Perpetual General Journal

Question

Sold merchandise to cornerstone co. for $3,400 under credit terms of 2/10 , n/60, FOB shipping point. The merchandise had cost $2,100

How should this be answered by entering into Journal Entries

Answer 1

Darrell,

When I mentor my students, I offer the chance for them to either provide the answer themselves or allow me to display my solution on an Excel spreadsheet which I screen share. I send a copy of my spreadsheet with all my notes after (or during) our class so they have a reminder of our discussion and its content.

What I share with my students is to read the last sentence of any multiple choice, essay, or problem seeking a numeric solution (e.g. all accounting problems!) before reading the situation facts. 

Too many non-essential items may be provided which may waste your valuable time during an actual exam. After determining what the question is – then read the preceding situation facts (all the stuff before the question asked in the last sentence). This technique should sharpen your problem-solving skills and allow you to focus on the actual question – because you will have read the last sentence twice!

Let’s discuss this journal entry and the business treatment of its credit terms. 

If this sale had been made in ‘the real world’ on the actual date of sale several unknowns would exist. Will the seller collect? Will the debtor pay within 10 days (e.g. 2/10, net 60) to receive any anticipated discount? Will the debtor pay the balance due within sixty days? 

The terms of shipping, ‘FOB shipping point’, refers to when will the title to the inventory transfer? At point of shipment, as in this case, or at ‘FOB destination point’? The title transfer means very little unless the product is lost, damaged, or stolen during shipment. This question didn’t provide any facts regarding a need to address freight terms.

To address the 2% sales discount, nothing should be recorded at point of sale re potential discount to be taken or missed. Only upon account collection will the discount be determined and applied. As far as shipping terms, these also do not matter - nor does the $2,100 merchandise cost.

A/R                                                              3,400

Sales                                                                        3,400

Record sale to Cornerstone Co. Credit sale with terms 2/10, n/60. FOB Shipping Point.

Cost of Goods Sold                                       2,100

Cash (or Accounts Payable or Inventory)                 2,100

Record cost of goods sold to Cornerstone Co.

This second entry is presumptuous since the facts don’t state if the purchase was paid in cash or via on account. It also doesn’t state if the goods sold were pulled from inventory (thus Inventory account would have been credited), presuming the goods had been paid for earlier. 

I offer the second journal entry to share with you that the omission of facts leads to the lack of any superior problem-solving ability. Again, if you were my student, I would encourage you to approach the professor if this was asked on an exam. Clearly there are not enough facts to solve this- thus the professor could confirm not to answer the second part or provide the facts and clear up any missing information. 

I hope my explanation and journal entries assist you in better understanding accounting. If I may serve you as your full-time tutor, please contact me via internal messaging. Best of luck!