38.
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F
9.
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15.
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21.
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27.
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a33.
F
39.
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10.
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16.
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28.
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40.
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MULTIPLE CHOICE QUESTIONS
43. Net income is gross profit less
a. financing expenses.
b. operating expenses.
c. other expenses and losses.
d. other expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44. An enterprise which sells goods to customers is known as a
a. proprietorship.
b. corporation.
c. retailer.
d. service firm.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45. Which of the following would not be considered a merchandising company?
a. Retailer
b. Wholesaler
c. Service firm
d. Dot Com firm
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46. A merchandising company that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service company.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47. Two categories of expenses for merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48. The primary source of revenue for a wholesaler is
a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
49. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales revenue – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
54. A perpetual inventory system would likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
60. The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
64. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
65. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?
a. $8,100
b. $8,280
c. $8,820
d. $9,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $9,000 ( (1 - .02) ( $8,820
66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 20%
b. 24%
c. 18%
d. 36%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [360 ( (30 ( 10)] ( 1% ( 18%
67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
a. Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
69. Jake’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $60,000, terms 2/10, n/30.
Returned $1,200 of the shipment for credit.
Paid $300 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory increased by
a. $57,624.
b. $57,918.
c. $57,924.
d. $59,100.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [($60,000 ( $1,200( .98)] ( 300 ( $57,924
70. Costner’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $38,612.
c. increased by $38,616.
d. increased by $39,400.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [($40,000 ( $800) ( .98] ( $200 ( $38,616
71. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in
a. Freight Expense.
b. Freight - In.
c. Inventory.
d Freight - Out.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:
a. Accounts Payable 5,000
Inventory 5,000
b. Accounts Payable 5,000
Inventory 150
Cash 5,150
c. Accounts Payable 5,000
Purchase Discounts 120
Inventory 4,850
d. Accounts Payable 5,000
Inventory 120
Cash 4,850
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:
a. Accounts Payable 9,000
Cash 9,000
b. Accounts Payable 8,730
Cash 8,730
c. Accounts Payable 9,000
Purchase Returns and Allowances 270
MC. 73 (Cont.)
Cash 8,730
d. Accounts Payable 9,000
Inventory 270
Cash 8,730
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $9,000 ( .97 ( $8,730
74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
a. Cash 5,000
Accounts Receivable 5,000
b. Cash 5,000
Sales Discounts 50
Accounts Receivable 4,950
c. Cash 4,950
Sales Discounts 50
Accounts Receivable 5,000
d. Cash 5,050
Sales Discounts 50
Accounts Receivable 5,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $5,000 ( .99 ( $4,950
75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day's cash sales will include:
a. a $3,600 credit to Cost of Goods Sold.
b. a $6,000 credit to Cash.
c. a $3,600 credit to Inventory.
d a $6,000 debit to Accounts Receivable.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?
a. $3,675
b. $3,750
c. $3,920
d $4,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($4,000 ( $250) ( .98 ( $3,675
77. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $40.
b. Cash for $1,960.
c. Accounts Receivable for $2,000.
d. Sales Revenue for $2,000.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78. The collection of a $6,000 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $120.
b. debit to Accounts Receivable for $5,880.
c. credit to Cash for $5,880.
d. credit to Accounts Receivable for $5,880.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $6,000 ( .02 ( $120
79. Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check?
a. $630
b. $720
c. $810
d. $882
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $900 ( .98 ( $882
80. Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $3,920
b. $4,000
c. $4,900
d. $4,920
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($5,000 ( $1,000) ( .98 ( $3,920
81. The collection of a $1,500 account after the 2 percent discount period will result in a
a. debit to Cash for $1,470.
b. debit to Accounts Receivable for $1,500.
c. debit to Cash for $1,500.
d. debit to Sales Discounts for $30.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
82. The collection of a $1,000 account after the 2 percent discount period will result in a
a. debit to Cash for $980.
b. credit to Accounts Receivable for $1,000.
c. credit to Cash for $1,000.
d. debit to Sales Discounts for $20.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84. Sales revenues are usually considered earned when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
85. A sales invoice is a source document that
a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
86. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87. The journal entry to record a credit sale is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales Revenue
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88. Sales Returns and Allowances is increased when
a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
89. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90. A credit granted to a customer for returned goods requires a debit to
a. Sales Revenue and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
92. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24?
a. $3,332
b. $3,440
c. $3,528
d $3,600
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($3,600 ( $200) ( .98 ( $3,332
93. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used.
b. the cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
95. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
96. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra-revenue account.
d. increase an operating expense account.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
99. Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check?
a. $1,750
b. $2,000
c. $2,250
d. $2,450
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution: $2,500 ( .98 ( $2,450
100. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $6,272
b. $6,400
c. $7,840
d. $7,872
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution: ($8,000 ( $1,600) ( .98 ( $6,272
101. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?
a. Cash 3,400
Accounts Receivable 3,400
b. Cash 3,332
Sales Returns and Allowances 668
Accounts Receivable 4,000
c. Cash 3,332
Sales Returns and Allowances 600
Sales Discounts 68
Accounts Receivable 4,000
d. Cash 3,920
Sales Discounts 80
Sales Returns and Allowances 600
Accounts Receivable 3,400
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