Chapter 05 - Accounting for Merchandising Operations
Chapter 5
Accounting for Merchandising Operations
QUESTIONS
1.
Additional accounts of a merchandising company likely include Merchandise Inventory,
Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and
Allowances (and possibly Delivery Expense).
2.
Merchandising companies report Merchandise Inventory on the balance sheet, service
companies do not. Also, merchandising companies report both Sales (of goods) and
Cost of Goods Sold on the income statement, while service companies do not.
3.
A company can have a net loss if its expenses (absent cost of goods sold) are greater
than its gross profit from sales of merchandise.
4.
A cash discount can be offered to encourage customers to promptly pay. This provides
cash more quickly to the seller and avoids the costs of additional collection activities.
Of course, the seller must perform a costs vs. benefits analysis on the merits and terms
of any cash discount offered to customers.
5.
For a perpetual inventory system, inventory shrinkage is determined by taking a
physical count of the inventory available at the end of a period and comparing that
amount with the amount recorded in the Merchandise Inventory account.
6.
Cash discounts are granted in return for early payment and reduce the amount paid
below the negotiated price. Cash discounts are recorded in the accounting records (as
a reduction of Merchandise Inventory). Trade discounts are deducted from the list or
catalog price to determine the purchase (negotiated) price. Trade discounts are not
recorded in the accounting records.
7.
Sales discount is a term used by a seller to describe a cash discount granted to a
customer. Purchase discount is a term used by a purchaser to describe a cash
discount received from a seller. (It is a matter of perspective: seller versus buyer.)
8.
A manager is concerned about the quantity of its purchase returns because the
company incurs costs in receiving, inspecting, identifying, and returning the
merchandise. More returns create more expenses. By knowing more about returns,
the manager can decide if they are a problem and how they can be minimized.
9.
The sender (maker) of a debit memorandum records a debit in an account of the
recipient; and the recipient records a credit in an account maintained for the sender.
5-1
Chapter 05 - Accounting for Merchandising Operations
10. The single-step income statement format presents cost of goods sold and expenses in
one list, totals the list, and subtracts the total from net sales in one step. The multiplestep format presents intermediate totals, including gross profit (the difference between
net sales and cost of goods sold) and sub-categories of expenses (often by key
activities).
11. Research In Motion calls its inventory account “Inventories.” A detailed calculation of
cost of sales is not presented by RIM. However, Research In Motion presents Cost of
Sales separate for “Devices and other” and “Service and software.”
12. Nokia titles its cost of goods sold account “Cost of sales.”
13. Apple titles its cost of goods sold account “Cost of sales.”
14. Palm reports a separate gross margin figure on its consolidated statement of income.
Its 2009 gross profit is $159,759 (in $ thousands).
15. A buyer should attempt to negotiate the shipping terms FOB destination. In this case,
title will pass after the goods are safely delivered to the buyer’s business and
transportation charges will be the responsibility of the supplier (seller).
QUICK STUDIES
Quick Study 5-1 (10 minutes)
1.
2.
3.
4.
5.
D.
C.
F.
A.
H.
6.
7.
8.
9.
10.
E.
J.
I.
B.
G.
Quick Study 5-2 (5 minutes)
Answer: e
5-2
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-3 (15 minutes)
Mar. 5 Merchandise Inventory .....................................
Accounts Payable .....................................
2,500
2,500
To record credit purchase [500 x $5].
Mar. 7 Accounts Payable .............................................
Merchandise Inventory ............................
250
250
Returned defective units
[(50/500) x $2,500] or [50 x $5].
Mar. 15 Accounts Payable .............................................
Cash ...........................................................
Merchandise Inventory ............................
2,250
2,205
45
Paid for purchase less cash discount
[$2,250 - ($2,250 x 2%)].
Quick Study 5-4 (10 minutes)
Apr. 1 Accounts Receivable .......................................
Sales .........................................................
2,000
2,000
To record credit sale.
1 Cost of Goods Sold ..........................................
Merchandise Inventory ...........................
1,400
1,400
To record cost of credit sale.
4 Sales Returns and Allowances .......................
Accounts Receivable ..............................
500
500
To record sales return.
4 Merchandise Inventory ....................................
Cost of Goods Sold .................................
350
350
Restore cost of returned goods to inventory.
11 Cash ...................................................................
Sales Discounts ................................................
Accounts Receivable ...............................
Received payment less cash discount
[($2,000 - $500) x 98%].
5-3
1,470
30
1,500
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-5 (10 minutes)
(a)
Sales ............................................$130,000
Sales discounts .......................... (4,200)
Sales returns and allowances ....... (17,000)
Net sales ...................................... 108,800
Cost of goods sold ..................... (76,600)
Gross profit .................................$ 32,200
Gross margin ratio:
(Gross profit / Net sales) ........
29.6%
(b)
$512,000
(16,500)
(5,000)
490,500
(326,700)
$163,800
(c)
$35,700
(400)
(5,000)
30,300
(21,300)
$ 9,000
(d)
$245,700
(3,500)
(700)
241,500
(125,900)
$115,600
33.4%
29.7%
47.9%
Interpretation of gross margin ratio for case a: The ratio of 29.6% shows that
for each dollar in net sales the company earns 29.6 cents in gross profit. The
company must still make deductions for other expenses that it incurs in
running the business when computing net income.
Quick Study 5-6 (10 minutes)
July 31 Cost of Goods Sold ....................................
Merchandise Inventory .....................
To adjust for shrinkage based on
physical count [$34,800 - $32,900].
5-4
1,900
1,900
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-7 (10 minutes)
July 31 Sales ............................................................
Income Summary ................................
157,200
157,200
To close temporary accounts with credit balances.
July 31 Income Summary .......................................
Sales Discounts .................................
Sales Returns and Allowances ........
Cost of Goods Sold* ...........................
Depreciation Expense .......................
Salaries Expense ...............................
Miscellaneous Expenses ...................
To close temporary accounts with debit
balances. (*$102,000 + $1,900 — from QS 5-6)
5-5
147,900
1,700
3,500
103,900
7,300
29,500
2,000
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-8 (10 minutes)
Acid-test ratio = ($1,200 + $2,700) / ($4,750 + $950) = 0.68
Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on)
the liquidity of a company. It helps in determining whether a company will be
able to meet its current obligations as they come due with its most liquid assets.
In this case, the company only has 68 cents available in quick assets to pay
$1.00 in current liabilities as they come due. An acid-test ratio less than one
usually suggests some concern and encourages further analysis of liquidity.
Quick Study 5-9 (10 minutes)
Similarities: Both the acid-test ratio and current ratio are used to assess
liquidity. Both ratios are computed with current liabilities as the denominator.
Differences: The current ratio includes all current assets in the numerator. The
acid-test ratio includes current assets less inventories and prepaids in its
numerator (leaving cash & equivalents, current receivables, and short-term
investments).
Comparison and Description: Compared with the current ratio, the acid-test
ratio is a more stringent test of a company’s ability to meet its current
obligations. The acid-test ratio is more stringent as it does not assume a
company relies on prepaids and inventory to pay current liabilities. This is
because prepaids and inventory assets are not generally available to satisfy
current obligations.
5-6
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-10 (10 minutes)
Answer: e
Quick Study 5-11A (5 minutes)
a.
b.
c.
d.
e.
Perpetual inventory system
Perpetual inventory system
Perpetual inventory system
Perpetual inventory system
Periodic inventory system
5-7
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-12A (10 minutes)
Mar. 5 Purchases ...........................................................
Accounts Payable ......................................
2,500
2,500
To record credit purchase [500 x $5].
7 Accounts Payable ..............................................
Purchases Returns & Allowances ...........
250
250
Returned defective units [(50/500) x $2,500].
15 Accounts Payable ..............................................
Cash ............................................................
Purchases Discounts ................................
Paid for purchase less cash discount
[$2,250 - ($2,250 x 2%)].
5-8
2,250
2,205
45
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-13A (10 minutes)
Apr. 1 Accounts Receivable .......................................
Sales .........................................................
2,000
2,000
To record credit sale.
4 Sales Returns and Allowances .......................
Accounts Receivable ..............................
500
500
To record sales return.
11 Cash ...................................................................
Sales Discounts ................................................
Accounts Receivable ...............................
Received payment less cash discount
($2,000 - $500) x 98%].
5-9
1,470
30
1,500
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-14 (20 minutes)
1. Multiple-step income statement
adidas AG
Income Statement (€ millions)
For Year Ended December 31, 2009
Net sales ......................................................................
Cost of sales ...............................................................
Gross profit .................................................................
Royalty and commission income ...........................
Other operating income .............................................
Other operating expenses .........................................
Operating profit ..........................................................
Financial income ........................................................
Financial expenses ....................................................
Income before taxes...................................................
Income taxes ...............................................................
Net income ..................................................................
€10,381
5,669
4,712
86
100
4,390
508
19
169
358
113
€ 245
2. Single-step income statement
adidas AG
Income Statement (€ millions)
For Year Ended December 31, 2009
Revenues
Net sales ......................................................................
Royalty and commission income ............................
Other operating income .............................................
Financial income ........................................................
Total revenues ............................................................
€10,381
86
100
19
10,586
Expenses
Cost of sales ............................................................... €5,669
Other operating expenses ......................................... 4,390
Financial expenses ....................................................
169
Income taxes ...............................................................
113
Total expenses ...........................................................
Net income ..................................................................
10,341
€ 245
5-10
Chapter 05 - Accounting for Merchandising Operations
Quick Study 5-15 (10 minutes)
a.
Both U.S. GAAP and IFRS include broad and similar guidance for the
accounting of merchandise purchases and sales.
b. Under IFRS, reference to finance costs usually refers to interest expense.
c. IFRS permits alternative measures of income to be reported as part of the
income statement.
EXERCISES
Exercise 5-1 (30 minutes)
Apr. 2
Merchandise Inventory .....................................
Accounts Payable—Blue ..........................
3,600
3,600
Purchased merchandise on credit.
3 Merchandise Inventory .....................................
Cash ............................................................
200
200
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Blue ..................................
Merchandise Inventory ..............................
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Blue ..................................
Merchandise Inventory ..............................
Cash ............................................................
3,000
60
2,940
Paid balance (less 2%) within discount period.
18 Merchandise Inventory ....................................
Accounts Payable—Fox ............................
7,500
7,500
Purchased merchandise on credit.
21 Accounts Payable—Fox ...................................
Merchandise Inventory .............................
2,100
2,100
Received an allowance on purchase.
28 Accounts Payable—Fox ...................................
Merchandise Inventory ..............................
