Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 5
Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
1.
Identify the differences
between a service
company and a merchandising company.
1, 2, 3, 4
2.
Explain the recording of
purchases under a perpetual inventory system.
5
1
3.
Explain the recording
of sales under a perpetual inventory system.
6, 7, 8
4.
Distinguish between a
single-step and a multiple-step statement of
earnings.
5.
6.
Exercises
A
Problems
B
Problems
1A
1B
1, 2, 3
2A, 3A,
4A, 7A,
2B, 3B,
4B, 7B,
2
2, 3,
2A, 3A,
4A,
2B, 3B,
4B
9, 10, 11,
12
3, 4, 5
4, 5, 6
3A, 4A,
5A, 6A,
7A
3B, 4B,
5B, 6B,
7B,
Explain the factors affecting profitability.
12, 13
6
4, 5, 6
4A, 6A,
7A, 8A
4B, 6B,
7B, 8B
Explain the recording of
purchases and sales
under a periodic inventory system (Appendix
5A).
14*, 15*,
16*
7*, 8*, 9*,
10*
7*, 8*, 9*,
10*
9A*, 10A*,
11A*
9B*, 10B*,
11B*
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
1A
Description
Classify accounts of merchandising company.
Difficulty
Level
Simple
Time
Allotted (min.)
20-30
2A
Journalize purchase and sales transactions.
Moderate
20-30
3A
Journalize, post, and prepare trial balance and partial
statement of earnings.
Simple
30-40
4A
Journalize, post, and prepare partial statement of
earnings, and calculate ratios.
Simple
30-40
5A
Journalize, post, and prepare adjusted trial balance
and financial statements.
Moderate
40-50
6A
Prepare financial statements and calculate profitability ratios.
Moderate
40-50
7A
Calculate missing amounts and assess profitability.
Complex
30-40
8A
Consider impact of changes on profitability ratios.
Moderate
20-30
9A*
Journalize purchase and sales transactions.
Moderate
20-30
10A*
Journalize purchase and sales transactions.
Moderate
20-30
11A*
Prepare partial statement of earnings.
Simple
20-30
1B
Classify accounts of merchandising company.
Simple
20-30
2B
Journalize purchase and sales transactions.
Moderate
20-30
3B
Journalize, post, and prepare trial balance and partial
statement of earnings.
Simple
30-40
4B
Journalize, post, and prepare statement of earnings,
and calculate ratios.
Simple
30-40
5B
Journalize, post, and prepare adjusted trial balance
and financial statements.
Moderate
40-50
6B
Prepare financial statements and calculate profitability ratios.
Moderate
40-50
7B
Calculate missing amounts and assess profitability.
Complex
30-40
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Kimmel, Weygandt, Kieso, Trenholm
Problem
Number
Financial Accounting, Second Canadian Edition
Description
Difficulty
Level
Time
Allotted (min.)
8B
Consider how the timing of sales and purchases can
affect ratios.
Moderate
20-30
9B
Journalize purchase and sales transactions.
Moderate
20-30
10B
Journalize purchase and sales transactions.
Moderate
20-30
11B
Prepare partial statement of earnings.
Simple
20-30
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Financial Accounting, Second Canadian Edition
ANSWERS TO QUESTIONS
1. (a)
The earnings measurement process is as follows:
Sales
Less
Revenues
Cost of
Goods Equals
Sold
Gross
Profit
Less
Operating
Net
Equals
Expenses
Earnings
(b)
Earnings measurement in a merchandising company differs from a service company as
follows: (a) sales are the primary source of revenue and (b) expenses are divided into
two main categories: cost of goods sold and operating expenses.
(c)
The earnings measurement is the same because in both types of companies, net earnings (or loss) results from the matching of expenses with revenue.
2. The normal operating cycle for a merchandising company is likely to be longer than in a service company because inventory must first be purchased and sold, and then the receivables
must be collected.
3. Under a perpetual inventory system the inventory records are updated for each sale and purchase when it takes place and the cost of goods sold is determined each time a sale takes
place. Using a periodic system the inventory and cost of goods sold are determined at the end
of the accounting period when a physical inventory count is taken.
4. A physical count is an important control feature. Using a perpetual inventory system a company knows what should be on hand. Performing a physical counts and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.
5. The reason for recording the purchase of merchandise for resale in a separate account is to
enable a company to determine its gross profit. This information is useful in setting prices.
6. Sales returns are not debited directly to the Sales account because this would not provide information on the cost of the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods.
7.
Seller
Cash sales—
Credit sales—
Cash ..............................................................
Sales ......................................................
Cost of Goods Sold .......................................
Merchandise Inventory ...........................
Accounts Receivable .....................................
Sales ......................................................
Cost of Goods Sold .......................................
Merchandise Inventory ...........................
Debit
XX
Credit
XX
XX
XX
XX
XX
XX
XX
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Questions (Continued)
7.
(Continued)
00,Purchaser
Debit
Cash
purchases—
Merchandise Inventory ..................................
Cash .......................................................
XX
Credit
purchases —
Merchandise Inventory
Accounts Payable ...................................
XX
Credit
XX
XX
8. Disagree. In accordance with the revenue recognition principle, sales revenues are generally
considered to be earned when the goods are transferred from the seller to the buyer; that is,
when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales.
9. There are three distinguishing features in the statement of earnings of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.
10. (a)
(b)
Sales, cost of goods sold, and operating expenses
Other revenues and other expenses
11. Gross profit ......................................................................................................
Less: Earnings from operations ($300,000 – $20,000) ....................................
Operating expenses.........................................................................................
$580,000
280,000
$300,000
12. Sales revenues ................................................................................................
Less: Cost of goods sold .................................................................................
Gross profit ......................................................................................................
$100,000
70,000
$ 30,000
Gross profit margin:
$30,000
 30%
$100,000
Gross profit ......................................................................................................
Less: Operating expenses ..............................................................................
Net earnings .....................................................................................................
Profit margin:
$30,000
20,000
$10,000
$10,000
 10%
$100,000
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Financial Accounting, Second Canadian Edition
Questions (Continued)
13. Factors affecting a company’s gross profit margin include selling products with a higher (or
lower) “mark-up,” increased competition that results in lower selling prices, and price increases from suppliers.
14.*
(1) Periodic
Debit
(a)
(b)
Cash ..............................................................
Sales ......................................................
XX
Purchases .....................................................
Cash .......................................................
XX
Credit
XX
XX
(2) Perpetual
(a)
Cash ..............................................................
Sales ......................................................
Cost of Goods Sold .......................................
Merchandise Inventory ...........................
(b)
Merchandise Inventory ..................................
Cash .......................................................
Debit
XX
Credit
XX
XX
XX
XX
XX
15.*
Accounts
Purchase Returns
and Allowances
Purchase Discounts
Freight-in
16.*
(a)
(b)
(c)
(d)
(a)
Added/Deducted
(b)
Normal Balance
Deducted
Deducted
Added
Credit
Credit
Debit
X = Purchase returns and allowances and
Y = Purchase discounts, or vice versa.
X = Freight-in.
X = Cost of goods purchased.
X = Ending merchandise inventory.
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a)
(b)
(c)
Jan.
3 Merchandise Inventory .......................................
Accounts Payable.......................................
900,000
6 Accounts Payable...............................................
Merchandise Inventory ...............................
100,000
Jan. 12 Accounts Payable...............................................
Cash ...........................................................
Merchandise Inventory ($80,000 X 2%) .....
800,000
Jan.
900,000
100,000
784,000
16,000
BRIEF EXERCISE 5-2
(a)
(b)
(c)
Jan.
3 Accounts Receivable ..........................................
Sales ..........................................................
900,000
Cost of Goods Sold ............................................
Merchandise Inventory ...............................
600,000
6 Sales Returns and Allowances ...........................
Accounts Receivable ..................................
100,000
Merchandise Inventory .......................................
Cost of Goods Sold ....................................
80,000
Jan. 12 Cash ...................................................................
Sales Discounts..................................................
Accounts Receivable ..................................
784,000
16,000
Jan.
900,000
600,000
100,000
80,000
800,000
BRIEF EXERCISE 5-3
(a)
(b)
(c)
(d)
(e)
(f)
Sales = $181,500 ($71,900 + $109,600).
Cost of goods sold = $31,500 ($75,000 – $43,500).
Gross profit = $43,000 ($108,000 – $65,000).
Operating expenses = $30,000 [$43,500 – ($16,200 - $2,700)].
Non operating revenues = $1,500 [$43,000 (from (c)) – $15,000 - $29,500).
Net earnings = $73,000 ($109,600 – $39,500 + $2,900).
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BRIEF EXERCISE 5-4
COSBY INC.
Statement of Earnings (Partial)
Month Ended October 31, 2004
Sales revenues
Sales ($300,000 + $100,000) ............................................
Less: Sales returns and allowances ...............................
Sales discounts .....................................................
Net sales ...........................................................................
$400,000
$18,000
5,000
23,000
$377,000
BRIEF EXERCISE 5-5
As the names suggest, numerous steps are required in determining net earnings in a multiplestep statement.
Item
Gain on sale of equipment
Cost of goods sold
Amortization expense
Interest expense
Sales returns and allowances
Income tax expense
(1)
Multiple Step
Other revenues
Cost of goods sold
Operating expenses
Other expenses
Sales revenue
Income tax expense
(2)
Single Step
Revenues
Expenses
Expenses
Expenses
Sales revenue
Income tax expense
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BRIEF EXERCISE 5-6
2003
2002
Gross profit margin:
Gross profit margin:
$923.8 - $603.3
= 34.7%
$923.8
$758.3 - $497.8
= 34.3%
$758.3
Profit margin:
Profit margin:
$30.5
= 3.3%
$923.8
$20.6
= 2.7%
$758.3
The Forzani Group Ltd. has maintained a fairly stable gross profit margin over the two years indicating there has been very little change in the percentage mark-up it has been able to command.
However, in 2003 the company had a slightly higher profit margin indicating it has been better
able to control its operating costs.
BRIEF EXERCISE 5-7
(a)
(b)
(c)
Jan. 3
Purchases ..........................................................
Accounts Payable.......................................
900,000
Accounts Payable...............................................
Purchase Returns and Allowances.............
100,000
Jan. 12 Accounts Payable...............................................
Cash ...........................................................
Purchase Discounts ...................................
800,000
Jan. 6
900,000
100,000
784,000
16,000
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BRIEF EXERCISE 5-8*
(a)
(b)
(c)
Jan.
3 Accounts Receivable ..........................................
Sales ..........................................................
900,000
6 Sales Returns and Allowances ...........................
Accounts Receivable ..................................
100,000
Jan. 12 Cash ...................................................................
Sales Discounts..................................................
Accounts Receivable ..................................
784,000
16,000
Jan.
900,000
100,000
800,000
BRIEF EXERCISE 5-9*
Purchases .................................................................................
Less: Purchase returns and allowances ...................................
Purchase discounts ........................................................
Net purchases ...........................................................................
$400,000
$11,000
7,800
Net purchases ...........................................................................
Add: Freight-in ........................................................................
Cost of goods purchased...........................................................
18,800
$381,200
$381,200
16,000
$397,200
BRIEF EXERCISE 5-10*
Net sales ..................................................................................
Beginning inventory ..................................................................
