ACC 102: Fundamentals of Financial Accounting and Reporting

Student Activity Sheet #11

Name: ____________________________________________________________ Class number: _____

Section: ____________ Schedule:_____________________________________ Date: _____________

Recognizing discounts, returns and allowances Materials:

Lesson Objectives: Activity Sheet #11
To compute for discounts, returns and allowances on merchandising
transactions and prepare corresponding journal entries References:
Fundamentals of Financial
Accounting and Reporting by WIN
Ballada

Productivity Tip:
Having a hard time remembering some terms? Try using the active recall method, in which you make
flashcards, questions on the front and answers on the back, you test yourself, separating the ones you got
right and the ones you got wrong. You repeat the ones you got wrong until you get it right.

What do you know about Accounting? Try answering the questions below by writing your ideas
under the What I Know column. You may use key words or phrases that you think are related to
the questions. Answer the What I learned section after finishing Activity 3.

What I Know Questions: What I Learned

What are Cash Discounts?

Describe at least one

difference between Sales
Returns and Sales
Discounts.
What is FOB Shipping point?

Concept Notes (15 minutes)

Cash Discounts

Merchandise may be purchased or sold for a period of time called the credit period. Some
businesses give discounts for prompt payment called cash discounts, 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 is called the
discount period.

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #11

Cash discounts are called purchase discounts from the buyer’s viewpoint, and sales discount
from the seller’s point of view. Trade discounts encourage the buyers to purchase products
because of markdowns from the list price.

Sales Discounts

Example: Assume that Sun Traders sold merchandise on June 20 for P5,000; terms 2/10,
n/30. At the time of sale, the entry is:

June 20 Accounts receivable 5,000

Sales 5,000

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

June 30 Cash 4,900

Sales discounts 100
Accounts receivable 5,000

Sales Returns and Allowances

Buyers may return goods to the seller for credit if the sale was made on account or for cash
refund if the sale was for cash. Each return or allowance is recorded as a debit to an account
called sales returns and allowances.

Example :
May 18 Sales returns and allowances 2,500
Accounts receivable (or Cash) 2,500
To record return or allowance on
unsatisfactory merchandise.

Purchase Discounts

Merchandise purchases are usually made on credit and commonly involve purchase
discounts for early payments.

Example: Assume that Jedi Company purchased merchandise on March 10 for P6,000; terms
1/15, n/30. The entry is:

March 10 Purchases 6,000

Accounts payable 6,000

If the company paid on March 20, the entry is:

March 20 Accounts payable 6,000

Purchase discounts 60
Cash 5,940

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Purchases Returns and Allowances

Sales Returns and Allowances in the seller’s books are recorded as Purchase Returns and
Allowances in the books of the buyer.

Example:
Nov. 18 Accounts payable 2,500
Purchase returns and allowances 2,500
To record return of damaged merchandise
purchased on Nov. 2.

Activity 1
Part I (10 minutes)
Directions: Write True if the statement is correct; False if incorrect.

1. ______Cash discounts are called purchase discounts from the buyer’s point of view.
2. ______The sales discounts account is a contra-income account and will have a debit
balance.
3. ______A credit term of “2/10, n/30” means that the buyer may deduct 2% from the
invoice if payment is made within 10 days from the end of the month.
4. ______Purchase returns and allowances is a deduction from purchases.
5. ______When the terms of the sale include a sales discount, it is usually advisable for the
buyer to pay within the discount period.
6. ______The terms2/10, n/30 mean that a 2% discount is allowed on payments made over
10 but before 30 days after the invoice date.
7. ______The entry to record the return of goods from a customer would include a credit to
Sales Returns and Allowances.
8. ______The entry to record a sale of P7,500 with terms of 2/10, n/30 would include a
credit to Sales for P7,500.
9. ______The collection of a P4,000 account within the 2% discount period would result in
a credit to Accounts Receivable for P3,920.
10. ______The collection of a P5,000 account beyond the 2% discount period would result
in a debit to Sales Discounts for P100.