Cash ............................................................
Paid balance (less 2%) within discount period.
5-11
5,400
108
5,292
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-2 (30 minutes)
1.
BUYER – Taos Company
Credit Purchase
Merchandise Inventory ....................................
Accounts Payable .....................................
22,000
22,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ............................................
Merchandise Inventory .............................
Cash ...........................................................
22,000
660
21,340
Paid account payable within 3% discount period.
2.
SELLER – Tuson Company
Credit Sale
Accounts Receivable .......................................
Sales...........................................................
22,000
22,000
Sold merchandise on account.
Cost of Goods Sold .........................................
Merchandise Inventory ............................
15,000
15,000
To record cost of sale.
Cash Collection
Cash ...................................................................
Sales Discounts ................................................
Accounts Receivable ................................
21,340
660
22,000
Collected account receivable.
3.
Amount borrowed to pay with discount .......................
Annual rate of interest ...................................................
Interest per year ..............................................................
$ 21,340
x 11%
$2,347.40
Interest per day ($2,347.40 / 365 days) ..........................
$6.43
Savings from discount taken ($22,000 - $21,340) ........
Interest paid on 50-day loan (50 days x $6.43) .............
Net savings from borrowing to pay in discount period ..
5-12
$ 660.00
(321.50)
$ 338.50
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-3 (10 minutes)
Operating cycle of a merchandiser with credit sales follows (chronological):
1
(a) purchases of merchandise
3
(b) credit sales to customers
2
(c) inventory made available for sale
5
(d) cash collections from customers
4
(e) accounts receivable accounted for
Exercise 5-4 (30 minutes)
May 5
Accounts Receivable .......................................
Sales ...........................................................
8,400
8,400
Sold merchandise on credit (600 x $14).
5
Cost of Goods Sold ..........................................
Merchandise Inventory .............................
6,000
6,000
To record cost of sale (600 x $10).
a.
May 7
Sales Returns and Allowances .......................
Accounts Receivable ................................
2,800
2,800
Accepted a return from a customer (200 x $14).
7
Merchandise Inventory ....................................
Cost of Goods Sold ..................................
2,000
2,000
Returned merchandise to inventory (200 x $10).
b.
May 8
Sales Returns and Allowances ........................
Accounts Receivable .................................
Granted allowance for damaged merchandise.
5-13
300
300
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-4 (Concluded)
c.
May 15 Sales Returns and Allowances ........................
Accounts Receivable .................................
92
92
Granted allowance for incorrect merchandise.
15 Sales Returns and Allowances ........................
Accounts Receivable .................................
406
406
Accepted return from a customer (29 x $14).
15 Merchandise Inventory .....................................
Cost of Goods Sold ...................................
290
290
Returned merchandise to inventory (29 x $10).
Exercise 5-5 (15 minutes)
May 5
Merchandise Inventory ....................................
Accounts Payable .....................................
8,400
8,400
Purchased merchandise on credit (600 x $14).
a.
May 7
Accounts Payable ............................................
Merchandise Inventory .............................
2,800
2,800
Returned unwanted merchandise (200 x $14).
b.
May 8
Accounts Payable ............................................
Merchandise Inventory .............................
300
300
To record allowance for damaged merchandise.
c.
May 15 Accounts Payable ............................................
Merchandise Inventory .............................
92
92
To record allowance for wrong color.
May 15 Accounts Payable ............................................
Merchandise Inventory .............................
To record return of merchandise. (29 x $14).
5-14
406
406
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-6 (25 minutes)
1. Entries for Smythe Company (BUYER):
May 11 Merchandise Inventory ..................................
Accounts Payable ....................................
30,000
30,000
Purchased merchandise on credit.
11 Merchandise Inventory ..................................
Cash ..........................................................
335
335
Paid shipping charges on purchased
merchandise.
12 Accounts Payable ...........................................
Merchandise Inventory ...........................
1,200
1,200
Returned unacceptable merchandise.
20 Accounts Payable ...........................................
Merchandise Inventory ............................
Cash ..........................................................
28,800
864
27,936
Paid balance within the 3% discount period.
2. Entries for Hope Corporation (SELLER):
May 11 Accounts Receivable ......................................
Sales..........................................................
30,000
30,000
Sold merchandise on account.
11 Cost of Goods Sold .........................................
Merchandise Inventory ............................
20,000
20,000
To record cost of sale.
13 Sales Returns and Allowances ......................
Accounts Receivable ...............................
1,200
1,200
Accepted a return from a customer.
13 Merchandise Inventory ..................................
Cost of Goods Sold .................................
800
800
Returned goods to inventory.
21 Cash ..................................................................
Sales Discounts ...............................................
Accounts Receivable ...............................
Collected account receivable.
5-15
27,936
864
28,800
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-7 (20 minutes)
In today’s competitive world, organizations must concentrate on meeting their
customers’ needs and avoiding dissatisfaction. If these needs are not met and
dissatisfaction grows, the customers will deal with other companies or entities.
One measure of dissatisfaction of customers is the amount of sold goods that
are later returned. Customer dissatisfaction needs to be understood and then
dealt with promptly to encourage them to remain loyal. The reasons for the
return also need to be determined to allow the problem to be avoided in the
future. For example, the returns might arise from product defects, shipping
damage, misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their
dollar amount. In addition, managers can set goals for reducing the dollar
amount of sales returns. Both objectives can be helped by having the
company’s accounting system record the sales value of returned goods in a
separate contra account instead of the Sales account. This approach captures
the information at the time of the return and allows it to be easily reported.
While a company’s sales return record is important for managers, it is also
valuable information for external decision makers. This information can help
external users identify organizations focusing on customer satisfaction and
product quality. Although management might choose to report the amount of
sales returns as evidence of sales satisfaction, their amount is rarely reported in
financial statements provided to investors, creditors, and other external users.
5-16
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-8 (30 minutes)
Balance, Dec. 31, 2010 .........
Invoice cost of purchases ...
Returns by customers .........
Transportation-in..................
Balance, Dec. 31, 2011
Merchandise Inventory
27,000
Purchase discounts received .............................................
1,600
190,500
Purchase returns and allow. ..............................................
4,100
2,200
Cost of sales transactions ..................................................
186,000
1,900
Shrinkage .............................................................................
700
29,200
Cost of Goods Sold
Cost of sales transactions ... 186,000
Returns by customers and
Inventory shrinkage
restored to inventory ........................................................
2,200
recorded in Dec. 31,
2011, adjusting entry ..........
700
Balance, Dec. 31, 2011
184,500
5-17
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-9 (30 minutes)
Note: The original missing numbers are blocked.
(a)
Sales ............................
(b)
(c)
(d)
(e)
$60,000
$42,500
$36,000
$78,000
$23,600
Cost of goods sold:
Merch. inv. (beg.) .......
Total cost of merch.
purchases ................
6,000
17,050
7,500
7,000
2,560
36,000
1,550
33,750
32,000
5,600
Merch. inv. (end.) .......
(7,950)
(2,700)
(9,000)
(6,600)
(2,560)
Cost of goods sold ....
34,050
15,900
32,250
32,400
5,600
Gross profit .................
25,950
26,600
3,750
45,600
18,000
Expenses.....................
9,000
10,650
12,150
2,600
6,000
Net income (loss) .......
$16,950
$15,950
$ (8,400)
$43,000
$12,000
Explanations:
a. Find merchandise inventory (ending) by subtracting cost of goods sold from
goods available for sale. Find gross profit as the difference between the sales
and cost of goods sold. Find net income as the gross profit less the expenses.
b. Find total cost of merchandise purchases by finding the number that makes the
total equal the cost of goods sold. Find gross profit from sales less cost of
goods sold.
c. Find cost of goods sold from sales less gross profit. Find cost of merchandise
purchases by finding the number to make the calculation equal cost of goods
sold.
d. Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of
goods sold.
e. Find merchandise inventory (ending) by subtracting cost of goods sold from
goods available for sale. Find gross profit from sales less cost of goods sold.
Find net income as gross profit less expenses.
5-18
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-10 (25 minutes)
Adjusting entries:
Dec. 31 Sales Salaries Expense ...................................
Salaries Payable........................................
1,600
1,600
To record accrued salaries.
Dec. 31 Selling Expenses ..............................................
Prepaid Selling Expenses ........................
2,000
2,000
To record expired prepaid selling expenses.
Dec. 31 Cost of Goods Sold ..........................................
Merchandise Inventory .............................
550
550
To record inventory shrinkage
($28,000 - $27,450).
Closing entries:
Dec. 31 Sales ..............................................................
Income Summary ...................................
429,000
429,000
To close temporary accounts with credit
balances.
Dec. 31 Income Summary ..........................................
Sales Returns and Allowances .............
Sales Discounts .....................................
Cost of Goods Sold ($211,000 + $550) ........
Sales Salaries Exp. ($47,000 + $1,600) ........
Utilities Expense ....................................
Selling Expenses ($35,000 + $2,000) ...........
Administrative Expenses ......................
426,650
16,500
4,000
211,550
48,600
14,000
37,000
95,000
To close temporary accounts with debit
balances.
Dec. 31 Income Summary ..........................................
J. Deacon, Capital ..................................
2,350
2,350
To close Income Summary account.
Dec. 31 J. Deacon, Capital .........................................
J. Deacon, Withdrawals .........................
To close the withdrawals account.
5-19
2,200
2,200
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-11 (20 minutes)
The employee’s oversight in omitting these goods from the physical count
would cause the cost of the physical count of ending inventory to be
understated. Therefore, the comparison of the perpetual inventory records
with the physical count would incorrectly indicate an additional shrinkage of
$2,000. An entry would be made to debit Cost of Goods Sold and credit
Merchandise Inventory for this amount. As a result, the company’s ending
inventory, current assets, total assets, equity, and net income would all be
understated by $2,000.
As a result of this error:
 Return on assets would be understated (numerator impact outweighs the
denominator impact).
 Debt ratio would be overstated because its denominator would be
understated.
 Current ratio would be understated because its numerator would be
understated.
 Acid-test ratio would be unaffected because inventory is not a quick asset.
Exercise 5-12 (20 minutes)
See the solution explanation in Exercise 5-11. As a result of this error:
 Gross margin (gross profit/sales) would be understated because the gross
profit would be understated.
 Profit margin (net income/sales) would be understated because the net
income would be understated.
5-20
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-13 (15 minutes)
Case A
Case B
Case C
Current ratio computation:
Current assets ........................
Current liabilities ....................
Current ratio ............................
