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CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
CHAPTER STUDY OBJECTIVES
1.
Identify the differences between a service enterprise and a merchandiser.
Because of
inventory, a merchandiser has sales revenue, cost of goods sold, and gross profit. To account
for inventory, a merchandiser must choose between a perpetual inventory system and a
periodic inventory system.
2.
Explain the entries for purchases under a perpetual inventory system.
The Merchandise
Inventory account is debited for all purchases of merchandise, freight-in, and other costs, and
it is credited for purchase discounts and purchase returns and allowances.
3.
Explain the entries for sales revenues under a perpetual inventory system.
When
inventory is sold, Accounts Receivable (or Cash) is debited and Sales is credited for the
selling price
of the merchandise. At the same time, Cost of Goods Sold is debited, and
Merchandise Inventory is credited for the cost
of the inventory items sold.
4.
Explain the steps in the accounting cycle for a merchandiser.
Each of the required steps
in the accounting cycle for a service enterprise applies to a merchandiser. A work sheet is
again an optional step. Under a perpetual inventory system, the Merchandise Inventory
account must be adjusted to agree with the physical count.
5.
Distinguish between a multiple-step and a single-step income statement.
A multiple-
step income statement shows numerous steps in determining net income, including
nonoperating activities sections. In a single-step income statement, all data are classified
under two categories, revenues or expenses, and net income is determined by one step.
6.
Explain the computation and importance of gross profit.
Gross profit is computed by
subtracting cost of goods sold from net sales. Gross profit represents the merchandising profit
of a company. The amount and trend of gross profit are closely watched by management and
other interested parties.
7.
Determine cost of goods sold under a periodic inventory system.
The steps in
determining cost of goods sold are (a) record the purchases of merchandise, (b) determine
the cost of goods purchased, and (c) determine the cost of goods on hand at the beginning
and end of the accounting period.
a
8.
Prepare the entries for purchases and sales of inventory under a periodic inventory
system.
In recording purchases, entries are required for (a) cash and credit purchases, (b)
purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording
sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and
(c) sales discounts.
a
9.
Prepare a work sheet for a merchandiser.
The steps in preparing a work sheet for a
merchandiser are the same as they are for a service company. The unique accounts for a
merchandiser are Merchandise Inventory, Sales, Sales Returns and Allowances, Sales
Discounts, and Cost of Goods Sold.
Test Bank for Financial Accounting, Fifth Edition
TRUE-FALSE STATEMENTS
1.
Retailers and wholesalers are both considered merchandisers. T
2.
The steps in the accounting cycle are different for a merchandiser than for a service
enterprise. F
3.
Sales minus operating expenses equals gross profit. F
4.
Under a perpetual inventory system, detailed records of the cost of each purchase and
sale are continuously updated. T
5.
Periodic inventory systems have traditionally been used by companies that sell
merchandise with high unit values such as automobiles and major appliances. F
6.
Freight terms of FOB Destination means that the seller pays the freight costs. T
7.
Freight costs incurred by the seller on outgoing merchandise are an operating expense to
the seller. T
8.
Sales revenues are earned during the period cash is collected from the buyer. F
9.
The Sales Returns and Allowances account and the Sales Discount account are both
deducted from Sales Revenue to arrive at Net Sales on the Income Statement. T
10.
The revenue recognition principle requires merchandisers to recognize sales revenues at
the point of sale. T
11.
A sales allowance is a reduction given by a seller for prompt payment of a credit sale. F
12.
To grant a customer a sales return, the seller credits Sales Returns and Allowances. F
13.
A company's unadjusted balance in Merchandise Inventory will usually not agree with the
actual amount of inventory on hand at year-end. T
14.
For a merchandiser, all accounts that affect the determination of income are closed to the
Income Summary account. T
15.
A merchandiser has different types of adjusting entries than a service company. T
16.
Operating expenses include cost of goods sold, salaries expense and depreciation
expense. F
17.
Selling expenses relate to general operating activities such as personnel management. F
18.
Net sales appears on both the multiple-step and single-step forms of an income
statement. T
19.
A multiple-step income statement provides users with more information about a
company’s income performance. T
20.
The multiple-step form of income statement is easier to read than the single-step form. F
5 - 2
Accounting for Merchandising Operations
21.
Rent revenue and rent expense are reported under other revenues and other expenses in
a multiple-step income statement. F
22.
Gain on sale of equipment and interest expense are reported under other revenues and
gains in a multiple-step income statement. F
23.
The gross profit section of a multi-step income statement includes net revenues, cost of
goods sold and other operating expenses. F
24.
In a multiple-step income statement, income from operations excludes other revenues and
gains and other expenses and losses. T
25.
A single-step income statement reports all revenues, both operating and other revenues
and gains, at the top of the statement. T
26.
If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
T
27.
Gross profit represents the merchandising profit of a company. T
28.
Gross profit is a measure of the overall solvency of a company. F
29.
Gross profit rate is computed by dividing cost of goods sold by net sales. F
30.
Purchase Returns and Allowances and Purchase Discounts are both contra-revenue
accounts. F
31.
Freight-in is an account that is subtracted from the Purchases account to arrive at cost of
goods purchased. F
a
32.
Under a periodic inventory system, the acquisition of inventory is charged to the
Purchases account. T
a
33.
Under a periodic inventory system, freight-in on merchandise purchases should be
charged to the Inventory account. F
a
34.
In a work sheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial
balance (Dr.) and income statement (Dr.) columns. T
35.
Cost of goods sold is an operating expense for a merchandising company. F
36.
Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are
more readily determined. T
37.
The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the
first 10 days of the next month. F
38.
The matching principle requires that the cost of the merchandise be matched against the
sales revenue from the merchandise. T
39.
Sales returns and allowances and sales discounts are both contra-revenue accounts and
have normal credit balances. F
5 - 3
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Test Bank for Financial Accounting, Fifth Edition
40.
A merchandiser using a perpetual inventory system will usually need to make an adjusting
entry to ensure that the recorded inventory agrees with physical inventory count. T
41.
If a merchandiser sells land at more than its cost, the gain should be reported in the sales
revenue section of the income statement. F
42.
The major difference between the balance sheets of a service company and a
merchandiser is inventory. T
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
1.
T
7.
T
13.
T
19.
T
25.
T
31.
F
37.
F
2.
F
8.
F
14.
T
20.
F
26.
T
a
32.
T
38.
T
3.
F
9.
T
15.
T
21.
F
27.
T
a
33.
F
39.
F
4.
T
10.
T
16.
F
22.
F
28.
F
a
34.
T
40.
T
5.
F
11.
F
17.
F
23.
F
29.
F
35.
F
41.
F
6.
T
12.
F
18.
T
24.
T
a
30.
F
36.
T
42.
T
MULTIPLE CHOICE QUESTIONS
43.
Income from operations is gross profit less
a.
administrative expenses.
b.
operating expenses.
c.
other expenses and losses.
d.
selling expenses.
44.
An enterprise which sells goods to consumers is known as a
a.
proprietorship.
b.
corporation.
c.
retailer.
d.
service firm.
45.
Which of the following would not
be considered a merchandiser?
a.
house cleaning business
b.
drugstore
c.
book store
d.
grocery store
46.
A merchandiser that sells directly to consumers is a
a.
retailer.
b.
wholesaler.
c.
broker.
d.
service enterprise.
47.
Two categories of expenses for merchandisers are
a.
cost of goods sold and financing expenses.
b.
operating expenses and financing expenses.
c.
cost of goods sold and operating expenses.
d.
sales and cost of goods sold.
5 - 4
Accounting for Merchandising Operations
48.
The primary source of revenue for a wholesaler is
a.
investment income.
b.
service fees.
c.
the sale of merchandise.
d.
the sale of fixed assets the company owns.
49.
Sales revenue less cost of goods sold is called
a.
gross profit.
b.
net profit.
c.
net income.
d.
marginal income.
Use the following information to answer questions 50 – 52.
During 2006, Salon Enterprises generated revenues of $60,000. Their expenses were as follows:
cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment
of $2,000.
50.
Salon’s gross profit is
a.
$60,000
b.
$30,000
c.
$18,000
d.
$16,000
51.
Salon’s operating income is
a.
$60,000
b.
$30,000
c.
$18,000
d.
$12,000
52.
Salon’s net income is a.
$60,000
b.
$30,000
c.
$18,000
d.
$16,000
53.
Detailed records of goods held for resale are not
maintained under a
a.
perpetual inventory system.
b.
periodic inventory system.
c.
double entry accounting system.
d.
single entry accounting system.
54.
