ST. RAPHAEL COLLEGE OF BUSINESS AND ARTS INC.

Manuel L. Quezon Ave. Poblacion Uno Real, Quezon

Email: st.raphael_college@yahoo.com
Tel. No.: (042) 536-6428 | CP no.: 0961-0645-030

SENIOR HIGH SCHOOL

DEPARTMENT

Quarter 3 – Module 9:
Merchandising Concern (Part 2)
Learning Competencies:
24. Compare cash discounts and trade discounts.
25. Summarize the treatment of transportation costs
considering the freight terms FOB Destination, FOB Shipping
Point, Freight Prepaid and Freight Collect.
26. Explain the inventory systems of merchandising entities.
27. Illustrate the major parts of the merchandising income
statement selected transactions.

S L M-SRCBAI PROPERTY
 SENIOR HIGH SCHOOL

Learning Objectives

This module was designed to help you demonstrate an understanding

the difference of cash discount and trade discount; treatment of
transportation costs; inventory system of merchandising entities; and recording
transactions for merchandise sales under a periodic inventory system.

Review Last Lesson

The previous chapters illustrated the accounting cycle of entities that earned
revenues by providing services. A service business sells knowledge or expertise while a
merchandising business sells a particular or a group of products. These products will
be sold either wholesale or retail in the same form that they were bought.

LEARNING COMPETENCY NO. 24

Compare cash discounts and trade discounts

Lesson Proper

Merchandise may be purchased and sold either on credit terms or for cash on delivery.
When goods are sold on account, a period of time called the credit period is allowed for
payment. The length of the credit period varies across industries and may even vary
within an entity, depending on the product.
When goods are sold on credit, both parties should have an understanding as to the
amount and time of payment. These terms are usually printed on the sales invoice and
constitute part of the sales agreement. If the credit period is 30 days, then payment is
expected within 30 days from the invoice date. The credit period is usually described as
the net credit period or net terms. The credit period of 30 days is noted as "n/30". If the
invoice is due ten days after the end of the month, it may be marked "n/10 eom."
Cash Discounts
Some businesses give discounts for prompt payment called cash discounts. If a trade
discount is also offered, cash discount is computed on the net amount after the trade
discount. This practice improves the seller's cash positon by reducing the amount of
money in accounts receivable. Cash discount is designated by such notation as "2/10"
which means the buyer may avail of a two percent discount if the invoice is paid within
ten days from the invoice date. The period covered by the discount, in this case-ten days,
is called the discount period.

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Cash discounts are called purchase discounts from the buyer's viewpoint and sales
discounts from the seller's point of view.
It is usually worthwhile for the buyer to take a discount if offered even if it would mean
borrowing the money to make the payment.
Illustration. Assume that an invoice for ₱150,000 with terms 2/10, n/30, is to be paid
within the discount period with money borrowed for the remaining 20 days of the credit
period. If the interest rate of 18% is assumed, the net savings to the buyer is ₱1,530
which is determined as follows:

Cash Discount of 2% on P150,000 ₱3,000

Interest for 20 days at an annual rate of 1,470
18% on the amount due within the
discount period:
₱147,000 x 18% x 20/360
Savings effected by borrowing ₱1,530
Amount Due = ₱150,000 invoice price - ₱3,000 Cash Discount

Trade Discounts
Suppliers furnish smaller wholesalers or retailers with price lists and catalogs showing
suggested retail prices for their products. These suppliers, however, also include a
schedule of trade discounts from the listed prices to enable the wholesalers and retailers
to determine the invoice price to be paid. Trade discounts encourage the buyers to
purchase products because of markdowns from the list price. Trade discounts should not
be confused with cash discounts Trade discounts enable the suppliers to vary prices
periodically without the inconvenience of revising price lists and catalogs.
There is no trade discount account and there is no special accounting entry for this
discount. Instead, all accounting entries are based on the invoice price which is obtained
by subtracting the trade discount from the list price.
Illustration. A computer shop quoted a list price of ₱2,500 for each tablet computer, less
a trade discount of 20%. If a buyer ordered seven units, the invoice price would be as
follows:
List price (₱2,500 x7) ₱17,500
Less: 20% trade discount 3,500
Invoice Price ₱14,000