$4,000
$2,200
1.82
$3,500
$1,100
3.18
$7,300
$3,650
2.00
Cash .........................................
Short-term investments .........
Current receivables ................
Quick assets ...........................
$ 800
$ 510
0
$ 800
790
$1,300
$3,200
1,100
800
$5,100
Current liabilities ....................
$2,200
$1,100
$3,650
Acid-test ratio .........................
0.36
1.18
1.40
Acid-test ratio computation:
Interpretation:
Case B exhibits the superior ability to meet current year obligations using the
current ratio, whereas Case C has the superior ability to meet near-term
obligations using the acid-test ratio. Specifically, all three companies’
current ratios are marginally adequate (such as Case A’s 1.82) to strong
(such as Case B’s 3.18). Further, two companies’ acid-test ratios exceed the
common benchmark (rule-of-thumb) of 1.0 (Case C’s is 1.40 and Case B’s is
1.18); whereas Case A falls short of the 1.0 benchmark.
In summary, Case A looks the worst for its ability to pay its immediate and
current year obligations, while both Cases B and C look strong. Moreover,
Case B looks a bit better using the current ratio, which reflects on its ability
to cover current year obligations, whereas Case C looks a bit better using the
acid-test ratio, which reflects on its ability to cover immediate obligations.
5-21
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-14 (20 minutes)
Perpetual Inventory System
1)
Nov. 1
Merchandise Inventory ....................................
Accounts Payable .....................................
1,400
1,400
To record merchandise purchases on credit.
2)
Nov. 5 Accounts Payable ............................................
Merchandise Inventory .............................
Cash ...........................................................
1,400
28
1,372
To record cash payment in discount period.
*$1,400 x 0.02
3)
Nov. 7 Cash ...................................................................
Merchandise Inventory .............................
98
98
To record check received for return of purchases
previously paid for with discount already taken.
*$100 – ($100 x 0.02)
4)
Nov. 10 Merchandise Inventory ....................................
Cash ...........................................................
80
80
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable .......................................
Sales...........................................................
1,500
1,500
To record sale of merchandise on credit.
Nov. 13 Cost of Goods Sold .........................................
Merchandise Inventory .............................
750
750
To record cost of merchandise sold.
6)
Nov. 16 Sales Returns and Allowances .......................
Accounts Receivable ................................
200
200
To record return of merchandise sold on credit.
Nov. 16 Merchandise Inventory ....................................
Cost of Goods Sold ..................................
To record cost of merchandise returned.
5-22
100
100
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-15 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only
Sales (gross) ...............................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
10,000
Net sales ......................................................................
$100,000
$2,000
8,000
90,000
Exercise 5-16A (30 minutes)
Apr. 2
Purchases ..........................................................
Accounts Payable—Blue ..........................
3,600
3,600
Purchased merchandise on credit.
3 Transportation-In ...............................................
Cash ............................................................
200
200
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Blue ..................................
Purchases Returns & Allowances ............
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Blue ..................................
Purchases Discounts ................................
Cash ............................................................
3,000
60
2,940
Paid balance (less 2%) within discount period.
18 Purchases ..........................................................
Accounts Payable—Fox ............................
7,500
7,500
Purchased merchandise on credit.
21 Accounts Payable—Fox ...................................
Purchases Returns & Allowances ............
2,100
2,100
Received an allowance on purchase.
28 Accounts Payable—Fox ...................................
Purchases Discounts ................................
Cash ............................................................
Paid balance (less 2%) within discount period.
5-23
5,400
108
5,292
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-17A (30 minutes)
1.
BUYER – Taos Company
Credit Purchase
Purchases .........................................................
Accounts Payable .....................................
22,000
22,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ............................................
Purchases Discounts ...............................
Cash ...........................................................
22,000
660
21,340
Paid account payable within 3% discount period.
2.
SELLER – Tuscon Company
Credit Sale
Accounts Receivable .......................................
Sales...........................................................
22,000
22,000
Sold merchandise on account.
Cash Collection
Cash ...................................................................
Sales Discounts ................................................
Accounts Receivable ................................
Collected account receivable.
5-24
21,340
660
22,000
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-18A (25 minutes)
1. Entries for Smythe Company (BUYER):
May 11 Purchases ........................................................
Accounts Payable ....................................
30,000
30,000
Purchased merchandise on credit.
11 Transportation-In .............................................
Cash ..........................................................
335
335
Paid shipping charges on purchased
merchandise.
12 Accounts Payable ...........................................
Purchases Returns and Allowances ......
1,200
1,200
Returned unacceptable merchandise.
20 Accounts Payable ...........................................
Purchases Discounts ..............................
Cash ..........................................................
28,800
864
27,936
Paid balance within the 3% discount period.
2. Entries for Hope Corporation (SELLER):
May 11 Accounts Receivable ......................................
Sales..........................................................
30,000
30,000
Sold merchandise on account.
13 Sales Returns and Allowances ......................
Accounts Receivable ...............................
1,200
1,200
Accepted a return from a customer.
21 Cash ..................................................................
Sales Discounts ...............................................
Accounts Receivable ...............................
Collected account receivable.
5-25
27,936
864
28,800
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-19A (20 minutes)
Periodic Inventory System
1)
Nov. 1
Purchases .........................................................
Accounts Payable .....................................
1,400
1,400
To record purchases on credit.
2)
Nov. 5 Accounts Payable ............................................
Purchases Discount .................................
Cash ...........................................................
1,400
28
1,372
To record cash payment in discount period.
*$1,400 x 2%
3)
Nov. 7 Cash ...................................................................
Purchases Returns and Allowances .......
98
98
To record check received for return of purchases
previously paid for with discount already taken.
*$100 – ($100 x 2%)
4)
Nov. 10 Transportation-In ..............................................
Cash ...........................................................
80
80
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable .......................................
Sales...........................................................
1,500
1,500
To record sale of merchandise on credit...........
6)
Nov. 16 Sales Returns and Allowances .......................
Accounts Receivable ................................
To record return of merchandise sold on credit.
5-26
200
200
Chapter 05 - Accounting for Merchandising Operations
Exercise 5-20 (20 minutes)
L´Oréal
Income Statement (€ millions)
For Year Ended December 31, 2009
Net sales ...................................................................................
€17,472.6
Cost of sales .............................................................................
5,161.6
Gross profit..........................................................................
12,311.0
Research and development expense ....................................
(609.2)
Advertising and promotion expense......................................
(5,388.7)
Selling, general and administrative expense ........................
(3,735.5)
Finance costs ...........................................................................
(76.0)
Other expense ..........................................................................
(30.6)
Profit before tax expense ...................................................
2,471.0
Income tax expense .................................................................
676.1
Net profit ...................................................................................
€ 1,794.9
5-27
Chapter 05 - Accounting for Merchandising Operations
PROBLEM SET A
Problem 5-1A (40 minutes)
Aug. 1 Merchandise Inventory .....................................
Accounts Payable—Abilene .....................
6,000
6,000
Purchased goods on credit.
4 Accounts Payable—Abilene .............................
Cash ............................................................
100
100
Paid freight for Abilene.
5 Accounts Receivable—Lux ..............................
Sales............................................................
4,200
4,200
Sold goods on credit.
5 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
3,000
3,000
To record the cost of August 5 sale.
8 Merchandise Inventory .....................................
Accounts Payable—Welch ........................
5,540
5,540
Purchased goods on credit.
9 Delivery Expense ...............................................
Cash ............................................................
120
120
Paid shipping charges on August 5 sale.
10 Sales Returns and Allowances ........................
Accounts Receivable—Lux .......................
700
700
Customer returned merchandise.
10 Merchandise Inventory .....................................
Cost of Goods Sold ...................................
500
500
Returned goods to inventory.
12 Accounts Payable—Welch ...............................
Merchandise Inventory ..............................
Received a credit memorandum for August 8
purchase.
5-28
800
800
Chapter 05 - Accounting for Merchandising Operations
Problem 5-1A (Concluded)
Aug. 15 Cash ....................................................................
Sales Discounts .................................................
Accounts Receivable—Lux .......................
3,430
70
3,500
Collected receivable within 2% discount period.
18 Accounts Payable—Welch ...............................
Merchandise Inventory* ............................
Cash** .........................................................
4,740
45
4,695
Paid payable within discount period
* (1% x [$5,300 - $800])
**([100%-1%] x [$5,300 - $800]) + $240 shipping.
19 Accounts Receivable—Trax .............................
Sales............................................................
3,600
3,600
Sold goods on credit.
19 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
2,500
2,500
To record cost of the August 19 sale.
22 Sales Returns and Allowances ........................
Accounts Receivable—Trax .....................
600
600
Issued credit memorandum.
29 Cash ....................................................................
Sales Discounts (1%) ........................................
Accounts Receivable—Trax .....................
2,970
30
3,000
Collected receivable within discount period.
30 Accounts Payable—Abilene .............................
Cash ............................................................
Paid payable ($6,000 - $100); discount period
has expired.
5-29
5,900
5,900
Chapter 05 - Accounting for Merchandising Operations
Problem 5-2A (40 minutes)
July 1
Merchandise Inventory .....................................
Accounts Payable—Black .........................
6,000
6,000
Purchased goods on credit.
2
Accounts Receivable—Coke ............................
Sales............................................................
800
800
Sold goods on credit.
2
Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
500
500
To record cost of the July 2 sale.
3
Merchandise Inventory .....................................
Cash ............................................................
100
100
Paid freight on incoming goods.
8
Cash ....................................................................
Sales............................................................
1,600
1,600
Sold goods for cash.
8
Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
1,200
1,200
To record cost of the July 8 sale.
9
Merchandise Inventory .....................................
Accounts Payable—Lane ..........................
2,300
2,300
Purchased goods on credit.
11
Accounts Payable—Lane .................................
Merchandise Inventory ..............................
200
200
Received credit memo from returning
goods to supplier.
12
Cash ....................................................................
Sales Discounts (2%) ........................................
Accounts Receivable—Coke ....................
Collected receivable within the discount period.
5-30
784
16
800
Chapter 05 - Accounting for Merchandising Operations
Problem 5-2A (Concluded)
July 16 Accounts Payable—Black ................................
Merchandise Inventory (1%) .....................
Cash ............................................................
6,000
60
5,940
Paid payable within discount period.
19 Accounts Receivable—AKP .............................
Sales............................................................
1,250
1,250
Sold goods on credit.
19 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
900
900
To record cost of the July 19 sale.
21 Sales Returns and Allowances ........................
Accounts Receivable—AKP .....................
150
150
Issued credit memo for allowance on
goods sold to customer.