Part II (10 minutes)

Directions: Encircle the letter of the correct answer.

Multiple Choice
1. The entry to record a sale of P7,500 with terms of 2/10, n/30 would include a
a. Debit to Sales Discounts for P150.
b. Debit to Sales for P7,350.
c. Credit to Accounts Receivable for P7,500.
d. Credit to Sales for P7,500.

2. The collection of a P4,000 account within the 2% discount period would result in a
a. Debit to Sales Discounts for P80.
b. Debit to Accounts Receivable for P3,920.

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Student Activity Sheet #11

c. Credit to Cash for P3,920.

d. Credit to Accounts Receivable for P3,920.

3. The collection of a P5,000 account beyond the 2%discount period would result in a
a. Debit to Cash for P4,900.
b. Credit to Accounts Receivable for P5,000.
c. Credit to Cash for P5,000.
d. Debit to Sales Discount for P100.

4. Goods totaling P50,000 were purchased February 2 with terms of 2/10, n/30. Returns of
P10,000 were made on February 10. How much discount, if any, can be availed if the
invoice was paid on February 12?
a. None
b. P1,000
c. P 800
d. P 200

5. The entry to record a payment on a P15,000 account within the 2% discount period
would include a
a. Debit to Cash for P15,000.
b. Debit to Accounts Payable for P14,700.
c. Credit to Purchase Discounts for P300.
d. Credit to Accounts Payable for P15,000.

6. A P5,000 purchases on account was made. The entry to record the payment on account
after the expiration of the 2% discount period would include a
a. Debit to Accounts Payable for P5,000.
b. Debit to Purchase Discounts for P100.
c. Credit to Cash forP4,900.
d. Credit to Accounts Payable for P4,900.

7. A buyer received an invoice for P6,000 dated June 10. If the terms are 2/10, n/30 and
the buyer paid the invoice within the discount period, what amount will the seller
receive?
a. P6,000
b. P5,880
c. P4,800
d. P 120

8. The purchase discounts account is a contra account to

a. Accounts Payable
b. Sales
c. Purchases
d. Sales Discount

9. The account that appears in the chart of accounts for a merchandising entity but not for
a service entity is
a. Accounts receivable
b. Advertising expense
c. Sales returns and allowances
d. Service revenue

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #11

10. Grace Company bought merchandise for P8,000, terms 2/10, n/30. If Grace returns
P2,000 of the goods to the vendor, the entry to record the return should include a
a. Debit to Accounts Payable of P2,000.
b. Debit to Discounts Lost of P40.
c. Credit to Purchase Returns and Allowances of P1,960.
d. Debit to Purchase Returns and Allowances of P1,960.

Part III (15 minutes)

Directions: Prepare journal entries for the following transactions

Problem # 1

Some of the sales transactions of Kate Company whose credit terms are 2/10, n/30 follows:

2020
June 1 Cash sales, P150,000.
4 Sales on account, P 250,000.
7 Received returned merchandise sold on account, P 30,000.
10 Collected the amount due from credit sales.

Required:
Prepare the journal entries.

Date Account Title and explanation Debit Credit

Problem # 2

Several purchase transactions of the Matt Company are presented below. The credit terms of
the company are 3/10, n/30.

2020
Oct. 6 Purchased merchandise for cash, P300,000.
12 Purchased merchandise on account, P400,000.
15 Returned merchandise purchased on account, P 20,000.

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Student Activity Sheet #11

17 Paid supplier the amount due.

Required:
Prepare the journal entries.

Date Account Title and explanation Debit Credit

Teacher-led Discussion and/or Coaching Time (20 minutes)

1. What is the justification for the use of the accounts Sales Returns and Allowances
and Purchases Returns and Allowances?
2. Differentiate credit period from discount period.