Trade discounts may be stated in a series. Assume instead that the trade discount given
by the computer shop to the buyer is 20% and 10%, the invoice price will be:
List price (₱2,500 x 7) ₱17,500
Less: 20% trade discount 3,500
Balance ₱14,000
Less: 10% trade discount 1,400
Invoice Price ₱12,600

In the first example, both the buyer and the seller would record only the ₱14,000 invoice
price while in the second example, the invoice price will be ₱12,600.

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LEARNING COMPETENCY NO. 25

Summarize the treatment of transportation costs considering
the freight terms FOB Destination, FOB Shipping Point, Freight
Prepaid and Freight Collect

Lesson Proper

Transportation Costs
When merchandise is shipped by a common carrier—a trucking entity or an airline-the
carrier prepares a freight bill in accordance with the instructions of the party making the
shipping arrangements. The freight bill designates which party shoulders the costs, and
whether the shipment is freight prepaid or freight collect.
Freight bills usually show whether the Shipping terms are FOB shipping point or FOB
destination. F.0.B. is an abbreviation for "Free on board". When the freight terms are FOB
shipping point, the buyer shoulders the shipping costs; ownership over the goods passes
from seller to the buyer when the inventory leaves the seller's place of business—the
shipping point. The buyer already owns the goods while still in transit and therefore,
shoulders the transportation costs.
If the terms are FOB destination, the seller bears the shipping costs. Title passes only
when the goods are received by the buyer at the point of destination; while in transit, the
seller is still the owner of the goods so the seller shoulders the transportation costs.
In freight prepaid, the seller pays the transportation costs before shipping the goods sold;
while in freight collect, the freight entity collects from the buyer. Payment by either party
will not dictate who should ultimately shoulder the costs.
Normally, the party bearing the freight cost pays the carrier. Thus, goods are typically
shipped freight collect when the terms are FOB shipping point; and freight prepaid when
the terms are FOB destination.
Sometimes, as a matter of convenience, the firm not bearing the freight cost pays the
carrier. When this situation occurs, the seller and buyer simply adjust the amount of the
payment for the merchandise. Figure below shows which party—the buyer or the seller
shoulders the transportation costs and pays the shipper for various freight terms:

Freight Terms Who Shoulders the Who Pays the Shipper?

Transportation Costs
FOB Destination, Freight Seller Seller
Prepaid

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FOB Shipping Point, Freight Buyer Buyer

Collect
FOB Destination, Freight Seller Buyer
Collect
FOB Shipping Point, Freight Buyer Seller
Prepaid

The shipping costs borne by the buyer using the periodic inventory system are debited to
transportation in account. In accounting, the cost of an asset-the merchandise inventory
—includes all costs (e.g. shipping costs) incurred to bring the asset to its intended use. In
the cost of sales section of the income statement, the balance in this account is added to
purchases in computing foe the net purchases for the period.
Shipping costs borne by the seller are debited to transportation out account. This account
which is also called delivery expense is an operating expense in the income statement.

LEARNING COMPETENCY NO. 26

Explain the inventory systems of merchandising entities

Lesson Proper

Inventory Systems
Merchandise inventory is the key factor in determining cost of sales. Because
merchandise inventory represents goods available for sale, there must be a method of
determining both the quantity and the cost of these goods. There are two systems
available to merchandising entities to record events related to merchandise inventory: the
perpetual inventory system and the periodic inventory system.
Perpetual Inventory System
The perpetual inventory system is an alternative to the periodic inventory system. Under
the perpetual inventory system, the inventory account is continuously updated.
Perpetually updating the inventory account requires that at the time of purchase,
"merchandise acquisitions be recorded as debits to the inventory account. At the time of
sale, the cost of sales is determined and recorded by a debit to the cost of sales account
and a credit to the inventory account. With a perpetual inventory system, both the
inventory and cost of sales accounts receive entries throughout the accounting period.
Many merchandising entities are now using the perpetual inventory system with point of-
sale equipment. Computers have decreased in prices. These powerful machines have
dramatically reduced the time required to manage inventory. Supermarkets and
department stores use point-of-sale scanners built into checkout counters to collect
transactional data for the cash register and to update their perpetual inventory system In
the absence of point-of-sale scanners, the perpetual inventory system is more advisable