Add: Cost of goods purchased* ................................................
Cost of goods available for sale ...............................................
Ending inventory.......................................................................
Cost of goods sold ....................................................................
Gross profit ...............................................................................
$630,000
$ 60,000
397,200
457,100
0 90,000
367,200
$262,800
Information taken from Brief Exercise 5-9*.
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a)
1.
April
5
2.
6
3.
7
4.
5.
(b)
8
15
May 4
Merchandise Inventory .................................
Accounts Payable ................................
18,000
Merchandise Inventory .................................
Cash ....................................................
900
Equipment ....................................................
Accounts Payable ................................
26,000
Accounts Payable .........................................
Merchandise Inventory ........................
2,800
Accounts Payable ($18,000 – $2,800) .........
Merchandise Inventory ........................
[($15,200 X 2%]
Cash ($15,200 – $304) ........................
15,200
Accounts Payable ($18,000 – $2,800) ...........
Cash……………………………………...
15,200
18,000
900
26,000
2,800
304
14,896
15,200
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EXERCISE 5-2
Sept.
6
10
12
14
20
21
Merchandise Inventory (60 X $20) ......................................
Accounts Payable ......................................................
1,200
Accounts Payable ...............................................................
Merchandise Inventory ..............................................
40
Accounts Receivable (26 X $30).........................................
Sales ..........................................................................
780
Cost of Goods Sold (26 X $20) ...........................................
Merchandise Inventory ..............................................
520
Sales Returns and Allowances ...........................................
Accounts Receivable .................................................
30
Merchandise Inventory .......................................................
Cost of Goods Sold ....................................................
20
Accounts Receivable (30 X $30).........................................
Sales ..........................................................................
900
Cost of Goods Sold (30 X $20) ...........................................
Merchandise Inventory ..............................................
600
Cash ($780 - $30) X 98% ...................................................
Sales Discounts ..................................................................
Accounts Receivable ($780 - $30) .............................
735
15
1,200
40
780
520
30
20
900
600
750
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EXERCISE 5-3
(a)
1.
Dec.
2.
8
3.
(b)
1.
2.
3.
3
13
Dec.
3
8
13
Accounts Receivable ...............................
Sales ..............................................
480,000
Cost of Goods Sold .................................
Merchandise Inventory ...................
320,000
Sales Returns and Allowances ................
Accounts Receivable ......................
24,000
Cash ($456,000 – $9,120) .......................
Sales Discounts.......................................
[($480,000 – $24,000) X 2%]
Accounts Receivable ......................
($480,000 – $24,000)
446,880
9,120
Merchandise Inventory ............................
Accounts Payable ...........................
480,000
Accounts Payable....................................
Merchandise Inventory ...................
24,000
Accounts Payable ($480,000 – $24,000)
Merchandise Inventory ...................
[($480,000 – $24,000) X 2%]
Cash ($456,000 – $9,120) ..............
456,000
480,000
320,000
24,000
456,000
480,000
24,000
9,120
446,880
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EXERCISE 5-4
(a)
Young Company
Sales.......................................................................................
*Sales returns (1) ....................................................................
Net sales .................................................................................
$90,000)
(9,000)
$81,000)
Net sales .................................................................................
Cost of goods sold ..................................................................
*Gross profit (2) ......................................................................
$81,000)
(56,000)
$25,000)
Gross profit .............................................................................
Operating expenses................................................................ 0
Income tax expense................................................................
*Net earnings (3).....................................................................
$25,000)
,(15,000)
(4,000)
$ 6,000)
Rioux Company
*Sales (4) ................................................................................
Sales returns...........................................................................
Net sales .................................................................................
$100,000)
0 (5,000)
$ 95,000)
Net sales .................................................................................
*Cost of goods sold (5) ...........................................................
Gross profit .............................................................................
$95,000)
57,000)
$38,000)
Gross profit .............................................................................
*Operating expenses (6) .........................................................
Income tax expense................................................................
Net earnings ...........................................................................
$38,000)
(20,000)
(7,000)
$11,000)
*Indicates missing amount
(b)
Young
Rioux
Profit margin
$6,000 ÷ $81,000 = 7.4%
$11,000 ÷ $95,000 = 11.6%
Gross profit margin
$25,000 ÷ $81,000 = 30.9%
$38,000 ÷ $95,000 = 40.0%
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EXERCISE 5-5
(a)
FORTIER CORP.
Statement of Earnings
Month Ended January 31, 2004
Sales revenues
Sales ........................................................................
Less: Sales returns and allowances ........................
Sales discounts ..............................................
Net sales...................................................................
Cost of goods sold .............................................................
Gross profit ........................................................................
Operating expenses
Salary expense .........................................................
Rent expense ...........................................................
Insurance expense ...................................................
Freight-out ................................................................
Total operating expenses ................................
Earnings before income taxes ...........................................
Income tax expense ..........................................................
Net earnings ....................................................................
(b)
Profit margin =
$350,000
$13,000
8,000
21,000
329,000
208,000
121,000
$61,000
18,000
12,000
7,000
98,000
23,000
9,200
$ 13,800
$13,800
= 4.2%
$329,000
Gross profit margin =
$121,000
= 36.8%
$329,000
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EXERCISE 5-6
(a)
DANIER LEATHER INC.
Statement of Earnings
Year Ended June 29, 2002
Revenue ............................................................................
Expenses
Cost of sales .............................................................
Selling, general, and administrative expenses..........
Interest expense .......................................................
Total expenses ................................................
Earnings before income taxes ...........................................
Income tax expense ..........................................................
Net earnings ......................................................................
$179,977
$92,098
69,264
461
161,823
18,154
7,429
$ 10,725
(b)
DANIER LEATHER INC.
Statement of Earnings
Year Ended June 29, 2002
Revenue ............................................................................
Cost of sales ....................................................................
Gross profit ........................................................................
Selling, general and administrative expenses ...................
Earnings from operations ..................................................
Interest expense ................................................................
Earnings before income taxes ...........................................
Income tax expense ..........................................................
Net earnings ....................................................................
(c)
Gross profit margin =
Profit margin =
$179,977
92,098
87,879
69,264
18,615
461
18,154
7,429
$ 10,725
$87,879
= 48.8%
$179,977
$10,725
= 6%
$179,977
Earnings per share =
$10,725
= $1.57
6,850 shares
Price-earnings ratio =
$12.10
= 7.7 times
$1.57
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 5-7
(a)
1.
April
5
2.
6
3.
7
4.
5.
(b)
8
15
May 4
Purchases ....................................................
Accounts Payable ................................
18,000
Freight-In ......................................................
Cash ....................................................
900
Equipment ....................................................
Accounts Payable ................................
26,000
Accounts Payable .........................................
Purchase Returns and Allowances ......
2,800
Accounts Payable ($18,000 – $2,800) .........
Purchase Discounts [($15,200 X 2%] ..
Cash ($15,200 – $304)........................
15,200
Accounts Payable ($18,000 – $2,800) ...........
Cash……………………………………...
15,200
18,000
900
26,000
2,800
304
14,896
15,200
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Financial Accounting, Second Canadian Edition
EXERCISE 5-8
(a)
Pele Ltd. (purchaser)
Perpetual Inventory System
June
10
11
12
19
Merchandise Inventory ...............................................
Accounts Payable .............................................
5,000
Merchandise Inventory (freight) .................................
Cash ..................................................................
300
Accounts Payable ......................................................
Merchandise Inventory (returns) .......................
300
Accounts Payable ($5,000 – $300) ............................
Merchandise Inventory ($4,700 X 2%) ..............
Cash ($4,700 – $94) .........................................
4,700
5,000
300
300
94
4,606
Periodic Inventory System
June
10
11
12
19
Purchases ..................................................................
Accounts Payable .............................................
5,000
Freight-In ....................................................................
Cash ..................................................................
300
5,000
300
Accounts Payable ......................................................
Purchase Returns and Allowances ...................
300
Accounts Payable ($5,000 – $300) ............................
Purchase Discounts ($4,700 X 2%) ..................
Cash ($4,700 – $94) .........................................
4,700
300
94
4,606
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EXERCISE 5-8 (Continued)
(b)
Duvall Ltd. (seller)
Perpetual Inventory System
June
10
Accounts Receivable..................................................
Sales .................................................................
5,000
Cost of Goods Sold ....................................................
Merchandise Inventory ......................................
3,000
5,000
3,000
11
No entry
12
Sales Returns and Allowances ..................................
Accounts Receivable .........................................
300
Merchandise Inventory ...............................................
Cost of Goods Sold ...........................................
180
Cash ($4,700 – $94) ..................................................
Sales Discounts ($4,700 X 2%) .................................
Accounts Receivable ($5,000 – $300) ..............
4,606
94
19
300
180
4,700
Periodic Inventory System
June
10
Accounts Receivable..................................................
Sales .................................................................
5,000
5,000
11
No entry
12
Sales Returns and Allowances ..................................
Accounts Receivable .........................................
300
Cash ($4,700 – $94) ..................................................
Sales Discounts ($4,700 X 2%) .................................
Accounts Receivable ($5,000 – $300) ..............
4,606
94
19
300
4,700
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5-19
Chapter 5
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Financial Accounting, Second Canadian Edition
EXERCISE 5-9*
(a)
(b)
(c)
(d)
$1,435 ($1,500  $40 - $25)
$1,545 ($1,435 + $110)
$1,485 ($1,795  $310)
$30 ($1,080  $20 - $1,030)
(g)
(h)
(i)
(j)
(e)
(f)
$200 ($1,230  $1,030)
$120 ($1,350  $1,230)
(k)
(l)
$7,650 ($7,210 + $150 + $290)
$730 ($7,940  $7,210)
$8,940 ($1,000 + $7,940)
$5,200 ($49,530  $44,330
from l)
$800 ($43,590  $700 - $42,090)
$44,330 ($42,090 + $2,240)
EXERCISE 5-10*
Inventory, September 1, 2003 .....................................
Purchases ...................................................................
Less: Purchase returns and allowances .....................
Purchase discounts ..........................................
Net purchases .............................................................
Add: Freight-in .............................................................
Cost of goods purchased.............................................
Cost of goods available for sale ..................................
Inventory, August 31, 2004… ......................................
Cost of goods sold .......................................................
$ 17,200
$144,000
2,000
2,200
139,800
4,000
143,800
161,000
25,000
$136,000
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Chapter 5
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
Account
Statement
Classification
Accounts payable and accrued Balance Sheet
liabilities
Current Liabilities
Accumulated depreciation
Balance Sheet
Cash and cash equivalents
Balance Sheet
Property, Plant and
Equipment, Contra Account
Current Assets
Cost of products sold
Statement of Earnings
Cost of Goods Sold
Current portion of long-term
debt
Balance Sheet
Current Liabilities
Depreciation expense
Statement of Earnings
Operating Expense
Deficit
Balance Sheet
Statement of
Retained Earnings
Shareholders’ Equity
Deficit
Goodwill and other intangible
assets
Balance Sheet
Assets
Income taxes expense
Statement of Earnings
Income Tax Expense
Income taxes payable
Balance Sheet
Current Liabilities
Interest expense
Statement of Earnings
Other Expenses
Inventories
Balance Sheet
Current Assets
Long-term debt
Balance Sheet
Long-term Liabilities
Operating expenses
Statement of Earnings
Operating Expenses
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-1A (Continued)
Account
Statement
Classification
Prepaid expenses
Balance Sheet
Current Assets
Property, plant and equipment
Balance Sheet
Property, Plant and
Equipment
Sales and operating revenue
Statement of Earnings
Revenue
Selling, administrative, and
general expenses
Statement of Earnings.
