Adams Liquidation Warehouse sells goods to retail stores and extends credit terms of 1/10, n/30. Adams has a stated policy of no returns, all sales are final. The company uses the perpetual inventory system and the contract-based approach for revenue recognition. At the May year end, the balance in the Merchandise Inventory account was $8,000. During the month of June (the first month of the new fiscal year), the following merchandising transactions occurred:

June 3 Purchased $4,500 of merchandise from Wagner Company, terms n/30, FOB destination.

4 The correct company paid $75 freight on the June 3 purchase.

6 Received a $250 credit on account from Wagner Company because some of their merchandise was damaged. Adams kept the merchandise and will mark down the selling price of the goods an additional 50%.

12 Sold $6,100 of merchandise to Gustava Retail Store, terms 1/10, n/30, FOB shipping point. The goods cost Adams $3,355.

14 Purchased $9,600 of merchandise from Adrian Plastics, terms 2/10, n/30, FOB shipping point.

15 Paid $115 freight to Ame Trucking for merchandise purchased from Adrian Plastics on June 14.

20 Sold $4,000 of merchandise to Albin Department Store, terms 1/10, n/30, FOB destination.

The merchandise cost Adams $2,200.

21 Paid $95 to Ame Trucking to ship the merchandise sold on June 20.

29 Collected the amount due from Albin Department Store for the sale on June 20.

30 Paid Wagner Company the amount owing from the purchase on June 3.

30 Collected the amount due from Gustava Retail Store for the sale on June 12.

Instructions

a. Record the transactions for the month of June for Adams Liquidation Warehouse. Purchase transactions are recorded the same way when using the contract-based approach as when using the earnings approach.

b. Create T accounts for Merchandise Inventory and Sales. Post the opening balance for Merchandise Inventory and August’s transactions, and calculate the June 30 balances.

c. Calculate the gross profit and the gross profit margin for Adams Liquidation for the month of June.

Adams Liquidation Warehouse’s management is contemplating whether to discontinue the sales discounts offered to its customers. Explain to management the advantages of providing a discount for prompt payment to customers and include in your answer the impact it may have on cash flows.