24 Accounts Payable—Lane .................................
Merchandise Inventory * ...........................
Cash ............................................................
2,100
42
2,058
Paid payable in discount period (*2% x $2,100).
30 Cash ....................................................................
Sales Discounts (2%) ........................................
Accounts Receivable—AKP .....................
1,078
22
1,100
Collected receivable within discount period.
[($1,250 - $150) x .02]
31 Accounts Receivable—Coke ............................
Sales............................................................
5,000
5,000
Sold goods on credit.
31 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
To record cost of the July 31 sale.
5-31
3,200
3,200
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3A (60 minutes)
Part 1
Adjustment (a)
Jan 31
Store Supplies Expense ...................................
Store Supplies ............................................
3,150
3,150
To record store supplies expense
($4,800 - $1,650).
Adjustment (b)
Jan 31
Insurance Expense ............................................
Prepaid Insurance ......................................
1,500
1,500
To record expired insurance.
Adjustment (c)
Jan 31
Depreciation Expense—Store Equip ...............
Accumulated Deprec.—Store Equip ........
1,400
1,400
To record depreciation expense.
Adjustment (d)
Jan 31
Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
To adjust inventory for shrinkage
($11,500 - $11,100).
5-32
400
400
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3A (Continued)
Part 2 Multiple-step income statement:
REX COMPANY
Income Statement
For Year Ended January 31, 2011
Sales .........................................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
$104,000
$ 1,000
2,000
Net sales ...................................................................
101,000
Cost of goods sold* ................................................
Gross profit ..............................................................
37,800
63,200
3,000
Expenses
Selling expenses
Depreciation expense—Store equipment ...........
Sales salaries expense** .....................................
Rent expense—Selling space**............................
Store supplies expense ........................................
Advertising expense ............................................
Total selling expenses ..........................................
General and administrative expenses
Insurance expense ................................................
Office salaries expense ........................................
Rent expense—Office space ................................
Total general and administrative expenses ........
Total expenses ......................................................
Net income ...............................................................
1,400
15,500
7,000
3,150
9,900
36,950
1,500
15,500
7,000
24,000
* $37,800 = $37,400 + $400 (shrinkage)
**Salaries and rent expenses are equally divided between selling activities
and general and administrative activities.
5-33
60,950
$ 2,250
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3A (Concluded)
Part 3 Single-step income statement:
REX COMPANY
Income Statement
For Year Ended January 31, 2011
Net sales ................................................................
Expenses
Cost of goods sold ..........................................
Selling expenses .............................................
General and administrative expense .............
Total expenses ................................................
Net income ............................................................
$101,000
$37,800
36,950*
24,000**
$
98,750
2,250
*$3,150 + $1,400 + $9,900 + 1/2($31,000 + $14,000) = $36,950
**$1,500 + 1/2($31,000 + $14,000) = $24,000
Part 4
Current assets
Cash ............................................................................. $ 2,200
Merchandise inventory** ............................................ 11,100
Store supplies .............................................................
1,650
Prepaid insurance .......................................................
800*
Total current assets .................................................... $15,750
Current liabilities ............................................................ $ 9,000
Current ratio ($15,750 / $9,000) .........................................
1.75
*$ 2,300 - $1,500 = $800
**$11,500 - $400 = $11,100
Quick assets (Cash) ....................................................... $ 2,200
Current liabilities ............................................................ $ 9,000
Acid-test ratio ($2,200 / $9,000) .........................................
5-34
0.24
Chapter 05 - Accounting for Merchandising Operations
Net Sales ......................................................................... $101,000
Cost of goods sold ......................................................... 37,800
Gross margin .................................................................. $ 63,200
Gross margin ratio ($63,200 / $101,000)............................
5-35
0.63
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4A (40 minutes)
1. Net sales:
Sales ..........................................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
Net sales ....................................................................
$212,000
(3,250)
(14,000)
$194,750
2. Cost of Merchandise purchased:
Invoice cost of merchandise purchased ................
$ 91,000
Purchase discounts received..................................
(1,900)
Purchase returns and allowances ..........................
(4,400)
Costs of transportation-in .......................................
3,900
Total cost of merchandise purchased....................
$ 88,600
5-36
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4A (Continued)
3. Multiple-step income statement
BIZKID COMPANY
Income Statement
For Year Ended August 31, 2011
Sales....................................................................
Less: Sales discounts .......................................
Sales returns and allowances ...............
Net sales .............................................................
Cost of goods sold * ..........................................
Gross profit ........................................................
Expenses
Selling expenses
Sales salaries expense ..................................
Rent expense—Selling space .......................
Store supplies expense .................................
Advertising expense ......................................
Total selling expenses ..................................
General and administrative expenses
Office salaries expense .................................
Rent expense—Office space ........................
Office supplies expense ................................
Total general and administrative expenses
Total expenses .................................................
Net income..........................................................
*Cost of goods sold (alternative computation):
Merchandise inventory, August 31, 2010 ...........................
Total cost of merchandise purchased (from part 2) ..........
Merchandise available for sale ............................................
Merchandise inventory, August 31, 2011 ...........................
Cost of goods sold ................................................................
5-37
$212,000
$ 3,250
14,000
17,250
194,750
82,600
112,150
29,000
10,000
2,500
18,000
59,500
26,500
2,600
800
29,900
89,400
$ 22,750
$ 25,000
88,600
113,600
31,000
82,600
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4A (Concluded)
4. Single-step income statement
BIZKID COMPANY
Income Statement
For Year Ended August 31, 2011
Net sales ..................................................................
$194,750
Expenses
Cost of goods sold ...............................................
Selling expenses ..................................................
$82,600
59,500
General and administrative expenses ................
29,900
Total expenses .....................................................
Net income...............................................................
5-38
172,000
$ 22,750
Chapter 05 - Accounting for Merchandising Operations
Problem 5-5A (30 minutes)
Part 1
Closing entries:
Aug. 31 Sales .............................................................
Income Summary ..................................
212,000
212,000
To close temporary accounts with credit
balances.
Aug. 31 Income Summary .........................................
Sales Discounts ...................................
Sales Returns and Allowances ...........
Cost of Goods Sold ..............................
Sales Salaries Expense ........................
Rent Expense—Selling Space .............
Store Supplies Expense .......................
Advertising Expense ............................
Office Salaries Expense .......................
Rent Expense—Office Space ...............
Office Supplies Expense ......................
189,250
3,250
14,000
82,600
29,000
10,000
2,500
18,000
26,500
2,600
800
To close temporary accounts with debit
balances.
Aug. 31 Income Summary .........................................
N. Kidman, Capital ................................
22,750
22,750
To close the Income Summary account.
Aug. 31 N. Kidman, Capital ........................................
N. Kidman, Withdrawals .......................
To close the withdrawals account.
5-39
8,000
8,000
Chapter 05 - Accounting for Merchandising Operations
Problem 5-5A (Concluded)
Part 2
The first step is to determine the amount of purchases that are subject to a
discount during the year:
Invoice cost of merchandise purchases ...................
$91,000
Purchase returns and allowances ..............................
(4,400)
Total cost of merchandise payable .............................
$86,600
This amount is used to determine the maximum discount, which is then
compared to the actual discount:
Maximum discount available (3% x $86,600) ............
$ 2,598
Purchase discounts received .....................................
(1,900)
Purchase discounts missed ........................................
$ 698
As a percent of available discounts ($698/$2,598) ..............
26.9%
This analysis suggests that nearly 27% of available discounts have been
missed. As a result, it would appear that cash is not being well managed.
Management should try to identify a better system for ensuring that all
favorable discounts are taken. It is possible that the discounts not taken are
actually not favorable to the company—further information is required to
assess this possibility.
Part 3
The first step is to compute this year’s sales returns and allowances rate:
Sales..............................................................................
Sales returns and allowances ....................................
$212,000
$ 14,000
Percent of returns and allowances to sales ...............
6.6%
This calculation shows that the company’s customers are returning or
requiring allowances on items at a higher rate than the 5% rate observed in
prior years. It appears that management should investigate the situation to
see why there are more dissatisfied customers this year than in prior years.
5-40
Chapter 05 - Accounting for Merchandising Operations
Problem 5-6AB (50 minutes)
REX COMPANY
Work Sheet
For Year Ended January 31, 2011
Account Title
Unadjusted
Trial Balance
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
Cash .............................................................. 2,200
Merchandise inventory.........................11,500
Store supplies ........................................... 4,800
Prepaid insurance................................... 2,300
(d)
(a)
(b)
400
3,150
1,500
(c)
1,400
Store equipment ......................................41,900
Accum. depreciation—Store eq.............
Accounts payable ...................................
T. Rex, Capital............................................
15,000
9,000
32,000
T. Rex, Withdrawals............................... 2,000
Sales..............................................................
104,000
Cost of goods sold..................................37,400
0
Salaries expense......................................31,000
Insurance expense .................................
0
Rent expense ............................................14,000
Store supplies expense........................
0
Advertising expense.............................. 9,900 ______
Totals.............................................................
160,000 160,000
Totals.............................................................
(d)
(c)
400
1,400
(b)
1,500
(a)
3,150
____
6,450
16,400
9,000
32,000
16,400
9,000
32,000
2,000
1,000
1,000
2,000
2,000
37,800
37,800
1,400
1,400
31,000
31,000
1,500
1,500
14,000
14,000
3,150
3,150
____
9,900 ______
9,900
6,450 161,400 161,400 101,750
2,250
104,000
5-41
Balance Sheet & Statement of Owner’s Equity
Dr.
Cr.
2,200
11,100
1,650
800
41,900
104,000
Sales returns and allowances............ 2,000
Net income..................................................
2,200
11,100
1,650
800
41,900
2,000
Sales discounts........................................ 1,000
Depreciation expense—Store eq ..........
Income
Statement
Dr.
Cr.
104,000
______ ______
104,000 59,650
______ ______
104,000 59,650
______
57,400
2,250
59,650
Chapter 05 - Accounting for Merchandising Operations
PROBLEM SET B
Problem 5-1B (40 minutes)
July 3 Merchandise Inventory ....................................
Accounts Payable—CAP ..........................
15,000
15,000
Purchased goods on credit.
4 Accounts Payable—CAP .................................
Cash ...........................................................
250
250
Paid freight for CAP Corp.
7 Accounts Receivable—Morris.........................
Sales...........................................................
10,500
10,500
Sold goods on credit.
7 Cost of Goods Sold ..........................................
Merchandise Inventory .............................
7,500
7,500
To record cost of the July 7 sale.
