Multi-step scenarios: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Buying on account, returning part, paying the rest
On May 3 a store bought merchandise on account for $6,000.00. On May 8 it returned damaged goods worth $800.00, and the supplier issued a credit memo. Both were recorded when they occurred. Today it pays the balance it owes the supplier by check. Record today’s payment only.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. No discount is granted for the payment.
Account Debit Credit Accounts Payable $5,200.00 Cash $5,200.00 Why
After the return the store owes $6,000.00 − $800.00 = $5,200.00. Today’s entry only settles that balance: Accounts Payable falls by $5,200.00 and so does Cash. The purchase and the return already went through Inventory.
Credit sale, return, then payment within the discount period
On May 1 a wholesaler sold merchandise on account for $8,000.00, terms 2/10, n/30. On May 4 the customer returned merchandise with a sales price of $1,500.00, and the wholesaler issued a credit memo. On May 9 the customer pays the balance in cash and takes the discount. Record the May 9 entry.
Assumptions: The sale and the return were recorded when they happened (gross method). The discount applies to the balance after the return. No sales tax applies.
Account Debit Credit Cash $6,370.00 Sales Discounts $130.00 Accounts Receivable $6,500.00 Why
After the return the customer owes $8,000.00 − $1,500.00 = $6,500.00. The discount is 2% of that, $130.00, recorded in Sales Discounts; the customer pays $6,370.00, and Accounts Receivable is cleared by $6,500.00.
A machine bought, depreciated for a year, then sold
On January 1 last year a company bought a machine for $18,000.00. It depreciates it straight-line over 6 years with no salvage value, and it recorded last year's depreciation on December 31. On January 1 this year it sells the machine for $11,000.00 cash. Record the sale.
Assumptions: Depreciation is accumulated in Accumulated Depreciation. One full year of depreciation has been recorded; none is due for this year before the sale. Sales tax is ignored in this item.
Account Debit Credit Cash $11,000.00 Accumulated Depreciation—Equipment $3,000.00 Loss on Disposal of Equipment $4,000.00 Equipment $18,000.00 Why
One year's depreciation is $18,000.00 / 6 = $3,000.00, so the book value is $18,000.00 − $3,000.00 = $15,000.00. The machine leaves Equipment at cost and its accumulated depreciation ($3,000.00) is removed; the price is $15,000.00 − $11,000.00 = $4,000.00 below the book value, a loss.
Insurance renewed during the year: the year-end entry and balance
On January 1 Prepaid Insurance had a balance of $540.00: the unexpired part of last year’s policy, covering January to March. On April 1 the company renewed the policy for one year (April 1 to March 31), paid $2,640.00 and debited Prepaid Insurance. No insurance adjustments have been recorded this year. Record the adjusting entry on December 31.
Assumptions: The company adjusts its accounts only at year end.
Account Debit Credit Insurance Expense $2,520.00 Prepaid Insurance $2,520.00 Why
All of the opening balance has expired, and 9 of the 12 months of the new policy: $540.00 + $2,640.00 × 9/12 = $2,520.00. Debit Insurance Expense and credit Prepaid Insurance for $2,520.00; Prepaid Insurance is left at $660.00, the three months of next year.
Final invoice for a service after a deposit
On March 2 a customer paid a deposit of $2,400.00 by bank transfer for a website redesign, and the company credited Unearned Revenue. Today the company completes the work, for a total price of $8,000.00, and bills the customer for the balance. Record today’s entry.
Assumptions: No sales tax applies.
Account Debit Credit Unearned Revenue $2,400.00 Accounts Receivable $5,600.00 Service Revenue $8,000.00 Why
The whole price $8,000.00 is earned today. The deposit is no longer owed as work, so Unearned Revenue is debited for $2,400.00, and the customer owes the rest, $5,600.00, in Accounts Receivable.
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