Operating Expenses
Share capital
Balance Sheet
Shareholders’ Equity
Trade and other accounts
receivable
Balance Sheet
Current Assets
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-2A
Oct. 1
5
8
10
12
15
Merchandise Inventory ...........................................
Accounts Payable ...........................................
75,000
Merchandise Inventory ...........................................
Cash ...............................................................
1,800
Accounts Payable ...................................................
Merchandise Inventory....................................
6,000
Accounts Receivable .............................................
Sales...............................................................
22,000
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
16,500
Sales Returns and Allowances ...............................
Accounts Receivable ......................................
3,000
Merchandise Inventory ...........................................
Cost of Goods Sold .........................................
2,250
Inventory–Supplies .................................................
Cash ...............................................................
5,000
Merchandise Inventory ...........................................
Cash. ..............................................................
7,500
75,000
1,800
6,000
22,000
16,500
3,000
2,250
5,000
7,500
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-2A (Continued)
Oct. 17
20
25
28
Cash [($22,000 – $3,000) X 98%]...........................
Sales Discounts [($22,000 – $3,000) X 2%] ...........
Accounts Receivable ($22,000 – $3,000) .......
18,620
380
Delivery Equipment ................................................
Accounts Payable ...........................................
44,000
Accounts Payable ($75,000 - $6,000).....................
Cash ...............................................................
69,000
Accounts Receivable .............................................
Sales...............................................................
30,000
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
22,500
19,000
44,000
69,000
30,000
22,500
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-3A
(a)
General Journal
Date
Apr. 4
6
8
10
11
13
14
15
17
Account Titles
Debit
Merchandise Inventory ...........................................
Accounts Payable...........................................
840
Merchandise Inventory ...........................................
Cash...............................................................
60
Accounts Receivable .............................................
Sales ..............................................................
900
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
600
Accounts Payable ..................................................
Merchandise Inventory ...................................
140
Merchandise Inventory ...........................................
Cash...............................................................
300
Accounts Payable ($840 – $140) ...........................
Merchandise Inventory ($700 X 2%) ..............
Cash...............................................................
700
Merchandise Inventory ...........................................
Accounts Payable...........................................
700
Cash ......................................................................
Merchandise Inventory ...................................
50
Merchandise Inventory ...........................................
Cash...............................................................
80
Credit
840
60
900
600
140
300
14
686
700
50
80
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5-25
Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-3A (Continued)
(a) (Continued)
Date
Account Titles
Apr. 18
Accounts Receivable .............................................
Sales ..............................................................
800
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
410
Cash ......................................................................
Accounts Receivable......................................
500
Accounts Payable ..................................................
Merchandise Inventory ($700 X 2%) ..............
Cash ..............................................................
700
Sales Returns and Allowances ..............................
Accounts Receivable......................................
50
Cash ......................................................................
Accounts Receivable......................................
350
20
21
27
30
Debit
Credit
800
410
500
14
686
50
350
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5-26
Chapter 5
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 5-3A (Continued)
(b)
Cash
Apr. 1 Bal. 2,500 Apr. 6
Apr. 15
50 Apr. 11
Apr. 20
500 Apr. 13
Apr. 30
350 Apr. 17
Apr. 21
Apr. 30 Bal. 1,588
60
300
686
80
686
Accounts Receivable
Apr. 8
900 Apr. 20
Apr. 18
800 Apr. 27
Apr. 30
Apr. 30 Bal. 800
500
50
350
Merchandise Inventory
Apr. 1 Bal. 1,700 Apr. 8
Apr. 4
840 Apr. 10
Apr. 6
60 Apr. 13
Apr. 11
300 Apr. 15
Apr. 14
700 Apr. 18
Apr. 17
80 Apr. 21
Apr. 30 Bal. 2,452
600
140
14
50
410
14
Sales
Apr. 8
900
Apr. 18
800
Apr. 30 Bal. 1,700
Sales Returns and Allowances
Apr. 27
50
Apr. 30 Bal. 50
Cost of Goods Sold
Apr. 8
600
Apr. 18
410
Apr. 30 Bal.1,010
Accounts Payable
Apr. 10
140 Apr. 4
840
Apr. 13
700 Apr. 14
700
Apr. 21
700
Apr. 30 Bal.
0
Common Shares
Apr. 1 Bal. 4,200
Apr. 30 Bal. 4,200
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-3A (Continued)
(c)
J’s TENNIS SHOP
Trial Balance
April 30, 2004
Cash ........................................................................
Accounts Receivable ...............................................
Merchandise Inventory .............................................
Common Shares ......................................................
Sales........................................................................
Sales Returns and Allowances ................................
Cost of Goods Sold ..................................................
Debit
$1,588
800
2,452
Credit
$4,200
1,700
50
1,010
$5,900
___ __
$5,900
(d)
J.’s TENNIS SHOP
Statement of Earnings (Partial)
Month Ended April 30, 2004
Sales revenues
Sales ....................................................................................
Less: Sales returns and allowances ....................................
Net sales ..............................................................................
Cost of goods sold .......................................................................
Gross profit ..................................................................................
$1,700
50
1,650
1,010
640
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(a) General Journal
Date
Apr. 2
4
5
6
11
13
14
16
18
20
Financial Accounting, Second Canadian Edition
PROBLEM 5-4A
Account Titles
Debit
Credit
Merchandise Inventory ........................................... 6,300
Accounts Payable ...........................................
6,300
Accounts Receivable .............................................. 5,000
Sales ..............................................................
5,000
Cost of Goods Sold ................................................ 4,000
Merchandise Inventory ...................................
4,000
Freight-out ..............................................................
Cash ...............................................................
200
Accounts Payable ..................................................
Merchandise Inventory ...................................
300
200
300
Accounts Payable ($6,300 – $300)......................... 6,000
Merchandise Inventory ($6,000 X 2%) ............
Cash ...............................................................
120
5,880
Cash....................................................................... 4,900
Sales Discounts ($5,000 X 2%) ..............................
100
Accounts Receivable ......................................
5,000
Merchandise Inventory ........................................... 4,400
Cash ...............................................................
4,400
Cash.......................................................................
Merchandise Inventory ...................................
500
500
Merchandise Inventory ........................................... 4,200
Accounts Payable ...........................................
Merchandise Inventory ...........................................
Cash ...............................................................
4,200
100
100
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-4A (Continued)
(a) (Continued)
General Journal
Date
Apr. 23
26
27
29
30
30
30
Account Titles
Debit
Credit
Cash ....................................................................... 8,100
Sales ...............................................................
8,100
Cost of Goods Sold ................................................ 6,700
Merchandise Inventory ....................................
6,700
Merchandise Inventory ........................................... 2,300
Cash ...............................................................
2,300
Accounts Payable ................................................... 4,200
Merchandise Inventory ($4,200 X 2%) ............
Cash ...............................................................
84
4,116
Sales Returns and Allowances ...............................
Cash ...............................................................
110
Merchandise Inventory ...........................................
Cost of Goods Sold .........................................
75
110
75
Accounts Receivable .............................................. 3,700
Sales ...............................................................
3,700
Cost of Goods Sold ................................................ 3,000
Merchandise Inventory ....................................
3,000
Operating Expenses ............................................... 1,400
Cash ...............................................................
1,400
Income Tax Expense .............................................. 1,000
Cash ...............................................................
1,000
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Chapter 5
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Financial Accounting, Second Canadian Edition
PROBLEM 5-4A (Continued)
(b)
Cash
Apr. 1 Bal. 9,000 Apr. 5
Apr. 13
4,900 Apr. 11
Apr. 16
500 Apr. 14
Apr. 23
8,100 Apr. 20
Apr. 26
Apr. 27
Apr. 29
Apr. 30
Apr. 30
Apr. 30 Bal. 2,994
200
5,880
4,400
100
2,300
4,116
110
1,400
1,000
Accounts Receivable
Apr. 4
5,000 Apr. 13
5,000
Apr. 30
3,700
Apr. 30 Bal. 3,700
Apr. 1 Bal. 9,000
Apr. 30 Bal. 9,000
Sales
Apr. 24
5,000
Apr. 23
8,100
Apr. 30
3,700
Apr. 30 Bal. 16,800
Sales Returns and Allowances
Apr. 29
110
Apr. 30 Bal. 110
Sales Discounts
Apr. 13
100
Apr. 30 Bal. 100
Merchandise Inventory
Apr. 2
6,300 Apr. 4
4,000
Apr. 14
4,400 Apr. 6
300
Apr. 18
4,200 Apr. 11
120
Apr. 20
100 Apr. 16
500
Apr. 26
2,300 Apr. 23
6,700
Apr. 29
75 Apr. 27
84
Apr. 30
3,000
Apr. 30 Bal. 2,671
Cost of Goods Sold
Apr. 4
4,000 Apr. 29
Apr. 23
6,700
Apr. 30
3,000
Apr. 30 Bal.13,625
Accounts Payable
Apr. 6
300 Apr. 2
6,300
Apr. 11
6,000 Apr. 18
4,200
Apr. 27
4,200
Apr. 30 Bal.
0
Freight -out
Apr. 5
200
Apr. 30 Bal. 200
Common Shares
75
Operating Expenses
Apr. 30
1,400
Apr. 30 Bal. 1,400
Income Tax Expense
Apr. 30
1,000
Apr. 30 Bal. 1,000
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Financial Accounting, Second Canadian Edition
PROBLEM 5-4A (Continued)
(c)
NISSON DISTRIBUTING LTD.
Statement of Earnings
Month Ended April 30, 2004
Sales revenues
Sales ....................................................................
Less: Sales returns and allowances ....................
Sales discounts .........................................
Net sales ..............................................................
Cost of goods sold .......................................................
Gross profit ..................................................................
Expenses
Operating expenses .............................................
Freight-out............................................................
Total expenses ............................................................
Earnings before taxes ..................................................
Income tax expense .....................................................
Net earnings ................................................................
(d) Gross profit margin =
Profit margin =
$16,800
$110
100
210
16,590
13,625
2,965
$1,400
200
1,600
1,365
1,000
$ 365
$2,965
= 17.9%
$16,590
$365
= 2.2%
$16,590
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PROBLEM 5-5A
(a) Nov. 30
30
30
30
30
Store Supplies Expense .............................
Store Supplies ....................................
3,000
Amort. Expense—Store Equipment............
Accumulated Amortization—
Store Equipment .............................
9,000
Amort. Expense—Delivery Equipment .......
Accumulated Amortization—
Delivery Equipment ........................
6,000
Interest Receivable ....................................
Interest Revenue ................................
3,000
Income Tax Expense..................................
Income Tax Payable ...........................