A perpetual inventory system would likely be used by a(n)
a.
automobile dealership.
b.
hardware store.
c.
drugstore.
d.
convenience store.
55.
Under a perpetual inventory system, purchases of merchandise for sale are recorded in an account
called:
a.
Inventory
b.
Purchases.
c.
Cost of goods sold.
d.
Finished goods.
5 - 5
Test Bank for Financial Accounting, Fifth Edition
56.
In a perpetual inventory system, cost of goods sold is recorded
a.
on a daily basis.
b.
on a monthly basis.
c.
on an annual basis.
d.
with each sale.
57.
In a periodic inventory system, the cost of goods sold is determined:
a.
each time a sale occurs.
b.
each time a purchase occurs.
c.
at the end of the accounting period.
d.
None of the above.
58.
Reymeyer Inc. uses a perpetual inventory system. A purchase of inventory on account for $2,000
will be recorded with the following journal entry:
a.
debit Merchandise Inventory, $2,000; credit Accounts Payable, $2,000.
b.
debit Purchases, $2,000; credit Accounts Payable, $2,000.
c.
debit Supplies, $2,000; credit Cash, $2,000.
d.
debit Cost of Goods Sold, $2,000; credit Merchandise Inventory, $2,000.
59.
A purchaser, dissatisfied with merchandise received, may return goods to the seller for credit.
From the standpoint of the seller, this transaction is known as a:
a.
purchase return.
b.
sales return.
c.
sales allowance.
d.
purchase allowance.
60.
The Merchandise Inventory account is used in each of the following except
the entry to record
a.
goods purchased on account.
b.
the return of goods purchased.
c.
payment of freight on goods sold.
d.
payment within the discount period.
61.
Meyer Company. uses a perpetual inventory system. Meyer purchased inventory on account for
$1,000. The credit terms are 2/10, n/60. The purchase will be recorded with the following journal
entry:
a.
debit Merchandise Inventory, $1,000; credit Accounts Payable, $1,000.
b.
debit Purchases, $1,000; credit Accounts Payable, $1,000.
c.
debit Merchandise Inventory, $980; credit Accounts Payable, $980.
d.
debit Cost of Goods Sold, $1,020; credit Merchandise Inventory, $1,020.
62.
If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a.
Merchandise Inventory account will be increased.
b.
Merchandise Inventory account will not be affected.
c.
seller will bear the freight cost.
d.
carrier will bear the freight cost.
63.
Freight costs paid by a seller on merchandise sold to customers will cause an increase
a.
in the selling expense of the buyer.
b.
in operating expenses for the seller.
c.
to the cost of goods sold of the seller.
d.
to a contra-revenue account of the seller.
5 - 6
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Accounting for Merchandising Operations
64.
Bryan Company purchased merchandise from Cates Company with freight terms of FOB shipping
point. The freight costs will be paid by the
a.
seller.
b.
buyer.
c.
transportation company.
d.
buyer and the seller.
65.
Flynn Company purchased merchandise inventory with an invoice price of $3,000 and credit terms
of 2/10, n/30. What is the net cost of the goods if Flynn Company pays within the discount period?
a.
$3,000.
b.
$2,940.
c.
$2,700.
d.
$2,760.
66.
Stine Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10,
n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit
terms?
a.
10%
b.
12%
c.
18%
d.
36%
67.
Morton Company uses a perpetual inventory system. On December 1, 2006, the company
purchased inventory on account for $9,000. The credit terms are 2/10, n/30. If Morton pays the bill
on December 29, 2006, what amount of discount will be taken?
a.
$0
b.
$90
c.
$180
d.
$882
68.
CMP Inc. maintains perpetual inventory records. During January, the company made purchases of
$40,000 and sold goods with a cost of $42,000 for $104,000. Cost of goods sold for the month is:
a.
$40,000
b.
$42,000
c.
$62,000
d.
$64,000
69.
Sales revenues are usually considered earned when
a.
cash is received from credit sales.
b.
an order is received.
c.
goods have been transferred from the seller to the buyer.
d.
adjusting entries are made.
70.
A sales invoice is a source document that
a.
provides support for goods purchased for resale.
b.
provides evidence of incurred operating expenses.
c.
provides evidence of credit sales.
d.
serves only as a customer receipt.
71.
Sales revenue
a.
may be recorded before cash is collected.
b.
will always equal cash collections in a month.
c.
only results from credit sales.
d.
is only recorded after cash is collected.
5 - 7
Test Bank for Financial Accounting, Fifth Edition
72.
On July 1, Freeman Company sold goods on account for $5,000 with credit terms 1/15, n/30.The
journal entry to record the revenue portion of the sale is:
a.
Cash
5,000
Sales
5,000
b.
Cash
4,550
Service Revenue
4,550
c.
Accounts Receivable
4,500
Service Revenue
4,500
d.
Accounts Receivable
5,000
Sales
5,000
73.
A credit memorandum is prepared when
a.
an employee does a good job.
b.
goods are sold on credit.
c.
goods that were sold on credit are returned.
d.
customers refuse to pay their accounts.
74.
Thelman Company reported the following balances at June 30, 2006:
Sales
$10,800
Sales Returns and Allowances 400
Sales Discounts
200
Cost of goods sold
5,000
Net sales for the month is:
a.
$10,800
b.
$10,400
c.
$10,200
d.
$5,200
75.
A credit memorandum is used as documentation for a journal entry that requires a debit to
a.
Sales and a credit to Cash.
b.
Sales Returns and Allowances and a credit to Accounts Receivable.
c.
Accounts Receivable and a credit to a contra-revenue account.
d.
Cash and a credit to Sales Returns and Allowances.
76.
Jacobson Company purchased inventory for $5,000 from Hotard Inc. After Jacobson agreed to
retain merchandise with a cost of $500 that was defective, Hotard reduced the selling price for the
damaged goods to $250. Hotard will record
a.
a sales discount of $250
b.
a sales return of $500
c.
a sales allowance of $250
d.
cost of goods sold of $4,750
77.
In a perpetual inventory system, the amount of the discount allowed for paying for merchandise
purchased within the period is credited to
a.
Merchandise Inventory.
b.
Purchase Discounts.
c.
Purchase Allowance.
d.
Sales Discounts.
78.
When goods are returned that relate to a prior cash sale,
a.
the Sales Returns and Allowances account should not be used.
b.
the cash account will be credited.
c.
Sales Returns and Allowances will be credited.
d.
Accounts Receivable will be credited.
5 - 8
Accounting for Merchandising Operations
79.
The Sales Returns and Allowances account does not
provide information to management about
a.
possible inferior merchandise.
b.
the percentage of credit sales versus cash sales.
c.
inefficiencies in filling orders.
d.
errors in overbilling customers.
80.
Alpha Company returned $2,000 of goods previously purchased on account to Beta Company
because the goods were not in accordance with specifications. The entry to record the return on
Beta Company’s books will include a.
a debit to Sales Revenue for $2,000
b.
a credit to Purchases Returns and Allowances for $2,000
c.
a debit to Sales Returns and Allowances for $2,000
d.
a credit to Accounts Payable for $2,000
81.
As an incentive for customers to pay their accounts promptly, a business may offer its customers
a.
a sales discount.
b.
free delivery.
c.
a sales allowance.
d.
a sales return.
82.
The credit terms offered by Neutron Enterprise are 2/10, n/30. Neutron sold goods on account to
James Company on June 15 for $300. If James Company pays the bill on June 27, Neutron’s journal
entry to record the collection on account will include:
a.
a debit to cash for $300.
b.
a debit to Accounts Payable for $300.
c.
a debit to Sales Discounts for $6
d.
a credit to Accounts Receivable for $294.
83.
A sales discount does not
a.
provide the purchaser with a cash saving.
b.
reduce the amount of cash received from a credit sale.
c.
increase a contra-revenue account.
d.
increase an operating expense account.
84.
Company A sells $300 of merchandise on account to Company B with credit terms of 2/10, n/30. If
Company B remits a check taking advantage of the discount offered, what is the amount of
Company B's check?
a.
$210
b.
$294
c.
$270
d.
$240
85.
Hale Company sells merchandise on account for $1,000 to Long Company with credit terms of
2/10, n/30. Long Company returns $200 of merchandise that was damaged, along with a check to
settle the account within the discount period. What is the amount of the check?
a.
$980
b.
$984
c.
$800
d.
$784
5 - 9
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Test Bank for Financial Accounting, Fifth Edition
86.
