Chapter 4, Problem 29BP

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+)			16,000
			Cash (A–)			16,000
		(To record the purchases of land)
Transaction 2		Purchases (E–)			46,000
			Accounts Payable (L+)			46,000
		(To record purchases of inventory on account)
Transaction 3		Transportation – in (E–)			460
			Cash (A–)			460
		(To record freight-in cost)
Transaction 4		Accounts Payable (E–)			4,000
			Purchases Return and Allowances (A–)			4,000
		(To record purchases return and allowances)
Transaction 5		Cash (A+)			54,000
			Sales Revenue (E+)			54,000
		(To record sales revenue)
Transaction 6		Accounts Receivable (A+)			100,000
			Sales Revenue(E+)			100,000
		(To record sales revenue on account)
Transaction 7		Accounts Payable (L–)			42,000
			Purchases Discount (E+)			840
			Cash (A–)			41,160
		(To record payment of accounts payable and purchases discount)

Transaction 8		Selling Expense (E–)			2,400
			Cash (A–)			2,400
		(To record payment of selling expense)
Transaction 9		Sales Discount (E–)			700
		Cash (A+)			69,300
			Accounts Receivable (A–)			70,000
		(To record the collection on accounts receivable and sales discount)
Transaction 10		Cash (A+)			24,000
			Accounts Receivable (A–)			24,000
		(To record the collection on accounts receivable)
Transaction 11		Other Operating Expense (E–)			6,400
			Cash (A–)			6,400
		(To record payment of operating expense)
Transaction 12		Cost of Goods Sold (E–)			101,620
		Merchandise Inventory (Ending) (A+)			60,000
		Purchases Discount (E–)			840
		Purchases Return and Allowance (E–)			4,000
			Purchases (E+)			46,000
			Transportation-in			460
			Merchandise Inventory (beginning) (A–)			120,000
		(To record the adjustment entry for inventory )

Table (1)

Working notes:

Calculate the amount of purchases discount.

$\begin{array}{c}\text{Purchases discount = }\left(\text{\$46,000–\$4,000}\right)\times 2\text{\%}\\ \text{= \$840}\end{array}$

Calculate the amount of sales discount.

$\begin{array}{c}\text{Sales discount = \$70,000}\times 1\text{\%}\\ \text{= \$700}\end{array}$

Calculate the amount of cost of goods sold.

Particulars	Amount ($)
Beginning merchandise inventory	120,000
Add: Purchases	46,000
Transportation-in	460
Less: Purchases return and allowance	(4,000)
Purchases Discount	(840)
Cost of goods available for sale	161,620
Less: Ending merchandise inventory	(60,000)
Cost of goods sold	$101,620

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	28,000			Land (Transaction 1)	16,000
	Sales Revenue (Transaction 5)	54,000			Transportation-in (Transaction 6)	460
	Accounts Receivable (Transaction 9)	69,300			Accounts payable (Transaction 7)	41,160
	Accounts Receivable (Transaction 10)	24,000			Selling Expense (Transaction 8)	2,400
					Other Operating  Expense (Transaction 11)	6,400
	Total	175,300			Total	66,420
	Ending Balance	108,880

Table (3)

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	18,000			Sales discount (Transaction 9)	700
	Sales Revenue (Transaction 6)	100,000			Cash (Transaction 9)	69,300
					Cash (Transaction 10)	24,000
	Total	118,000			Total	94,000
	Ending Balance	24,000

Table (4)

Merchandise Inventory Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	120,000			Adjustment (Transaction 12)	120,000
	Adjustment (Transaction 12)	60,000
	Total	160,000			Total	120,000
	Ending Balance	60,000

Table (5)

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0
	Cash (Transaction 1)	16,000
	Total	16,000			Total	-
	Ending Balance	16,000

Table (6)

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Purchases return and allowances (Transaction 4)	4,000			Beginning balance	10,000
	Purchases Discount (Transaction 7)	840			Purchases (Transaction 2)	46,000
	Cash (Transaction 7)	41,160
	Total	46,000			Total	56,000
					Ending Balance	10,000

Table (7)

Common stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Balance	140,000

Table (8)

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Balance	16,000

Table (9)

Sales Revenue Account
Date	Details	Debit ($)		Date	Details	Credit ($)
					Beginning balance	0
					Cash (Transaction 5)	54,000
					Accounts Receivable (Transaction 6)	100,000
					Total	154,000
					Ending Balance	154,000

Table (10)

Sales Discounts Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Accounts receivable (Transaction 9)	700
	Total	700			Total	-
	Ending Balance	700

Table (11)

