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Dog1937
Nov 4, 2013, 07:31 AM
Have a question about the following...

Annie's Fitness sells a set of free weights to a customer for which Annie's had paid $750. Which one of the following statements describes the most appropriate accounting for the transaction?

A.Debit cost of goods sold expense $750; credit cash $750
B.Debit inventory $750; credit cost of goods sold expense $750
C.Debit cost of goods sold expense $750; credit inventory $750
D.Debit inventory $750; credit accounts payable $750

I believe the answer is C. Am I headed in the right direction?

Thanks

pready
Nov 4, 2013, 07:50 AM
You are correct.

The original entry to record the purchase of the weights would have been a Debit to Inventory and a Credit to Cash or Accounts Payable.

Now to record to cost of weights being sold would be a Debit to Cost of Goods Sold (an Expense account) and a Credit to Inventory. This reduces your inventory available for sale and will increase your Cost of Goods Sold amount.

A is incorrect because cash is not affected in this transaction.

B is incorrect because inventory is being decreased and a Debit would increase inventory. Also COGS is being increased and a Credit would decrease COGS.

D. is incorrect because inventory is being decreased and a Debit would increase inventory. Also Accounts Payable is not affected in this transaction. Accounts Payable would only be Credited if Annie's Fitness purchased the weights on credit, not when Annie's Fitness sold the weights to a customer.

Dog1937
Nov 4, 2013, 08:29 AM
Perfect. I appreciate the prompt reply and explanation!

Thanks!