Eaton Company sells merchandise on account for $1,000 to Tang Company with credit terms of
2/10, n/30. Tang Company returns $300 of merchandise that was damaged, along with a check to
settle the account within the discount period. What entry does Eaton Company make upon receipt
of the check?
a.
Cash
..............................................................................................
700
Accounts Receivable
...........................................................
700
b.
Cash
..............................................................................................
686
Sales Returns and Allowances
......................................................
314
Accounts Receivable
...........................................................
1,000
c
. Cash
..............................................................................................
686
Sales Returns and Allowances
......................................................
300
Sales Discounts
.............................................................................
14
Accounts Receivable
...........................................................
1,000
d.
Cash
..............................................................................................
980
Sales Discounts
.............................................................................
20
Sales Returns and Allowances
............................................
300
Accounts Receivable
...........................................................
700
87.
Which of the following would not
be classified as a contra account?
a.
Sales
b.
Sales Returns and Allowances
c.
Accumulated Depreciation
d.
Sales Discounts
88.
Which of the following accounts has a normal credit balance?
a.
Sales Returns and Allowances
b.
Sales Discounts
c.
Sales
d.
Selling Expense
89.
With respect to the income statement,
a.
contra-revenue accounts do not appear on the income statement.
b.
sales discounts increase the amount of sales.
c.
contra-revenue accounts increase the amount of operating expenses.
d.
sales discounts are included in the calculation of gross profit.
90.
When a seller grants credit for returned goods, the account that is credited is
a.
Sales.
b.
Sales Returns and Allowances.
c.
Merchandise Inventory.
d.
Accounts Receivable.
91.
The respective normal account balances of Sales, Sales Returns and Allowances, and Sales
Discounts are
a.
credit, credit, credit.
b.
debit, credit, debit.
c.
credit, debit, debit.
d.
credit, debit, credit.
92.
The operating cycle of a merchandiser is
a.
always one year in length.
b.
generally longer than it is for a service company.
c.
about the same as for a service company.
d.
generally shorter than it is for a service company.
5 - 10
Accounting for Merchandising Operations
93.
All of the following are contra accounts except:
a.
Purchases
b.
Purchases Discounts
c.
Sales Discounts
d.
Sales Returns and Allowances
94.
In preparing closing entries for a merchandiser, the Income Summary account will be credited for
the balance of
a.
sales.
b.
merchandise inventory.
c.
sales discounts.
d.
freight-out.
95.
On December 1, 2005, XYZ Co. sold merchandise which costs $400 on account to ABC Co. for $600 with terms of 3/10, n/30. XYZ Co. uses a perpetual inventory system. The journal entry to record this transaction on XYZ’s books will include:
a.
a debit to Cost of Goods Sold for $600.
b.
a debit to Sales Discounts for $18.
c.
a credit to Sales Revenue for $200.
d.
a credit to Merchandise Inventory for $400.
96.
All of the following are contra revenue accounts except
a.
sales.
b.
sales allowances.
c.
sales discounts.
d.
sales returns.
97.
The sales revenue section of an income statement for a retailer would not
include
a.
Sales discounts.
b.
Sales.
c.
Net sales.
d.
Cost of goods sold.
98.
The operating expense section of an income statement for a wholesaler would not
include
a.
freight-out.
b.
utilities expense.
c.
cost of goods sold.
d.
insurance expense.
99.
Income from operations will always result if
a.
the cost of goods sold exceeds operating expenses.
b.
revenues exceed cost of goods sold.
c.
revenues exceed operating expenses.
d.
gross profit exceeds operating expenses.
100.
Indicate which one of the following would appear on the income statement of both a merchandiser
and a service enterprise.
a.
Gross profit
b.
Operating expenses
c.
Sales revenues
d.
Cost of goods sold
101.
The gross profit rate is computed by dividing gross profit by
a.
cost of goods sold.
b.
net income.
c.
net sales.
d.
sales.
5 - 11
Test Bank for Financial Accounting, Fifth Edition
102.
In terms of liquidity, merchandise inventory is
a.
more liquid than cash.
b.
more liquid than accounts receivable.
c.
more liquid than prepaid expenses.
d.
less liquid than store equipment.
103.
On a classified balance sheet, merchandise inventory is classified as
a.
an intangible asset.
b.
property, plant, and equipment.
c.
a current asset.
d.
a long-term investment.
104.
Gross profit for a merchandiser is net sales minus
a.
operating expenses.
b.
cost of goods sold.
c.
sales discounts.
d.
cost of goods available for sale.
105.
All of the following items would be reported as other expenses and losses except
a.
freight-out.
b.
casualty losses.
c.
interest expense.
d.
loss from employees' strikes.
106.
If a company has net sales of $500,000 and cost of goods sold of $300,000, the gross profit
percentage is
a.
60%.
b.
40%.
c.
20%.
d.
100%.
107.
A company shows the following balances:
Sales
$1,000,000
Sales Returns and Allowances
180,000
Sales Discounts
20,000
Cost of Goods Sold
600,000
What is the gross profit percentage?
a.
50%
b.
75%
c.
40%
d.
25%
Use the following information to answer questions 108 – 111.
During August, 2006, Sal’s Supply Store generated revenues of $30,000. Their operating expenses were as follows: cost of goods sold of $12,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.
108.
Sal’s gross profit for August, 2006 is:
a.
$30,000
b.
$19,000
c.
$18,000
d.
$16,000
5 - 12
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Accounting for Merchandising Operations
109.
Sal’s non-operating income (loss) for the month of August 2006 is
a.
$0
b.
$500
c.
$1,000
d.
$1,500
110.
Sal’s operating income for the month of August 2006 is
a.
$30,000
b.
$19,500
c.
$18,500
d.
$16,000
111.
Sal’s net income for August 2006 is
a.
$18,000
b.
$17,500
c.
$16,500
d.
$16,000
112.
At the beginning of September 2006, RFI Company reported Merchandise Inventory of $4,000.
During the month, the company made purchases of $7,800. At September 31, 2006, a physical
count of inventory reported $3,200 on hand. Cost of goods sold for the month is
a.
$600
b.
$7,800
c.
$8,600
d.
$11,800
113.
The Freight-in account
a.
increases the cost of merchandise purchased.
b.
is contra to the Purchases account.
c.
is a permanent account.
d.
has a normal credit balance.
114.
Net purchases plus freight-in determines
a.
cost of goods sold.
b.
cost of goods available for sale.
c.
cost of goods purchased.
d.
total goods available for sale.
115.
West Company has the following account balances:
Purchases
$30,000
Sales Returns and Allowances
4,000
Purchase Discounts
2,500
Freight-in
1,875
Delivery Expense
2,500
The cost of goods purchased for the period is
a.
$32,500
b.
$29,375
c.
$31,875
d.
$27,875
5 - 13
Test Bank for Financial Accounting, Fifth Edition
116.
Baden Shoe Store has a beginning merchandise inventory of $15,000. During the period,
purchases were $70,000; purchase returns, $2,000; and freight-in $5,000. A physical count of
inventory at the end of the period revealed that $10,000 was still on hand. The cost of goods
available for sale was
a.
$82,000
b.
$78,000
c.
$88,000
d.
$92,000
a
117.
In a periodic inventory system, a return of defective merchandise by a customer is recorded by
crediting
a.
Accounts Payable.
b.
Merchandise Inventory.
c.
Purchases.
d.
Purchase Returns and Allowances.
a
118.
Which one of the following transactions is recorded with the same entry in a perpetual and a
periodic inventory system?
a.
Cash received on account with a discount
b.
Payment of freight costs on a purchase
c.
Return of merchandise sold
d.
Inventory portion of a sale of merchandise on credit
a
119.
The journal entry to record a return of merchandise purchased on account under a periodic
inventory system would be
a.
Accounts Payable
Purchase Returns and Allowances
b.
Purchase Returns and Allowances
Accounts Payable
c.
Accounts Payable
Inventory
d.
Inventory
Accounts Payable
a
120.
Under a periodic inventory system, acquisition of merchandise is debited to the
a.
Merchandise Inventory account.
b.
Cost of Goods Sold account.
c.
Purchases account.
d.
Accounts Payable account.
a
121.
Which of the following accounts has a normal credit balance?
a.
Purchases
b.
Sales Returns and Allowances
c.
Freight-in
d.
Purchase Discounts
a
122.
The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are
a.
credit, credit, debit
b.
debit, credit, credit
c.
debit, credit, debit
d.
debit, debit, debit
5 - 14
Accounting for Merchandising Operations
a
123.
