For the problems given, I will just give you some notes to help you solve the problems

on your own. Try

to read them and make the necessary entries, I still indicated the proforma entries naman so it will be
easy.

Notes:

1. December 12 – Christina sold to McDreamy merchandise for 17,000.00.

Selling on Account

Selling on account would entail the recording of an Accounts Receivable for the marked-up cost or the
grossed up value of the goods sold.

For instance, the shop sells at 50% grossed up value (aka gross profit based on cost aka selling price),
compute the selling price by multiplying the 50% profit rate to the cost of the goods and adding the
product to the cost. Applying it to the problem (at this point, I will not give you muna the entries but will
help you come up with the amounts), the problem said “was able to sell some of the store’s
merchandise to Mr McDreamy for 17,000”. This alone states that the selling price of the inventory sold
is 17,000.00. Thus, as previously mentioned, the entire amount of the selling price should be recorded as
Accounts Receivable. Why? Because when we sell goods, the money we expect is the selling price, thus,
the same amount should be recorded as the Accounts Receivable.

When selling goods, our debit will be Cash, if cash sales, and Accounts Receivable, when sold in credit.
What is our credit entry? The credit will be the amount of the expected sales to the “Sales” account title.
In brief, entry should look like this:

Accounts Receivable/Cash xx
Sales xx

Now, customers have various payment terms. In this case, the payment terms is 50% downpayment,
balance 2/10, n/30. FOB Destination, freight collec. Mr. McDreamy paid. And yes, need to have a
calculator on this (because of the % sign).

Downpayment
50% downpayment means, the 50% of the selling price will be paid on the day of the sales transaction
and the remaining 50% shall be on credit. Let’s modify the entry above:

Cash (50%) xx
Accounts Receivable xx
Sales xx

Credit Terms
So ano ang ibig sabihin ng “2/10, n/30”? Clue: It is actually a strategy to speed up collection of Accounts
Receivable.

Ang tawag diyan ay “CREDIT TERMS”. It pertains to the discount allowed to the customer when the
latter pays. “2/10” means 2% when paid within the 10 th day after the sales was made, and “n/30” means
net amount should be paid on or before the 30 th day. What other fact does this tell you, the buyer
should pay the credit within 30 days (as determined in the “n/30”).
Summary: “2/10, n/30”

“2” – discount rate if paid on or before the 10 th day

10 – no of days when the discount will be availed

“n” – net amount (or total amount due) of the selling price

“30” – the credit term within which the selling price should be paid.

Additional Fact (why there is a credit period): The effect of non-collection beyond the 30 days will enable
the seller to demand from the buyer the selling price. If the buyer fails to pay despite demand, usually,
the seller will assess the collectability of the Accounts Receivable. If they find that the collectability of
the selling price is low, they may adjust the receivable by recognizing allowance for bad debts or bad
debts expense. If they find naman na collectability is high pero the collection might happen in the
future, they can agree with the buyer to settle the Accounts Receivable through the issuance of a
promissory note.

Take note that the discount indicated in the credit terms have no effect sa entries mo on the date of
sales transactions. The Accounts Receivable will still be recorded at the selling price on credit, while the
Sales also recorded at the selling price.

The discount will only have an effect if the buyer pays for the selling price already. For instance, what if
Mr. McDreamy paid the Accounts Receivable on December 15 which is within the discount period of 10
days (in “2/10”). The entry will be:

Cash (17,000 x 50% - Discount) xx

Discount (17,000 x 50% 2%) xx
Accounts Receivable xx

If paid beyond the discount period:

Cash xx
Accounts Receivable xx

If there were no collections made within 30 days.

No entry. No transaction made but seller might send a demand letter to the buyer.

FOB Destination, freight collect

As mentioned in the previous discussion, FOB Destination means any damages or loss during shipment
shall be shouldered by the seller.
Freight collect means the delivery charges will be paid upon delivery by the buyer. So sino tayo in this
case? We are the seller and we did not pay for the delivery so is there an entry for this FOB Destination,
freight collect? NONE. Why? Because we didn’t pay anything.

2. December 20, Mr. Karev paid 35,000 for the merchandise bought on the same day.

There are two transactions here:

a. Payment for merchandise for 36,000.00.
b. Delivery of the merchandise worth 15,000.00.

Payment for merchandise for 36,000.00. This means that the customer, Mr. Karev made a cash payment
for goods for 36,000.00. Mr. Karev is a customer and the business made sales. So entry is….of course
debit to cash and credit to Sales.

Delivery of the merchandise. When you sell your goods, what’s next? Sellers will now deliver the goods
sold. Remember when we purchased the inventory (school supplies?), we debited Merchandise
Inventory and credited Cash/Accounts Payable. Thus, when we deliver the goods, we let go of the goods
and give them to the buyer. So the entry is…credit Merchandise Inventory. Debit is Cost of Goods Sold.

Cost of Goods Sold (use the purchase price when you purchased it) xx
Merchandise Inventory xx

In this problem nga lang, there is partial delivery, meaning out of the 36,000 purchases, the customer
only requested 15,000.00 worth of merchandise. Note that the 15,000.00 is the selling price. Remember
the gross profit of 50% na discussed in the previous transactions? That applies here now.

The 15,000.00 is the selling price pero how much is the purchase cost? Formula: Selling Price = Purchase
Cost + Gross Profit, apply the amounts to the formula:

15,000.00 = Purchase Cost + 50% (Purchase Cost)

15,000.00 = 1.5 Purchase Cost

15,000.00 = Purchase Cost

1.5

Purchase Cost = 10,000.00

The Purchase Cost is the cost to be recorded as the Cost of Goods Sold and the actual cost of the
merchandise sold.

End of Discussion.

Take note that I didn’t give the actual journal entries required because I have already mentioned what
to debit and credit naman. If you don’t understand the discussion, feel free to ask me. I will try to make
new examples.