Exercise 3-9 Effect of product cost and period cost: Horizontal statements model

Question

Exercise 3-9 Effect of product cost and period cost: Horizontal statements model LO 3-2 The Sports Store experienced the following events for the 2014 accounting periood 1. Acquired $55,000 cash from the issue of common stock. 2. Purchased $80,000 of inventory on account. 3. Received goods purchased in Event 2 FOB shipping point; freight cost of $400 paid in cash 4. Sold inventory on account that cost $53,300 for $82,000 5. Freight cost on the goods sold in Event 4 was $670. The goods were shipped FOB destination. Cash was paid for the freight cost. 6. Customer in Event 4 returned $5,000 worth of goods that had a cost of $3,250 7. Collected $72,000 cash from accounts receivable 8. Paid $68,100 cash on accounts payable 9. Paid $3,700 for advertising expense 10.Paid $3,500 cash for insurance expense

Explanation / Answer

Upto 6 entries you have done all are correct except 4b , 6a & 6b

4b) Cost of the goods sold is $53,300 but you have entered $ 53,000 wrongly

6a) $5,000 worth goods return by cutomer : it means it is sales return so Accounts receivable should be reduce by $5,000 because customer has returned us the goods so he/she is not going to pay us $5,000 so we reduce it from there and Sales return is our reduction in revenue so treat it as an expense vis-avis reduce it from Retained earning

Account receivable = (5,000)

Expense = 5,000

Retained earning = (5,000)

6b) goods returned had a cost of $ 3,250 so inventory will increase by $3,250 and its reduction in expense so you can treat it as a revenue or put in expense with negative vis-a-vis increase in Retained earnings

Inventory = 3,250

Expense = ( 3,250)

retained earning = 3,250

and now other entries after 6th point

7) Cash = 72,000

Accounts Receivable = (72,000)

Statement of Cash flow = OA

8) Cash = (68,100)

Accounts payable = (68,100)

Statement of Cash flow = OA

9) Cash = (3,700)

retained earning = (3,700)

Expense = 3,700

Statement of Cash flow = OA

10) Cash = (3,500)

retained earning = (3,500)

Expenses = 3,500

Statement of Cash flow = OA

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