In a work sheet for a merchandiser, Merchandise Inventory would appear in the
a.
trial balance and adjusted trial balance columns only.
b.
trial balance and balance sheet columns only.
c.
trial balance, adjusted trial balance, and balance sheet columns.
d.
trial balance, adjusted trial balance, and income statement columns.
a
124.
The Merchandise Inventory account balance appearing in a work sheet represents the
a.
ending inventory.
b.
beginning inventory.
c.
cost of merchandise purchased.
d.
cost of merchandise sold.
125.
Dodd Company has sales revenue of $26,000, cost of goods sold of $16,000 and operating
expenses of $6,000 for the year ended December 31. Dodd's gross profit is
a.
$20,000.
b.
$10,000.
c.
$4,000.
d.
$0.
126.
Klugg Company made a purchase of merchandise on credit from Claude Corporation on August 3,
for $4,000, terms 2/10, n/45. On August 10, Klugg makes the appropriate payment to Claude. The
entry on August 10 for Klugg Company is
a.
Accounts Payable
..........................................................................
4,000
Cash
......................................................................................
4,000
b.
Accounts Payable
..........................................................................
3,920
Cash
......................................................................................
3,920
c.
Accounts Payable
..........................................................................
4,000
Purchase Returns and Allowances
........................................
80
Cash
......................................................................................
3,920
d.
Accounts Payable
..........................................................................
4,000
Merchandise Inventory
..........................................................
80
Cash
......................................................................................
3,920
127.
Boswell Company purchased inventory from Pissaro Company. The shipping costs were $400 and
the terms of the shipment were FOB shipping point. Boswell would have the following entry
regarding the shipping charges:
a.
There is no entry on Boswell's books for this transaction.
b.
Freight Expense
............................................................................
400
Cash
....................................................................................
400
c.
Freight-out
.....................................................................................
400
Cash
....................................................................................
400
d.
Merchandise Inventory
..................................................................
400
Cash
....................................................................................
400
128.
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by
crediting
a.
Purchases.
b.
Purchase Returns.
c.
Purchase Allowance.
d.
Merchandise Inventory.
129.
On October 4, 2005, Terry Corporation had credit sales transactions of $2,800 from merchandise
having cost $1,900. The entries to record the day's credit transactions include a
a.
debit of $2,800 to Merchandise Inventory.
b.
credit of $2,800 to Sales.
c.
debit of $1,900 to Merchandise Inventory.
d.
credit of $1,900 to Cost of Goods Sold.
5 - 15
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Test Bank for Financial Accounting, Fifth Edition
130.
Which of the following accounts is not
closed to Income Summary?
a.
Cost of Goods Sold
b.
Merchandise Inventory
c.
Sales
d.
Sales Discounts
131. Clark Company’s sales were $480,000, sales returns and allowances were $30,000, and cost of
goods sold was $270,000. The gross profit rate was
a.
60%.
b.
40%.
c.
37.5%.
d.
56.3%.
Use the following information to answer questions 132 -134.
On July 3, 2006, Elton Company sold goods on account to Radar Enterprises with terms of 2/10, n/30. The
goods had a cost of $360 and a selling price of $720. On July 7, Radar returned $100 of goods because
they did not meet specifications. On July 29, Radar Company paid the account in full. Both Elton and
Radar use a perpetual inventory system.
132.
The entry made by Radar to record the purchase on account will include:
a.
a debit to Merchandise Inventory for $360.
b.
a debit to Cost of Goods Sold for $360.
c.
a credit to Accounts Payable for $720.
d.
a credit to Merchandise Inventory for $720.
133.
The entry made by Elton to record the return of merchandise will include:
a.
a debit to Merchandise Inventory for $100.
b.
a credit to Accounts Receivable for $100.
c.
a debit to Sales Revenue for $100.
d.
a debit to Accounts Payable for $100.
134.
The entry made by Elton to record collection of Radar’s account will include:
a.
a debit to Cash for $720.
b.
a debit to Cash for $706.
c.
a debit to Accounts Receivable for $608.
d.
a debit to Sales Discounts for $12.40.
EXERCISES
Ex. 135
For
each
of
the
following,
determine
the
missing
amounts.
Cost of
Operating
Sales
Goods Sold
Gross Profit
Expenses
Net Income
1.
$100,000
________
_________
$25,000
$15,000
5 - 16
Accounting for Merchandising Operations
2.
________
$95,000
$130,000
________
$80,000
Solution 135
(5 min.)
1.
Gross Profit = $40,000 ($25,000 + $15,000)
Cost
of
Goods
Sold
=
$60,000
($100,000
–
$40,000)
2.
Sales = $225,000 ($95,000 + $130,000)
Operating Expenses = $50,000 ($130,000 – $80,000)
Ex. 136
On October 1, Taylor Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200
each. During the month of October, the following transactions occurred.
Oct.
4
Purchased 25 bicycles at a cost of $200 each from Lang Bicycle Company, terms
2/10, n/30.
6 Sold 15 bicycles to Team America for $300 each, terms 2/10, n/30.
7
Received credit from Lang Bicycle Company for the return of 2 defective bicycles.
13
Issued a credit memo to Team America for the return of a defective bicycle.
14
Paid Lang Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Solution 136
(20 min.)
Oct.
4
Merchandise Inventory
.........................................................
5,000
Accounts Payable
.......................................................
5,000
6 Accounts Receivable
...........................................................
4,500
Sales
...........................................................................
4,500
Cost of Goods Sold
..............................................................
3,000
Merchandise Inventory
................................................
3,000
7 Accounts Payable
................................................................
400
Merchandise Inventory
................................................
400
13
Sales Returns and Allowances
............................................
300
Accounts Receivable
...................................................
300
Merchandise Inventory
.........................................................
200
Cost of Goods Sold
.....................................................
200
5 - 17
Test Bank for Financial Accounting, Fifth Edition
14
Accounts Payable ($5,000 – $400)
......................................
4,600
Cash ($4,600
×
.98)
..................................................
4,508
Merchandise Inventory ($4,600
×
.02)
.......................
92
Ex. 137
On August 1, Rigby Sporting Goods had an inventory of 55 backpacks at a cost of $25 each. The
company uses a perpetual inventory system. During August, the following transactions and
events occurred.
August 2
Purchased 200 backpacks at $25 each from Fair Manufacturing Supply Company,
terms 2/10, n/30.
August 4
Returned 20 backpacks purchased on August 2 because the zippers did not work
properly.
August
9
Sold 40 backpacks for $40 each to Playville Toys, terms 1/10, n/30.
August 14
Paid Fair in full, less discount.
August 19
Collected receivable from Playville.
Instructions
Journalize the August transactions for Rigby Sporting Goods.
Solution 137
(15 min.)
August
2
Merchandise Inventory
......................................................
5,000
Accounts Payable
....................................................
5,000
August
4
Accounts Payable
.............................................................
500
Merchandise Inventory
.............................................
500
August
9
Accounts Receivable
........................................................
1,600
Sales
........................................................................
1,600
Cost of Goods Sold
...........................................................
1,000
Merchandise Inventory
.............................................
1,000
August 14
Accounts Payable ($5,000 – $500)
...................................
4,500
Cash ($4,500 × .98)
.................................................
4,410
Merchandise Inventory ($4,500 × .02)
......................
90
August 19
Cash
.................................................................................
1,584
Sales Discounts
................................................................
16
5 - 18
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Accounting for Merchandising Operations
Accounts Receivable
................................................
1,600
Ex. 138
Dan Stark is a new accountant with Utley Company. Utley purchased merchandise on account for
$9,000. The credit terms are 2/10, n/30. Dan has talked with the company's banker and knows
that he could earn 10% on any money invested in the company's savings account.
Instructions
(a)
Should Dan pay the invoice within the discount period or should he keep the $9,000 in the
savings account and pay at the end of the credit period? Support your recommendation with
a calculation showing which action would be best.
(b)
If Dan forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of
$9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Solution 138
(10 min.)
Dan should pay the invoice within the discount period to save $130:
(a)
Discount of 2% on $9,000
$180
Interest received on $9,000 (for 20 days at 10%)
50
($9,000 × 10% × 20 ÷ 360)
Savings by taking the discount
$130
(b)
The equivalent annual interest rate is:
2% × 360 ÷ 20 = 36%.
Ex. 139
(a)
Adler Company purchased merchandise on account from Office Suppliers for $65,000, with
terms of 2/10, n/30. During the discount period, Adler returned some merchandise and paid
$58,800 as payment in full. Adler uses a perpetual inventory system. Prepare the journal
entries that Adler Company made to record:
(1)
the purchase of merchandise.
(2)
the return of merchandise.
(3)
the payment on account.
