Chapter 5 Cases ACCT 1301
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Chapter 5 Cases
Case 1 Party Mart and Koozie Distributors
On October 5, 2012, Party Mart (a Texas-sized merchandising
company) purchased $5,000 of Halloween koozies from Koozie
Distributors. Koozie Distributors had marked the koozies up by 100%
before selling them to Party Mart, and Party Mart is going to sell them
to its customers at a price that generates a 75% return. The terms of
sale were 2/10, n/30 and Party Mart was responsible for paying
shipping costs of $200. Both companies use a perpetual inventory
system.
Party Mart received the goods on October 8 and determined that its
rookie purchasing manager had been a bit overzealous. As a result, on
October 10, Party Mart returned 20% of the koozies to Koozie
Distributors.
On October 12, Party Mart sent a check to Koozie Distributors to cover
the invoice balance, minus the purchase discount. On October 21,
Party Mart sold 60% of its Halloween koozie inventory for cash to a
demented (but loaded) parent who wanted little Johnny to have the
Best. Halloween. Party. Ever. Assume no haggling occurred such that
Party Mart did, in fact, realize a 75% return on the book value of its
inventory.
What is Koozie Distributors Gross Profit percentage after accounting
for all of these events? Im not asking for journal entries, but getting
an answer without using them would be tough.
Accounts Receivable 5,000
Sales Revenue
5,000
CGS
2,500
Inventory
2,500
Sales R&A
1,000
Accounts Receivable
1,000
Inventory
500
CGS
500
Cash
3,920
Sales Discount
80
Accounts Receivable
4,000
From all of these entries, you have the following:
Chapter 5 Cases ACCT 1301
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Sales
5,000
Sales R&A (1,000)
Sales Discount
(80)
(1,080)
Net Sales
3,920
Cost of Goods Sold
2,000
Gross Margin
1,920
1,920 / 3,920 = 48.98%
So Gross Profit percentage =
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Case 1 Party Mart and Koozie Distributors
(continued)
What would be the balance in Party Marts Koozie Inventory
account on October 22? Again, Im not asking for journal entries, but
getting an answer without using them would be tough. When you
get to recording the sales entry, be careful.
Inventory
5,000
Accounts Payable
200
Inventory
5,000
Accounts Payable 1,000
4,000
Inventory
1,000
80
200
Cash
Accounts Payable
Inventory
Cash
3,920
So after making these four entries, the balance in the inventory
account is 4,120.
If you sell 60% of this inventory, the cost will be 2,472 (4120*.6) and
the sales revenue will be 4,326 (4120*.6*1.75), reflecting a 75%
markup.
Cash
4,326
2,472
Sales Revenue
2,472
Cost of Goods Sold
4,326
Inventory
After all of these entries, the balance in the inventory account
should be 1,648.
How would all of these transactions (combined) impact Party Marts
net income?
Sales CGS = 1,854
Is there anything weve forgotten about in accounting for all of the
events for Party Mart? I dont think your book ever talks about this
issue specifically, but use your head. Map out the sequence of
events and see if anything pops up.
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Theres no specific mention of accounting for the shipping costs
associated with returning the merchandise to Koozie Distributors.
Textbooks always ignore this issue.
What do you think? The credit is obvious (cash). But whats the
debit?
Might be reasonable to increase the carrying cost of the existing
inventory, since returning inventory does increase your holding cost.
I would tend to vote along the lines of recording it as Freight-Out
(an operating expense), though.
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Case 1 Party Mart and Koozie Distributors
(continued)
Suppose Party Mart makes the following entries on October 31.
What happened? Be specific.
Cash
1,236
Sales Revenue
824
1,236
Cost of Goods Sold
824
Inventory
With a previous ending inventory balance of 1,648, theyve
obviously sold half of the inventory. Did they make as much as
theyd hoped? No, because the markup implicit in the sales price is
only 50% (not 75%). So they sold 20% of the inventory at a
markup of 50%.
Assume the data below (stolen from P5-3A) come from Koozie
Distributors December 31, 2012 trial balances.
What is Koozie Distributors operating income for the year?
133,100 (gross margin operating expenses)
What will Koozie Distributors report as Retained Earnings in its
12/31/2012 balance sheet?
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169,100