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for firms that sell low-volume, high-priced goods such as motor vehicles, jewelry and
furniture.
When an entity uses the perpetual inventory system, the ending inventory should
reconcile with the actual physical count at the end of the period assuming that no theft,
spoilage, or error has occurred. Even if there is a little chance for or suspicion of inventory
discrepancy, most entities make a physical count. At that time, the account is adjusted
for any inaccuracies discovered. The count provides an independent check on the amount
of inventory that should be reported at the end of the period.
Periodic Inventory System
The periodic Inventory system is primarily used by businesses that sell relatively
inexpensive goods and that are not yet using computerized scanning systems to analyze
goods sold. A characteristic of the periodic inventory system is that no entries are made to
the inventory account as the merchandise is bought and sold. When goods are purchased,
a separate set of accounts-purchases, purchases discounts, purchases returns and
allowances, and transportation in—is used to accumulate information on the net cost of
the purchases. Only at the end of the period, when the inventory is counted, will entries
be made to the inventory account to establish its proper balance.

LEARNING COMPETENCY NO. 27

Illustrate the major parts of the merchandising income
statement selected transactions

Lesson Proper

To illustrate the major parts of the merchandising income statement selected transactions
made by FLDC Trading will be used unless otherwise stated.
NET SALES
Net sales is the first part of the merchandising income statement as presented below:
FLDC Trading
Partial Income Statement
For the Year Ended Dec. 31, 2018
Net Sales
Gross Sales ₱2,463,500
Less: Sales Returns and Allowances ₱27,500
Sales Discounts 42,750 70,250
Net Sales ₱2,393,250

Gross Sales

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Under accrual accounting, revenues from the sale of merchandise are considered to be
earned in the accounting period in which the title of goods passes-usually at the point of
delivery—from the seller to the buyer. Gross sales consist of total sales for cash and on
credit during an accounting period. Although cash for the sale is uncollected, the revenue
is recognized as earned at the time of the sale. For this reason, there is likely to be a
difference between net sales and cash collected from those sales in a given period.
As an income account, the sales account is credited whenever sales on account or cash
sales are made. Only sales of merchandise held for resale are recorded in the sales
account. If a merchandising firm sold one of its delivery trucks, the credit would be made
to the delivery equipment account, not to sales account.
The journal entry to record the sale of merchandise for cash is as follows:

Sept. 16 Cash 25,000

Sales 25,000
To record sale of merchandise for cash

If the sale of merchandise is on credit, the entry will be:

Sept. 16 Accounts Receivable 25,000

Sales 25,000
To record sale of merchandise for cash

Sales Discounts
Assume that FLDC Trading sold merchandise on Sept 20 for ₱3,000; terms 2/10, n/60. At
the time of sale, the entry is:

Sept. 20 Accounts Receivable 3,000

Sales 3,000
To record sales on credit; terms 2/10, n/60

The customer may take advantage of the sales discount any time on or before Sept. 30,
which is 10 days after the date of the invoice. If the client paid on Sept. 30, the entry is:

Sept. 30 Cash 2,940

Sales Discount 60
Accounts Receivable 3,000
To record collection on the Sept.20 sale,
discount taken.

At the end of the accounting period, the sales discounts account has accumulated all the
sales discounts for the period. The account is considered a contra-income account and
deducted from gross sales in the income statement.
Sales Returns and Allowances
Buyers may be dissatisfied with the merchandise received either because the goods are
damaged or defective, of inferior quality or not in accordance with their specifications In
such cases, the buyer may return the goods to the seller for credit if the sale was made on
account or for cash refund if the sale was for cash. Alternatively, the seller may just grant
an allowance or deduction from the selling price. A high sales return and allowances

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figure is not commendable because it may signal poor quality of goods and thus may
result to dissatisfied customers.
Each return or allowance is recorded a debit to an account called sales returns and
allowances.
Example:

Sept. 17 Sales Return and Allowances 760

Accounts Receivable (or Cash) 760
To record return or allowance on
unsatisfactory merchandise.

