Chapter 4, Problem 29AP

a.

To determine

Prepare journal entries to record these transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Date			Accounts and Explanation		Post Ref	Debit ($)	Credit ($)
Transaction 1			Land (A+)			30,000
				Cash (A–)			30,000
			(To record the purchases of land)
Transaction 2			Purchases (E–)			230,000
				Accounts Payable (L+)			230,000
			(To record purchases of inventory on account)
Transaction 3			Transportation – in (E–)			2,100
				Cash (A–)			2,100
			(To record freight-in cost)
Transaction 4			Accounts Payable (E–)			8,600
				Purchases Return and Allowances (A–)			8,600
			(To record purchases return and allowances)
Transaction 5			Cash (A+)			186,000
				Sales Revenue (E+)			186,000
			(To record sales revenue)
Transaction 6		Accounts Receivable (A+)				236,000
				Sales Revenue(E+)			236,000
		(To record sales revenue on account)
Transaction 7		Accounts Payable (L–)				221,400
				Purchases Discount (E+)			2,214
				Cash (A–)			219,186
		(To record payment of accounts payable and purchases discount)

Transaction 8		Selling Expense (E–)			28,500
			Cash (A–)			28,500
		(To record payment of selling expense)
Transaction 9		Sales Discount (E–)			3,120
		Cash (A+)			152,880
			Accounts Receivable (A–)			156,000
		(To record the collection on accounts receivable and sales discount)
Transaction 10		Cash (A+)			56,000
			Accounts Receivable (A–)			56,000
		(To record the collection on accounts receivable)
Transaction 11		Other Operating Expense (E–)			17,100
			Cash (A–)			17,100
		(To record payment of operating expense)
Transaction 12		Cost of Goods Sold (E–)			262,986
		Merchandise Inventory (Ending) (A+)			48,300
		Purchases Discount (E–)			2,214
		Purchases Return and Allowance (E–)			8,600
			Purchases (E+)			230,000
			Transportation-in			2,100
			Merchandise Inventory (beginning) (A–)			90,000
		(To record the adjustment entry for inventory )

Table (1)

Working notes:

Calculate the amount of purchases discount.

$\begin{array}{c}\text{Purchases discount = }\left(\text{\$230,000–\$8,600}\right)\times \text{1\%}\\ \text{= \$2,214}\end{array}$

Calculate the amount of sales discount.

$\begin{array}{c}\text{Sales discount = \$156,000}\times 2\text{\%}\\ \text{= \$3,120}\end{array}$

Calculate the amount of cost of goods sold.

Particulars	Amount ($)
Beginning merchandise inventory	90,000
Add: Purchases	230,000
Transportation-in	2,100
Less: Purchases return and allowance	(8,600)
Purchases Discount	(2,214)
Cost of goods available for sale	311,286
Less: Ending merchandise inventory	(48,300)
Cost of goods sold	262,986

Table (2)

b.

To determine

Post the above journal entry to the T-account.

Explanation of Solution

T-account: The condensed form of a ledger is referred to as T-account. The left-hand side of this account is known as debit, and the right hand side is known as credit.

Cash Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	64,000			Land (Transaction 1)	30,000
	Sales Revenue (Transaction 5)	186,000			Transportation-in (Transaction 6)	2,100
	Accounts Receivable (Transaction 9)	152,880			Accounts payable (Transaction 7)	219,186
	Accounts Receivable (Transaction 10)	56,000			Selling Expense (Transaction 8)	28,500
					Other Operating  Expense (Transaction 11)	17,100
	Total	458,880			Total	296,886
	Ending Balance	161,994

Table (3)

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	12,000			Sales discount (Transaction 9)	3,120
	Sales Revenue (Transaction 6)	236,000			Cash (Transaction 9)	152,880
					Cash (Transaction 10)	56,000
	Total	248,000			Total	212,000
	Ending Balance	36,000

Table (4)

Merchandise Inventory Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	90,000			Adjustment (Transaction 12)	90,000
	Adjustment (Transaction 12)	48,300
	Total	138,300			Total	90,000
	Ending Balance	48,300

Table (5)

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0
	Cash (Transaction 1)	30,000
	Total	30,000			Total	-
	Ending Balance	30,000

Table (6)

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Purchases return and allowances (Transaction 4)	8,600			Beginning balance	7,500
	Purchases Discount (Transaction 7)	2,214			Purchases (Transaction 2)	230,000
	Cash (Transaction 7)	219,186
	Total	230,000			Total	237,500
					Ending Balance	7,500

Table (7)

Common stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Balance	89,000

Table (8)

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Balance	69,500

Table (9)

Sales Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Beginning balance	0
					Cash (Transaction 5)	186,000
					Accounts Receivable (Transaction 6)	236,000
					Total	422,000
					Ending Balance	422,000

Table (10)

Sales Discounts Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Accounts receivable (Transaction 9)	3,120
	Total	3,120			Total	-
	Ending Balance	3,120

Table (11)

Purchases Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Adjustment (Transaction 12)	230,000
	Accounts payable (Transaction 2)	230,000
	Total	230,000			Total	230,000
	Ending Balance	0

Table (12)

Purchases Return and Allowance Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Accounts payable (Transaction 4)	8,600
	Adjustment (Transaction 12)	8,600
	Total	8,600			Total	8,600
	Ending Balance	0

Table (13)

Purchases Discount Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Accounts payable (Transaction 7)	2,214
	Adjustment (Transaction 12)	2,214
	Total	2,214			Total	2,214
	Ending Balance	0

Table (14)

Transportation –in Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Adjustment (Transaction 12)	2,100
	Cash (Transaction 3)	2,100
	Total	2,100			Total	-
	Ending Balance	0

Table (15)

Cost of Goods Sold Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Adjustment (Transaction 12)	262,986
	Total	262,986			Total	-
	Ending Balance	262,986

Table (16)

Other Operating Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Cash (Transaction 11)	17,100
	Total	17,100			Total	-
	Ending Balance	17,100

Table (17)

Selling Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Cash (Transaction 8)	28,500
	Total	28,500			Total	-
	Ending Balance	28,500

Table (18)

c.

