SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a) & (b)
Company A
(c) & (d)
Company B
(e) & (f)
Company C
(g) & (h)
Company D
Gross profit = $80,000 ($250,000 – $170,000)
Profit = $30,000 ($80,000 – $50,000)
Gross profit = $38,000 ($108,000 – $70,000)
Operating expenses = $8,500 ($38,000 – $29,500)
Cost of goods sold = $45,000 ($75,000 – $30,000)
Operating expenses = $19,200 ($30,000 – $10,800)
Sales = $170,000 ($75,000 + $95,000)
Loss = $(20,000) ($95,000 – $115,000)
BRIEF EXERCISE 5-2
Inventory Item
Bubble gum
Jelly beans
Lollipops
Quantity
600
400
350
Cost per Package
$0.95
$1.25
$1.60
Total Cost
$ 570
500
560
$1,630
BRIEF EXERCISE 5-3
Total Merchandise Inventory cost:
Invoice cost (500 × $5.50)
Plus: Freight in
Less: Purchase discount
Total cost
Cost per unit
$2,750
75
(55)
$2,770
= Total cost ÷ 500 packages
= $2,770 ÷ 500 = $5.54 per package
Balance in Merchandise Inventory account:
Balance from BE5-2
Cost of Canada Mints
Total
$1,630
2,770
$4,400
BRIEF EXERCISE 5-4
(a)
Mar.
16
18
25
Merchandise Inventory ...................................
Accounts Payable .....................................
15,000
Accounts Payable ...........................................
Merchandise Inventory .............................
750
Accounts Payable ($15,000 – $750) ...............
Merchandise Inventory
($14,250 × 2%) ............................................
Cash............................................................
14,250
Assets
Inventory
+ $15,000
Inventory
– $750
Inventory
– $285
Cash
– $13,965
Owner’s Equity
NE
15,000
750
285
13,965
(b)
Date
Mar. 16
18
25
Liabilities
Accounts Payable
+ $15,000
Accounts Payable
– $750
Accounts Payable
– $14,250
NE
NE
BRIEF EXERCISE 5-5
Jan.
Jan.
Jan.
2
4
6
Feb. 1
Merchandise Inventory ...................................
Accounts Payable .....................................
20,000
Merchandise Inventory ...................................
Cash............................................................
215
Accounts Payable ...........................................
Merchandise Inventory .............................
1,500
Accounts Payable ...........................................
Cash............................................................
18,500
20,000
215
1,500
18,500
BRIEF EXERCISE 5-6
Mar.
12
Merchandise Inventory ...................................
Accounts Payable .....................................
13
No entry required.
14
Accounts Payable ...........................................
Merchandise Inventory .............................
21
Accounts Payable ($25,000 – $2,000) . 23,000
Merchandise Inventory
($23,000 × 2%) ............................................
Cash............................................................
25,000
25,000
2,000
2,000
460
22,540
BRIEF EXERCISE 5-7
(a)
Mar.
16
17
18
25
Accounts Receivable......................................
Sales............................................................
15,000
Cost of Goods Sold ..........................................
Merchandise Inventory .............................
8,700
Freight Out........................................................
Cash............................................................
170
Sales Returns and Allowances .......................
Accounts Receivable ................................
750
Cash ($14,250 – $285) .....................................
Sales Discounts ($14,250 × 2%).......................
Accounts Receivable
($15,000 – $750) .........................................
13,965
285
15,000
8,700
170
750
14,250
(b)
Owner’s Equity
Date
Mar. 16
16
17
18
25
Assets
Accounts Receivable
+ $15,000
Inventory
– $8,700
Cash
– $170
Accounts Receivable
– $750
Cash
+ $13,965
Accounts Receivable
– $14,250
Liabilities
+ $15,000
– $8,700
– $170
– $750
– $285
BRIEF EXERCISE 5-8
Jan.
Feb.
2
Accounts Receivable......................................
Sales............................................................
20,000
Cost of Goods Sold ..........................................
Merchandise Inventory .............................
7,900
20,000
7,900
4
No entry required.
6
Sales Returns and Allowances .......................
Accounts Receivable ................................
1,500
Merchandise Inventory ...................................
Cost of Goods Sold ....................................