30,000
3,000
9,000
6,000
3,000
30,000
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Financial Accounting, Second Canadian Edition
PROBLEM 5-5A (Continued)
(b)
Store Supplies
Nov. 30 Bal.5,500 Nov. 30
Nov. 30 Bal.2,500
3,000
Accumulated Amortization—
Store Equipment
Nov. 30 Bal. 18,000
Nov. 30
9,000
Nov. 30 Bal. 27,000
Accumulated Amortization—
Delivery Equipment
Nov. 30 Bal. 6,000
Nov. 30
6,000
Nov. 30 Bal. 12,000
Amortization Expense—
Delivery Equipment
Nov. 30
6,000
Nov. 30 Bal. 6,000
Interest Receivable
Nov. 30
3,000
Nov. 30 Bal. 3,000
Interest Revenue
Nov. 30
3,000
Nov. 30 Bal. 3,000
Income Tax Payable
Nov. 30
30,000
Nov. 30 Bal. 30,000
Store Supplies Expense
Nov. 30
3,000
Nov. 30 Bal. 3,000
Income Tax Expense
Nov. 30
30,000
Nov. 30 Bal. 30,000
Amortization Expense—
Store Equipment
Nov. 30
9,000
Nov. 30 Bal. 9,000
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Financial Accounting, Second Canadian Edition
PROBLEM 5-5A (Continued)
(c)
FASHION CENTRE LTD.
Adjusted Trial Balance
November 30, 2004
Debit
$ 16,700
33,700
51,000
45,000
2,500
72,000
Cash ...............................................................
Accounts Receivable ......................................
Notes Receivable – Current ............................
Merchandise Inventory ....................................
Store Supplies ................................................
Store Equipment .............................................
Accumulated Amortization—Store ..................
Equipment...................................................
Delivery Equipment ......................................... 30,000
Accumulated Amortization—Delivery
Equipment...................................................
Accounts Payable ...........................................
Common Shares .............................................
Retained Earnings ..........................................
Dividends ........................................................ 10,000
Sales...............................................................
Sales Returns and Allowances .......................
4,200
Cost Of Goods Sold ........................................ 469,400
Salaries Expense ............................................ 100,000
Advertising Expense ....................................... 26,400
Utilities Expense ............................................. 14,000
Repair Expense .............................................. 12,100
Delivery Expense ............................................ 16,700
Rent Expense ................................................. 24,000
Store Supplies Expense ..................................
3,000
Amortization Expense—Store
Equipment...................................................
9,000
Amortization Expense—Delivery
Equipment...................................................
6,000
Income Tax Expense ...................................... 30,000
Income Tax Payable .......................................
Interest Revenue ............................................
Interest Receivable .........................................
3,000
Totals ...................................................... $978,700
Credit
$ 27,000
12,000
39,500
80,000
30,000
757,200
30,000
3,000
0000 000
$978,700
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PROBLEM 5-5A (Continued)
(d)
FASHION CENTRE LTD.
Statement of Earnings
Year Ended November 30, 2004
Sales revenues
Sales .........................................................
Less: Sales returns and allowances ..........
Net sales ...................................................
Cost of goods sold ............................................
Gross profit .......................................................
Operating expenses
Salaries expense.......................................
Advertising expense ..................................
Rent expense ............................................
Delivery expense.......................................
Utilities expense ........................................
Repair expense .........................................
Amortization expense—store equipment ...
Amortization expense—delivery equipment
Store supplies expense .............................
Total operating expenses ..................
Earnings from operations ..................................
Other revenues
Interest revenue ........................................
Earnings before tax...........................................
Income tax expense..........................................
Net earnings .....................................................
$757,200)
4,200)
753,000)
469,400)
283,600)
$100,000
26,400
24,000
16,700
14,000
12,100
9,000
6,000
3,000
211,200)
72,400
3,000)
75,400
30,000
$ 45,400
FASHION CENTRE LTD.
Statement of Retained Earnings
Year Ended November 30, 2004
Retained earnings, December 1, 2003 .............
Add: Net earnings ............................................
Less: Dividends ...............................................
Retained earnings, November 30, 2004 ...........
0$30,000)
45,400
75,400
10,000
$65,400)
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Financial Accounting, Second Canadian Edition
PROBLEM 5-5A
(d)
(Continued)
FASHION CENTRE LTD.
Balance Sheet
November 30, 2004
Assets
Current assets
Cash .....................................................
Accounts receivable..............................
Interest receivable ................................
Notes receivable – current portion ........
Merchandise inventory ..........................
Store supplies .......................................
Total current assets.......................
Notes receivable, due 2006 ..........................
Property, plant and equipment
Store equipment ...................................
Accumulated amortization—
store equipment ................................
Delivery equipment ...............................
Accumulated amortization—
delivery equipment............................
Total assets ..................................................
$ 16,700
33,700
3,000
30,000
45,000
2,500
130,900
21,000
$72,000
27,000
$30,000
45,000
12,000
18,000
$214,900
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .................................
Income taxes payable ...........................
Total current liabilities ...................
Shareholders’ equity
Common shares ...................................
Retained earnings.................................
Total shareholders’ equity .............
Total liabilities and shareholders’ equity .......
$ 39,500
30,000
69,500
80,000
65,400
145,400
$214,900
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Financial Accounting, Second Canadian Edition
PROBLEM 5-6A
(a)
N-MART DEPARTMENT STORE LTD.
Statement of Earnings
Year Ended December 31, 2004
Sales revenues
Sales .....................................................
Less: Sales returns and allowances ......
Net sales ...............................................
Cost of goods sold.........................................
Gross profit....................................................
Operating expenses
Sales salaries expense ..........................
Office salaries expense .........................
Sales commissions expense..................
Amortization expense ............................
Insurance expense ................................
Property taxes expense .........................
Utilities expense ....................................
Total operating expenses ...............
Earnings from operations ..............................
Other revenues
Interest revenue .....................................
Other expenses
Interest expense ....................................
Earnings before income tax expense ............
Income tax expense ......................................
Net earnings ..................................................
$700,000
8,000
692,000
412,700
279,300
$76,000
32,000
14,500
7,600
21,350
24,800
11,000
186,850
92,450
$4,000
6,400
(2,400)
90,050
46,000
$ 44,050
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PROBLEM 5-6A (Continued)
(a) (Continued)
N-MART DEPARTMENT STORE
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1...........................................
Add: Net earnings ..........................................................
Less: Dividends ...............................................................
Retained earnings, December 31 .....................................
$199,300
44,050
243,350
8,000
$235,350
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PROBLEM 5-6A (Continued)
(a) (Continued)
N-MART DEPARTMENT STORE
Balance Sheet
December 31, 2004
Assets
Current assets
Cash .....................................................
Accounts receivable..............................
Merchandise inventory ..........................
Prepaid insurance .................................
Total current assets.......................
Property, plant and equipment
Land .....................................................
Building.................................................
Less: Accumulated amortization—
building ..................................
Delivery equipment ...............................
Less: Accumulated amortization—
equipment..............................
Total property, plant and equipment
Total assets ..................................................
$ 17,000
50,300
75,000
2,400
144,700
250,000
$190,000
38,000
$110,000
152,000
68,750
41,250
443,250
$587,950
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ......................................................
Property taxes payable ..............................................
Interest payable .........................................................
Sales commissions payable.......................................
Current portion of mortgage payable .........................
Total current liabilities ........................................
Long-term liabilities
Mortgage payable ......................................................
Total liabilities ....................................................
Shareholders’ equity
Common shares ........................................................
Retained earnings......................................................
Total shareholders’ equity ..................................
Total liabilities and shareholders’ equity.....................
$ 89,300
24,800
5,000
3,500
20,000
142,600
60,000
202,600
150,000
235,350
385,350
$587,950
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PROBLEM 5-6A (Continued)
(b)
Gross profit margin =
Profit margin =
$279,300
= 40.4%
$692,000
$44,050
= 6.3%
$692,000
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PROBLEM 5-7A
(a)
2003
Cost of goods sold:
Beginning inventory
Plus: Purchases
Equals: Cost of goods available for sale
Less: Ending inventory
Equals: Cost of goods sold
2004
2005
$ 13,000
141,000
154,000
$ 11,000
150,000
161,300
$ 14,700
132,000
146,700
(11,300)
$142,700
(14,700)
$146,600
(12,200)
$134,500
2003
$225,700
142,700
$ 83,000
2004
$227,600
146,600
$ 81,000
2005
$219,500
134,500
$ 85,000
36.8%
35.6%
38.7%
2003
$ 20,000
141,000
135,000
$ 26,000
2004
$ 26,000
150,000
161,000
$ 15,000
2005
$ 15,700
132,000
127,000
$ 20,000
(b)
Net sales
Less: Cost of goods sold
Gross profit
Gross profit margin
(c)
Beginning accounts payable
Plus: Purchases
Less: Payment to suppliers
Ending accounts payable
(d)
Even though sales declined in 2005 from each of the two prior years, the
gross profit margin increased. This means that cost of goods sold declined
more than sales did, reflecting better purchasing power or control of costs.
Therefore, in spite of declining sales, profitability, as measured by the gross
profit margin, actually improved.
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PROBLEM 5-8A
(a)
Gross profit margin =
Profit margin =
$135,000
= 30%
$450,000
$21,000
= 4.7%
$450,000
(b)
1.
Gross profit margin = Gross profit ÷ Sales
0000000000000
= $136,080* ÷ $504,000 = 27.0%
Profit margin = Net earnings ÷ Sales
000000000000000
= $17,412*** ÷ $504,000 = 3.5%
* 27% x $504,000 ($450,000 X 1.12) = $136,080
** $92,000 + ($5,600 x 10%) + ($65,000 x 10%) = $99,060
*** $136,080 - $99,060 - $8,000 = $29,020 – ($29,020 x 40%) = $17,412
2.
Sales will increase by $54,000. However, this will be off-set by the increase in
cost of goods sold, advertising expense and sales salaries. Overall, the proposal will result in a decrease in net earnings of $3,588 and a decrease in
profit margin from 4.7% to 3.5%. The sales manager’s proposal should be rejected.
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PROBLEM 5-9A*
Oct. 1
5
8
10
12
15
17
20
25
28
Purchases ..............................................................
Accounts Payable ...........................................
75,000
Freight-in ................................................................
Cash ...............................................................
1,800
Accounts Payable...................................................
Purchase Returns and Allowances .................
6,000
Accounts Receivable .............................................
Sales ..............................................................
22,000
Sales Returns and Allowances ...............................
Accounts Receivable ......................................
3,000
Inventory–Supplies .................................................
Cash ...............................................................
5,000
Purchases ..............................................................
Cash. ..............................................................
7,500
Cash [($22,000 – $3,000) X 98%] ..........................
Sales Discounts [($22,000 – $3,000) X 2%] ...........
Accounts Receivable ($22,000 – $3,000) ......
18,620
380
Delivery Equipment ................................................
Accounts Payable ...........................................
44,000
Accounts Payable ($75,000 - $6,000).....................
Cash ...............................................................
69,000
Accounts Receivable .............................................
Sales ..............................................................
30,000
75,000
1,800
6,000
22,000
3,000
5,000
7,500
19,000
44,000
69,000
30,000
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*PROBLEM 5-10A
(a)
General Journal
Date
Apr. 4
6
8
10
11
13
14
15
17
18
Account Titles
Debit
Purchases ..............................................................
Accounts Payable ...........................................
840
Freight-in ................................................................
Cash ...............................................................
60
Accounts Receivable ..............................................
Sales ..............................................................
