Selling goods and services: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Cash sale of merchandise (periodic inventory)
A store sells merchandise for $240.00. The customer pays immediately in cash.
Assumptions: The store uses the periodic inventory system: the cost of the goods sold is not recorded at the time of each sale. No sales tax applies to this sale.
Account Debit Credit Cash $240.00 Sales Revenue $240.00 Why
Under the periodic system a sale records only the revenue: Cash goes up by $240.00 and Sales Revenue is credited. Inventory and Cost of Goods Sold are not touched until the period-end count.
Sale on account with a trade discount
A wholesaler sells merchandise on account to a retailer at a list price of $2,500.00, less a 10% trade discount. Terms n/30.
Assumptions: The wholesaler uses the periodic inventory system: the cost of the goods sold is not recorded at the time of each sale. The retailer buys for resale, so no sales tax is charged.
Account Debit Credit Accounts Receivable $2,250.00 Sales Revenue $2,250.00 Why
A trade discount is never recorded: the sale is recorded at the invoice price, $2,500.00 less 10% = $2,250.00, in Accounts Receivable and Sales Revenue. Under the periodic system there is no cost-of-goods-sold line.
Cash sale with cost of goods sold (perpetual inventory)
A store sells merchandise for $850.00, paid immediately in cash. The merchandise cost the store $510.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. No sales tax applies to this sale.
Account Debit Credit Cash $850.00 Cost of Goods Sold $510.00 Sales Revenue $850.00 Inventory $510.00 Why
Under the perpetual system a sale needs two pairs of lines: the revenue (Cash and Sales Revenue, $850.00) and the cost (Cost of Goods Sold debited and Inventory credited, $510.00).
Sale on account with cost of goods sold
A wholesaler sells merchandise on account for $4,200.00, terms n/30, to a retailer that will resell it. The merchandise cost the wholesaler $2,600.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. The retailer buys for resale, so no sales tax is charged.
Account Debit Credit Accounts Receivable $4,200.00 Cost of Goods Sold $2,600.00 Sales Revenue $4,200.00 Inventory $2,600.00 Why
Under the perpetual system the sale is recorded twice over: the customer owes $4,200.00 (Accounts Receivable and Sales Revenue), and the cost of the goods ($2,600.00) moves from Inventory to Cost of Goods Sold. No sales tax is charged on a sale for resale.
Customer returns merchandise bought on account (periodic inventory)
Last week a store sold merchandise on account for $4,000.00. Today the customer returns part of the merchandise, with a sales price of $600.00, because it does not match the order, and the store issues a credit memo. The customer has not paid yet.
Assumptions: The store uses the periodic inventory system, so the return of the goods to stock is not recorded in Inventory. Returns are recorded in Sales Returns and Allowances, not by debiting Sales Revenue. No sales tax applies.
Account Debit Credit Sales Returns and Allowances $600.00 Accounts Receivable $600.00 Why
The return reduces what the customer owes by $600.00. Sales Returns and Allowances, a contra-revenue account, is debited so that gross sales stay visible. Under the periodic system there is no inventory or cost-of-goods-sold line.
Customer returns goods for a cash refund, restocked (perpetual inventory)
Yesterday a store sold merchandise for $450.00, paid in cash; the merchandise had cost the store $270.00. Today the customer returns all of it undamaged and receives a full cash refund. The merchandise goes back into inventory.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. Returns are recorded in Sales Returns and Allowances, not by debiting Sales Revenue. No sales tax applies to this sale.
Account Debit Credit Sales Returns and Allowances $450.00 Inventory $270.00 Cash $450.00 Cost of Goods Sold $270.00 Why
Under the perpetual system the return reverses both halves of the sale: Sales Returns and Allowances is debited and Cash credited for the refund ($450.00), and the goods go back into Inventory at their cost ($270.00), reducing Cost of Goods Sold.
Collecting a customer’s invoice in full, in cash
Last month a store sold merchandise on account for $360.00 plus 6% sales tax. Today the customer comes to the store and pays the full amount owed in cash.