The seller usually issues the customer a credit memorandum, i.e., accounts receivable or
cash is credited, which is a formal acknowledgment that the seller has reduced the
amount owed by the customer. Sales returns and allowances is a contra-income account
and is accordingly deducted from gross sales in the income statement.
Transportation Out
When the freight term is FOB destination, the seller shoulders the transportation costs;
when the term is FOB shipping point, the buyer bears the shipping costs.
Case No. 1. Assume that FLDC Trading sold merchandise totaling ₱17,000 F0B
destination, freight prepaid; terms 2/10, n/30. The transportation costs amounted to
₱1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 17,000

Transportation Out 1,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30;
FOB Destination, Freight Prepaid ₱1,900

If this invoice is collected on Dec, 5, the sales discount will be ₱340 (₱17,000 x 28%
Transportation out is an operating expense.

Dec. 5 Cash 16,660

Sales Discounts 340
Accounts Receivable 17,000

Case No, 2. Assume that FLDC Trading sold merchandise totaling ₱17,000 F0B shipping
point, freight collect; terms 2/10, n/30. The transportation costs amounted to ₱1.900.
The entry to record this transaction would be:

Nov. 25 Accounts Receivable 17,000

Sales 17,000
Sold merchandise on account; terms
2/10, n/30; FOB shipping point, freight
collect.

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There is no debit to transportation out account since the shipping term provided that the
buyer should shoulder the transportation costs. If this invoice is collected on Dec.5 the
sales discount will be ₱340 (₱17,000 2%. The entry would be:

Dec. 5 Cash 16,660

Sales Discounts 340
Accounts Receivable 17,00

Case No. 3. Now, assume that FLDC Trading sold merchandise totaling ₱17,000 F0B
destination, freight collect; terms 2/10, n/30. The transportation costs amounted to
₱1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 15,100

Transportation Out 1,900
Sales 17,000
Sales on account; terms 2/10, n/30;
FOB destination, freight collect, ₱1,900

Accounts receivable is decreased by the transportation charges paid by the buyer for the
benefit of the seller. If this invoice is collected on Dec. 5, the sales discount will be ₱340
(₱17,000 x 2%) since the discount applies to total sales.

Dec. 5 Cash 14,760

Sales Discounts 340
Accounts Receivable 15,100

Case No. 4. Assume further that FLDC Trading sold merchandise totaling ₱17,000 F08
shipping point, freight prepaid; terms 2/10, n/30. The transportation cost is amounted to
₱1,900. The entry to record this transaction would be:

Nov. 25 Accounts Receivable 18,900

Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30;
FOB shipping point, freight prepaid, ₱1,900

If this invoice is collected on Dec. 5, the sales discount will be ₱340 (₱17,000 x 2%). The
discount only applies to total sales.

Dec. 5 Cash 18,560

Sales Discounts 340
Accounts Receivable 18,900

COST OF SALES
Cost of sales or cost of goods sold is the largest single expense of the merchandising
business. It is the cost of inventory that the entity has sold to customers. Every
merchandising business has goods available for sale to customers. The goods available for
sale during the year is the sum of two factors—merchandise inventory at the beginning of
the year and net purchases during the period.

