Question

The transactions listed below are typical of those involving Amalgamated Textiles and American Fashions. Amalgamated is a wholesale merchandiser and American Fashions is a retail merchandiser. Assume all sales of merchandise from Amalgamated to American Fashions are made with terms n/60, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended December 31.
A. Amalgamated sold merchandise to American Fashions at a selling price of $280,000. The merchandise had cost Amalgamated $195,000.
B. Two days later, American Fashions returned goods that had been sold to the company at a price of $29,500 and complained to Amalgamated that some of the remaining merchandise differed from what American Fashions had ordered. Amalgamated agreed to give an allowance of $4,500 to American Fashions. The goods returned by American Fashions had cost Amalgamated $20,270.
C. Just three days later, American Fashions paid Amalgamated, which settled all amounts owed.
For each of the events (a) through (c), indicate the amount and direction of the effect on Amalgamated Textiles in terms of the following items. (Enter any decreases to account balances with a minus sign.) Prepare the journal entries that Amalgamated Textiles would record. TIP: When using a perpetual inventory system, the seller always makes two journal entries when goods are sold. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Answer and Explanation:

The amount and direction of the effect is presented below:

1 Transaction Sales             Sales      Sales            Net     Cost of    Gross                                  Revenues    returns    allowances Sales  goods    Profit

                                                                                                     sold

                                                                            (a)     (b)   (a)-(b)  

               a.       $280,000                                        $280,000 $195,000

$85,000  

               b.                                 $29,500      $4,500     -$34,000  -$20,270

$13,730

                 c. No effect No effect No effect No effect No effect No effect

2. Now the journal entries are as follows

a.  Accounts receivable $280,000  

              To Sales revenues  $280,000

(Being sales of account is recorded)

For recording this we debited the account receivable as it increased the assets and credited the revenues as it increase the sales

a-2 Cost of goods sold $195,000

                    To  Merchandise Inventory $195,000  

(Being cost of goods sold is recorded)

For recording this we debited the cost of goods sold as it increased the expenses and credited the inventory as it decreased the assets         b. Sales allowances and returns ($29,500 + $4,500) $34,000

                 To Accounts receivable $34,000

(Being Sales allownaces and returns is recorded)        For recording this we debited the sales return as it increased it and credited the account receivable as it decreased the assets

b-2 Merchandise Inventory    $20,270

                 To Cost of goods sold    $20,270

(Being Cost of goods sold on goods returned)  

For recording this we debited the merchandise inventory as it increased the assets  and credited the cost of goods sold as it decreased the expenses    

c Cash ($280,000 - $34,000) $246,000

               To Accounts receivable $246,000

(Being Payment in full is recorded)

For recording this we debited the cash as it increased the assets and credoted the account receivable as it decreased the assets