To determine

Prepare a schedule of cost of goods sold, income statement, statement of changes in stockholders’ equity, balance sheet and statement of cash flows for Shop B for Year 2

Explanation of Solution

Schedule of cost of goods sold: The schedule which shows the total costs incurred for the goods sold, is referred to as schedule of cost of goods sold.

The following formula is used to calculate cost of goods sold:

$\boxed{\text{Cost of Goods Sold}=\text{Beginning Inventory}+\text{Purchases}–\text{Ending Inventory}}$

Schedule of cost of goods sold:

Shop B Schedule of Cost of Goods Sold For the Year Ended December 31, Year 2
Particulars	Amount ($)
Beginning merchandise inventory	90,000
Add: Purchases	230,000
Transportation-in	2,100
Less: Purchases return and allowance	(8,600)
Purchases Discount	(2,214)
Cost of goods available for sale	311,286
Less: Ending merchandise inventory	(48,300)
Cost of goods sold	$262,986

Table (19)

Income statement: This statement reports revenues and expenses from business operations and the result of those operations as net income or net loss. Net income is the positive difference between revenues and expenses. If the difference between revenues and expenses is negative, it results in net loss.

Income statement for Shop B for Year 2:

Shop B Income Statement For the Year Ended December 31, Year 2
Particulars	Amount
Revenues:
Sales Revenue	$422,000
Less: Sales discounts	$(3,124)
Cost of goods sold	$(262,986)
Gross margin	$155,894
Less: Expenses:
Selling Expense	$(28,500)
Other Operating Expense	$(17,100)
Net Income	$110,294

Table (20)

Statement of stockholders’ equity: The statement which reports the changes in stock, paid-in capital, retained earnings, and treasury stock, during the year is referred to as statement of stockholders’ equity.

Statement of changes in stockholders’ equity for Shop B Year 2:

Shop B Statement of Changes in Stockholders’ Equity For the Year ended December 31, Year 2
Beginning Common Stock	$89,000
Add: Stock Issued	$0
Ending common stock		$89,000
Beginning Balance of Retained earnings	$69,500
Add: Net Income for the year	$110,294
Ending Balance of Retained Earnings		$179,794
Total Stockholders’ Equity		$268,794

Table (21)

Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources, on a specific date. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.

Balance sheet for Shop B for Year 2:

Shop B Balance Sheet As of December 31, Year 2
Assets:
Cash	$161,994
Accounts Receivable	$36,000
Merchandise inventory	$48,300
Land	$30,000
Total Assets		$276,294
Liabilities:
Accounts Payable		$7,500
Stockholders’ Equity:
Common Stock	$89,000
Retained Earnings	$179,794
Total Stockholders’ Equity		$268,794
Total Liabilities and Stockholders’ Equity		$276,294

Table (22)

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Statement of cash flows for Shop B for Year 2:

Shop B Statement of Cash Flows For Year Ended December 31, Year 2
Cash Flows From Operating Activities:
Cash Inflow from Customers	$394,880
Cash Outflow to purchase inventory	$(221,286)
Cash Outflow for selling expense	$(28,500)
Cash Outflow for other operating expense	$(17,100)
Net Cash Flow from Operating Activities		$127,994
Cash Flows From Investing Activities:
Cash outflow from purchases of land	$(30,000)
Net Cash Flow from investing Activities		$(30,000)
Cash Flows From Financing Activities		$0
Net Increase in Cash		$97,994
Plus: Beginning Cash Balance		$64,000
Ending Cash Balance		$161,994

Table (23)

Working notes:

Calculate the amount of cash inflows from customers.

$\begin{array}{c}\text{Cash inflows from customers = }\left(\begin{array}{l}\text{Sales revenue +}\\ \text{ Collected accounts receivable }\\ \text{+ Collected accounts receivable}\end{array}\right)\\ \text{=}\left(\$186,000+\$152,880+\$56,000\right)\\ =\$394,880\end{array}$

Calculate the amount of cash outflow for inventory.

$\begin{array}{c}\text{Cash outflow for inventory = }\left(\begin{array}{l}\text{Paid freight on merchandised purchased+}\\ \text{Paid cash on accounts payable }\end{array}\right)\\ \text{=}\left(\$2,100+\$219,186\right)\\ =\$221,286\end{array}$

Calculate the amount of cash outflow for expenses.

$\begin{array}{c}\text{Cash outflow for expenses = }\left(\begin{array}{l}\text{Paid selling expenses }\\ \text{+Paid operating expenses}\end{array}\right)\\ \text{=}\left(\$28,000+\$17,100\right)\\ =\$45,100\end{array}$