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If an entity is able to sell all the goods available for sale during a given accounting period,
the cost of sales would then equal goods that had been available for sale. In most cases,
however, the business will have goods still unsold at the end of the year. To find the
actual cost of sales, the merchandise inventory at the end of the period is subtracted from
the goods available for sale.
Exhibit below showed goods costing ₱1,/96,600 as available for sale-FLDC started with
₱528,000 in beginning merchandise inventory and purchased (net) ₱1,268,600 worth of
goods during the year. At the end of the year, ₱483,000 of goods were left unsold; this
amount should appear as the merchandise inventory in the balance sheet. When this
ending merchandise inventory is subtracted from goods available for sale, the resulting
cost of sales is ₱1,313,600.
FLDC Trading
Partial Income Statement
For the Year Ended Dec. 31, 2018

Cost of Sales
Merchandise Inventory, 1/1/2018 ₱528,000
Purchases ₱1,264,000
Less: Purchases Returns and Allowances ₱56,400
Purchases Discounts 21,360 77,760
Net Purchases ₱1,186,240
Transportation In 82,360
Net Cost of Purchases ₱1,268,600
Goods Available for Sale ₱1,796,600
Less: Merchandise Inventory, 12/31/2018 483,000
Cost of Sales ₱1,313,600

Figure above shows a pictorial diagram of the cost of sales section. In summary, goods
available for sale during a period come from beginning inventory and net purchases. i The
goods are either sold during the period or remain unsold at the end of the period. Goods
available for sale will eventually turn to expense for the period—as cost of sales or to asset
—as merchandise inventory.

Beginnin Net
g Purchas
Inventor es
y

Goods Available for Sale

Ending Cost of Goods

Inventory Sold

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To understand fully the concept of cost of sales, it is necessary to examine the details
affecting merchandise inventory and net purchases.
Merchandise Inventory
The inventory of a merchandising entity consists of goods purchased for resale. For a
grocery store, inventory would be made up of meats, vegetables, canned goods, and other
items. For a lumber and hardware, it would be plywood, nails, paints, iron sheets, ament,
tools, and other items. Merchandising entities purchase their inventories from
manufacturers, wholesalers and other suppliers.
The merchandise inventory at the beginning of the accounting period is called the
beginning inventory. Conversely, the merchandise inventory at the end of the accounting
period is called the ending inventory. As presented in the figure above, beginning and
ending inventories are used in calculating cost of sales in the income statement. The
ending inventory shown in the income statement will be the merchandise inventory to be
reported in the balance sheet. Effectively, the ending inventory of the current period will be
the beginning inventory of the next period.
Net Cost of Purchases
Under the periodic inventory method, net cost of purchases consist of gross purchases
minus purchases discounts and purchases returns and allowances equals net purchases
plus transportation costs.
Purchases
When the periodic inventory method s used, all purchases of merchandise are debited to
the purchases account as shown below:

Nov. 12 Purchases 15,000

Accounts Payable 15,000
To record purchases of merchandise;
terms 2/10, n/30

The purchases account, a temporary account, is used only for merchandise purchased for
resale. Its sole purpose is to accumulate the total cost of merchandise purchased during
an accounting period. Purchases of other assets such as equipment should be recorded in
the appropriate asset accounts. Recording merchandise purchases at invoice price is
known as the gross price method of recording purchases.
Purchases Returns and Allowances
Sales returns and allowances in the seller’s books are recorded as purchases returns and
allowances in the books of the buyer. This should be recorded as follows:

Nov. 14 Accounts Payable 2,000

Purchase Return and Allowances 2,000
Returned of damaged merchandise purchased
on Nov. 12

Purchases returns and allowances is a contra account and is accordingly deducted from
purchases in the income statement. It is important that a separate account be used to
record purchases returns and allowances because management needs the information for
decision making.

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It may be very costly to return merchandise. There are costs that cannot be recovered
such as ordering costs, accounting costs, transportation costs, and interest on the money
invested in the goods. There may also be lost sales resulting from poor ordering or
unsaleable goods. Frequent returns may call for new purchasing procedures or suppliers.
Purchases Discounts
Merchandise purchases are usually made on credit and commonly involve purchase
discounts for early payment. In relation to the Nov. 12 and 14 transactions, the payment
is recorded as follows:

Nov. Accounts Payable 13,000

22 Purchase Discounts (₱13,000 x 2%) 26
Cash 0
12,740

Like purchases returns and allowances, purchases discounts is a contra account that is
deducted from purchases on the income statement. If the entity makes a partial payment
on an invoice, most creditors will allow the entity to take the discount applicable to the
partial payment. The discount does not apply to transportation or other charges that
might appear on the invoice.
Case No. 1. Assume that FLDC Trading made purchases totaling ₱8,500 F0B destination,
freight prepaid; terms 2/10, n/30 Transportation costs amounted to ₱950. The entry
would be:

