1. avatar says

    Sir please for the question 4

    In October 2006 James sold some goods on sale or return terms for $2,500. Their cost to James was $1,500.
    The transaction has been treated as a credit sale in James’s financial statements for the year ended 31 October
    2006. In November 2006 the customer accepted half of the goods and returned the other half in good
    What adjustments, if any, should be made to the financial statements?
    A Sales and receivables should be reduced by $2,500, and closing inventory increased by $1,500.
    B Sales and receivables should be reduced by $1,250, and closing inventory increased by $750
    C Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory
    D No adjustment is necessary

    i don’t understand why inventory increased by $ 1500. he returned half of the goods in november, so how does it increased by 1500 and not 750 ?

      • Profile photo of John Moffat says

        Goods sold on sale or return should not be treated as sales until the customer has confirmed that he/she is keeping them. Until that happens, they have not been sold and they still belong to the seller.

        In this question, at the end of October (when the financial statements are prepared) the customer had not said that he was keeping them (it was not until November that he said he was accepting half of them).

        So….at the end of October there had been no sale at all. James was wrong to have recorded them as a sale.
        Therefore, sales and receivables need to be reduced by the full $2,500, and the inventory needs to be increased by the full $1,500.

    • Profile photo of John Moffat says

      Discount allowed of 3840 should be debited to the discounts allowed account. At the moment there is a debit on the discounts allowed account of 2960, and so if we debit with another 880 (the difference) then this account will be correct.

      Also, discount received of 2960 should have been credit to the discounts received account. At the moment there is a credit on this account of 3840, and so if we debit the account with 880 (the difference) then this balance will be correct as well.

      So…..we need to debit discounts allowed, and also to debit discounts received. Both errors will have caused the trial balance not to balance (because the original entries were wrong) and so the credit for both goes to the suspense account.

      • Profile photo of mehnoor says

        Thank you very much.

        Actually, what i did was to cancel the amount and then enter the right amount.. but it doesn’t work… i.e. debit discount received with 3840 and then debit discount allowed by 3840. And then cancel the amount on the discount allowed account which is credit discount allowed 2960 and credit discount received by 2960. And hence debiting suspense by 5920 and crediting suspense by 7680.
        Can you please tell me where i went wrong?
        However, i understood the way u did it… I just dont fathom where i went wrong…

        Thank you a lot Sir

      • Profile photo of John Moffat says

        But what you have done is correct :-)

        If you calculate the net debit or credit on each of the accounts, you end up with the same answer.

        Had your entries all been listed as one of the choices then that would have been OK, but because they were not listed then you have no choice but to work out the net debit or credit on each account.

    • avatar says

      @williamansah, in the test question 5, why is the answer C instead of A since you taught that lower closing inventory implies lower profits and higher inventory implies higher profits.
      ignore earlier question, i mean C instead of A

      • Profile photo of John Moffat says

        @williamansah, Because the goods were received on 29 June (before the year end) it was correct to include them in inventory. So the inventory figure is correct.

        However, they should have accrued for the invoice (which was not actually entered until after the year end). If they accrue for the invoice then it will make the purchases higher. This will make the profit lower (so the profit at the moment is overstated).

    • Profile photo of John Moffat says

      @rhwesley, The entry will be debit cash and credit irrecoverable debts expense account.
      (Instead, you can credit an account for irrecoverable debts recovered, but since this will appear in the income statement as a ‘negative’ expense, it is easier to simply credit irrecoverable debts expense account. The end result is the same.)

  2. avatar says

    With question four because the customer didn’t come back until after the year end can the transaction not be left as is assuming that they will be buying and a return done in the next fiancial year accounts??

    • Profile photo of John Moffat says

      @olivianyland, The sale does not actually take place until the customer informs the company that he is going to buy.

      Since he did not inform the company until November (i.e. next year), the sale did not take place until next year. At the end of this year, there has been no sale and the goods still belong to the company (and should therefore be included in the companys inventory).

      However, they have recorded the sale this year – they should not have done this and so this years statements need adjusting.

Leave a Reply