Zach Corp. pays commissions to its sales staff at the rate of 3% of net sales. Sales staff are not paid salaries but are given monthly advances of $15,000. Advances are charged to commission expense, and reconciliations against commissions are prepared quarterly. Net sales for the year ended March 31 were $15,000,000. The unadjusted balance in the commissions expense account on March 31 was $400,000. March advances were paid on April 3. In its income statement for the year ended March 31 what amount should Zach report as commission expense?

A. $465,000 B. $450,000 C. $415,000 D. $400,000

Explanation

Choice "B" is correct. The commission expense is 3% of net sales of $15,000,000, or $450,000. An adjustment would be required on March 31 to bring the expense to this amount.

Choice "A" is incorrect. Advances should not be considered as expenses at year-end. Charging an expense subject to adjustment is permitted, but Zach should adjust the expense to 3% of net sales of $15,000,000.

Choice "C" is incorrect. Advances should not be considered as expenses at year-end. Charging an expense subject to adjustment is permitted, but Zach should adjust the expense to 3% of net sales of $15,000,000.

Choice "D" is incorrect. The unadjusted balance in the commissions expense account is not the amount reported as commission expense. Net sales for the period must be considered. "How to make journal entries, based on which principles, and what is the impact on financial statements?"