10 Merchandise Inventory ....................................
Accounts Payable—Murdock ..................
14,800
14,800
Purchased goods on credit.
11 Delivery Expense ..............................................
Cash ...........................................................
300
300
Paid shipping charges on July 7 sale.
12 Sales Returns and Allowances .......................
Accounts Receivable—Morris .................
1,750
1,750
Customer returned merchandise.
12 Merchandise Inventory ....................................
Cost of Goods Sold ..................................
1,250
1,250
Returned goods to inventory.
14 Accounts Payable—Murdock ..........................
Merchandise Inventory .............................
Received a credit memorandum for July
10 purchase.
5-42
2,000
2,000
Chapter 05 - Accounting for Merchandising Operations
Problem 5-1B (Concluded)
July 17 Cash ...................................................................
Sales Discounts (2%) .......................................
Accounts Receivable—Morris .................
8,575
175
8,750
Collected receivable within discount period.
20 Accounts Payable—Murdock ..........................
Merchandise Inventory .............................
Cash ...........................................................
12,800
122
12,678
Paid payable within discount period.
$14,200 + $600 - $2,000 = $12,800
($14,200 - $2,000) x 1% = $122
21 Accounts Receivable—Ulsh ............................
Sales...........................................................
9,000
9,000
Sold goods on credit.
21 Cost of Goods Sold ..........................................
Merchandise Inventory .............................
6,250
6,250
To record cost of the July 21 sale.
24 Sales Returns and Allowances .......................
Accounts Receivable—Ulsh ....................
1,500
1,500
Issued credit memo.
30 Cash ...................................................................
Sales Discounts (1%) .......................................
Accounts Receivable—Ulsh ....................
7,425
75
7,500
Collected receivable within discount period.
31 Accounts Payable—CAP .................................
Cash ...........................................................
Paid payable ($15,000 - $250); discount period
has expired.
5-43
14,750
14,750
Chapter 05 - Accounting for Merchandising Operations
Problem 5-2B (40 minutes)
May
2 Merchandise Inventory .....................................
Accounts Payable—Bots ..........................
9,000
9,000
Purchased goods on credit.
4 Accounts Receivable—Chase ..........................
Sales............................................................
1,200
1,200
Sold goods on credit.
4 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
750
750
To record cost of the May 4 sale.
5 Merchandise Inventory .....................................
Cash ............................................................
150
150
Paid freight on incoming goods.
9 Cash ....................................................................
Sales............................................................
2,400
2,400
Sold goods for cash.
9 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
1,800
1,800
To record cost of the May 9 sale.
10 Merchandise Inventory .....................................
Accounts Payable—Snyder ......................
3,450
3,450
Purchased goods on credit.
12 Accounts Payable—Snyder..............................
Merchandise Inventory ..............................
300
300
Received credit memo from returning goods
to supplier.
14 Cash ....................................................................
Sales Discounts (2%) ........................................
Accounts Receivable—Chase ..................
Collected receivable within discount period.
5-44
1,176
24
1,200
Chapter 05 - Accounting for Merchandising Operations
Problem 5-2B (Concluded)
May 17 Accounts Payable—Bots .................................
Merchandise Inventory * ...........................
Cash ............................................................
9,000
90
8,910
Paid payable in discount period (*1% x $9,000).
20 Accounts Receivable—Tex .............................
Sales............................................................
2,800
2,800
Sold goods on credit.
20 Cost of Goods Sold ..........................................
Merchandise Inventory ..............................
1,450
1,450
To record cost of the May 20 sale.
22 Sales Returns and Allowances .......................
Accounts Receivable—Tex .......................
400
400
Issued credit memo for allowances on goods
sold to customers.
25 Accounts Payable—Snyder.............................
Merchandise Inventory * ...........................
Cash ............................................................
3,150
63
3,087
Paid payable in discount period (*2% x $3,150).
30 Cash ...................................................................
Sales Discounts (2%) .......................................
Accounts Receivable—Tex .......................
2,352
48
2,400
Collected receivable within discount period.
[($2,800 - $400) x .02]
31 Accounts Receivable—Chase .........................
Sales............................................................
Sold goods on credit.
7,500
31 Cost of Goods Sold ..........................................
Merchandise Inventory ..............................
4,800
To record cost of the May 31 sale.
5-45
7,500
4,800
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3B (60 minutes)
Part 1
Adjustment (a)
Oct. 31 Store Supplies Expense ...................................
Store Supplies ............................................
6,300
6,300
To record store supplies expense
($9,600 - $3,300).
Adjustment (b)
Oct. 31 Insurance Expense ............................................
Prepaid Insurance ......................................
3,000
3,000
To record expired insurance.
Adjustment (c)
Oct. 31 Depreciation Expense—Store Equip ...............
Accumulated Deprec.—Store Equip ........
2,800
2,800
To record depreciation expense.
Adjustment (d)
Oct. 31 Cost of Goods Sold ...........................................
Merchandise Inventory ..............................
To adjust inventory for shrinkage ($23,000
- $22,200).
5-46
800
800
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3B (Continued)
Part 2 Multiple-step income statement
FAB PRODUCTS COMPANY
Income Statement
For Year Ended October 31, 2011
Sales .........................................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
Net sales ...................................................................
Cost of goods sold * ...............................................
Gross profit ..............................................................
Expenses
Selling expenses
Depreciation expense—Store equipment .........
Sales salaries expense .......................................
Rent expense—Selling space ............................
Store supplies expense ......................................
Advertising expense ...........................................
Total selling expenses ........................................
General and administrative expenses
Insurance expense ..............................................
Office salaries expense ......................................
Rent expense—Office space ..............................
Total general and administrative expenses ......
Total expenses .......................................................
Net income ...............................................................
$208,000
$ 2,000
4,000
6,000
202,000
75,600
126,400
2,800
31,000
14,000
6,300
19,800
73,900
3,000
31,000
14,000
48,000
121,900
$ 4,500
* $75,600 = $74,800 + $800 (shrinkage)
** Salaries and rent expenses are equally divided between selling and general and administrative.
Part 3 Single-step income statement
FAB PRODUCTS COMPANY
Income Statement
For Year Ended October 31, 2011
Net sales ...................................................................
Expenses
Cost of goods sold .............................................
Selling expenses ................................................
General and administrative expense ................
Total expenses ...................................................
Net income ...............................................................
* $73,900 = $6,300 + $2,800 + $19,800 + 1/2($62,000 + $28,000)
** $48,000 = $3,000 + 1/2($62,000 + $28,000)
5-47
$202,000
$75,600
73,900*
48,000**
(197,500)
$ 4,500
Chapter 05 - Accounting for Merchandising Operations
Problem 5-3B (Concluded)
Part 4:
Current assets
Cash ...........................................................................
Merchandise inventory ............................................
Store supplies ...........................................................
Prepaid insurance ....................................................
Total current assets ..................................................
$ 4,400
22,200
3,300
1,600*
$ 31,500
Current liabilities .........................................................
$ 16,000
Current ratio ($31,500 / $16,000) .....................................
1.97
*$4,600 - $3,000 = $1,600
Quick assets (Cash in this case) ...............................
$ 4,400
Current liabilities .........................................................
$ 16,000
Acid-test ratio ($4,400 / $16,000) ....................................
0.28
Net sales .......................................................................
Cost of goods sold ......................................................
Gross margin ...............................................................
$202,000
75,600
$126,400
Gross margin ratio ($126,400 / $202,000) .......................
0.63
5-48
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4B (40 minutes)
1.
2.
Net sales:
Sales ..............................................................................
Less: Sales discounts .................................................
Sales returns and allowances ..........................
Net sales .......................................................................
$318,000
(4,875)
(21,000)
$292,125
Cost of merchandise purchased:
Invoice cost of merchandise purchases....................
Purchase discounts received .....................................
Purchase returns and allowances ..............................
Costs of transportation-in ...........................................
Total cost of merchandise purchases .......................
$136,500
(2,850)
(6,600)
5,850
$132,900
5-49
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4B (Continued)
3. Multiple-step income statement
ALBIN COMPANY
Income Statement
For Year Ended March 31, 2011
Sales.........................................................................
Less: Sales discounts ...........................................
Sales returns and allowances ....................
Net sales ..................................................................
$318,000
$ 4,875
21,000
25,875
292,125
Cost of goods sold * ...............................................
123,900
Gross profit .............................................................
168,225
Expenses
Selling expenses
Sales salaries expense .......................................
Rent expense—Selling space ............................
Store supplies expense ......................................
Advertising expense ...........................................
Total selling expenses .......................................
General and administrative expenses
Office salaries expense ......................................
Rent expense—Office space .............................
Office supplies expense .....................................
Total general and administrative expenses .....
Total expenses ........................................................
Net income...............................................................
*Cost of goods sold (alternative computation):
Merchandise inventory, March 31, 2010 ..................................
Total cost of merchandise purchases (from part 2) ...............
Goods available for sale ...........................................................
Merchandise inventory, March 31, 2011 ..................................
Cost of goods sold ....................................................................
5-50
43,500
15,000
3,750
27,000
89,250
39,750
3,900
1,200
44,850
134,100
$ 34,125
$ 37,500
132,900
170,400
46,500
123,900
Chapter 05 - Accounting for Merchandising Operations
Problem 5-4B (Concluded)
4. Single-step income statement
ALBIN COMPANY
Income Statement
For Year Ended March 31, 2011
Net sales ................................................................
Expenses
Cost of goods sold ...........................................
Selling expenses ..............................................
General and administrative expenses ............
Total expenses ..................................................
Net income ............................................................
$292,125
$123,900
89,250
44,850
258,000
$ 34,125
Problem 5-5B (30 minutes)
Part 1
Closing entries:
March 31 Sales ..................................................................
Income Summary ..........................................
318,000
318,000
To close temporary accounts with credit balances.
March 31 Income Summary ...............................................
Sales Discounts ...........................................
Sales Returns and Allowances ...................
Cost of Goods Sold ......................................
Sales Salaries Expense ................................
Rent Expense, Selling Space .......................
Store Supplies Expense ...............................
Advertising Expense ....................................
Office Salaries Expense ...............................
Rent Expense, Office Space ........................
Office Supplies Expense ..............................
283,875
4,875
21,000
123,900
43,500
15,000
3,750
27,000
39,750
3,900
1,200
To close temporary accounts with debit balances.
March 31 Income Summary ...............................................
R. Albin, Capital ............................................
34,125
34,125
To close the Income Summary account.
March 31 R. Albin, Capital .................................................
