Chapter 5, Problem 4APSA

Requirement-1.1:

To determine

To prepare:

The closing entries of the Valley Company for the fiscal year August 31^st, 2015.

Answer to Problem 4APSA

Solution:

a. To record the Sales of Valley Company for the year ended August 31 2015:

Date	General Journal	Debit ($)	Credit ($)
Aug 31	Sales	225,600
	Income Summary		225,600

Explanation of Solution

Given,

Sales: $225,600

Sales account is debited with the sale amount of $225,600 and income summary is credited with the same amount of $225,600 to close the temporary accounts with credit balances.

b. To record the total expenses, discounts and allowances of Sales of Valley Company for the year ended August 31^st, 2015.

Date	General Journal	Debit ($)	Credit ($)
Aug 31	Income Summary	175,750
	Sales discounts		2,250
	Sales returns & allowances		12,000
	Cost of goods sold		74,500
	Sales Salaries expense		32,000
	Rent expense-Selling space		8,000
	Stores supplies expense		1,500
	Advertising expense		13,000
	Office salaries expense		28,500
	Rent expense-Office space		3,600
	Office Supplies expense		400

Income summary is debited with the total sales expenses, discounts and allowances of $175,750 and credited with corresponding amounts of sales expenses, discounts and allowances related to sales as given in the trial balance of Valley Company for the year ended August 31^st, 2015.

c. To record the net income or retained earnings determined from the income statement for the year ended August 31^st, 2015.

Date	General Journal	Debit ($)	Credit ($)
Aug 31	Income summary	49,850
	Retained earnings		49,850

Income summary is debited with the net income of $49,850 ($225,600-$175,750) i.e. Sales-Total expenses, discounts and allowances of Sales and retained earnings is credited with the percentage of net earnings made by the company not paid out as dividends which is $49,850.

Conclusion

Hence the closing entries are recorded for the income summary for the year ended August 31^st, 2015.

Requirement-1.2:

To determine

To analyse:

The cash management system of Valley Company to accomplish the goal by taking all available purchase discounts of 3%.

Answer to Problem 4APSA

Solution:

No, the company’s cash management system does not accomplish the goal by taking all available discounts on purchase.

Explanation of Solution

Calculation of Purchase discount if payment is made in agreed time for credit terms:

Particulars	Amount in $
Invoice Cost of merchandise purchases	92,000
Less: Purchase Returns & Allowances	4,500
Net Purchases	87,500
Discount 3% on net purchases	87,500*3%
Purchase Discount, if payment made in agreed time	$2,625

The purchase discount computed in the above table for 3% if payment is made on agreed time is $2,625 whereas as per the supplementary records, Valley Company has received only $2,000 for the year ended August 31^st, 2015.

Therefore, the above statement indicates that the Valley Company failed to pay cash on their credit purchases to suppliers within allowed time to avail purchase discount of 3% due to lack of cash balance. If the Valley Company has paid within allowed time then the company would have got full discount of $2,625.

Conclusion

Hence from analysing the payment made on credit purchases and the discount received by the Valley Company, it is clear that the company does not have efficient cash management.

Requirement-1.3:

To determine

To analyse:

The comparison of percentage of returns and allowances on sales of the Valley Company between the prior years and the current year 2015.

Answer to Problem 4APSA

Solution:

The Valley Company’s current year percentage rate of sales returns and allowance is increased to 5.3% compared to prior year’s rate of 4% of its gross sales that were eventually returned outright or caused the company to grant allowances to customers. The increase in current year rate on returns and allowances to 5.3% indicates that company has inefficient sales system in meeting the specifications of the customer that made the company to grant more returns and allowances compared to prior year’s that had only 4% of sales returns and allowances on gross sales.

Explanation of Solution

Given,

Sales for the year August 31^st, 2015: $225,600

Sales returns and allowances for August 31^st, 2015: $12,000

Percentage of sales returns and allowances on Sales: $\$12,000/\$225,600*100=5.3\%$

Conclusion

Hence from the above analysis, the sales returns and allowances for the current year ended 2015 is increased to 5.3% when comparing to prior year’s rate of 4%.

Requirement-2.1:

To determine

To Compute:

The net sales of Valley Company for the year August 31^st, 2015 after discounts and returns allowed.

