E6-14 Analyzing and Recording Sales and Gross Profit with Sales Returns [LO 6-4, LO 6-6] Cycle Wholesaling sold merchandise on account, with terms n/60, to Sarah’s Cycles on February 1 for $700 (cost of goods sold of $450). On February 9, Sarah’s Cycles returned to Cycle Wholesaling one-quarter of the merchandise from February 1 (cost of goods returned was $110). Cycle Wholesaling uses a perpetual inventory system, and it allows returns only within 15 days of initial sale. Required: 1. to 3. Prepare the journal entry to record the sales, Goods returned on February 9 and Cash collected on March 2. 4. Calculate the gross profit percentage for the sale to Sarah’s Cycles. g

Answer and Explanation:

The journal entries are shown below:

Accounts Receivable $700

          To Sales Revenue $700

(Being the sales revenue is recorded)

Cost of Goods Sold $450

        To Inventory $450

(being the cost of goods sold is recorded)

Sales Revenue $175 ($700 × 1 ÷ 4)

            To Accounts Receivable $175

(Being return inventory is recorded)

Inventory $110

   To Cost of Goods Sold $110

(Being return inventory is recorded)

Cash $525

       To Accounts Receivable $525

(being cash received)

Now the gross profit percentage is

Gross Profit Percentage35.23%

= (Gross Profit ÷ Net Income)  

= ($700 - $175 - $450 + 110) ÷ ($700 - $175)

= 35.23%

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