(b)
Boggs Company sold merchandise to Wilsey Company on account for $53,000 with credit
terms of ?/10, n/30. The cost of the merchandise sold was $31,800. During the discount
period, Wilsey Company returned $3,000 of merchandise and paid its account in full (minus
the discount) by remitting $49,000 in cash. Both companies use a perpetual inventory
system. Prepare the journal entries that Boggs Company made to record:
(1)
the sale of merchandise.
(2)
the return of merchandise.
(3)
the collection on account.
5 - 19
Test Bank for Financial Accounting, Fifth Edition
Solution 139
(20 min.)
(a)
To compute the amount due after returns but before the discount, divide $58,800 by .98 (100% – 2%).
$58,800 ÷ .98 = $60,000.
Subtract $60,000 from $65,000 to determine that $5,000 of merchandise was returned.
(1)
Merchandise Inventory
.........................................................
65,000
Accounts Payable
.......................................................
65,000
(2)
Accounts Payable
................................................................
5,000
Merchandise Inventory
................................................
5,000
(3)
Accounts Payable
................................................................
60,000
Merchandise Inventory
................................................
1,200
Cash
...........................................................................
58,800
(b)
Wilsey Company returns $3,000 of merchandise and owes $50,000 to Boggs Company.
$49,000 ÷ $50,000 = .98
100% – 98% = 2%
The missing discount percentage is 2%. $50,000 × 2% = $1,000 sales discount.
$50,000 – $1,000 = $49,000 cash received on account.
(1)
Accounts Receivable
...........................................................
53,000
Sales
...........................................................................
53,000
Cost of Goods Sold
..............................................................
31,800
Merchandise Inventory
................................................
31,800
(2)
Sales Returns and Allowances
............................................
3,000
Accounts Receivable
...................................................
3,000
Merchandise Inventory $3,000 × ($31,800 ÷ $53,000)
.........
1,800
Cost of Goods Sold
.....................................................
1,800
(3)
Cash
....................................................................................
49,000
Sales Discounts
...................................................................
1,000
Accounts Receivable
...................................................
50,000
Ex. 140
For
each
of
the
following,
determine
the
missing
amounts.
Beginning
Goods avbl.
Cost of Ending
Inventory
Purchases
for Sale Goods Sold
Inventory 5 - 20
Accounting for Merchandising Operations
1.
$100,000
________
$300,000
$225,000 _________
2.
________
$195,000
$230,000
________
$70,000
Solution 140
(6-8 min.)
1.
Purchases: $200,000 ($300,000 - $100,000),
Ending inventory: $75,000 ($300,000 - $225,000)
2.
Beginning inventory: $35,000 ($230,000 - $195,000)
Cost of Goods Sold: $160,000 ($230,000 - $70,000)
Ex. 141
Prepare the necessary journal entries to record the following transactions, assuming Sollberger
Company uses a perpetual inventory system.
(a)
Sollberger sells $140,000 of merchandise, terms 2/10, n/30 to J.Waters Company on August
31, 2006. The merchandise cost $70,000.
(b)
Waters returned $14,000 of merchandise to Sollberger on September 3. The merchandise
returned cost $7,000.
(c)
Waters paid the account in full on September 9.
Solution 141
(7-9 min.)
(a)
August 31, 2006
Accounts Receivable
....................................................................
140,000
Sales
....................................................................................
140,000
Cost of Goods Sold
......................................................................
70,000
Merchandise Inventory
.........................................................
70,000
(b)
Sept. 3, 2006
Sales Returns and Allowances
.....................................................
14,000
Accounts Receivable
...........................................................
14,000
Merchandise Inventory
.................................................................
7,000
Cost of Goods Sold
..............................................................
7,000
(c)
Sept. 9, 2006
Cash ($126,000 – $2,520)
............................................................
123,480
Sales Discounts ($126,000 × .02)
.................................................
2,520
Accounts Receivable
...........................................................
126,000
5 - 21
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Test Bank for Financial Accounting, Fifth Edition
Ex. 142
Rosen Company completed the following transactions in October:
Credit Sales Sales Returns
Date of
Date Amount
Terms Date Amount
Collection
Oct.
3
$ 600
2/10, n/30
Oct.
8
Oct.
11
1,000
3/10, n/30
Oct. 14
$ 400
Oct.
16
Oct.
17
5,000
1/10, n/30
Oct. 20
1,000
Oct.
29
Oct.
21
1,400
2/10, n/60
Oct. 23
300
Oct.
27
Oct.
23
1,600
2/10, n/30
Oct. 27
400
Oct.
28
Instructions
(a)
Indicate the cash received for each collection. Show your calculations.
(b)
Prepare the journal entry for the
(1)
Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2)
Oct. 23 sales return. The merchandise returned had a cost of $200.
(3)
Oct. 28 collection.
Rosen uses a perpetual inventory system.
Solution 142
(20 min.)
(a)
Oct.
8
$588
[Sales $600 – Sales discount $12 ($600 × .02)]
Oct. 16
$582
[Sales $1,000 – Sales return $400 = $600;
$600 – Sales discount $18 ($600 × .03)]
Oct. 29
$4,000
[Sales $5,000 – Sales return $1,000 = $4,000;
(discount lapsed)]
Oct. 27
$1,078
[Sales $1,400 – Sales return $300 = $1,100;
$1,100 – Sales discount $22 ($1,100 × .02)]
Oct. 28
$1,176
[Sales $1,600 – Sales return $400 = $1,200;
$1,200 – Sales discount $24 ($1,200 × .02)]
(b)
(1)
Oct. 17
Accounts Receivable .........................................
5,000
Sales ........................................................
5,000
Cost of Goods Sold
............................................
3,500
Merchandise Inventory
..............................
3,500
(2)
Oct. 23
Sales Returns and Allowances ..........................
300
Accounts Receivable ................................
300
Merchandise Inventory
.......................................
200
Cost of Goods Sold
....................................
200
(3)
Oct. 28
Cash ..................................................................
1,176
Sales Discounts .................................................
24
Accounts Receivable ................................
1,200
5 - 22
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Accounting for Merchandising Operations
Ex. 143
The following information is available for Tolan Company:
Debit Credit
Retained Earnings
$ 30,000
Common Stock
20,000
Dividends
$ 42,000
Sales
510,000
Sales Returns and Allowances
20,000
Sales Discounts
7,000
Cost of Goods Sold
337,000
Freight-out
2,000
Advertising Expense
15,000
Interest Expense
19,000
Store Salaries Expense
45,000
Utilities Expense
18,000
Depreciation Expense
7,000
Interest Revenue
25,000
Instructions
Using the above information, prepare the closing entries for Tolan Company.
Solution 143
(10 min.)
Dec.
31
Interest Revenue ................................................................
25,000
Sales ...................................................................................
510,000
Income Summary .......................................................
535,000
31
Income Summary ................................................................
470,000
Sales Returns and Allowances ...................................
20,000
Sales Discounts .........................................................
7,000
Cost of Goods Sold ....................................................
337,000
Freight-out ..................................................................
2,000
Store Salaries Expense ..............................................
45,000
Interest Expense ........................................................
19,000
Advertising Expense ..................................................
15,000
Utilities Expense ........................................................
18,000
Depreciation Expense ................................................
7,000
31
Income Summary ................................................................
65,000
Retained Earnings
.......................................................
65,000
31
Retained Earnings
...............................................................
42,000
Dividends
....................................................................
42,000
5 - 23
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Test Bank for Financial Accounting, Fifth Edition
Ex. 144
The adjusted trial balance of Yount Book Company appears below.
Instructions
Using the information given, prepare the year-end closing entries.
YOUNT BOOK COMPANY
Adjusted Trial Balance
December 31, 2005
Debit Credit
Cash
32,000
Accounts Receivable
25,000
Merchandise Inventory
35,000
Building
150,000
Accumulated Depreciation—
Building
20,000
Accounts Payable
12,000
Common Stock
100,000
Retained Earnings
49,000
Dividends
10,000
Sales
305,000
Sales Discounts
6,000
Sales Returns & Allowances
8,000
Cost of Goods Sold
183,000
Selling Expenses
18,000
Administrative Expenses
19,000
486,000
486,000
Solution 144
(10 min.)
Dec. 31
Sales
....................................................................................
305,000
Income Summary
........................................................
305,000
(To close credit balance accounts)
31
Income Summary
.................................................................
234,000
Sales Discounts
..........................................................
6,000
Sales Returns and Allowances
....................................
8,000
Cost of Goods Sold
.....................................................
183,000
Selling Expenses
........................................................