Nov. 25 Purchases 8,500

Accounts Payable 8,500
Purchased merchandise on account; terms
2/10, n/30; FOB Destination, freight prepaid

There is no debit to transportation in account since the shipping term provided that the
seller should shoulder the transportation costs. In addition, the seller prepaid the freight.
If this invoice is paid on Dec. 5, the purchases discount will be ₱170 (₱8,500 x 2%). The
entry would be:

Dec. 5 Accounts Payable 8,500

Purchase Discounts 170
Cash 8,330

Case No. 2. Assume that FLDC Trading made purchases totaling ₱8,500 FOB shipping
point, freight collect; terms 2/10, n/30. The transportation costs amounted to ₱950. The
entry to record this transaction would be:

Nov. 25 Purchases 8,500

Transportation In 950
Accounts Payable 8,500
Cash 950
Purchases on account; terms 2/10, n/30;
FOB shipping point, freight collect, ₱950

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If this invoice is paid on Dec. 5, the purchases discount will be ₱170 (₱8,500 x 2%).
Transportation in will form part of net purchases.

Dec. 5 Accounts Payable 8,500

Purchase Discounts 170
Cash 8,330

Case No. 3. Now, assume that FLDC Trading made purchases totaling ₱8,500 F08
destination, freight collect; terms 2/10, n/30. The transportation costs amounted to ₱950.
The entry to record this transaction would be:

Nov. Purchases 8,500

25 Accounts Payable 7,550
Cash 950
Purchases on account; terms 2/10, n/30;
FOB destination, freight collect, ₱950

Accounts payable is decreased by the transportation charges paid by the buyer for the
benefit of the seller. If this invoice s paid on Dec. 5, the purchases discount will be ₱170
(₱8,500 x 2%) because the discount apples to total purchases.

Dec. 5 Accounts Payable 7,550

Purchase Discounts 170
Cash 7,380

Case No. 4. Assume further that FLDC Trading made purchases totaling ₱8,500 F08
shipping point, freight prepaid; terms 2/10, n/30. The transportation costs amounted to
₱950. The entry to record this transaction would be:

Nov. 25 Purchases 8,500

Transportation In 950
Accounts Payable 9,450
Purchased merchandise on account;
terms 2/10, n/30; FOB shipping point,
freight prepaid, ₱950

If this invoice is paid on Dec. 5, the purchases discount will be ₱170 (₱8,500 x 2%). The
buyer is not entitled to discounts on the transportation costs. Discounts apply only to
total purchases.

Dec. 5 Accounts Payable 9,450

Purchase Discounts 170
Cash 9,280

It will be useful to contrast these transportation-in' entries to the 'transportation out’

entries discussed earlier.
OPERATING EXPENSES
Operating expenses make up the third major part of the income statement for a
merchandising entity. These are expenses, other than the cost of sales, which are
incurred to generate profit from the entity's major line of business—merchandising. It

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customary to group operating expenses into useful categories. Distribution costs,

administrative expenses and other operating expenses are the categories.
Distribution costs or selling expenses are those expenses related directly to the entity’s
efforts to generate sales. These include sales salaries and commissions, and the related
employer payroll expenses; advertising and store displays: traveling expenses; store
supplies used; depreciation of store property and equipment; and transportation out.
Administrative expenses are those expenses related to the general administration of the
business. These include officers and office salaries, and the related employer payroll
expenses; office supplies used; depreciation of office property and equipment; business
taxes; professional services: uncollectible accounts expense and other general office
expenses.
Other operating expenses are those expenses that are not related to the central operations
of the business. These are expenses and losses from peripheral or incidental transactions
of the enterprise; for example, loss on sale of investments or loss on sale of property and
equipment.

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Activity/ Exercise

Trade and Cash Discount Calculations:

On June 1, 2018, HDC Farm Products sold merchandise with ₱120,000 list price.