R. Albin, Withdrawals ...................................
To close the withdrawals account.
5-51
2,000
2,000
Chapter 05 - Accounting for Merchandising Operations
Problem 5-5B (Concluded)
Part 2
The first step is to determine the amount of purchases that were subject to a
discount during the year:
Invoice cost of merchandise purchases ...........................
Purchase returns and allowances .....................................
Total cost of merchandise purchases payable ................
$136,500
(6,600)
$129,900
This amount is used to determine the maximum discount, which is then
compared to the actual discount:
Maximum discount available (3% x $129,900) ..................
Purchase discounts received..............................................
Purchase discounts missed ................................................
As a percent of available discounts ($1,047/$3,897) ..............
$
3,897
(2,850)
$ 1,047
26.9%
This analysis suggests that about 27% of available discounts have been
missed. As a result, it would appear that cash is not being well managed.
Management should try to identify a better system for ensuring that all
favorable discounts are taken. It is possible that the discounts not taken are
actually not favorable to the company.
Part 3
First, we compute this year’s sales returns and allowances rate:
Sales ......................................................................................
Sales returns and allowances .............................................
Percent of returns and allowances to sales ......................
$318,000
$ 21,000
6.6%
This calculation shows that the company’s customers are returning or
requiring allowances on items at a higher rate than the 5% rate observed in
prior years. It appears that management should investigate the situation to
see why there are more dissatisfied customers this year than in prior years.
5-52
Chapter 05 - Accounting for Merchandising Operations
Problem 5-6BB (50 minutes)
FAB PRODUCTS COMPANY
Work Sheet
For Year Ended October 31, 2011
Account Title
Unadjusted
Trial Balance
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
Cash....................................................... 4,400
Merchandise inventory....................23,000
(d)
800
Store supplies..................................... 9,600
(a)
(b)
6,300
3,000
(c)
2,800
Prepaid insurance ............................. 4,600
Store equipment ................................83,800
Accum. depreciation—Store eq.............
Accounts payable .............................
A. Fab., Capital....................................
30,000
16,000
64,000
A. Fab Withdrawals.......................... 2,000
Sales.......................................................
Income
Statement
Dr.
Cr.
4,400
22,200
4,400
22,200
3,300
1,600
83,800
3,300
1,600
83,800
32,800
16,000
64,000
32,800
16,000
64,000
2,000
208,000
Sales returns and allowances............ 4,000
Cost of goods sold............................74,800
0
Salaries expense................................62,000
Insurance expense............................
0
Rent expense......................................28,000
Store supplies expense...................
0
Depreciation expense—Store eq ..........
Advertising expense.........................19,800 ______
Totals .....................................................
318,000 318,000
Net income...........................................
Totals .....................................................
2,000
208,000
Sales discounts.................................. 2,000
208,000
2,000
4,000
75,600
2,800
62,000
2,000
4,000
75,600
2,800
62,000
(d)
(c)
800
2,800
(b)
3,000
3,000
28,000
3,000
28,000
(a)
6,300
6,300
6,300
____
12,900
____ 19,800 ______ 19,800
12,900 320,800 320,800 203,500
4,500
208,000
5-53
Balance Sheet & Statement of Owner’s Equity
Dr.
Cr.
______
208,000
______
208,000
______
117,300
______
117,300
______
112,800
4,500
117,300
Chapter 05 - Accounting for Merchandising Operations
SERIAL PROBLEM
— SP 5
Serial Problem — SP 5, Business Solutions (150 minutes) Part 1
Journal entries
Jan. 4
Wages Expense ..............................................623
Wages Payable ...............................................210
Cash .........................................................101
125
500
625
Paid employee.
5
Cash .................................................................101
S. Rey, Capital ..........................................301
25,000
25,000
Additional investment by owner.
7
Merchandise Inventory ..................................119
Accounts Payable ...................................201
5,800
5,800
Purchased merchandise on credit.
9
Cash .................................................................101
Accounts Receivable—Gomez Co. .......106.6
2,668
2,668
Collected accounts receivable.
11 Accounts Receivable—Alex’s Eng. Co ............106.1
Unearned Computer Services Revenue ..........236
Computer Services Revenue .................403
5,500
1,500
7,000
Completed work on project.
13 Accounts Receivable—Liu Corp. ...................106.5
Sales .........................................................413
5,200
5,200
Sold merchandise on credit.
13 Cost of Goods Sold ........................................502
Merchandise Inventory ...........................119
3,560
3,560
To record cost of Jan. 13 sale.
15 Merchandise Inventory ..................................119
Cash ..........................................................101
600
600
Paid freight on incoming merchandise.
16 Cash .................................................................101
Computer Services Revenue .................403
Collected cash revenue from customer.
5-54
4,000
4,000
Chapter 05 - Accounting for Merchandising Operations
Serial Problem
— SP 5
(Continued)
Jan. 17 Accounts Payable ..........................................201
Merchandise Inventory ...........................119
Cash .........................................................101
5,800
58
5,742
Paid account payable within discount period.
(Discount taken = $5,800 x .01 = $58)
20* Sales Returns and Allowances .....................414
Accounts Receivable—Liu Corp. ...........106.5
500
500
Customer returned defective goods.
* Business Solutions leaves the cost of defective
products in its costs of goods sold. If it did not,
the following entry would have been recorded:
Loss from Defective Merchandise ...... 808
Cost of Goods Sold ......................... 502
320
320
22 Cash .................................................................101
Sales Discounts ..............................................415
Accounts Receivable—Liu Corp ............106.5
4,653
47
4,700
Collected accounts receivable.
January 13 sale .....................................
January 20 return ...................................
Amount due from Liu.............................
Discount at 1% .......................................
Cash received from Liu .........................
$5,200
500
$4,700
47
$4,653
24 Accounts Payable ..........................................201
Merchandise Inventory ............................119
496
496
Returned merchandise for credit.
26 Merchandise Inventory ..................................119
Accounts Payable ...................................201
9,000
9,000
Purchased merchandise for resale.
26 Accounts Receivable—KC, Inc ......................106.8
Sales .........................................................413
5,800
5,800
Sold merchandise on credit.
26 Cost of Goods Sold ........................................502
Merchandise Inventory ...........................119
4,640
4,640
To record cost of Jan. 26 sale.
29
No entry recorded in the journal.
31
Wages Expense ..............................................623
Cash .........................................................101
Paid employee wages.
5-55
1,250
1,250
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Feb. 1 Prepaid Rent ...................................................131
Cash .........................................................101
2,475
2,475
Paid three months’ rent in advance.
3 Accounts Payable ..........................................201
Merchandise Inventory ...........................119
Cash .........................................................101
8,504
90
8,414
Paid account payable within discount period.
January 26 purchase ........................
$9,000
Less credit allowed ..........................
(496)
Accounts payable to Kansas Corp.
$8,504
Less discount at 1% x $9,000 ..........
(90)
Amount due to Kansas Corp. ..........
$8,414
5 Advertising Expense ......................................655
Cash .........................................................101
600
600
Purchased ad in local newspaper.
11 Cash .................................................................101
Accounts Receivable—Alex’s Eng. Co. ......106.1
5,500
5,500
Collected accounts receivable.
15 S. Rey, Withdrawals ........................................302
Cash .........................................................101
4,800
4,800
Owner withdrew cash.
23 Accounts Receivable—Delta Co. ...................106.7
Sales .........................................................413
3,220
3,220
Sold merchandise on credit.
23 Cost of Goods Sold ........................................502
Merchandise Inventory ...........................119
2,660
2,660
To record cost of Feb. 23 sale.
26 Wages Expense ..............................................623
Cash .........................................................101
1,000
1,000
Paid employee.
27 Mileage Expense ............................................676
Cash .........................................................101
Reimbursed Rey for business mileage.
5-56
192
192
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Mar. 8 Computer Supplies ........................................126
Accounts Payable ...................................201
2,730
2,730
Purchased supplies on credit.
9 Cash .................................................................101
Accounts Rec.—Delta Co. ......................106.7
3,220
3,220
Collected accounts receivable.
11 Repairs Expense–Computer .........................684
Cash .........................................................101
960
960
Paid for computer repairs.
16 Cash .................................................................101
Computer Services Revenue .................403
5,260
5,260
Collected cash revenue from customer.
19 Accounts Payable ..........................................201
Cash .........................................................101
3,830
3,830
Paid accounts payable ($1,100 + $2,730).
24 Accounts Receivable—Easy Leasing ...........106.3
Computer Services Revenue .................403
9,047
9,047
Billed customer for services.
25 Accounts Receivable—Wildcat Services ........... 106.2
Sales .........................................................413
2,800
2,800
Sold merchandise on credit.
25 Cost of Goods Sold ........................................502
Merchandise Inventory ...........................119
2,002
2,002
To record cost of March 25 sale.
30 Accounts Receivable—IFM Co. .....................106.4
Sales .........................................................413
2,220
2,220
Sold merchandise on credit.
30 Cost of Goods Sold ........................................502
Merchandise Inventory ...........................119
1,048
1,048
To record cost of March 30 sale.
31 Mileage Expense ............................................676
Cash .........................................................101
Reimbursed Rey for business mileage.
5-57
128
128
Chapter 05 - Accounting for Merchandising Operations
Serial Problem
— SP 5
(Continued)
Part 2
Ledger accounts as of March 31 before posting of March 31 adjusting entries
Cash
Date
Explanation
Dec. 31 Balance
Jan. 4
5
9
15
16
17
22
31
Feb. 1
3
5
11
15
26
27
Mar. 9
11
16
19
31
PR
Acct. No. 101
Debit Credit Balance
48,372
625
47,747
25,000
72,747
2,668
75,415
600
74,815
4,000
78,815
5,742 73,073
4,653
77,726
1,250 76,476
2,475 74,001
8,414 65,587
600
64,987
5,500
70,487
4,800 65,687
1,000 64,687
192
64,495
3,220
67,715
960
66,755
5,260
72,015
3,830 68,185
128
68,057
Accounts Receivable—Alex’s Engineering Co.
Acct. No. 106.1
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
0
Jan. 11
5,500
5,500
Feb. 11
5,500
0
Accounts Receivable—Wildcat Services
Acct. No. 106.2
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
0
Mar. 25
2,800
2,800
5-58
Chapter 05 - Accounting for Merchandising Operations
Serial Problem
— SP 5 (Continued)
Accounts Receivable—Easy Leasing
Acct. No. 106.3
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
0
Mar. 24
9,047
9,047
Accounts Receivable—IFM Co.