Answer to Problem 4APSA

Solution:

Particulars	Amount in $
Sales	225,600
Less: Sales discounts	2,250
Less: Sales returns & allowances	12,000
Net sales for the year	211,350

Explanation of Solution

The net sales is computed using the formula:

  $Netsales=Sales-Salesdiscounts-SalesReturnsandallowances$

  $NetSales=\$225,600-2,250-12,000$

  $NetSales=\$211,350$

Conclusion

Hence the net sales of Valley Company for the year 2015 is $211,350.

Requirement-2.2:

To determine

To Compute:

The total cost of merchandise purchased by the Valley Company for the year 2015.

Answer to Problem 4APSA

Solution:

Particulars	Amount in $	Amount in $
Invoice Cost of Merchandise	92,000
Add: Cost of transportation	4,600	96,600
Less: Purchase discounts	(2,000)
Less: Purchase returns & allowances	(4,500)	(6,500)
Cost of Merchandise Purchased		90,100

Explanation of Solution

The cost of merchandise is computed by using the formula:

  $CostofMerchandise=Costofmerchandisepurchase+TransportationCost-PurchaseDiscounts-PurchaseReturns\&Allowances$

Cost of Merchandise $=\$92,000+\$4,600-\$2,000-\$4,500$

Cost of Merchandise $=\$90,100$

Conclusion

Hence the cost of Merchandise of Valley Company for the year 2015 is $90,100.

Requirement-2.3:

To determine

To Prepare:

The multi-step income statement of Valley Company for the year ended August 31^st, 2015 to determine the net income of the company.

Answer to Problem 4APSA

Solution:

Valley Company Income Statement for the year ended August 31st,2015
Particulars	Amount in $	Amount in $
Revenues:
Sales	225,600
Less: Sales discounts	2,250
Less: Sales returns & allowances	12,000
Net Sales		211,350
Cost of goods sold		74,500
Gross Profit		136,850
Expenses:
Selling Expenses:
Advertising Expense	13,000
Sales salaries expense	32,000
Rent expense-Selling space	8,000
Store supplies expense	1,500
Total Selling expenses	54,500
General & administrative expenses:
Office Supplies expense	400
Office salaries expense	28,500
Rent expense-Office space	3,600
Total General & administrative expenses	32,500
Total expenses		87,000
Net income		49,850

Explanation of Solution

Computation of Gross Profit: The formula used to compute gross profit is:

  $GrossProfit=NetSales-Costofgoodssold$

Gross Profit= $\$211,350-\$74,500$

Gross Profit=$136,850

Computation of Net income: The formula used to compute net income is:

  $Netincome=Revenues-Expenses$

Revenues: $136,850 (Gross Profit)

Expenses: $87,000

Net income= $\$136,850-\$87,000$

Net income=$49,850

Conclusion

Hence the net income of Valley Company for the year 2015 is $49,850.

Requirement-2.4:

To determine

To prepare:

The single-step income statement for Valley Company for the year ended August 31^st, 2015 to determine the net income of the company.

Answer to Problem 4APSA

Solution:

Valley Company Income Statement for the year ended August 31st,2015
Particulars	Amount in $	Amount in $
Net Sales		211,350
Expenses:
Cost of goods sold	74,500
Selling Expenses	54,500
General & Administrative Expenses	32,500
Total Expenses		161,500
Net Income		49,850

Explanation of Solution

Computation of Net sales: The formula for computing net sales is:

  $NetSales=Sales-Salesdiscounts-Salesreturnsandallowances$

Net Sales= $\$225,600-\$2,250-\$12,000$

Net Sales=$211,350

Computation of total expenses:

Total expenses is derived by adding cost of goods sold, selling expenses and general & administrative expenses.

Cost of goods sold: $74,500

Selling Expenses: Advertising expense ($13,000) + Sales Salaries Expense ($32,000) + Rent expense (Selling Space) ($8,000) + Stores supplies expense ($1,500) = $54,500

General and Administrative Expenses: Office Supplies expense ($400) + Office Salaries expense ($28,500) + Rent expense (office space) ($3,600) = $32,500

Therefore total expenses for the year is $74,500+$54,500+$32,500=$161,500

Computation of Net income:

The formula used to compute net income is:

  $Netincome=Revenues-Expenses$

Revenues: $211,350 (Net Sales)

Expenses: $161,500

Net income= $\$211,350-\$161,500$

Net income=$49,850

Conclusion

Hence the net income of Valley Company for the year 2015 is $49,850.