Trade Discount Credit Terms Date Paid

A 30% 2/10, n/30 June 8
B 40% 1/10, n/30 June 15
C 10% 2/10, n/30 June 11
D 20% 1/15, n/30 June 14
E 40% n/30 June 28

Required:

For each of the sales terms, determine the following: (10 points)
1. The amount recorded as a sale
2. The amount of cash received

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Challenge
Fundamentals of Accountancy, Business and Management 1
Grade 11 – MODULE NO.9

Learner Name: _______________________________________ DATE: ___________

Grade & Section: _______________________________________ SCORE: __________

Multiple Choice
1. The purchase account normally has a debit balance. There are instances wherein
goods debited to purchase account are returned for some reasons. It is proper to
credit the amount returned to
a. Purchase account
b. Purchase discount
c. Purchase returns and allowances
d. None of the above
2. To encourage promise payment of account, the seller offers a discount on the
invoice price. To take up the discount
a. Purchase account is credited
b. Purchase discount is credited
c. Purchase return and allowances is credited
d. None of the above
3. If the buyer pays his account within the discount period, he is granted the cash
discount. The effect is that the cash settlement would be
a. Lower than the invoice price
b. Higher than the invoice price
c. No change
d. None of the above
4. The term of purchase 2/10 means that 2% discount will be allowed if the
merchandise is paid within
a. 30 days
b. 365 days
c. 6 months
d. 10 days
5. Referring to question 4, if the buyers pays within 10 days, the buyer is entitled to
a discount of
a. 2%
b. 1%
c. 10%
d. No discount

Purchase Transactions
1. Purchase of merchandise with cash
a. Merchandise is purchased for cash, P35,000.

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b. Merchandise listed at P50,000, subject to a trade discount o 10%, is

purchased for cash.
2. Purchase of merchandise on account with credit terms:
a. Merchandise is purchased on account, credit terms 2/10, n/30, P40,000
b. Merchandise is purchased on account, credit terms 3/10, n/30, P28,000.
c. Payment is made on invoice (a within the discount period.
d. Payment is made on invoice (b too late to receive the cash discount.
3. Purchase of merchandise on account with return of merchandise:
a. Merchandise is purchased on account, credit terms 2/10, n/30, P56,000
b. Merchandise is returned for credit before payment is made, P6,000.
c. Payment is made within the discount period.
4. Purchase of merchandise with Transportation In:
a. Merchandise is purchased on account P38,000 excluding transportation
charges of P800. Terms of the sale were FOB shipping point.
b. Payment is made for the cost of merchandise and the transportation charge.
Required:
Using T-accounts for Cash, Accounts Payable, Purchases, Purchases Returns and
Allowances, Purchases Discounts, and Transportation In, enter the above purchase
transactions. Identify each transaction with its corresponding letter.

Answer Key

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 SENIOR HIGH SCHOOL

Trade and Cash Discount Calculations:

On June 1, 2018, HDC Farm Products sold merchandise with ₱120,000 list price.

Trade Discount Credit Terms Date Paid

A 30% 2/10, n/30 June 8
B 40% 1/10, n/30 June 15
C - 2/10, n/30 June 11
D 20% 1/15, n/30 June 14
E 40% n/30 June 28

Required:

For each of the sales terms, determine the following: (10 points)
3. The amount recorded as a sale
4. The amount of cash received

Answer:

Sales Cash
Trade Discount Sale Price
Discount Received

36,000.00 84,000.00 2% 82,320.00

48,000.00 72,000.00   72,000.00

- 120,000.00 2% 117,600.00

24,000.00 96,000.00   96,000.00

48,000.00 72,000.00   72,000.00

References

 Ballada, W. Accounting Fundamentals Made Easy; DomDane Publishers & Made

Easy Books, 2019
 https://courses.lumenlearning.com/sac-finaccounting/chapter/the-account-
needed-for-a-merchandising-business/
 Arganda, A.M. Accounting Principles 1 Textbook/Workbook;
National Bookstore, 2007

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