Acct. No. 106.4
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
3,000
Mar. 30
2,220
5,220
Date
Dec. 31
Jan. 13
20
22
Accounts Receivable—Liu Corporation
Acct. No. 106.5
Explanation
PR
Debit Credit Balance
Balance
0
5,200
5,200
500
4,700
4,700
0
Accounts Receivable—Gomez Co.
Date
Explanation
PR
Debit
Dec. 31 Balance
Jan. 9
Acct. No. 106.6
Credit Balance
2,668
2,668
0
Accounts Receivable—Delta Co.
Acct. No. 106.7
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
0
Feb. 23
3,220
3,220
Mar. 9
3,220
0
Accounts Receivable—KC, Inc.
Acct. No. 106.8
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
0
Jan. 26
5,800
5,800
5-59
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Accounts Receivable—Dream, Inc.
Date
Explanation
PR
Debit
Dec. 31 Balance
Date
Dec. 31
Jan. 7
13
15
17
24
26
26
Feb. 3
23
Mar. 25
30
Acct. No. 106.9
Credit Balance
0
Merchandise Inventory
Acct. No. 119
Explanation
PR
Debit Credit Balance
Balance
0
5,800
5,800
3,560 2,240
600
2,840
58
2,782
496
2,286
9,000
11,286
4,640 6,646
90
6,556
2,660 3,896
2,002 1,894
1,048 846
Computer Supplies
Date
Explanation
PR
Dec. 31 Balance
Mar. 8
Acct. No. 126
Debit Credit Balance
580
2,730
3,310
Prepaid Insurance
Date
Explanation
PR
Dec. 31 Balance
Acct. No. 128
Credit Balance
1,665
Debit
Prepaid Rent
PR
Acct. No. 131
Debit Credit Balance
825
2,475
3,300
Office Equipment
Date
Explanation
PR
Dec. 31 Balance
Acct. No. 163
Credit Balance
8,000
Date
Explanation
Dec. 31 Balance
Feb. 1
5-60
Debit
Chapter 05 - Accounting for Merchandising Operations
Serial Problem
— SP 5 (Continued)
Accumulated Depreciation—Office Equipment Acct. No. 164
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
400
Computer Equipment
Date
Explanation
PR
Debit
Dec. 31 Balance
Acct. No. 167
Credit Balance
20,000
Accumulated Depreciation—Computer Equipment
Acct. No. 168
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
1,250
Accounts Payable
Date
Explanation
PR
Dec. 31 Balance
Jan. 7
17
24
26
Feb. 3
Mar. 8
19
Wages Payable
Date
Explanation
PR
Dec. 31 Balance
Jan. 4
Acct. No. 201
Debit Credit Balance
1,100
5,800 6,900
5,800
1,100
496
604
9,000 9,604
8,504
1,100
2,730 3,830
3,830
0
Debit
500
Acct. No. 210
Credit Balance
500
0
Unearned Computer Services Revenue
Acct. No. 236
Date
Explanation
PR
Debit Credit Balance
Dec. 31 Balance
1,500
Jan. 11
1,500
0
5-61
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
S. Rey, Capital
Date
Explanation
PR
Dec. 31 Balance
Jan. 5
105,360
Date
Feb. 15
Date
Jan. 11
16
Mar. 16
24
25,307
Debit
S. Rey, Withdrawals
Acct. No. 302
Explanation
PR
Debit Credit Balance
4,800
4,800
Computer Services Revenue
Explanation
PR
Debit
Sales
Date
Jan. 13
26
Feb. 23
Mar. 25
30
19,240
Date
Jan. 20
Acct. No. 301
Credit Balance
80,360
25,000
Explanation
PR
Debit
Sales Returns and Allowances
Explanation
PR
Debit
500
5-62
Acct. No. 403
Credit Balance
7,000 7,000
4,000 11,000
5,260 16,260
9,047
Acct. No. 413
Credit Balance
5,200 5,200
5,800 11,000
3,220 14,220
2,800 17,020
2,220
Acct. No. 414
Credit Balance
500
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Date
Jan. 22
Date
Jan. 13
26
Feb. 23
Mar. 25
30
Date
Sales Discounts
Explanation
PR
Cost of Goods Sold
Explanation
PR
Debit
47
Acct. No. 415
Credit Balance
47
Acct. No. 502
Debit Credit Balance
3,560
3,560
4,640
8,200
2,660
10,860
2,002
12,862
1,048
13,910
Depreciation Expense—Office Equipment Acct. No. 612
Explanation
PR
Debit Credit Balance
Depreciation Expense—Computer Equipment
Date
Date
Jan. 4
31
Feb. 26
Explanation
PR
Wages Expense
Explanation
PR
Date
Insurance Expense
Explanation
PR
Date
Rent Expense
Explanation
PR
5-63
Debit
Acct. No. 613
Credit Balance
Acct. No. 623
Debit Credit Balance
125
125
1,250
1,375
1,000
2,375
Debit
Acct. No. 637
Credit Balance
Debit
Acct. No. 640
Credit Balance
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Date
Computer Supplies Expense
Explanation
PR
Debit
Acct. No. 652
Credit Balance
Date
Feb. 5
Advertising Expense
Explanation
PR
Debit
600
Acct. No. 655
Credit Balance
600
Mileage Expense
Explanation
PR
Acct. No. 676
Credit Balance
192
320
Date
Feb. 27
Mar. 31
Debit
192
128
Date
Miscellaneous Expenses
Explanation
PR
Debit
Acct. No. 677
Credit Balance
Date
Mar. 11
Repairs Expense—Computer
Explanation
PR
Debit
960
Acct. No. 684
Credit Balance
960
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Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Acct.
No.
101
106.1
106.2
106.3
106.4
106.5
106.6
106.7
106.8
106.9
119
126
128
131
163
164
167
168
201
210
236
301
302
403
413
414
415
502
612
613
623
637
640
652
655
676
677
684
Part 3
BUSINESS SOLUTIONS
Partial Work Sheet
March 31, 2012
Unadjusted
Trial Balance
Adjustments
Account Title
Cash...........................................................
68,057
Alex’s Engineering Co......................... 0
Wildcat Services....................................
2,800
Easy Leasing..........................................
9,047
IMF Co.......................................................
5,220
Liu Corporation...................................... 0
Gomez Co................................................ 0
Delta Co. ................................................... 0
KC, Inc.......................................................
5,800
Dream, Inc................................................ 0
Merchandise inventory .......................846
Computer supplies...............................
3,310
Prepaid insurance.................................
1,665
Prepaid rent.............................................
3,300
Office equipment...................................
8,000
Accumulated depreciation–
Office equipment................................
Computer equipment ..........................
20,000
Accumulated depreciation–
Computer equip..................................
Accounts payable.................................
Wages payable ......................................
Unearned computer
services revenue ................................
S. Rey, Capital.........................................
S. Rey, Withdrawals..............................
4,800
Computer services revenue.................
Sales..........................................................
Sales returns and allow.......................500
Sales discounts ..................................... 47
Cost of goods sold ...............................
13,910
Depreciation expense–
0
Office equipment................................
Depreciation expense–
0
Computer equipment .......................
Wages expense.....................................
2,375
Insurance expense............................... 0
Rent expense.......................................... 0
Computer supplies expense................ 0
Advertising expense............................600
Mileage expense....................................320
Miscellaneous expenses.................... 0
Repairs expense–Computer................960
Totals.........................................................
151,557
Adjusted
Trial Balance
(g) 142
(a) 1,305
(b) 555
(d) 2,475
(f)
400
68,057
0
2,800
9,047
5,220
0
0
0
5,800
0
704
2,005
1,110
825
8,000
400
800
20,000
(e) 1,250
1,250
0
0
0
(c)
2,500
0
875
0
875
105,360
105,360
4,800
25,307
19,240
25,307
19,240
142
400
500
47
14,052
400
(e) 1,250
1,250
(c) 875
(b) 555
(d) 2,475
(a) 1,305
3,250
555
2,475
1,305
600
320
0
960
154,082
(g)
(f)
______
151,557
5-65
____
7,002
____
7,002
______
154,082
Chapter 05 - Accounting for Merchandising Operations
Serial Problem — SP 5 (Continued)
Part 4
BUSINESS SOLUTIONS
Income Statement
For Three Months Ended March 31, 2012
Revenues
Computer services revenue ......................................
Net sales* ....................................................................
Total revenues ............................................................
Expenses
Cost of goods sold .....................................................
Depreciation expense—Office equipment ...............
Depreciation expense—Computer equipment ...........
Wages expense ..........................................................
Insurance expense .....................................................
Rent expense ..............................................................
Computer supplies expense .....................................
Advertising expense ..................................................
Mileage expense .........................................................
Repairs expense—Computer ....................................
Total expenses ...........................................................
Net income ....................................................................
$25,307
18,693
44,000
$14,052
400
1,250
3,250
555
2,475
1,305
600
320
960
25,167
$18,833
* Net sales = $19,240 - $500 - $47 = $18,693
Part 5
BUSINESS SOLUTIONS
Statement of Owner’s Equity
For Three Months Ended March 31, 2012
S. Rey, Capital, Dec. 31, 2011 ....................................
Plus: Investments by owner ......................................
$ 80,360
25,000
Net income ........................................................
18,833
Less: Withdrawals by owner .....................................
S. Rey, Capital, March 31, 2012 .................................
124,193
4,800
$119,393
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Chapter 05 - Accounting for Merchandising Operations
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Chapter 05 - Accounting for Merchandising Operations
Serial Problem
— SP 5 (Concluded)
Part 6
BUSINESS SOLUTIONS
Balance Sheet
March 31, 2012
Assets
Current assets
Cash .............................................................................
Accounts receivable* ..................................................
Merchandise inventory ...............................................
Computer supplies ......................................................
Prepaid insurance .......................................................
Prepaid rent .................................................................
Total current assets ....................................................
Plant assets
Office equipment .........................................................
Accumulated depreciation—Office equipment ........
..........................................................................................
$ 68,057
22,867
704
2,005
1,110
825
95,568
$8,000
(800)
Computer equipment ..................................................
Accumulated depreciation—Computer equipment ....
..........................................................................................
Total plant assets ........................................................
Total assets ...................................................................
20,000
(2,500)
7,200
17,500
24,700
$120,268
Liabilities
Current liabilities
Wages payable ............................................................
$
875
Equity
S. Rey, Capital ...............................................................
119,393
Total liabilities and equity ............................................