900
Accounts Payable ..................................................
Purchase Returns and Allowances .................
140
Purchases ..............................................................
Cash ...............................................................
300
Accounts Payable ($840 – $140) ...........................
Purchase Discounts ($700 X 2%) ...................
Cash ...............................................................
700
Purchases ..............................................................
Accounts Payable ...........................................
700
Cash.......................................................................
Purchase Returns and Allowances .................
50
Freight-In................................................................
Cash ...............................................................
80
Accounts Receivable ..............................................
Sales ..............................................................
800
Credit
840
60
900
140
300
14
686
700
50
80
800
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PROBLEM 5-10A* (Continued)
(a) (Continued)
Date
Apr. 20
21
27
30
Account Titles
Debit
Cash .......................................................................
Accounts Receivable ......................................
500
Accounts Payable ...................................................
Purchase Discounts ($700 X 2%) ...................
Cash ...............................................................
700
Sales Returns and Allowances ...............................
Accounts Receivable ......................................
50
Cash .......................................................................
Accounts Receivable ......................................
350
Credit
500
14
686
50
350
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PROBLEM 5-10A* (Continued)
(b)
Cash
Apr. 1 Bal. 2,500 Apr. 6
Apr. 15
50 Apr. 11
Apr. 20
500 Apr. 13
Apr. 30
350 Apr. 17
Apr. 21
60
300
686
80
686
Apr. 30 Bal. 1,588
Accounts Receivable
Apr. 8
900 Apr. 20
Apr. 18
800 Apr. 27
Apr. 30
Sales Returns and Allowances
Apr. 27
50
Apr. 30 Bal. 50
500
50
350
Apr. 30 Bal. 800
Merchandise Inventory
Apr. 1 Bal. 1,700
Apr. 30 Bal.
Purchases
Apr. 4
840
Apr. 11
300
Apr. 14
700
Apr. 30 Bal. 1,840
Purchase Returns and Allowances
Apr. 10
140
Apr. 15
50
Apr. 30 Bal. 190
Apr. 30 Bal. 1,700
Accounts Payable
Apr. 10
140 Apr. 4
Apr. 13
700 Apr. 14
Apr. 21
700
Sales
Apr. 8
900
Apr. 18
800
Apr. 30 Bal. 1,700
840
700
0
Common Shares
Apr. 1 Bal. 4,200
Apr. 30 Bal. 4,200
Purchase Discounts
Apr. 13
Apr. 21
Apr. 30 Bal.
14
14
28
Freight-in
Apr. 6
60
Apr. 17
80
Apr. 30 Bal. 140
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PROBLEM 5-10A* (Continued)
(c)
J’s TENNIS SHOP
Trial Balance
April 30, 2004
Cash ........................................................................
Accounts Receivable ...............................................
Merchandise Inventory .............................................
Common Shares ......................................................
Sales........................................................................
Sales Returns and Allowances.................................
Purchases ................................................................
Purchase Returns and Allowances ..........................
Purchase Discounts .................................................
Freight-in..................................................................
Debit
$1,588
800
1,700
Credit
$4,200
1,700
50
1,840
140
$6,118
190
28
00 000
$6,118
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PROBLEM 5-10A* (Continued)
(d)
J’s TENNIS SHOP
Statement of Earnings (Partial)
Month Ended April 30, 2004
Sales revenues
Sales ..................................................................
Less: Sales returns and allowances ..................
Net sales ............................................................
Cost of goods sold
Inventory, March 31 ........................................... $1,700
Purchases ........................................
$1,840
Less: Purchase returns and allowances
190
Purchase discounts .................
28
Net purchases ..................................
1,622
Add: Freight-in ..................................
140
Cost of goods purchased ................................... 1,762
Cost of goods available for sale ......................... 3,462
Inventory, April 30 .............................................. 2,100
Cost of goods sold .....................................
Gross profit ................................................................
$1,700
50
1,650
1,362
$ 288
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PROBLEM 5-11A*
ABELA CORPORATION
Statement of Earnings (Partial)
Year Ended July 31, 2004
Sales revenues
Sales ..................................................................
$910,000
Less: Sales returns and allowances ..................
20,000
Sales discounts .......................................
5,000
Net sales ............................................................
885,000
Cost of goods sold
Inventory, August 1 ............................................ $44,360
Purchases ........................................ $630,000
Less: Purchase returns and allowances 3,000
Purchase discounts .................
7,000
Net purchases ..................................
620,000
Add: Freight-in ..................................
5,060
Cost of goods purchased .................
625,060
Cost of goods available for sale .......
669,420
Inventory, July 31 .............................
36,200
Cost of goods sold .....................................
633,220
Gross profit ................................................................
$251,780
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PROBLEM 5-1B
Account
Statement
Classification
Accounts payable
Balance Sheet
Current Liabilities
Accounts receivable
Balance Sheet
Current Assets
Accumulated amortization
Balance Sheet
Property, Plant and
Equipment, Contra
Account
Advertising expense
Statement of
Earnings
Operating Expenses
Amortization expense
Statement of
Earnings
Operating Expenses
Cash
Balance Sheet
Current Assets
Common shares
Balance Sheet
Shareholders' Equity
Dividends
Statement of Retained Earnings
Dividends
Freight-out
Statement of
Earnings
Operating Expenses
Income tax expense
Statement of
Earnings
Other Expenses
Income tax payable
Balance Sheet
Current Liabilities
Insurance expense
Statement of
Earnings
Statement of
Earnings
Operating Expenses
Interest expense
Other Expenses
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PROBLEM 5-1B (Continued
Account
Statement
Classification
Interest payable
Balance Sheet
Current Liabilities
Land
Balance Sheet
Property, Plant
Equipment
Merchandise inventory
Balance Sheet
Current Assets
Mortgage payable
Balance Sheet
Long-Term Liabilities
Office building
Balance Sheet
Property, Plant
Equipment
Prepaid insurance
Balance Sheet
Current Assets
Retained earnings
Balance Sheet
Shareholders' Equity
Salaries expense
Statement of
Earnings
Operating Expenses
Salaries payable
Balance Sheet
Current Liabilities
Sales
Revenue
Sales returns and
allowances
Statement of
Earnings
Statement of
Earnings
Statement of
Earnings
Store equipment
Balance Sheet
Property, Plant
Equipment
Utilities expense
Statement of
Earnings
Operating Expenses
Unearned sales revenue
Balance Sheet
Current Liabilities
Wages payable
Balance Sheet
Current Liabilities
Sales discounts
and
and
Contra Revenue
Contra Revenue
and
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PROBLEM 5-2B
Sept. 2
4
5
5
6
14
15
16
Delivery Equipment ...............................................
Accounts Payable ..........................................
28,000
Merchandise Inventory ..........................................
Accounts Payable ..........................................
60,000
Merchandise Inventory ..........................................
Cash ..............................................................
2,500
Accounts Payable .................................................
Merchandise Inventory ..................................
8,000
Accounts Receivable .............................................
Sales .............................................................
20,000
Cost of Goods Sold ...............................................
Merchandise Inventory ..................................
15,000
Accounts Payable ($60,000 - $8,000) ...................
Cash ($52,000 - $1,040) ................................
Merchandise Inventory ($52,000 x 2%) .........
52,000
Supplies ................................................................
Cash ..............................................................
4,000
Cash [$20,000 – ($20,000 x 1%)] ..........................
Sales Discounts ($20,000 – $19,800)....................
Accounts Receivable .....................................
19,800
200
28,000
60,000
2,500
8,000
20,000
15,000
50,960
1,040
4,000
20,000
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PROBLEM 5-2B (Continued)
Sept. 18
22
28
Merchandise Inventory ..........................................
Cash ..............................................................
6,000
Accounts Receivable .............................................
Sales .............................................................
27,000
Cost of Goods Sold ...............................................
Merchandise Inventory ..................................
20,000
Sales Returns and Allowances ..............................
Accounts Receivable .....................................
9,500
Cost of Goods Sold ...............................................
Merchandise Inventory ..................................
7,000
6,000
27,000
20,000
9,500
7,000
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PROBLEM 5-3B
(a)
General Journal
Date
Apr. 5
7
9
10
12
14
17
20
21
Account Titles
Debit
Merchandise Inventory ........................................... 1,700
Accounts Payable...........................................
Merchandise Inventory ...........................................
Cash...............................................................
80
Accounts Payable ..................................................
Merchandise Inventory ...................................
100
Accounts Receivable .............................................
Sales ..............................................................
950
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
630
Merchandise Inventory ...........................................
Accounts Payable...........................................
660
Credit
1,700
80
100
950
630
660
Accounts Payable ($1,700 – $100) ........................ 1,600
Merchandise Inventory ($1,600 X 2%)............
Cash...............................................................
Accounts Payable ..................................................
Merchandise Inventory ...................................
60
Accounts Receivable .............................................
Sales ..............................................................
700
Cost of Goods Sold ................................................
Merchandise Inventory ...................................
490
Accounts Payable ($660 – $60) .............................
Merchandise Inventory ($600 X 1%) ..............
Cash...............................................................
600
32
1,568
60
700
490
6
594
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PROBLEM 5-3B (Continued)
(a) (Continued)
Date
Account Titles
Debit
Apr. 27
Sales Returns and Allowances ..............................
75
Accounts Receivable......................................
Note: No merchandise was returned.
30
Cash ...................................................................... 1,100
Accounts Receivable......................................
Credit
75
1,100
(b)
Cash
Apr. 1 Bal. 2,500 Apr. 7
Apr. 30
1,100 Apr. 14
Apr. 21
Apr. 30 Bal. 1,358
80
1,568
594
Accounts Receivable
Apr. 10
950 Apr. 27
75
Apr. 20
700 Apr. 30
1,100
Apr. 30 Bal. 475
Merchandise Inventory
Apr. 1 Bal. 3,500 Apr. 9
Apr. 5
1,700 Apr. 10
Apr. 7
80 Apr. 14
Apr. 12
660 Apr. 17
Apr. 20
Apr. 21
Apr. 30 Bal. 4,622
Apr. 9
Apr. 14
Apr. 17
Apr. 21
100
630
32
60
490
6
Common Shares
Apr. 1 Bal. 6,000
Apr. 30 Bal. 6,000
Sales
Apr. 10
950
Apr. 20
700
Apr. 30 Bal. 1,650
Sales Returns and Allowances
Apr. 27
75
Apr. 30
75
Cost of Goods Sold
Apr. 10
630
Apr. 20
490
Apr. 30 Bal.1,120
Accounts Payable
100 Apr. 5
1,700
1,600 Apr. 12
660
60
600
Apr. 30 Bal.
0
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PROBLEM 5-3B (Continued)
(c)
WEIR’S PRO SHOP
Trial Balance
April 30, 2004
Cash ........................................................................
Accounts Receivable ...............................................
Merchandise Inventory .............................................
Common Shares ......................................................
Sales........................................................................
Sales Returns and Allowances.................................
Cost of Goods Sold ..................................................
Debit
$1,358
475
4,622
Credit
$6,000
1,650
75
1,120
$7,650
000 00
$7,650
Sales revenues
Sales ...................................................................................
Less: Sales returns and allowances ...................................
Net sales .............................................................................
Cost of goods sold ......................................................................
Gross profit .................................................................................