Assumptions: Sales tax 6%. The sale and its sales tax were recorded last month. No discount is given.
Account Debit Credit Cash $381.60 Accounts Receivable $381.60 Why
The sale and the sales tax were recorded when the goods were sold, so collecting the money only exchanges one asset for another: Cash goes up and Accounts Receivable goes down by the full amount owed, $360.00 + $21.60 = $381.60.
Customer pays within the discount period
Eight days ago a wholesaler sold merchandise on account for $5,000.00, terms 2/10, n/30. Today the customer pays the invoice in cash and takes the discount.
Assumptions: The wholesaler records sales and receivables at the full invoice amount (gross method). No sales tax applies to this sale.
Account Debit Credit Cash $4,900.00 Sales Discounts $100.00 Accounts Receivable $5,000.00 Why
The customer pays $4,900.00 instead of $5,000.00: the discount (2% of $5,000.00 = $100.00) goes to Sales Discounts, a contra-revenue account, and the whole receivable of $5,000.00 is cleared.
Selling merchandise on account with sales tax
A store sells merchandise on account for $3,000.00 plus 6% sales tax. The merchandise cost the store $1,800.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. Sales tax 6%.
Account Debit Credit Accounts Receivable $3,180.00 Cost of Goods Sold $1,800.00 Sales Revenue $3,000.00 Sales Tax Payable $180.00 Inventory $1,800.00 Why
The customer owes the price plus the tax ($3,180.00). The sales tax charged to the customer is owed to the state, so it is a liability, not revenue. Under the perpetual system the same sale also moves the cost of the goods ($1,800.00) from Inventory to Cost of Goods Sold.
Cash sales with sales tax included in the total
At the end of the day a store’s cash register shows total receipts of $1,590.00, including 6% sales tax that was not rung up separately. The merchandise sold cost the store $900.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. Sales tax 6%. All the merchandise sold is taxed at the same rate.
Account Debit Credit Cash $1,590.00 Cost of Goods Sold $900.00 Sales Revenue $1,500.00 Sales Tax Payable $90.00 Inventory $900.00 Why
The receipts include the tax, so sales are $1,590.00 divided by (1 + 6%) = $1,500.00, and the tax is $90.00. Sales Revenue gets the net $1,500.00, Sales Tax Payable the $90.00 owed to the state, and Cash the full $1,590.00. Under the perpetual system the cost ($900.00) also moves from Inventory to Cost of Goods Sold.
Invoicing a client for services rendered
A design studio has finished a project for a client and sends its invoice for $1,800.00, payable in 30 days.
Assumptions: Design services are not subject to sales tax here.
Account Debit Credit Accounts Receivable $1,800.00 Service Revenue $1,800.00 Why
The service has been performed, so the revenue is earned now even though no cash has come in: Accounts Receivable is debited and Service Revenue credited for $1,800.00.
Service paid for on completion
An IT support firm repairs a client’s office network. When the job is done the client pays the fee of $640.00 immediately in cash.
Assumptions: IT support services are not subject to sales tax here.
Account Debit Credit Cash $640.00 Service Revenue $640.00 Why
The service is performed and paid at the same time, so there is no receivable: Cash is debited and Service Revenue credited for $640.00.
Receiving a customer deposit before the service
A catering company will cater a customer’s event next month. Today the customer pays a deposit of $1,200.00 in cash, as an advance on the price.
Assumptions: Catering services are not subject to sales tax here.
Account Debit Credit Cash $1,200.00 Unearned Revenue $1,200.00 Why
Nothing has been earned yet: the company owes the customer the service, so the deposit is a liability. Cash is debited and Unearned Revenue credited for $1,200.00; it becomes Service Revenue when the event is catered.
Delivering a service the customer paid in advance
Last month a customer paid a catering company $950.00 in cash in advance for an event, and the company credited Unearned Revenue. The deposit covers the whole price. Today the company caters the event.
Assumptions: Catering services are not subject to sales tax here.
