Cycle Wholesaling sold merchandise on account, with terms n/60, to Sarah's Cycles on February 1 for $1,250 (cost of goods sold of $725). On February 9, Sarah's Cycles returned to Cycle Wholesaling one-quarter of the merchandise from February 1 (cost of goods returned was $195). Cycle Wholesaling uses a perpetual inventory system, and it allows returns only within 15 days of initial sale. Required:

1. 1-Feb

Dr Accounts receivable 1,250

Cr Sales revenue 1,250

2 .1-Feb

Dr Cost of goods sold 725

Cr Inventory 725

3. 9-Feb

Dr Sales revenue 312.50

Cr Accounts Receivable 312.50

4. 9-Feb

Dr inventory 195

Cr Cost of goods sold 195

5.2-Mar

Dr Cash 937.50

Cr Accounts receivable 937.50

B. Gross profit percentage=43.47%

Explanation:

A. Preparation of the journal entries to record sales , goods return on February 9 and Cash collected on March 2

1 to 3 Preparation of the journal entries to record sales

1. 1-Feb

Dr Accounts receivable 1,250

Cr Sales revenue 1,250

2 .1-Feb

Dr Cost of goods sold 725

Cr Inventory 725

3. 9-Feb

Dr Sales revenue 312.50

Cr Accounts Receivable 312.50

(1/4*1,250)

4. Preparation of the journal entry to record goods return on February 9

9-Feb

Dr inventory 195

Cr Cost of goods sold 195

5. Preparation of the journal entry to record collected on March 2

2-Mar

Dr Cash 937.50

Cr Accounts receivable 937.50

(1,250-312.50)

B. Calculation for the gross profit percentage for sales to Sarah's Cycles

First step is to find the gross profit

Net sales 937.50

Less Cost of goods sold (530)

(725-195)

Gross profit 407.50

Now let calculate the Gross profit percentage using this formula

Gross profit percentage =Gross profit/Sales

Let plug in the formula

Gross profit percentage=407.50/937.50

Gross profit percentage=0.4347*100

Gross profit percentage=43.47%