$1,650
75
1,575
1,120
455
(d)
WEIR’S PRO SHOP
Statement of Earnings (Partial)
Month Ended April 30, 2004
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PROBLEM 5-4B
(a)
General Journal
Date
May 1
2
5
9
10
11
12
15
17
Account Titles
Debit
Merchandise Inventory ...................................................
5,000
Accounts Payable...................................................
Credit
5,000
Accounts Receivable .....................................................
4,500
Sales ......................................................................
4,500
Cost of Goods Sold ........................................................
3,000
Merchandise Inventory ...........................................
3,000
Accounts Payable ..........................................................
200
Merchandise Inventory ...........................................
200
Cash ($4,500 – $90) ......................................................
4,410
Sales Discounts ($4,500 X 2%) .....................................90
Accounts Receivable ..............................................
4,500
Accounts Payable ($5,000 – $200) ................................
4,800
Merchandise Inventory ($4,800 X 2%)....................
Cash.......................................................................
096
4,704
Supplies .........................................................................
900
Cash.......................................................................
900
Merchandise Inventory ...................................................
3,100
Cash.......................................................................
3,100
Cash ..............................................................................
230
Merchandise Inventory ...........................................
230
Merchandise Inventory ...................................................
1,900
Accounts Payable...................................................
1,900
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PROBLEM 5-4B (Continued)
(a) (Continued)
General Journal
Date
May 19
24
25
27
29
31
31
31
Account Titles
Debit
Merchandise Inventory ...................................................
250
Cash.......................................................................
Credit
250
Cash ..............................................................................
6,200
Sales ......................................................................
6,200
Cost of Goods Sold ........................................................
4,340
Merchandise Inventory ...........................................
4,340
Merchandise Inventory ...................................................
800
Accounts Payable...................................................
800
Accounts Payable ..........................................................
1,900
Merchandise Inventory ($1,900 X 2%)....................
Cash.......................................................................
38
1,862
Sales Returns and Allowances ......................................
100
Cash.......................................................................
100
Merchandise Inventory ...................................................70
Cost of Goods Sold ................................................
70
Accounts Receivable .....................................................
1,600
Sales ......................................................................
1,600
Cost of Goods Sold ........................................................
1,120
Merchandise Inventory ...........................................
1,120
Operating Expenses ......................................................
1,500
Cash.......................................................................
1,500
Income Tax Expense .....................................................
500
Income Tax Payable ...............................................
500
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PROBLEM 5-4B (Continued)
(b)
Cash
May 1 Bal. 5,000 May 10
May 9
4,410 May 11
May 15
230 May 12
May 24
6,200 May 19
May 27
May 29
May 31
May 31 Bal.3,424
4,704
900
3,100
250
1,862
100
1,500
Accounts Receivable
May 2
4,500 May 9
4,500
May 31
1,600
May 31 Bal.1,600
Merchandise Inventory
May 1
5,000 May 2
3,000
May 12
3,100 May 5
200
May 17
1,900 May 10
96
May 19
250 May 15
230
May 25
800 May 24
4,340
May 29
70 May 27
38
May 31
1,120
May 31 Bal.2,096
Supplies
May 11
900
May 31 Bal. 900
Accounts Payable
May 5
200 May 1
5,000
May 10
4,800 May 17
1,900
May 27
1,900 May 25
800
May 31 Bal. 800
Common Shares
May 1 Bal. 5,000
May 31 Bal. 5,000
Sales
May 2
4,500
May 24
6,200
May 31
1,600
May 31 Bal.12,300
Sales Returns and Allowances
May 29
100
May 31 Bal. 100
Sales Discounts
May 9
90
May 31 Bal. 90
Cost of Goods Sold
May 2
3,000 May 29
May 24
4,340
May 31
1,120
May 31 Bal.8,390
70
Income Tax Expense
May 31
500
May 31 Bal. 500
Operating Expenses
May 31
1,500
May 31 Bal. 1,500
Income Taxes Payable
May 31
500
May 31 Bal. 500
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Financial Accounting, Second Canadian Edition
PROBLEM 5-4B (Continued)
(c)
EAGLE HARDWARE STORE LTD.
Statement of Earnings
Month Ended May 31, 2004
Sales revenues
Sales ....................................................................
Less: Sales returns and allowances ....................
Sales discounts .........................................
Net sales ..............................................................
Cost of goods sold .......................................................
Gross profit ..................................................................
Less: Operating expenses ...........................................
Earnings before taxes ..................................................
Income tax expense .....................................................
Net earnings ................................................................
(d) Gross profit margin =
Profit margin =
$12,300
$100
90
190
12,110
8,390
3,720
1,500
2,220
500
$ 1,720
$3,720
= 30.7%
$12,110
$1,720
= 14.2%
$12,110
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PROBLEM 5-5B
(a) Dec. 31
31
31
31
Amortization Expense—Buildings...............
Accumulated Amortization—
Buildings .........................................
10,000
Amortization Expense—Equipment ............
Accumulated Amortization—
Equipment ......................................
9,000
Interest Expense ........................................
Interest Payable ..................................
3,640
Income Tax Expense ..................................
Income Tax Payable ...........................
20,000
10,000
9,000
3,640
20,000
(b)
Accumulated
Amortization—Buildings
Dec. 31 Bal. 57,000
Dec. 31
10,000
Dec. 31 Bal. 67,000
Accumulated
Amortization—Equipment
Dec. 31 Bal. 42,400
Dec. 31
9,000
Dec. 31 Bal. 51,400
Amortization
Expense—Equipment
Dec. 31
9,000
Dec. 31 Bal. 9,000
Interest Payable
Dec. 31
3,640
Dec. 31 Bal. 3,640
Amortization
Expense—Buildings
Dec. 31
10,000
Dec. 31 Bal. 10,000
Income Tax Expense
Dec. 31
20,000
Dec. 31 Bal. 20,000
Income Tax Payable
Dec. 31
20,000
Dec. 31 Bal. 20,000
Interest Expense
Dec. 31
3,640
Dec. 31 Bal. 3,640
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PROBLEM 5-5B (Continued)
(c)
MESA INC.
Adjusted Trial Balance
December 31, 2004
Cash ............................................................
Accounts Receivable ...................................
Merchandise Inventory .................................
Land.............................................................
Buildings ......................................................
Accumulated Amortization—
Buildings ..................................................
Equipment....................................................
Accumulated Amortization—
Equipment................................................
Notes Payable .............................................
Accounts Payable ........................................
Interest Payable ...........................................
Income Tax Payable ....................................
Common Shares ..........................................
Retained Earnings .......................................
Dividends .....................................................
Sales............................................................
Sales Discounts ...........................................
Cost of Goods Sold ......................................
Salaries Expense .........................................
Utilities Expense ..........................................
Repair Expense ...........................................
Gas & Oil Expense .......................................
Insurance Expense ......................................
Amortization Expense—Buildings ................
Amortization Expense—Equipment..............
Interest Expense ..........................................
Income Tax Expense ...................................
Totals ...................................................
Debit
$ 33,400
37,600
110,000
92,000
197,000
Credit
$
67,000
83,500
51,400
52,000
37,500
,03,640
000,20,000
0200,000
68,200
12,000
922,100
5,000
709,900
69,800
9,400
8,900
7,200
3,500
10,000
9,000
3,640
20,000
$1,421,840
_________
$1,421,840
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PROBLEM 5-5B (Continued)
(d)
MESA INC.
Statement of Earnings
Year Ended December 31, 2004
Sales revenues
Sales ............................................................
Less: Sales discounts.................................
Net sales ......................................................
Cost of goods sold ...............................................
Gross profit ..........................................................
Operating expenses
Salaries expense..........................................
Amortization expense—buildings .................
Amortization expense—equipment ...............
Utilities expense ...........................................
Repair expense ............................................
Gas & oil expense ........................................
Insurance expense .......................................
Total operating expenses .....................
Income from operations .......................................
Other expenses
Interest expense...........................................
Earnings before income tax .................................
Income tax expense .............................................
Net earnings ........................................................
$922,100
5,000
917,100
709,900
207,200
$69,800
10,000
9,000
9,400
8,900
7,200
3,500
117,800
89,400
3,640
85,760
20,000
$ 65,760
MESA INC.
Statement of Retained Earnings
Year Ended December 31, 2004
Retained earnings, January 1 ..................................................
Add: Net earnings ..................................................................
Less: Dividends ......................................................................
Retained earnings, December 31 ............................................
$ 68,200
65,760
133,960
12,000
$121,960
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PROBLEM 5-5B (Continued)
(d) (Continued)
MESA INC.
Balance Sheet
December 31, 2004
Assets
Current assets
Cash .........................................
$ 33,400
Accounts receivable ..................
37,600
Merchandise inventory ..............
110,000
Total current assets ..........
181,000
Property, plant and equipment
Land .........................................
$ 92,000
Buildings ................................... $197,000
Less: Accum. amortization ....... 67,000
130,000
Equipment ................................. $83,500
Less: Accum. amortization ....... 51,400
Total property, plant and
equipment ........................
Total assets ........................................
32,100
254,100
$435,100
Liabilities and Shareholders’ Equity
Current liabilities
Notes payable due in 2005 ........
Accounts payable ......................
Interest payable .........................
Income tax payable ...................
Total current liabilities.......
Long-term liabilities
Notes payable due after 2005 ...
Total liabilities ..................
Shareholders’ equity
Common shares ........................
Retained earnings .....................
Total shareholders’ equity
Total liabilities and shareholders’ equity
$15,000
37,500
3,640
20,000
$ 76,140
37,000
113,140
$200,000
121,960
321,960
$435,100
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PROBLEM 5-6B
(a)
METRO DEPARTMENT STORE LTD.
Statement of Earnings
Year Ended November 30, 2004
Sales revenues
Sales .....................................................
Less: Sales returns and allowances ......
Net sales................................................
Cost of goods sold.........................................
Gross profit....................................................
Operating expenses
Salaries expense ...................................
Sales commissions expense ..................
Amortization expense—store
equipment ..........................................
Delivery expense ...................................
Insurance expense ................................
Amortization expense—delivery
equipment ..........................................
Rent expense ........................................
Utilities expense.....................................
Total operating expenses ...............
Earnings from operations ..............................
Other revenues
Interest revenue .....................................
Other expenses
Interest expense ....................................
Earnings before income tax expense ............
Income tax expense ......................................
Net earnings ..................................................
$910,000
20,000
890,000
623,000
267,000
$110,000
14,000
15,625
8,200
9,000
11,400
29,000
10,600
207,825
59,175
$7,000
2,850
4,150
63,325
21,000
$ 42,325
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PROBLEM 5-6B (Continued)
(a) (Continued)
METRO DEPARTMENT STORE LTD.
Statement of Retained Earnings
Year Ended November 30, 2004
Retained earnings, December 1, 2003 .............................
Add: Net earnings ..........................................................
Less: Dividends ...............................................................
Retained earnings, November 30, 2004 ...........................
$34,785
42,325
77,110
6,000
$71,110
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PROBLEM 5-6B (Continued)
(a)
(Continued)
METRO DEPARTMENT STORE LTD.
Balance Sheet
November 30, 2004
Assets
Current assets
Cash .....................................................
Accounts receivable ..............................
Merchandise inventory ..........................
