Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 5 Accounting for Merchandise Operations 239

The following transactions were completed by Montrose Company during May of the current

year. Montrose Company uses a perpetual inventory system.

May 3 Purchased merchandise on account from Floyd Co., $4,000, terms FOB shipping

point, 2/10, n/30, with prepaid transportation costs of $120 added to the invoice.

5 Purchased merchandise on account from Kramer Co., $8,500, terms FOB destina-

tion, 1/10, n/30.

6 Sold merchandise on account to C. F. Howell Co., $2,800, terms 2/10, n/30. The

cost of the merchandise sold was $1,125.

8 Purchased office supplies for cash, $150.

10 Returned merchandise purchased on May 5 from Kramer Co., $1,300.

13 Paid Floyd Co. on account for purchase of May 3, less discount.

14 Purchased merchandise for cash, $10,500.

15 Paid Kramer Co. on account for purchase of May 5, less return of May 10 and

discount.

16 Received cash on account from sale of May 6 to C. F. Howell Co., less discount.

19 Sold merchandise on nonbank credit cards and reported accounts to the card

company,American Express, $2,450. The cost of the merchandise sold was

$980.

22 Sold merchandise on account to Comer Co., $3,480, terms 2/10, n/30. The cost of

the merchandise sold was $1,400.

24 Sold merchandise for cash, $4,350. The cost of the merchandise sold was

$1,750.

25 Received merchandise returned by Comer Co. from sale on May 22, $1,480. The

cost of the returned merchandise was $600.

31 Received cash from card company for nonbank credit card sales of May 19, less

$140 service fee.

Instructions

1. Journalize the preceding transactions.


2. Journalize the adjusting entry for merchandise inventory shrinkage, $3,750.

Solution

1.

SalesThe total amount charged to customers for merchan-
dise sold, including cash sales and sales on account.

Sales discounts From the seller’s perspective, discounts
that a seller may offer the buyer for early payment.

Sales returns and allowances From the seller’s perspec-
tive, returned merchandise or an adjustment for defective
merchandise.

Selling expenses Expenses that are incurred directly in the

selling of merchandise.

Single-step income statement A form of income state-

ment in which the total of all expenses is deducted from the

total of all revenues.

Subsidiary ledger A ledger containing individual accounts

with a common characteristic.

ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM

May 3 Merchandise Inventory 4,120

Accounts Payable—Floyd Co. 4,120

5 Merchandise Inventory 8,500

Accounts Payable—Kramer Co. 8,500

(continued)