Applying the periodic inventory system Materials:

Lesson Objectives: Activity Sheet #11
To describe the periodic inventory system
To prepare journal entries References:
Fundamentals of Financial
Accounting and Reporting by WIN
Ballada

Review I (5 minutes)

Directions: Prepare journal entries for the transactions below

1. Merchandise purchased on account, P38,000 excluding transportation charges of P800.

Terms were FOB shipping point.
2. Sold merchandise on account, P35,000 and paid for transportation costs, P2,000. Terms
were FOB destination.

1 2

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Concept Notes (5 minutes)

Periodic Inventory System

 Under a periodic inventory system, there is no continuous record of the
movement of the physical quantities of inventory on hand.
 In the system, 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, purchase
discounts, purchase returns and allowances, and transportation) 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.

Periodic Inventory System

(Illustrative Problem)
Assume that the beginning inventory for the year is P250,000 and the only
transactions for the entire year are numbers 1 to 7.The balance in the inventory account at year-
end under the periodic inventory system is P250,000.

At year-end, the physical inventory is taken, and it revealed that the actual inventory
on hand is P231,500. The year-end journal entries (numbers 8 to 10) are then made to bring the
inventory account balance into agreement with the amount of the physical inventory. When
posted to the general ledger, the ending inventory amounts to P231,500.

Sold merchandise on account costing P8,000 for P10,000; terms were 2/10, n/30:

Accounts receivable 10,000

Sales 10,000

Customer returned merchandise costing P400 that had been sold on account for P500:

Sales returns and allowance 500

Accounts receivable 500

Received payment from customer for merchandise sold above:

Cash 9,310
Sales discounts 190
Accounts receivable 9,500

Purchased on account merchandise for resale for P6,000; terms were2/10, n/30:

Purchases 6,000
Accounts payable 6,000

Paid freight on the P6,000 purchase; terms were FOB shipping point, freight collect:

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Transportation in 200
Cash 200

Returned merchandise costing P300:

Accounts payable 300

Purchase returns and allowances 300

Paid for merchandise purchased:

Accounts payable 5,700

Purchase discounts 114
Cash 5,586

To transfer the beginning inventory balance to the Income Summary account:

Income Summary 250,000
Inventory 250,000

To record the ending inventory balance:

Inventory 231,500
Income Summary 231,500

Activity 2
Part I (10 minutes)

Directions: Write True if the statement is correct; False if the statement is incorrect.

1. _____The debit balance of the inventory account in the trial balance under the periodic
inventory system is the amount of the inventory at the end of the current year.
2. _____An advantage of using the periodic inventory system is that it requires less
recordkeeping than the perpetual inventory system.
3. _____The periodic inventory system relies on a physical count of merchandise for its
balance sheet amount.
4. _____Under the periodic inventory system, cost of goods sold is treated as an account.
5. _____The periodic inventory system provides an up-to-date amount of inventory on
hand.
6. _____Under the periodic inventory system, purchases of merchandise are not recorded
in the Merchandise Inventory account.
7. _____A company would be more likely to know the amount of inventory on hand if it
used the periodic system rather than the perpetual inventory system.
8. _____Taking a physical inventory refers to making a count of all merchandise on hand at
a particular time.
9. _____When the periodic inventory system is used, a physical inventory should be taken
at the end of the fiscal year.
10. _____Under the periodic inventory system, the Purchases account is used to
accumulate all purchases of merchandise for resale.

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Part II (15 minutes)

Directions: Prepare journal entries for the following transactions

Sun Company entered into the following transactions during the month of June 2013:

June 2 Purchased 1,000 tires at a cost of P600 per tire. Terms of payment: 1/10, net 45.
4 Paid trucking firm P8,000 to ship the tires purchased on June 2.
5 Purchased 600 tires at a cost of P600 per tire. Terms of payment: 2/10,net 30.
6 Paid trucking firm P5,000 to ship the tires purchased on June 5.
7 Returned 150 of the tires purchased on June 2 because they were defective. Received
a credit on open
account from the seller.
11 Paid for tires purchased on June 2.
13 Sold 700 tires from those purchased on June 2. The selling price was P900 per tire.
Terms: 1/10, net 30.
22 Received cash from sale of tires on June 13.
30 Paid for tires purchased on June 5.