Prepaid insurance .................................
Total current assets .......................
Property, plant and equipment
Store equipment ...................................
Less: Accumulated amortization—
store equipment .....................
Delivery equipment ...............................
Less: Accumulated amortization—
delivery equipment.................
Total property, plant and equipment
Total assets ..................................................
$
8,000
11,770
36,200
6,000
61,970
$125,000
31,250
$57,000
93,750
22,800
__34,200
127,950
$189,920
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ......................................................
Sales commissions payable .......................................
Total current liabilities.........................................
Long-term liabilities
Note payable due 2008 ..............................................
Total liabilities.....................................................
Shareholders’ equity
Common shares ........................................................
Retained earnings......................................................
Total shareholders’ equity ..................................
Total liabilities and shareholders’ equity ............................
$ 27,310
6,000
33,310
47,500
80,810
38,000
71,110
109,110
$189,920
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PROBLEM 5-6B (Continued)
(b) Gross profit margin =
Profit margin =
$267,000
= 30%
$890,000
$42,325
= 4.8%
$890,000
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PROBLEM 5-7B
(a)
Cost of goods sold
= Net Sales – Gross profit
= $96,000 - $69,000 = $27,000
(b)
Net earnings
= Gross profit – Operating expenses
= $69,000 – $63,000 = $6,000
(c)
Net sales
= Cost of goods sold + Gross profit
= $27,000 + $61,000 = $88,000
(d)
Operating expenses
= Gross profit - Net earnings
= $61,000 - $4,000 = $57,000
(e)
Merchandise inventory = Inventory 2003 + Purchases – CGS
= $11,000 + $30,000 – $27,000 = $14,000
(f)
Cash payments to suppliers = Accounts payable 2003 + Purchases –
Accounts payable 2004
= $6,000 + $30,000 – $4,000 = $32,000
(g)
Gross profit
= Net sales – CGS
= $82,000 – $26,000 = $56,000
(h)
Net earnings
= Gross profit – Operating expenses
= $ 56,000 (from (g)) – $51,000 = $5,000
(i)
Accounts payable = Accounts payable 2004 + Purchases –
Cash payments to suppliers
= $4,000 + $22,000 – $24,000 = $2,000
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PROBLEM 5-7B (Continued)
(b)
A decline in sales does not necessarily mean that profitability declined. Profitability is affected by sales, cost of goods sold and operating expenses. If cost
of goods sold or operating expenses decline more than sales, profitability can
increase even when sales decline. However, in this particular case, sales declined with insufficient offsetting cost savings to improve profitability. Therefore, profitability declined for Psang, Inc. in 2004 but increased somewhat in
2005.
2003
2004
2005
Gross profit margin
$69,000 ÷ $96,000 $61,000 ÷ $88,000 $56,000 ÷ $82,000
= 72%
= 69%
= 68%
Profit margin
$6,000 ÷ $96,000
= 6.3%
$4,000 ÷ $88,000
= 4.5%
$5,000 ÷ $82,000
= 6.1%
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PROBLEM 5-8B
(a) 1. Current ratio = Current assets ÷ Current liabilities
= $80,000 ÷ $35,000 = 2.3:1
2. Debt to total assets ratio = Total debt ÷ Total assets
= $65,000 ÷ $109,000 = 59.6%
3. Gross profit margin = Gross profit ÷ Net sales
= $8,000 ÷ $24,000 = 33.3%
4. Profit margin = Net earnings ÷ Net sales
= $1,000 ÷ $24,000 = 4.2%
(b) 1. Current ratio = Current assets÷ Current liabilities = $96,000 ÷ $48,500
= 1.98:1
Debt to total assets ratio = Total debt ÷ Total assets = $78,500 ÷ $125,000
= 62.8%
Gross profit margin = Gross profit ÷ Net sales = $10,500 ÷ $40,000
= 26.3%
Profit margin = Net earnings ÷ Net sales = $3,500 ÷ $40,000
= 8.8%
2. The $2,500 profit on the deal makes it an attractive suggestion. However,
the deal will put the company off-side with respect to its debt covenants.
The current ratio will drop from 2.3 to 1.98, which is slightly below the minimum required by the bank. As well, the company’s debt-to-total assets ratio
is presently just below the maximum 60% threshold. If the inventory is purchased on credit, the company’s debt-to-assets ratio will climb to 62.8%.
Although the deal will improve the company’s profitability, it will result in violation of debt covenants. Before accepting or rejecting the deal, the company should meet with the bank manager to renegotiate its debt covenants.
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PROBLEM 5-9B*
Sept. 2
4
5
5
6
14
15
16
18
22
28
Delivery Equipment ...........................................
Accounts Payable ......................................
28,000
Purchases .........................................................
Accounts Payable ......................................
60,000
Freight-in ...........................................................
Cash ..........................................................
2,500
Accounts Payable .............................................
Purchase Returns and Allowances ............
8,000
Accounts Receivable .........................................
Sales .........................................................
20,000
Accounts Payable ($60,000 - $8,000) ...............
Cash ($52,000 - $1,040) ............................
Purchase Discounts ($52,000 x 2%) ..........
52,000
Supplies ............................................................
Cash ..........................................................
4,000
Cash [($20,000 – ($20,000 X 1%)] ....................
Sales Discount ($20,000 – $19,800) .................
Accounts Receivable .................................
19,800
200
Purchases .........................................................
Cash ..........................................................
6,000
Accounts Receivable .........................................
Sales .........................................................
27,000
Sales Returns and Allowances ..........................
Accounts Receivable .................................
9,500
28,000
60,000
2,500
8,000
20,000
50,960
1,040
4,000
20,000
6,000
27,000
9,500
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PROBLEM 5-10B*
(a)
General Journal
Date
Apr. 5
7
9
10
12
14
17
20
21
27
30
Account Titles
Debit
Purchases .....................................................................
1,700
Accounts Payable ..................................................
Credit
1,700
Freight-In ....................................................................... 80
Cash ......................................................................
80
Accounts Payable ..........................................................100
Purchase Returns and Allowances ........................
100
Accounts Receivable .....................................................950
Sales......................................................................
950
Purchases .....................................................................660
Accounts Payable ..................................................
660
Accounts Payable ($1,700 – $100) ................................
1,600
Purchase Discounts ($1,600 X 2%) .......................
Cash ......................................................................
32
1,568
Accounts Payable .......................................................... 60
Purchase Returns and Allowances ........................
60
Accounts Receivable .....................................................700
Sales......................................................................
700
Accounts Payable ($660 – $60).....................................600
Purchase Discounts ($600 X 1%) ..........................
Cash ......................................................................
6
594
Sales Returns and Allowances ...................................... 75
Accounts Receivable .............................................
75
Cash..............................................................................
1,100
Accounts Receivable .............................................
1,100
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PROBLEM 5-10B* (Continued)
(b)
Cash
Apr. 1 Bal. 2,500 Apr. 7
Apr. 30
1,100 Apr. 14
Apr. 21
Apr. 30 Bal. 1,358
80
1,568
594
Accounts Receivable
Apr. 10
950 Apr. 27
75
Apr. 20
700 Apr. 30
1,100
Apr. 30 Bal. 475
Merchandise Inventory
Apr. 1 Bal. 3,500
Sales Returns and Allowances
Apr. 27
75
Apr. 30
75
Purchases
Apr. 5
1,700
Apr. 12
660
Apr. 30 Bal. 2,360
Purchase Returns and Allowances
Apr. 9
100
Apr. 17
60
Apr. 30 Bal. 160
Apr. 30 Bal. 3,500
Apr. 9
Apr. 14
Apr. 17
Apr. 21
Purchase Discounts
Apr. 14
Apr. 21
Apr. 30 Bal.
Accounts Payable
100 Apr. 5
1,700
1,600 Apr. 12
660
60
600
Apr. 30 Bal.
0
Apr. 7
Common Shares
Apr. 1 Bal. 6,000
Apr. 30 Bal. 6,000
Apr. 30 Bal.
32
6
38
Freight-In
80
80
Sales
Apr. 10
950
Apr. 20
700
Apr. 30 Bal. 1,650
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PROBLEM 5-10B* (Continued)
(c)
WEIR’S PRO SHOP
Trial Balance
April 30, 2004
Cash ........................................................................
Accounts Receivable................................................
Merchandise Inventory .............................................
Common Shares ......................................................
Sales ........................................................................
Sales Returns and Allowances .................................
Purchases ................................................................
Freight-in..................................................................
Purchase Returns and Allowances...........................
Purchase Discounts .................................................
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5-76
Debit
$1,358
475
3,500
Credit
$6,000
1,650
75
2,360
80
00 000
$7,848
160
38
$7,848
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PROBLEM 5-10B* (Continued)
(d)
WEIR’S PRO SHOP
Statement of Earnings (Partial)
Month Ended April 30, 2004
Sales revenues
Sales ...........................................
Less: Sales returns and allowances
Net sales .....................................
Cost of goods sold
Inventory, March 31 ....................
Purchases ................................... $2,360
Less: Purchase returns and
allowances .........................
160
Purchase discounts ............
38
Net purchases .............................
2,162
Add: Freight-in ............................
80
Cost of goods purchased ............
Cost of goods available for sale ..
Inventory, April 30 .......................
Cost of goods sold .............
Gross profit...........................................
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5-77
$1,650
75
1,575
$3,500
2,242
5,742
4,500
1,242
333
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PROBLEM 5-11B*
ALAIN CORPORATION
Statement of Earnings (Partial)
Year Ended January 31, 2005
Sales revenues
Sales .........................................
Less: Sales returns and allowances
Sales discounts .........................
Net sales ......................
Cost of goods sold
Inventory, February 1 .................
Purchases.................................. $442,000
Less: Purchase
returns and allowances ....
6,400
Purchase discounts .........
12,000
Net purchases ........................... 423,600
Add: Freight-in .........................
5,600
Cost of goods purchased ...........
Cost of goods available for sale .
Inventory, January 31 ................
Cost of goods sold .......
Gross profit.....................................
Solutions Manual
5-78
$718,000
8,000
6,000
704,000
$ 40,500
429,200
469,700
75,000
394,700
309,300
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BYP 5-1 FINANCIAL REPORTING PROBLEM
(a)
Percentage change in sales:
2001 to 2002
($23,082 – $21,486) ÷ $21,486 = 7.4%
Percentage change in net earnings:
2001 to 2002
($728 – $563) ÷ $563 = 29.3%
(b)
There is not enough information to calculate Loblaw’s gross profit margin. The cost of
sales is included in the cost of sales, selling, and administrative expenses.
(c)
Profit margin 2002
=
$728
= 3.2%
$23,082
Profit margin 2001 =
$563
= 2.6%
$21,486
The company’s profitability increased in 2002 as evidenced by the higher profit margin.
(d)
Interest expense is included as a non-operating expense in Loblaw’s Statement of Earnings.