18,000
Administrative Expenses
.............................................
19,000
(To close accounts with debit balances)
31
Income Summary
.................................................................
71,000
Retained Earnings
.......................................................
71,000
(To transfer net income to retained earnings)
31
Retained Earnings
...............................................................
10,000
Dividends
....................................................................
10,000
(To close dividend account to retained earnings)
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Accounting for Merchandising Operations
Ex. 145
Elton Company gathered the following condensed data for the year ended December 31, 2006:
Cost of goods sold
$ 660,000
Net sales
1,200,000
Administrative expenses
234,000
Interest expense
58,000
Dividend revenue
38,000
Loss from employee strike
233,000
Selling expenses
45,000
Instructions
1.
Prepare a single-step income statement for the year ended December 31, 2006.
2.
Prepare a multiple-step income statement for the year ended December 31, 2006.
Solution 145
(25 min.)
1.
ELTON COMPANY
Income Statement
For the Year Ended December 31, 2006
Revenues
Net sales
.........................................................................................
$1,200,000
Dividend revenue
............................................................................
38,000
Total revenues
........................................................................
1,238,000
Expenses
Cost of goods sold
...........................................................................
$660,000
Selling expenses
.............................................................................
45,000
Administrative expenses
..................................................................
234,000
Interest expense
..............................................................................
58,000
Loss from employee strike
...............................................................
233,000
Total expenses
.......................................................................
1,230,000
Net income
....................................................................................
$ 8,000
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Test Bank for Financial Accounting, Fifth Edition
Solution 145
(cont.)
2.
ELTON COMPANY
Income Statement
For the Year Ended December 31, 2005
Net sales
...................................................................
$1,200,000
Cost of goods sold
.....................................................
660,000
Gross profit
................................................................
540,000
Operating expenses
Selling expenses
...............................................
$ 45,000
Administrative expenses
...................................
234,000
Total operating expenses
.........................
279,000
Income from operations
.............................................
261,000
Other revenues and gains
Dividend revenue
..............................................
38,000
Other expenses and losses
Interest expense
...............................................
$ 58,000
Loss from employee strike
................................
233,000
291,000
253,000
Net income
................................................................
$ 8,000
Ex. 146
Instructions
State the missing items identified by ?.
1.
Gross profit – Operating expenses = ?
2.
? + ? = Operating expenses
3.
Sales – (? + ?) = Net sales
4.
Income from operations + ? – ? = Net income
5.
Net sales – Cost of goods sold = ?
6.
Cost of goods sold + Gross profit on sales = ?
Solution 146
(5 min.)
1.
Income from operations (or Net income)
2.
Selling expenses, Administrative expenses
3.
Sales discounts, Sales returns and allowances
4.
Other revenues and gains, Other expenses and losses
5.
Gross profit
6.
Net sales
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Accounting for Merchandising Operations
Ex. 147
The adjusted trial balance of Olsen Company contained the following information:
Debit
Credit
Sales
$580,000
Sales Returns and Allowances
$ 20,000
Sales Discounts
7,000
Cost of Goods Sold
386,000
Freight-out
2,000
Advertising Expense
15,000
Interest Expense
18,000
Store Salaries Expense
50,000
Utilities Expense
28,000
Depreciation Expense
7,000
Interest Revenue
30,000
Instructions
1.
Use the above information to prepare a multiple-step income statement for the year ended December 31, 2005.
2.
Prepare a single-step income statement for the year ended December 31, 2005.
Solution 147
(20 min.)
1.
OLSEN COMPANY
Income Statement
For the Year Ended December 31, 2005
Sales revenues
Sales
........................................................................
$580,000
Less:
Sales returns and allowances
.......................
$ 20,000
Sales discounts
............................................
7,000
27,000
Net sales
..................................................................
553,000
Cost of goods sold
...................................................
386,000
Gross profit
..............................................................
167,000
Operating expenses
Selling expenses
Freight-out
....................................................
$ 2,000
Advertising expense
.....................................
15,000
Store salaries expense
.................................
50,000
Total selling expenses
............................
67,000
Administrative expenses
Utilities expense
...........................................
28,000
Depreciation expense
...................................
7,000
Total administrative expenses
................
35,000
Total operating expenses
..................
102,000
Income from operations
............................................
65,000
Other revenues and gains
Interest revenue
.................................................
30,000
Other expenses and losses
Interest expense
.................................................
18,000
12,000
Net income
..........................................................
$ 77,000
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Test Bank for Financial Accounting, Fifth Edition
Solution 147
(cont.)
2.
OLSEN COMPANY
Income Statement
For the Year Ended December 31, 2005
Revenues
Net sales
...................................................................................
$553,000
Interest revenue
.........................................................................
30,000
Total revenues
.....................................................................
583,000
Expenses
Cost of goods sold
.....................................................................
$386,000
Selling expenses
.......................................................................
67,000
Administrative expenses
............................................................
35,000
Interest expense
........................................................................
18,000
Total expenses
....................................................................
506,000
Net income
..........................................................................................
$ 77,000
Ex. 148
The following information is available for Baumhauer Company for the year ending December 31, 2006:
Administrative expenses
$ 70,000
Inventory, 1/1/2006
40,000
Inventory, 12/31/2006
60,000
Purchases
320,000
Sales
550,000
Sales returns and allowances
15,000
Sales discounts
5,000
Selling expenses
55,000
Instructions
Compute each of the following:
(a)
Net sales
(b)
Cost of Goods Sold
(c)
Gross profit
(d)
Income from operations
Solution 148
(10 min.)
(a)
Net sales = $530,000 ($550,000 – $15,000 - $5,000)
(b)
Cost of Goods Sold = $300,000 ($40,000 + $320,000 - $60,000)
(c)
Gross profit = $230,000 ($530,000 – $300,000)
(d)
Income from operations = $105,000 ($230,000 – $70,000 – $55,000)
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Accounting for Merchandising Operations
Ex. 149
The income statement of Miller, Inc. includes the items listed below:
Net sales
$900,000
Gross profit
350,000
Beginning inventory
100,000
Purchase discounts
15,000
Purchase returns and allowances
8,000
Freight-in
10,000
Operating expenses
300,000
Purchases
540,000
Instructions
Use the appropriate items listed above as a basis for determining:
(a)
Cost of goods sold.
(b)
Cost of goods available for sale.
(c)
Ending inventory.
Solution 149
(15 min.)
(a)
Net sales – Cost of goods sold = Gross profit
$900,000 – Cost of goods sold = $350,000
Cost of goods sold = $550,000
(b)
Beginning inventory
$100,000
Purchases
$540,000
Less:
Purchase discounts
$15,000
Purchase returns and allowances
8,000
23,000
Net Purchases
517,000
Add:
Freight-in
10,000
Cost of goods purchased
527,000
Cost of goods available for sale
$627,000
(c)
Cost of goods available for sale – Ending inventory = Cost of goods sold
$627,000 – Ending inventory = $550,000
Ending inventory = $77,000
Ex. 150
Three items are missing in each of the following columns and are identified by letter.
Sales
$ (a)
$840,000
Sales returns and allowances
25,000
20,000
Sales discounts
10,000
15,000
Net sales
440,000
(d)
Beginning inventory
(b)
300,000
Cost of goods purchased
220,000
(e)
Ending inventory
170,000
303,000
Cost of goods sold
260,000
575,000
Gross profit
(c)
(f)
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Test Bank for Financial Accounting, Fifth Edition
Ex. 150
(cont.)
Instructions
Calculate the missing amounts and identify them by letter.
Solution 150
(15 min.)
(a)
$475,000 ($440,000 + $10,000 + $25,000)
(b)
$210,000 ($260,000 + $170,000 - $220,000)
(c)
$180,000 ($440,000 - $260,000)
(d)
$805,000 ($840,000 - $20,000 - $15,000)
(e)
$578,000 ($575,000 + $303,000 - $300,000)
(f)
$230,000 ($805,000 - $575,000)
a
Ex. 151
Harper Supply Company uses a periodic inventory system. During July, the following transactions
and events occurred.
July
3
Purchased 60 pumps at a cost of $30 each from Kahle Company, terms 2/10, n/30.
July
6
Returned 6 defective pumps to Kahle.
July
9
Sold 10 pumps for $50 each to Praytor’s Auto Supply , terms 1/10, n/30.
July
13
Paid Kahle Company in full.
July 19
Collected receivable in full from Praytor.
Instructions
Journalize the July transactions for Harper Supply Company. You may omit explanations.
a
Solution 151
(15 min.)
July
3
Purchases
.........................................................................