Date Account Title and Explanation Debit Credit

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Part III (10 minutes)

Directions: Journalize the following transactions. Use the answer sheet below.

1. Sold merchandise on account, P162,000. Terms: FOB destination; 2/10,n/30. Freight

charges amounted to P2,000.
2. Sold merchandise on account, P710,000. Terms: FOB shipping point; 2/10,n/30. Freight
charges amounted to P8,000.
3. Received returned merchandise in the amount of P12,000 from the sale in #1.
4. Received payment for #1transaction less returns and discounts.
5. Paid the transportation charges on the shipment in #1.
6. Received payment for #2 transaction.
7. Sold merchandise on account, P250,000. Terms:40% trade discount; FOB shipping
point; 2/10,n/30.
8. Received payment for the amount due from the transaction in # 7.

Answer Sheet

Date Account Title and Explanation Debit Credit

Teacher-led Discussion and/or Coaching Time (20 minutes)

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 ACC 102: Fundamentals of Financial Accounting and Reporting
Student Activity Sheet #11

1. Is there really a need for a physical count under the periodic inventory system? Why?
2. What does the term “inventory short or over” mean?

Applying the perpetual inventory system Materials:

Lesson Objectives: Activity Sheet #11
To describe the perpetual inventory system
To prepare journal entries References:
Fundamentals of Financial
Accounting and Reporting by WIN
Ballada

Productivity Tip:
Fond of using the active recall method? Make it even more effective by using spaced repetition. It is based
on the premise that you forget things that you study eventually, so to combat this you purposefully study at
spaced intervals in order for you to avoid forgetting the things that you studied. For example, you study your
flashcards at Day 1, then at Day 3, then at Day 7.

Concept Notes (5 minutes)

Perpetual Inventory System

 Under the perpetual inventory system, the inventory account is continuously updated
with the movement in inventory.
 Perpetually updating the inventory account requires that at the time of purchase, the
merchandise inventory account is debited.
 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.
 When a company 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.
 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 and Perpetual Inventory System Compared

(Illustrative Problem)

Assume that the beginning inventory for the year is P250,000 and transactions 1 to 7
were the only transactions for the entire year. The balance in the inventory account at year-end

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under the periodic inventory system is P231,500. The year-end balance in the inventory account
under the perpetual inventory system is P231,860.

Under the perpetual inventory system, the inventory account is increased by

purchases, transportation in and sales returns and is decreased by the cost of sales, purchase
returns and allowances and purchase discounts.
At year-end, the physical inventory is taken, and it revealed that the actual
inventory on hand is P231,500. The year-end journal entries (nos. 8 to 10) are then made to
bring the inventory account balance into agreement with the amount of the physical inventory.
When posted to the general ledger, the perpetual inventory system results in the same ending
inventory amount, P231,500.

Comparison of journal entries under the two inventory systems:

PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY

SYSTEM

1. Sold merchandise on account costing P8,000 for P10,000; terms were 2/10,n/30:

Accounts receivable 10,000 Accounts receivable 10,000

Sales 10,000 Sales 10,000

Cost of sales 8,000

Inventory 8,000

2. Customer returned merchandise costing P400 that had been sold on account for P500:

Sales returns and allowances 500 Sales returns and allowances 500
Accounts receivable 500 Accounts receivable 500

Inventory 400
Cost of sales 400

3. Received payment from customer for merchandise sold above (cash discount taken)

Cash 9,310 Cash 9,310

Sales discounts 190 Sales discounts 190
Accounts receivable 9,500 Accounts receivable 9,500