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BYP 5-2 COMPARATIVE ANALYSIS PROBLEM
(a)
Loblaw
(in millions)
(in millions)
1. % Change in sales
2001 to 2002
$10,414.5 – $9,732.5
$9,732.5
= 7.0%
$23,082 – $21,486
$21,486
= 7.4%
2. % Change in
operating earnings
2001 to 2002
$326.1 – $296.6
$296.6
= 9.9%
$1,303 – $1,136
$1,136
= 14.7%
3. Gross profit margin
2002
Cannot be calculated
Cannot be calculated
Cannot be calculated
Cannot be calculated
$179.0
= 1.7%
$10,414.5
$728
= 3.2%
$23,082
$210.6
= 2.2%
$9,732.5
$563
= 2.6%
$21,486
2001
4. Profit margin
2002
2001
(b)
Sobeys Inc.*
Loblaw’s higher profit margin ratio suggests that it was better at turning sales dollars into
net earnings. Neither company presents the information required to calculate gross profit
margin so it is not possible to determine what effect mark-up has on profitability.
* Note: Sobeys’ results are May 2002 to May 2003.
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BYP 5-3 RESEARCH CASE
(a)
To get his business going Sam Walton had to keep costs low. To accomplish this he offered employees profit sharing and developed partnerships with suppliers. To compete
with retailing giants such as K-Mart and Sears he had to position the store as an alternative to the other large retailers. To accomplish this he stressed “everyday low prices”,
friendly service and a focus of cost control with savings passed onto the customer.
(b)
The high level of inventory turnover is accomplished through the use of technology such
as scanners in every department, which allow Wal-Mart associates to monitor the sales,
mark-ups and stock in transit.
(c)
Allowing suppliers to have access to information on how their products are selling helps
the suppliers better plan production runs. The subsequent cost saving provides higher
profitability for the supplier and lower cost and more reliable inventory control for WalMart.
(d)
Wal-Mart has not enjoyed complete success internationally. It has done well in Canada
and Mexico but has incurred heavy losses in foreign countries such as Argentina, Indonesia and Germany. The failure of the company to perform well in these markets was
attributed to attempts by the company to import its own culture rather than understanding and adapting to the culture of the host country. There is also a lack of local “human
capital” trained in the Wal-Mart philosophy to help staff the foreign stores. Finally, the
foreign expansion has not yet grown sufficiently for the company to enjoy the economies of scale that is such a key success factor for the company’s domestic operations.
ons.
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BYP 5-4 INTERPRETING FINANCIAL STATEMENTS
(a)
2003
2002
2001
Gross profit
$30,463,010
-11,728,022
$18,734,988
$24,909,081
- 10,167,456
$14,741,625
$23,199,678
-9,240,503
$13,959,175
Net earnings
$18,734,988
-15,694,624
-747,367
$ 2,292,997
$14,741,625
-12,772,839
-751,000
$1,217,786
$13,959,175
-11,951,602
-655,000
$ 1,352,573
(b)
Percentage Change in Sales
Percentage Change in Net Earnings
Solutions Manual
$30,463,01 0 – $23,199,67 8
= 31.3%
$23,199,67 8
$2,292,997 – $1,352,573
= 69.5%
$1,352,573
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BYP 5-4
Financial Accounting, Second Canadian Edition
(Continued)
(c)
Gross profit margin
(d)
Profit margin
2003
$18,734,98 8
$30,463,01 0
= 61.5%
2002
$14,741,62 5
$24,909,08 1
= 59.2%
2001
$13,959,17 5
$23,199,67 8
= 60.2%
$2,292,997
$30,463,01 0
= 7.5%
$1,217,786
$24,909,08 1
= 4.9%
$1,352,573
$23,199,67 8
= 5.8%
The gross profit margin has remained relatively stable over the past three years indicating the company has maintained a steady mark-up. The profit margin has improved
over the past three years from 5.8% in 2001 to 7.5% in 2003.
(e)
Since the gross margin percentage has remained relatively constant, the higher profit
margin indicates the company is doing a better job of controlling its operating expenses
over the three-year period. This is further supported by the fact that although the company has increased sales by 31.3% over the past three years, it has enjoyed a 69.5%
increase in earnings. This shows that improvement in earnings is largely caused by the
reduction in expenses.
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BYP 5-5 A GLOBAL FOCUS
(a)
Carrefour
(Euros)
Gross profit margin
Profit margin
Return on assets ratio
Wal-Mart
(US Dollars)
(E69.5 – E53.9)
E69.5
($217.8 – $171.6)
$217.8
= 22.4%
= 21.2%
E1.3
= 1.9%
E69.5
E1.3
= 3.0%
E43.8
$6.7
= 3.1%
$217.8
$6.7
= 8.3%
$80.8
Based on the gross profit margin, it would appear that Wal-Mart and Carrefour charge about
the same mark-up. Wal-Mart is renowned for its efficiency—this is what has caused it to dominate its U.S. competitors. It would appear from these data that it is also more efficient both in
its ability to generate net earnings from its assets and in its ability to generate net earnings
from each dollar of sales than Carrefour
(b)
Current ratio
E16.9
= 1.3:1
E13.0
$28.2
= 1.03:1
$27.3
Debt to total assets ratio
E32.8
= 75.4%
E43.5
$48.3
= 57.8%
$83.5
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BYP 5-5 (Continued)
(b)
(Continued)
Both companies report low current ratios. This is not surprising since in recent years
most large companies have tried to reduce costs and increase profitability by limiting the
amount of current assets that they hold. The debt to total assets ratio reveals that Carrefour relies more heavily on debt financing. This reduces Carrefour’s solvency and makes
Carrefour more susceptible to swings in the economy. This could reduce its ability to
compete head-to-head with Wal-Mart.
(c)
Ratios improve our ability to compare these two companies that report financial information using different currencies. However, other factors can still reduce our ability to
compare them. For example, the two companies might classify items quite differently. Also, different accounting standards in the two countries might result in dramatically different results under the same circumstances. Also, differences in laws, such as bankruptcy
laws, can affect the results. For example, if French bankruptcy laws favour shareholders
more than North American bankruptcy laws, then it would be prudent for a French company to rely more on debt financing than a North American company.
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Financial Accounting, Second Canadian Edition
BYP 5-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide
Web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor
Resources section of our home page <www.wiley.com/canada/kimmel>.
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Financial Accounting, Second Canadian Edition
BYP 5-7 COLLABORATIVE LEARNING ACTIVITY
(a)
(1)
WU DEPARTMENT STORE LTD.
Projected Statement of Earnings
Year Ended December 31, 2005
Net sales [$700,000 + ($700,000 X 6% X 17%)] .........................................
Cost of goods sold ($868,140 X 75%) .........................................................
Gross profit ($868,140 X 25%*) ...................................................................
Operating expenses ....................................................................................
Earnings before income tax .........................................................................
Income tax expense ....................................................................................
Net earnings ................................................................................................
$868,140
651,105
217,035
125,000
92,035
36,814
$ 55,221
*$154,000 ÷ $700,000 = 22% + 3% = 25%
(2)
WU DEPARTMENT STORE LTD.
Projected Statement of Earnings
Year Ended December 31, 2005
Net sales......................................................................................................
Cost of goods sold .......................................................................................
Gross profit ..................................................................................................
Operating expenses* ...................................................................................
Earnings before income tax .........................................................................
Income tax expense ....................................................................................
Net earnings ................................................................................................
$700,000
546,000
154,000
97,000
57,000
22,800
$ 34,200
*$125,000 – $30,000 + ($700,000 X 2%) – ($30,000 X 40%) = $97,000
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Financial Accounting, Second Canadian Edition
BYP 5-7 (Continued)
(b)
Kathy’s proposed changes will increase net earnings by $37,221. John’s proposed
changes will reduce operating expenses and result in an increase in net earnings of
$16,200. Thus, if the choice is between Kathy’s plan and John’s plan, Kathy’s plan
should be adopted. While John’s plan will increase net earnings, it may also have an adverse effect on sales personnel. Under John’s plan, sales personnel will be taking a cut
of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].
(c)
WU DEPARTMENT STORE
Projected Statement of Earnings
Year Ended December 31, 2005
Net sales ............................................................................................
Cost of goods sold .............................................................................
Gross profit.........................................................................................
Operating expenses* ..........................................................................
Earnings before income tax................................................................
Income tax expense ...........................................................................
Net earnings .......................................................................................
$868,140
651,105
217,035
100,363
116,672
46,669
$ 70,003
*$125,000 – $30,000 + ($868,140 X 2%) – ($30,000 X 40%) = $100,362.80
(d)
A variety of factors might be presented by the student. For example, increasing the quantity of inventory purchased will increase warehousing and other costs of inventory. It will
also increase the risk of holding obsolete or out-of-fashion inventory. Reduced store deliveries may anger customers, especially if competitors provide more frequent service.
Cutting sales salaries and making sales staff more dependent on commissions might actually be viewed favourably by the sales staff if they have the potential to increase their
total compensation.
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BYP 5-8 COMMUNICATION ACTIVITY
(a) and (b)
President
The Great Canadian Snowboarding Company, Inc.
Dear Sir:
As you know, the financial statements for The Great Canadian Snowboarding Company, Inc.
are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized
when they are earned.
Typically, sales revenues are earned when the goods are transferred from the buyer to the
seller. At this point, the sales transaction is completed and the sales price is established. Thus,
in the typical situation, revenue on the snowboard ordered by Dexter is earned at event No. 7,
when Dexter picks up the snowboard.
The circumstances pertaining to this sale may seem to you to be atypical because Dexter has
ordered a specific kind of snowboard. From an accounting standpoint, this would be true only if
you could not reasonably expect to sell this snowboard to another customer. In such a case, it
would be proper under generally accepted accounting principles to recognize sales revenue
when you have completed the snowboard for Dexter.
Whether Dexter makes a down payment with the purchase order is irrelevant in recognizing
sales revenue because at this time, you have not done anything to earn the revenue. A down
payment may be an indication of Dexter’s “good faith.” However, its effect on your financial
statements is limited entirely to recognizing the down payment as unearned revenue.
If you have further questions about the accounting for this sale, please let me know.
Sincerely,
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BYP 5-9 ETHICS CASE
(a)
Rita Pelzer, as a new employee, is placed in a position of responsibility and is pressured
by her supervisor to continue an unethical practice previously performed by him. The unethical practice is taking undeserved cash discounts. Her dilemma is either follow her
boss’s unethical instructions or offend her boss and maybe lose the job she just assumed.
(b)
The stakeholders (affected parties) are:
Rita Pelzer, the assistant treasurer.
Jamie Caterino, the treasurer- benefited (he looks good to superiors because of his
unethical behaviour)
Zaz Stores Ltd., the company - benefited
Creditors of Zaz Stores Ltd. (suppliers) - harmed
Mail room employees (those assigned the blame) - harmed
(c)
Ethically Rita should not consider the practice started by Jamie. She has a choice in that
she could:
1.
Tell the treasurer (her boss) that she will attempt to take every allowable cash discount by preparing and mailing cheques within the discount period—the ethical thing
to do. This will offend her boss and may jeopardize her continued employment.
2.
Join the team and continue the unethical practice of taking undeserved cash discounts.
3.
Go over her boss’s head and take the chance of receiving just and reasonable
treatment from an officer superior to Jamie. The company may not condone this
practice. Rita definitely has a choice, but probably not without consequence. To continue the practice is definitely unethical. If Rita submits to this request, she may be
asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical
things—if she isn’t fired. Maybe nobody has ever challenged Jamie’s unethical behaviour and his reaction may be one of respect rather than anger and retribution.
Being ethically compromised is no way to start a new job.
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