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Hi
please help me with the following:Revenue includes an amount of $20 m for cash sales made through Xtol retail outlet during the year on behalf of Francais who is acting as an agent and is entitled to a commission of 10% of selling price of the goods.By 31 March 20×4 Xtol Co had remitted to Francais $15 m of the $20 m and recorded this amount in cost of sales.
i only understood the commission received. CR other income of $2000
the solution is to
DR revenue 20000
CR COS 15000
CR other income 2000
CR Trade payable 3000Hi.
The question clearly states that it is Xtol which is the agent:
“Xtol, acting as agent, is entitled to a commission of 10% of the selling price of these goods.”So Xtol could only record an income amount equal to 10% of the sale made on behalf of Francais. So, when the cash of $20m was received, Xtol could only record commission as its other income while the remaining amount would be a liability (to be transferred to Francais).
Following entries should have been made:
Dr Cash $20m
Cr Other income $2m
Cr Trade payable (Francais) $18mAnd when cash was eventually transferred to Francais, the entry should have been
Dr Trade payable (Francais) $xx
Cr Cash $xxInstead, Xtol recorded the full amount as its own revenue, i.e.
Dr Cash $20m
Cr Revenue $20mand when $15m was remitted to Francais, this was recorded as Cost of Sales i.e.
Dr Cost of Sales $15m
Cr Cash $15mIn summary:
revenue is overstated by $20m
Cost of Sales is overstated by $15m
No entry is made for either Commission income or Trade payable (Francais).I hope you can do the rest of the answer yourself.
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