$120,268
*Accounts receivable = $2,800 + $9,047 + $5,220 + $5,800 = $22,867
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Chapter 05 - Accounting for Merchandising Operations
Reporting in Action
— BTN 5-1
1. Compute cost of sales as follows ($ thousands)
February 28, 2009 inventory .................................
Plus cost of goods purchased .............................
Less February 27, 2010 inventory .......................
Cost of goods sold ................................................
$ 682,400
?
(621,611)
$8,368,958
Then, solve for:
Cost of goods purchased *...................................
$8,308,169
*($8,368,958 + $621,611 - $682,400)
2.
($ thousands)
Fiscal 2010
Current
Acid-Test
Ratio
Ratio
Current assets
Cash and equivalents .............. $1,550,861
Short-term investments ...........
360,614
Total of current receivables ...... 2,800,115
Inventories..............................
621,611
Remaining current assets ........
479,455
Total current assets .................. $5,812,656
Total quick assets .....................
Total current liabilities................ $2,431,777
Ratio........................................
2.39
5-69
$1,550,861
360,614
2,800,115
________
Fiscal 2009
Current
Acid-Test
Ratio
Ratio
$ 835,546
682,666
2,269,845
682,400
371,129
$4,841,586
$ 835,546
682,666
2,269,845
________
$4,711,590
$3,788,057
$2,431,777
$2,115,351 $2,115,351
1.94
2.29
1.79
Chapter 05 - Accounting for Merchandising Operations
Interpretation: The current ratio increased from 2.29 in 2009 to 2.39 in
2010. The acid-test ratio increased from 1.79 in 2009 to 1.94 in 2010. The
year-to-year comparison shows that Research In Motion’s liquidity position
has slightly improved when considering the current ratio and the acid-test
ratio. Further, in both years its current ratio is roughly similar to the
industry average of 2.4 and above the rule-of-thumb ratio of 2.0. A similar
interpretation applies to its acid-test ratio, which exceeds the industry
average of 1.5, and is above the rule-of-thumb ratio of 1.0.
3. Solution depends on the financial statement data obtained.
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Chapter 05 - Accounting for Merchandising Operations
Comparative Analysis
— BTN 5-2
1.
($ millions)
Research In Motion
Current
Prior
Apple
Current
Net sales ..................
$14,953
$11,065
$42,905
$37,491
Cost of sales ............
8,369
5,968
25,683
24,294
Gross margin ...........
$ 6,584
$ 5,097
$17,222
$13,197
Gross margin ratio....
44.0%
46.1%
40.1%
35.2%
Prior
2. In both years, Reserach In Motion’s gross margin ratio was higher than
that for Apple. For 2008, Apple’s gross margin ratio was below the
industry average of 40.0%, whereas in 2009 Apple’s gross margin
slightly exceeded the industry average. Research In Motion’s gross
margin exceeded the industry average in both years.
3. Apple’s gross margin ratio improved from 35.2% to 40.1%. However,
Research In Motion’s gross margin ratio revealed a slightly negative
development — declining from 46.1% to 44.0%. Analysts need to
monitor this ratio.
Ethics Challenge
— BTN 5-3
1. A few students sometimes feel that Ashton has devised a clever way to
beat the system. She appears to be succeeding in getting something for
free. However, most students fortunately feel that Ashton is abusing the
system and that her ethical conduct needs an overhaul. The instructor
may wish to point out that customer abuses such as Ashton’s usually
result in stores adopting stringent return policies that impact all
customers who have legitimate needs to return unused products. At
some point, Ashton will probably suffer discomfort when questioned
about items that are returned in less than new condition. Also, if store
managers suspect Ashton is abusing the system, they may no longer
allow her to shop at their store. If Ashton is banned from the store, she
will likely suffer humiliation for herself, her family, and her friends.
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Chapter 05 - Accounting for Merchandising Operations
Ethics Challenge, BTN 5-3 — (Concluded)
2. The merchandising company accounts for sales returns using a contra
revenue account called Sales Returns and Allowances.
A dress
returned with a sales bill of $200 would be accounted for as follows:
Sales Returns and Allowances ...............
Accounts Receivable .....................
200
200
Also, if the item is returned to inventory (and it had cost $160), the
following entry is made:
Merchandise Inventory ............................
Cost of Goods sold ........................
Communicating in Practice
160
160
— BTN 5-4
Note: While responses will vary, the essence of its content follows:
TO:
Mr. J. Madsen
FROM:
DATE:
SUBJECT: Reply to inventory shrinkage question
You are correct in noting that Music Plus has lost inventory as a result of
shoplifting and other forms of shrinkage. However, you will be pleased to
know your investment in security has paid off. Let me explain.
We maintain a perpetual inventory system, which continuously updates
inventory account balances as goods are purchased, sold, and returned.
At the end of each accounting period, we take an actual physical inventory
and compare this amount to our inventory records. These accounting
procedures for verifying inventory available have disclosed that the
amount of inventory loss is not abnormally large. Accounting procedures
allow this immaterial shrinkage to be directly charged to cost of goods
sold. This is why you do not see a specific deduction for shrinkage on the
income statement. Instead, the deduction has been taken in the form of
increased cost of goods sold.
I hope this addresses your concern and that you are now confident that net
income is not overstated. If you have any additional questions or require
more specific information regarding inventory shrinkage, please let me
know. The supporting information is available in the accounting records.
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Chapter 05 - Accounting for Merchandising Operations
Taking It to the Net
Fiscal Year ($ thousands)
2008
— BTN 5-5
2009
2010
Net sales ...........................................
$1,334,723
$1,427,970
$1,578,042
Cost of goods sold ..........................
746,180
872,547
882,385
Gross margin ...................................
$ 588,543
$ 555,423
$ 695,657
Gross margin ratio ..........................
44.1%
38.9%
44.1%
Analysis: J. Crew’s gross margin ratio declined from 44.1% in 2008 to
38.9% in 2009, but then rebounded to 44.1% in 2010. Its net sales
increased in both 2009 and 2010, albeit with a lower gross margin for the
2009 recessionary period.
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Chapter 05 - Accounting for Merchandising Operations
Teamwork in Action
— BTN 5-6
1.
a. Net sales computation:
Sales ............................................................................
Less: Sales discounts .............................................
Sales returns and allowances ......................
Net sales .....................................................................
b. Total cost of merchandise purchases computation:
Invoice cost of merchandise purchases ....................
Less: Purchase discounts received .........................
Purchase returns and allowances ..................
Add costs of transportation-in ....................................
Total cost of merchandise purchases ........................
c. Cost of goods sold computation:
Merchandise inventory, Beginning.............................
Total cost of merchandise purchased (from b) .........
Merchandise available for sale ...................................
Merchandise inventory, Ending ..................................
Cost of goods sold .......................................................
$430,000
$ 6,600
18,000
24,600
$405,400
$180,000
(4,500)
(5,500)
11,000
$181,000
$ 49,000
181,000
$230,000
(42,000)
$188,000
d. Gross profit computation:
Net sales (from a) ........................................................
Less: Cost of goods sold (from c) .............................
Gross profit .................................................................
$405,400
188,000
$217,400
e. Net income computation:
Gross profit from sales (from d) ...............................
Operating expenses (given) ......................................
Net income ..................................................................
$217,400
20,000
$197,400
2. Net income is $197,400.
3. The inventory account balance is $42,000. If actual (physical) inventory
is $38,000, a $4,000 loss from inventory shrinkage occurred. This
would result in an adjustment necessitating a reduction (credit) to the
inventory account and an increase (debit) to cost of goods sold. This
$4,000 increase in cost of goods sold would result in a corresponding
decrease in both gross profit and net income. This means that net
income would decline to $193,400.
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Chapter 05 - Accounting for Merchandising Operations
Entrepreneurial Decision
— BTN 5-7
1.
Heritage Link Brands
Forecasted Income Statement
For Year Ended January 31, 2011
Net sales ($10,000,000 x 1.09) ....................................................
Cost of sales** ($10,900,000 x 61%) ...........................................
Expenses ($2,000,000 x 1.06) .....................................................
Net income ..............................................................................
$10,900*
6,649
2,120
$ 2,131
* In thousands.
**Gross profit ratio = ($10,000,000 - $6,100,000) / $10,000,000 = 39%; therefore the ratio of
cost of sales to sales = 100% - 39% = 61%
2. The proposal yields a forecasted net income of $2,131,000. This compares
favorably to the prior year’s net income of $1,900,000. Accordingly, based
on these facts alone, the company should implement the proposal.
3. There are many issues that should be considered. Among them are:
 First, there is the issue of the prediction itself. That is, are estimates
reasonable or could reality be markedly different from these estimates?
 Second, and related to the first, there is a need to consider “ranges” of
possible scenarios since the future is unpredictable. This would involve
looking at alternative possibilities and then assessing the range of
outcomes.
 Third, there is a concern with the impact of these changes on customer
attitudes. For example, one concern might be with the proposed change
to an FOB shipping point policy from FOB destination. We need to be
certain that our customers will not object to this change and look
elsewhere for their merchandise.
 In addition to issues of confidence in prediction, one should also
consider that there may be speeding up of cash collections. Customers
now have 15 days to earn a 1% discount. By changing the terms,
customers will have only 10 days to earn a 3% discount. That additional
discount may motivate some customers to pay sooner.
 Currently, the company sends a signal to customers through terms of
n/60 that it is willing to wait 60 days for payment. By changing the terms
to n/30, the company signals that it is now only willing to wait 30 days
before payments are overdue. This may motivate customers to pay
sooner.
In sum, we must consider alternative possibilities, both good and bad,
with these proposed policy changes.
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Chapter 05 - Accounting for Merchandising Operations
Hitting the Road
— BTN 5-8
There is no formal solution for this field activity. As the discussion
facilitator, the instructor should try to develop a sense of how willing retail
managers are in granting sales allowances, the range of return policies
employed, and strategies managers use to stem return abuses.
Global Decision
— BTN 5-9
1.
(in millions)
Nokia
Revenues ..........................................
40,984
Research
In Motion
$14,953
$42,905
Cost of sales.....................................
27,720
8,369
25,683
Gross margin....................................
13,264
$ 6,584
$17,222
Gross margin ratio ...........................
32.4%
44.0%
40.1%
Gross Margin %
Research In Motion ................
44.0%
Apple
Rank
1
Apple .......................................
40.1%
2
Nokia .......................................
32.4%
3
2. Research In Motion, Apple, and Nokia each use the multiple-step format
for their income statements. Nokia’s income statement is somewhat
different from what most U.S. companies use in that the term profit is
used instead of net income, the title finance costs is used instead of
interest expense, and they report in EUR instead of dollars.
5-76