4. Purchased on account merchandise for resale for P6,000; terms were 2/10, n/30

Purchases 6,000 Inventory 6,000

Accounts payable 6,000 Accounts payable 6,000

5. Paid P200 freight on the P6,000 purchase; terms were FOB shipping point, freight
collect

Transportation in 200 Inventory 200

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Cash 200 Cash 200

6. Returned merchandise costing Php300

Accounts payable 300 Accounts payable 300

Purchase returns and Inventory 300
Allowances 300

7. Paid for merchandise purchased

Accounts payable 5,700 Accounts payable 5,700

Purchase discounts 114 Inventory 114

Cash 5,586 Cash 5,586

8. To record the ending inventory balance

Income Summary 250,000

Inventory 250,000 No entry required

9. To record ending inventory balance

Inventory 231,500 No entry required

Income Summary 231,500

10. To adjust the ending perpetual inventory balance for the shrinkage during the year

Cost of sales 360

No entry required Inventory 360

Activity 3
Part I (10 minutes)

Directions: Write True if the statement is correct or False if it is incorrect.

1. ________The perpetual inventory system requires recording the cost of each sale as it
occurs.
2. ________There is no need for a physical inventory count in the perpetual inventory
system.
3. ________A physical inventory is usually taken at the end of the accounting period.
4. ________A company would be more likely to know the amount of inventory on hand if it
used the periodic inventory system rather than the perpetual inventory system.
5. ________Under the perpetual inventory system, the cost of merchandise is debited to
Merchandise Inventory at the time of purchase.
6. ________Under the perpetual inventory system, the account Cost of Goods Sold would
not be used.
7. ________Under the perpetual system, in addition to making the entry to record a sale, a
company would debit Cost of Goods Sold and credit Merchandise Inventory.
8. ________The entry to record a purchase return under the perpetual inventory system
would include a credit to Merchandise Inventory.

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 ACC 102: Fundamentals of Financial Accounting and Reporting
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9. ________In addition to making the entry to record a sales return under the perpetual
inventory system, a company would debit Cost of Goods Sold and credit Merchandise
Inventory.
10. ________The perpetual inventory system is used most commonly by companies that
sell low-priced, high-volume merchandise.

Part II (15 minutes)

Directions: Prepare journal entries for the following transactions

Diamond Company engaged in the following transactions in May:

May 1 Sold merchandise to Mikan Company on credit; terms n/30,FOB shipping point,
P21,000.
3 Purchased merchandise on credit from Red Store, terms n/30, FOB shipping
point, P38,000.
5 Paid South Freight for freight charges on merchandise received, P290.
6 Purchased store supplies on credit from Indigo Supplies, terms n/20, P6,360.
8 Purchased merchandise on credit from Pink Trading, terms n/30, FOB shipping
point, P36,000. Pink Co. paid P200 for freight costs.
12 Returned some of the merchandise received on May 3 for credit, P6,000.
15 Sold merchandise on credit to Color Stores, terms n/30, FOB shipping point, P12,000.
17 Sold merchandise for cash, P10,000.
18 Accepted for full credit a return from Mikan Company, P2,000.
24 Paid accounts to Red Store.
25 Received full payment from Mikan Company.

Answer Sheet

Date Explanation Debit Credit

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Part III (10 minutes)

Directions: Journalize the following transactions. Use the answer sheet below.

9. Sold merchandise on account costing P150,000 for P162,000. Terms: 1/10, n/30.
10. Sold merchandise on account costing P650,000 for P710,000. Terms: 2/10,n/45.
11. Received returned merchandise costing P9,000 in the amount of P12,000 from the sale
in #1.
12. Received payment for #1transaction less returns and discounts.

Answer Sheet
Date Explanation Debit Credit

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 ACC 102: Fundamentals of Financial Accounting and Reporting
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Teacher-led Discussion and/or Coaching Time (20 minutes)

1. There are two acceptable inventory systems – periodic and perpetual. Distinguish
one from the other.
2. Explain the two inventory systems in terms of the journal entries from the point of
view of the seller and that of the buyer.

Work Tracker

Good Work! Did you learn something new? You are done with this session! Let’s track your
progress. Shade the session number you just completed.

Key to Corrections:

Review I
1 Purchases 38,000 2 Accounts receivable 35,000
Transportation in 800 Transportation out 2,000
Accounts 38,000 Sales 35,000
payable
Cash 800 Cash 2,000

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