Purchases Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Adjustment (Transaction 12)	46,000
	Accounts payable (Transaction 2)	46,000
	Total	46,000			Total	46,000
	Ending Balance	0

Table (12)

Purchases Return and Allowance Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Accounts payable (Transaction 4)	4,000
	Adjustment (Transaction 12)	4,000
	Total	4,000			Total	4,000
	Ending Balance	0

Table (13)

Purchases Discount Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Accounts payable (Transaction 7)	840
	Adjustment (Transaction 12)	840
	Total	840			Total	840
	Ending Balance	0

Table (14)

Transportation –in Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0			Adjustment (Transaction 12)	460
	Cash (Transaction 3)	460
	Total	460			Total	-
	Ending Balance	0

Table (15)

Cost of Goods Sold Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Adjustment (Transaction 12)	101,620
	Total	101,620			Total	-
	Ending Balance	101,620

Table (16)

Other Operating Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Cash (Transaction 11)	6,400
	Total	6,400			Total	-
	Ending Balance	6,400

Table (17)

Selling Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	0				-
	Cash (Transaction 8)	2,400
	Total	2,400			Total	-
	Ending Balance	2,400

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 S 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 S Schedule of Cost of Goods Sold For the Year Ended December 31, Year 2
Particulars	Amount ($)
Beginning merchandise inventory	120,000
Add: Purchases	46,000
Transportation-in	460
Less: Purchases return and allowance	(4,000)
Purchases Discount	(840)
Cost of goods available for sale	161,620
Less: Ending merchandise inventory	(60,000)
Cost of goods sold	$101,620

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 S for Year 2:

Shop S Income Statement For the Year Ended December 31, Year 2
Particulars	Amount
Revenues:
Sales Revenue	$154,000
Less: Sales discounts	$(700)
Cost of goods sold	$(101,620)
Gross margin	$51,680
Less: Expenses:
Selling Expense	$(2,400)
Other Operating Expense	$(6,400)
Net Income	$42,880

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 S for Year 2:

Shop S Statement of Changes in Stockholders’ Equity For the Year ended December 31, Year 2
Beginning Common Stock	$140,000
Add: Stock Issued	$0
Ending common stock		$140,000
Beginning Balance of Retained earnings	$16,000
Add: Net Income for the year	$42,880
Ending Balance of Retained Earnings		$58,880
Total stockholders’ Equity		$198,880

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 S for Year 2:

Shop S Balance Sheet As of December 31, Year 2
Assets:
Cash	$108,880
Accounts Receivable	$24,000
Merchandise inventory	$60,000
Land	$16,000
Total Assets		$208,880
Liabilities:
Accounts Payable		$10,000
Stockholders’ Equity:
Common Stock	$140,000
Retained Earnings	$58,880
Total Stockholders’ Equity		$198,880
Total Liabilities and Stockholders’ Equity		$208,880

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 S for Year 2.

Shop S Statement of Cash Flows For Year Ended December 31, Year 2
Cash Flows From Operating Activities:
Cash Inflow from Customers	$147,300
Cash Outflow to purchase inventory	$(41,620)
Cash Outflow for selling expense	$(2,400)
Cash Outflow for other operating expense	$(6,400)
Net Cash Flow from Operating Activities		$96,880
Cash Flows From Investing Activities:
Cash outflow from purchases of land	$(16,000)
Net Cash Flow from investing Activities		$(16,000)
Cash Flows From Financing Activities		$0
Net Increase in Cash		$80,880
Plus: Beginning Cash Balance		$28,000
Ending Cash Balance		$108,880

Table (23)

Working notes:

Calculate the amount of cash inflows from customers.

$\begin{array}{c}\text{Cash inflows from customers = }\left(\begin{array}{l}\text{Sales revenue +}\\ \text{ Collected accounts receivable }\\ \text{+ Collected accounts receivable}\end{array}\right)\\ \text{=}\left(\$54,000+\$69,300+\$24,000\right)\\ =\$147,300\end{array}$

Calculate the amount of cash outflow for inventory.

$\begin{array}{c}\text{Cash outflow for inventory = }\left(\begin{array}{l}\text{Paid freight on merchandised purchased+}\\ \text{Paid cash on accounts payable }\end{array}\right)\\ \text{=}\left(\$460+\$41,160\right)\\ =\$41,620\end{array}$

Calculate the amount of cash outflow for expenses.

$\begin{array}{c}\text{Cash outflow for expenses = }\left(\begin{array}{l}\text{Paid selling expenses }\\ \text{+Paid operating expenses}\end{array}\right)\\ \text{=}\left(\$2,400+\$6,400\right)\\ =\$8,800\end{array}$