1,800
Accounts Payable
....................................................
1,800
July
6
Accounts Payable
.............................................................
180
Purchase Returns and Allowances
...........................
180
July
9
Accounts Receivable
........................................................
500
Sales
........................................................................
500
July
13
Accounts Payable ($1,800 – $180)
...................................
1,620
Purchase Discounts ($1,620 × .02)
..........................
32.40
Cash
.........................................................................
1,587.60
July
19
Cash
.................................................................................
495
Sales Discount
..................................................................
5
Accounts Receivable
................................................
500
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Accounting for Merchandising Operations
a
Ex. 152
The following information is available for Olson Company:
Beginning inventory
$ 45,000
Ending inventory
70,000
Freight-in
10,000
Purchases
300,000
Purchase returns and allowances
8,000
Instructions
Compute each of the following:
(a)
Net purchases
(b)
Cost of goods purchased
(c)
Cost of goods sold
a
Solution 152
(6 min.)
(a)
Net purchases = $292,000 ($300,000 - $8,000)
(b)
Cost of goods purchased = $302,000 ($292,000 + $10,000)
(c)
Cost of goods sold = $277,000 ($45,000 + $302,000 - $70,000)
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Test Bank for Financial Accounting, Fifth Edition
a
Ex. 153
The adjusted trial balance of Lawson Music Company appears below. Lawson Music Company
prepares monthly financial statements and uses the perpetual inventory method.
Instructions
Complete the work sheet below.
LAWSON MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2006
Adjusted
Trial Balance Income Statement
Balance Sheet
Debit
Credit
Debit
Credit
Debit
Credit
Cash
9,000
Supplies
3,500
Merchandise Inventory
21,000
Equipment
80,000
Accum. Depreciation—
Equipment
15,000
Accounts Payable
20,000
Common Stock
80,000
Retained Earnings
12,000
Dividends
8,000
Sales
39,000
Sales Discounts
2,000
Cost of Goods Sold
25,000
Advertising Expense
7,000
Supplies Expense
6,000
Depreciation Expense
1,000
Rent Expense
2,500
Utility Expense
1,000
166,000
166,000
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Accounting for Merchandising Operations
a
Solution 153
(15 min.)
LAWSON MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2006
Adjusted
Trial Balance Income Statement
Balance Sheet
Debit
Credit Debit
Credit Debit
Credit
Cash
9,000
9,000
Supplies
3,500
3,500
Merchandise Inventory
21,000
21,000
Equipment
80,000
80,000
Accum. Depreciation—
Equipment
15,000
15,000
Accounts Payable
20,000
20,000
Common Stock
80,000
80,000
Retained Earnings
12,000
12,000
Dividends
8,000
8,000
Sales
39,000
39,000
Sales Discounts
2,000
2,000
Cost of Goods Sold
25,000
25,000
Advertising Expense
7,000
7,000
Supplies Expense
6,000
6,000
Depreciation Expense
1,000
1,000
Rent Expense
2,500
2,500
Utility Expense
1,000
1,000
166,000
166,000
44,500
39,000
121,500
127,000
Net Loss
5,500
5,500
44,500
44,500
127,000
127,000
a
Ex. 154
Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:
(a)
Purchased $300,000 of merchandise on account, terms 2/10, n/30.
(b)
Returned $40,000 of damaged merchandise for credit.
(c)
Paid for the merchandise purchased within 10 days.
a
Solution 154
(6 min.)
(a)
Purchases
....................................................................................
300,000
Accounts Payable
.............................................................
300,000
(b)
Accounts Payable
.........................................................................
40,000
Purchase Returns and Allowances
...................................
40,000
(c)
Accounts Payable ($300,000 – $40,000)
......................................
260,000
Purchase Discounts ($260,000 × .02)
...............................
5,200
Cash ($260,000 – $5,200)
................................................
254,800
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Test Bank for Financial Accounting, Fifth Edition
COMPLETION STATEMENTS
155.
A ________________ buys and sells goods rather than performing services to earn a
profit.
156.
__________________ is deducted from net sales revenue for the period in order to arrive
at Gross Profit.
157.
Merchandise Inventory on hand can be obtained from detailed inventory records when a
________________ inventory system is maintained.
158.
The acquisition of merchandise inventory is debited to the ____________ account when a
perpetual inventory system is used.
159.
The freight cost incurred by a seller to deliver goods sold to a customer is called
________________.
160.
When a customer returns merchandise previously purchased on credit, the entry on the
seller’s books to record the return requires a debit to the ________________ account and
a credit to the ________________ account.
161.
Sales Returns and Allowances and Sales Discounts are both ______________ accounts
and have _______________ normal balances.
162.
Every sales transaction should be supported by a ________________ that provides
written evidence of the sale.
163.
Gross profit is obtained by subtracting ________________ from ________________.
164.
Income from operations is determined by subtracting total operating expenses from
________________.
Answers to Completion Statements
155.
merchandiser
161.
contra revenue, debit 156.
Cost of goods sold
162.
business document
157.
perpetual
163.
cost of goods sold, net sales
158.
Merchandise Inventory
164.
gross profit
159.
freight-out
160.
Sales Returns and Allowances,
Accounts Receivable
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Accounting for Merchandising Operations
MATCHING
165.
Match the items below by entering the appropriate code letter in the space provided.
A.
Net sales
F.
FOB shipping point
B.
Sales discounts
G.
Freight-out
C.
Purchase invoice
H.
Contra-revenue accounts
D.
Periodic inventory system
I.
Selling expenses
E.
FOB destination
J.
Sales invoice
______
1.
An incentive to encourage customers to pay their accounts early.
______
2.
Expenses associated with making sales.
______
3.
Freight terms that require the seller to pay the freight cost.
______
4.
Sales less sales returns and allowances and sales discounts.
______
5.
A document that supports each credit purchase.
______
6.
Sales Discounts and Sales Returns and Allowances
______
7.
Freight cost to deliver goods to customers reported as a selling expense.
______
8.
Requires a physical count of goods on hand to compute cost of goods sold.
______
9.
A document that provides support for credit sales
______10.
Freight terms that require the buyer to pay the freight cost.
Answers to Matching
1.
B
6.
H
2.
I
7.
G
3.
E
8.
D
4.
A
9.
J
5.
C
10.
F
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Test Bank for Financial Accounting, Fifth Edition
SHORT-ANSWER ESSAY QUESTIONS
S-A E 166
A merchandiser frequently has a need to use contra accounts related to the sale of goods.
Identify the contra accounts that have normal debit balances and explain why they are not
considered expenses.
Solution 166
The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and
Allowances. These accounts have debit balances but are not expenses because they are
adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment
of the inflow from the sale of goods, rather than a cost used to help earn revenue.
S-A E 167
In a single-step income statement, all data are classified under two categories: (1) Revenues, or
(2) Expenses. If the income statement is recast in a multiple-step format, what additional
information or intermediate components of income would be presented if the company uses a
periodic inventory system?
Solution 167
The items reported in a multiple-step income statement that are not reported in a single-step
income statement are: gross revenues as well as net revenues, the computation of cost of goods
sold using beginning and ending inventories, purchases (gross and net), gross profit, detailed
selling and administrative expenses, income from operations, and other revenues and gains, and
other expenses and losses.
S-A E 168
(Ethics)
Grider Corporation manufactures electronic components for use in many consumer products.
Their raw materials are purchased literally from all over the world. Depending on the country
involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while
others are content to receive payment within six months of receipt of the goods.
Because of this situation, Grider never closes its books until at least ten days after month end. In
this way, it can sort out ownership of goods in transit, and document which goods were received
by month end, and which were not.
Sue Rush, a new accountant, was asked to record about $50,000 in inventory as having been
received before the previous month ended. She argued that the shipping documents clearly
showed that the goods were actually received on the 8th of the current month. Her boss, busy
with month-end reports, curtly tells Sue to check the shipping terms. She did so, and found the
notation "FOB shipper's dock" on the document. She hadn't seen that particular notation before,
but she reasoned that if the selling company considered it shipped when it reached their dock,
Grider should consider it received when it reached Grider's dock. She did not record the sale
until after month end.
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Accounting for Merchandising Operations
Required:
1.
Why are accountants concerned with the timing in the recording of purchases?
2.
Was there a violation of ethical standards here? Explain.
Solution 168
1.
Accountants are concerned with timing because they seek to make sure that sales are
recorded in the proper period so that revenues and expenses are properly matched; to make
sure that goods recorded as owned by the company actually are owned as of the last date of
the period; and to make certain that sales recorded have been actually completed.
2.