Account Debit Credit Unearned Revenue $950.00 Service Revenue $950.00 Why
The service has now been performed, so the liability becomes revenue: Unearned Revenue is debited and Service Revenue credited for $950.00. No cash moves today.
Sale paid partly in cash, partly on account
A store sells merchandise for $6,000.00. The customer pays $2,000.00 in cash and owes the rest on account, due in 30 days. The merchandise cost the store $3,800.00.
Assumptions: Perpetual inventory: each sale also records its cost of goods sold. No sales tax applies to this sale.
Account Debit Credit Cash $2,000.00 Accounts Receivable $4,000.00 Cost of Goods Sold $3,800.00 Sales Revenue $6,000.00 Inventory $3,800.00 Why
The sale is recorded at its full price ($6,000.00) whatever the means of payment: Cash receives $2,000.00 and Accounts Receivable the rest ($4,000.00). Under the perpetual system the cost ($3,800.00) moves from Inventory to Cost of Goods Sold.
Writing off a bad debt: direct write-off method
A customer who owes $2,500.00 on account for goods bought earlier this year has gone bankrupt, and the account is uncollectible. Record the write-off.
Assumptions: The company uses the direct write-off method: it has no Allowance for Doubtful Accounts. No sales tax applies.
Account Debit Credit Bad Debt Expense $2,500.00 Accounts Receivable $2,500.00 Why
Under the direct write-off method the loss is recorded only when an account proves uncollectible: debit Bad Debt Expense and credit Accounts Receivable for $2,500.00. No allowance is involved.
Writing off an account under the allowance method
The company uses the allowance method. A customer’s account of $4,000.00 is now determined to be uncollectible and is written off.
Assumptions: The Allowance for Doubtful Accounts has a credit balance larger than this account. No sales tax applies.
Account Debit Credit Allowance for Doubtful Accounts $4,000.00 Accounts Receivable $4,000.00 Why
The loss was already expensed when the allowance was estimated, so the write-off only removes the account: debit Allowance for Doubtful Accounts and credit Accounts Receivable for $4,000.00. Bad Debt Expense is not touched, and the net receivable does not change.
Estimating bad debts as a percentage of sales
Credit sales for the year were $480,000.00. The company estimates that 2% of credit sales will prove uncollectible. Before adjustment, the Allowance for Doubtful Accounts has a credit balance of $900.00. Record the year-end entry for bad debts.
Assumptions: The company uses the allowance method with the percentage-of-sales approach.
Account Debit Credit Bad Debt Expense $9,600.00 Allowance for Doubtful Accounts $9,600.00 Why
With the percentage-of-sales approach the expense is a share of credit sales, whatever the allowance balance: $480,000.00 × 2% = $9,600.00. Debit Bad Debt Expense and credit Allowance for Doubtful Accounts; the existing balance of $900.00 plays no part.
Recovering an account previously written off
Earlier this year the company wrote off a customer’s account of $1,800.00 against the Allowance for Doubtful Accounts. Today the customer unexpectedly pays the full $1,800.00 by bank transfer.
Assumptions: The company uses the allowance method. No sales tax applies.
Account Debit Credit Cash $1,800.00 Allowance for Doubtful Accounts $1,800.00 Why
The collection shows the write-off was wrong, so the account is reinstated (debit Accounts Receivable, credit Allowance for Doubtful Accounts) and then collected (debit Cash, credit Accounts Receivable). Accounts Receivable nets to zero, so recording only Cash and the Allowance for $1,800.00 is the same entry and is accepted.
Receiving rent for a van rented out
A trading company rents out a delivery van it does not need this month to a private individual. It receives this month’s rent of $850.00 by bank transfer.
Assumptions: Renting out vehicles is not the company’s main business. The rent is for the current month. No sales tax applies.
Account Debit Credit Cash $850.00 Rent Revenue $850.00 Why
The rent has been earned this month and received, so Cash is debited and Rent Revenue credited for $850.00. Unearned Revenue would apply only to rent received for a later period.
Practice these entries online with instant feedback: https://practibalance.com/