[Talia59]

Turnadot & Sons is a small wholesaler of decorative cast iron objects. The following events,
related to a special customer order, occur as described below:
 August 5, 2005: Turnadot receives the special order for 200 outdoor planters at a selling
price of $50 each, including delivery at a future convenient time and location. The
customer, with whom Turnadot has had a long term, trouble-free relationship, pays
$3,000 as a deposit and agrees to pay the rest on delivery. Turnadot immediately orders
$4,000 worth of planters from its supplier and pays a $1,000 deposit for them.
 August 27, 2005: Turnadot pays $3,000 balance due to the supplier upon delivery of the
planters to its warehouse.
 September 5, 2005: The customer calls for delivery of the planters, and pays the balance
of $7,000 when they arrive at the customer site.
16. On August 5, 2005, which one of the following accounting entries, related to the $1,000
deposit paid to the supplier for the planters, should be recorded in Turnadot's financial
accounting system?

A. Debit cost of goods sold $1,000; credit revenues $1,000
B. Debit the current asset 'advances to suppliers' $1,000; credit cash $1,000
C. Debit cost of goods sold $4,000; credit cash $1,000; credit accounts payable $3,000
D. Debit inventory $1,000; credit cash $1,000

**My answer is B: Debit the current asset advances to suppliers and credit cash $1,000 because those are the only two things Turnadot is doing at this time on Aug 5th

On September 5, 2005, when the planters are delivered and the balance of $7,000 due from the customer is collected, which one of the following journal entries best reflects the
economic impact of the special order on Turnadot's financial condition?
A. Dr. Cash 7,000, Dr. Advances from customers (liability) 3,000, Cr. Revenues 10,000
and Dr. COGS 4,000, Cr. Inventory 4,000
B. Dr. Cash 7000, Cr. Revenues 7,000 and Dr. COGS 4,000, Cr. Inventory 4,000
C. Dr. Cash 7,000, Cr. Revenues 7,000 and Dr. Inventory 4,000, Cr. COGS 4,000

**My answer is B: Debit cash 7000 because you are receiving the cash. Credit the revenues by 7,000 because an increase in revenues is a credit of revenues. Debit Cogs 4,000 because you have officially sold the goods so it is time to record that and credit the merchandise inventory because that is the matching journal entry to the debit of the cogs.

18. What is the dollar gross margin earned by Turnadot on the special order for 200 planters?
A. $7,000
B. $6,000
C. $2,000
D. $9,000

***My answer is B: 10,000 (revenue) - 4,000 (COGS) = 6,000 ($gross margin)

Can someone please tell me if I came to my answers in the correct way? Thx!

[ArcSine]

Yes, No, Yes.

Revisit the second question. With your proposed answer (B), two problems arise:

• Your Revenues are showing only 7K, when in fact the total sale was for 10K. Note that the entire 10K was earned upon shipment of the units.

• Your still have a credit balance of 3K in the liability account Advances From Customers. This suggests you still are obligated to the customer for 3,000. This is not the case, however, since upon fulfillment of the order (Sep 5 delivery) you have earned not only the 7K the customer paid in cash at such time, but also the 3K cash the customer had previously given you as an advance payment.

Put another way, on Sep 5 when you shipped the goods, the 3,000 of the customer's money you had been holding stopped being a liability owed to the customer, and immediately became earned revenue. A bit of reflection on this fact shows that the two problems I've noted above are in fact the same problem expressed two different ways.

[Talia59]

Yes, No, Yes.

Revisit the second question. With your proposed answer (B), two problems arise:

• Your Revenues are showing only 7K, when in fact the total sale was for 10K. Note that the entire 10K was earned upon shipment of the units.

• Your still have a credit balance of 3K in the liability account Advances From Customers. This suggests you still are obligated to the customer for 3,000. This is not the case, however, since upon fulfillment of the order (Sep 5 delivery) you have earned not only the 7K the customer paid in cash at such time, but also the 3K cash the customer had previously given you as an advance payment.

Put another way, on Sep 5 when you shipped the goods, the 3,000 of the customer's money you had been holding stopped being a liability owed to the customer, and immediately became earned revenue. A bit of reflection on this fact shows that the two problems I've noted above are in fact the same problem expressed two different ways.

Ahhh so would I be correct in choosing option A? I would do so to account for the debit in advances from customers (liability) correct?

[ArcSine]

Now you got it.

[Talia59]

Now ya got it.

Thank you!

[newacctstudent]

For question 1, why don't you show the deposit of $3,000 anywhere?