Cycle Wholesaling sold merchandise on account, with terms n/60, to Sarah's Cycles on February 1 for $550 (cost of goods sold of $375). On February 9, Sarah's Cycles returned to Cycle Wholesaling one-quarter of the merchandise from February 1 (cost of goods returned was $85). Cycle Wholesaling uses a perpetual inventory system, and it allows returns only within 15 days of initial sale.

The journal entries are shown below:

On February 1

Account receivable - Sarah's Cycles A/c Dr $550

To Sales $550

(Being the goods are sold on credit)

Cost of goods sold A/c Dr $375

To Merchandise Inventory A/c $375

(Being goods are sold at cost)

On February 9

Sales return and allowance A/c Dr $137.50 ($550 : 4)

To Accounts receivable - Sarah's Cycles $137.50

(Being sales return is recorded)

Merchandise Inventory A/c $85

To Cost of goods sold A/c Dr $85

(Being sales return is recorded)

On March 2

Cash A/c Dr $412.50 ($550 - $137.50)

To Accounts receivable - Sarah's Cycles $412.50

(Being cash is received)

The net profit margin is

= (Net sales - Cost of goods sold) : Net sales

= ($412.50 - $290) : ($412.50)

= 29.69%

The cost of goods sold

= $375 - $85

= $290