The only ethical principle that may be involved is one of competence. Sue does not appear to
know enough about reading shipping documents to make a proper determination of
ownership. The goods were owned by Grider as soon as they left the shipper's dock.
Otherwise, the goods would have been owned by no one while in transit. It does not appear
that Sue compromised her integrity or that she sought some sort of gain from her mistake. It
does seem likely that she should have known how to better interpret the shipping documents.
S-A E 169
(Communication)
Mary Stine and Jane Kohl, two salespersons in adjoining territories, regularly compete for
bonuses. During the last month, their dollar volume of sales, on which the bonuses are based,
was nearly equal. On the last day of the month, both made a large sale. Both orders were
shipped on the last day of the month and both were received by the customer on the fifth of the
following month. Mary's sale was FOB shipping point, and Jane's was FOB destination. The
company "counts" sales for purposes of calculating bonuses on the date that ownership passes
to the purchaser. Mary's sale was therefore counted in her monthly total of sales, Jane's was not.
Jane is quite upset. She has asked you to just include it, or to take Mary's off as well. She also
has told you that you are being unethical for allowing Mary to get a bonus just for choosing a
particular shipping method.
Write a memo to Jane. Explain your position.
Solution 169
M E M O
TO:
Jane Kohl
FROM:
Martha King, Accounting
RE:
Sales Bonuses
DATE:
June 15, 200x
As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $100,000. This total does not include the $20,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else's sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing.
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Test Bank for Financial Accounting, Fifth Edition
I do understand your disappointment, but this sale does count in June—and it just may
make the difference in June's bonus. Please call me if I can be of further help.
(signature)
Brief Exercises
BE 170
Erving Company sold goods on account to Farley Enterprises with terms of 2/10, n/30. The
goods had a cost of $600 and a selling price of $900. Both Erving and Farley use a perpetual
inventory system. Record the sale on the books of Erving and the purchase on the books of
Farley.
Solution 170
Journal entry on Erving’s books:
Accounts Receivable ..................................................................
900
Sales .................................................................
900
Cost of Goods Sold
..................................................................
600
Merchandise Inventory
..........................................................
600
Journal entry on Farley’s books:
Merchandise Inventory ..................................................................
900
Accounts Payable
.................................................................
900
BE 171
For
each
of
the
following,
determine
the
missing
amounts.
Cost of
Operating
Sales
Goods Sold
Gross Profit
Expenses
Net Income
1.
$75,000
________
_________
$35,000
$15,000
2.
________
$10,000
$23,000
________
$5,000
Solution 171
(5 min.)
1.
Gross Profit = $50,000 ($35,000 + $15,000)
Cost
of
Goods
Sold
=
$25,000
($75,000
–
$50,000)
2.
Sales = $33,000 ($10,000 + $23,000)
Operating Expenses = $18,000 ($23,000 – $5,000)
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Accounting for Merchandising Operations
BE 172
For
each
of
the
following,
determine
the
missing
amounts.
Beginning
Goods avbl.
Cost of Ending
Inventory
Purchases
for Sale Goods Sold
Inventory 1.
$20,000
________
$ 40,000
$25,000
_________
2.
________
$220,000
$250,000
________
$40,000
Solution 172
1.
Purchases $20,000 ($40,000 - $20,000), Ending inventory $15,000 ($40,000 - $25,000)
2.
Beginning inventory $30,000 ($250,000 - $220,000), Cost of Goods Sold $210,000 ($250,000 - $40,000)
BE 173
Manning Company sells merchandise on account for $2,000 to Tiger Company with credit terms
of 3/10, n/60. Tiger Company returns $200 of merchandise that was damaged, along with a check
to settle the account within the discount period. What entry does Manning Company make upon
receipt of the check?
Solution 173
Sales Returns and Allowances
......................................................
200
Sales Discounts
($1,800 x .03)
.....................................................
54
Cash($2,000 - $200 – $54)
............................................................
1,746
Accounts Receivable ............................................................
2,000
BE 174
The income statement for Avery Company for the year ending 12/31/2006 is as follows:
AVERY COMPANY
Income Statement
For the Year Ended December 31, 2006
Revenues
Sales
.........................................................................................
$55,000
Interest revenue
.........................................................................
3,000
Total revenues
.....................................................................
58,000
Expenses
Cost of goods sold
.....................................................................
$36,000
Selling expenses
.......................................................................
7,000
Administrative expenses
............................................................
5,000
Interest expense
........................................................................
1,000
Total expenses
....................................................................
49,000
Net income
..........................................................................................
$ 9,000
Prepare the entries to close the revenue and expense accounts at 12/31/2006. You my omit explanations for the transactions.
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Test Bank for Financial Accounting, Fifth Edition
Solution 174
Dec. 31
Sales
....................................................................................
55,000
Interest revenue
...................................................................
3,000
Income Summary
........................................................
58,000
(To close credit balance accounts)
31
Income Summary
.................................................................
49,000
Administrative Expenses
.............................................
5,000
Interest Expenses
.......................................................
1,000
Cost of Goods Sold
.....................................................
36,000
Selling Expenses
........................................................
7,000
BE 175
During October 2006, Katie’s Catering Company generated revenues of $13,000. Sales
discounts totalled $200 for the month. Expenses were as follows: Cost of goods sold of $7,000
and operating expenses of $2,000. Calculate gross profit and operating income for the month.
175 Solution
Gross profit: $5,800 ($13,000 - $200 - $7,000)
Operating income: $3,800 ($5,800 - $2,000)
a
BE 176
Waller Brothers Supply uses a periodic inventory system. During May, the following transactions
and events occurred.
May
13
Purchased 6 motors at a cost of $44 each from Ord Company, terms 1/10, n/30.
The motors cost Ord Company $25 each.
May
16
Returned 1 defective motor to Ord.
May
23
Paid Ord Company in full.
Instructions
Journalize the May transactions for Waller Brothers. You may omit explanations.
a
Solution 176
May
13
Purchases
.........................................................................
264
Accounts Payable
....................................................
264
May
16
Accounts Payable
.............................................................
44
Purchase Returns and Allowances
...........................
44
May
23
Accounts Payable ($264 – $44)
........................................
220
Purchase Discounts ($220 × .01)
.............................
2
Cash
.........................................................................
218
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Accounting for Merchandising Operations
BE 177
Ord Company uses a perpetual inventory system. During May, the following transactions and
events occurred.
May
13
Sold 6 motors at a cost of $44 each to Waller Brothers Supply Company, terms 1/10,
n/30. The motors cost Ord $25 each.
May
16
One defective motor was returned to Ord.
May
23
Received payment in full from Waller Brothers.
Instructions
Journalize the May transactions for Ord Company (seller) assuming that Ord uses a perpetual inventory system. You may omit explanations.
Solution 177
May
13
Accounts Receivable
........................................................
264
Sales
........................................................................
264
Cost of Goods Sold
...........................................................
150
Merchandise Inventory
.............................................
150
May
16
Sales Returns and Allowances
.........................................
44
Accounts Receivable
................................................
44
Merchandise Inventory
......................................................
25
Cost of Goods Sold
..................................................
25
May
23
Cash ($264 – $44)
............................................................
218
Sales Discounts ($220 × .01)
............................................
2
Accounts Receivable
................................................
220
BE 178
Prepare the necessary journal entries on the books of Tri-State Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):
(a)
Tri-State purchased $40,000 of merchandise on account, terms 2/10, n/30.
(b)
Returned $4,000 of damaged merchandise for credit.
(c)
Paid for the merchandise purchased within 10 days.
Solution 178
(a)
Merchandise Inventory
.................................................................
40,000
Accounts Payable
.............................................................
40,000
(b)
Accounts Payable
.........................................................................
4,000
Merchandise Inventory
......................................................
4,000
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Test Bank for Financial Accounting, Fifth Edition
(c)
Accounts Payable ($40,000 – $4,000)
..........................................
36,000
Merchandise Inventory ($36,000 × .02)
............................
720
Cash ($36,000 – $720)
.....................................................
35,280
BE 179
The following information is available for Olson Company:
Beginning inventory
$ 4,500
Ending inventory
7,000
Freight-in
1,200
Purchases
35,000
Purchase returns and allowances
1,000
Compute each of the following:
(a)
Net purchases
(b)
Cost of goods purchased
(c)
Cost of goods sold
Solution 179
(a)
Net purchases = $34,000 ($35,000 - $1,000)
(b)
Cost of goods purchased = $35,200 ($34,000 + $1,200)
(c)
Cost of goods sold = $32,700 ($4,500 + $35,200 - $7,000)
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