590
Cash ($20,000 – $1,500) ..................................
Accounts Receivable ................................
18,500
1
1,500
590
18,500
BRIEF EXERCISE 5-9
Mar.
12 Accounts Receivable......................................
Sales............................................................
25,000
Cost of Goods Sold ..........................................
Merchandise Inventory .............................
13,250
13 Freight Out........................................................
Cash............................................................
265
14 Sales Returns and Allowances .......................
Accounts Receivable ................................
2,000
22 Cash ($23,000 – $460) .....................................
Sales Discounts ($23,000 × 2%).......................
Accounts Receivable ................................
22,540
460
25,000
13,250
265
2,000
23,000
BRIEF EXERCISE 5-10
June 30
Cost of Goods Sold ...............................................
Merchandise Inventory
($89,000 – $86,500) ..........................................
2,500
2,500
BRIEF EXERCISE 5-11
Sept.
30 Sales ..................................................................
Income Summary .....................................
218,750
30 Income Summary ............................................
Sales Returns and Allowances .................
Sales Discounts ..........................................
Cost of Goods Sold ...................................
Freight Out .................................................
Salaries Expense .......................................
171,000
218,750
3,150
950
125,000
1,900
40,000
Merchandise Inventory and Supplies are balance sheet (permanent) accounts and are not closed.
BRIEF EXERCISE 5-12
(a)
Net sales = $539,000 ($561,000 – $5,500 – $16,500)
(b)
Gross profit = $154,000 ($539,000 – $385,000)
(c)
Operating expenses = $115,500 ($13,200 + $3,300 + $44,000 + $55,000)
(d)
Profit = $36,300 ($154,000 – $115,500 + $8,800 – $11,000)
BRIEF EXERCISE 5-13
Cost of goods sold
Depreciation expense
Freight out
Insurance expense
Interest expense
Interest revenue
Rent revenue
Rent expense
Sales revenue
Sales returns and
allowances
(a)
Single-step income
statement
Expenses
Expenses
Expenses
Expenses
Expenses
Revenues
Revenues
Expenses
Revenues
(Net Sales)
Revenues
(Net Sales)
(b)
Multiple-step income
statement
Gross profit
Operating expenses
Operating expenses
Operating expenses
Other expenses
Other revenues
Other revenues
Operating expenses
Net Sales
Net Sales
BRIEF EXERCISE 5-14
2014
Gross profit margin = 36.84%
[($950,000 – $600,000) ÷ $950,000]
Profit margin = 7.37%
[$70,000 ÷ $950,000]
2013
Gross profit margin = 37.50%
[($800,000 – $500,000) ÷ $800,000]
Profit margin = 8.13%
[$65,000 ÷ $800,000]
Red River’s profitability has deteriorated since both its gross profit margin and its profit margin have
decreased from the previous year.
BRIEF EXERCISE 4-11
Working capital = Current assets − Current liabilities
Big: Working capital = $1,000,000 − $900,000 = $100,000
Small: Working capital = $200,000 − $100,000 = $100,000
Current ratio = Current assets ÷ Current liabilities
Big River: Current ratio = $1,000,000 ÷ $900,000 = 1.11:1
Small Fry: Current ratio = $200,000 ÷ $100,000 = 2.00:1
The working capital is the same for both companies but Small Fry Company’s current ratio is much
stronger. The current ratio is more relevant.
BRIEF EXERCISE 4-12
(a)
(1) Working capital = Current assets − Current liabilities
Working capital 2013 = $33,510 − $24,800 = $8,710
Working capital 2014 = $35,100 − $24,460 = $10,640
(2) Current ratio
Current ratio
Current ratio
= Current assets ÷ Current liabilities
2013 = $33,510 ÷ $24,800 = 1.35:1
2014 = $35,100 ÷ $24,460 = 1.43:1
(3) Acid-test ratio
= (Cash + Accounts Receivable + Short-term
Investments) ÷ Current liabilities
(b)
Acid-test ratio 2013
= $20,430 ÷ $24,800 = 0.82:1
Acid-test ratio 2014
= $22,680 ÷ $24,460 = 0.93:1
All three measures of Drew Co.’s liquidity show improvement in 2014 compared to 2013.
SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
3
8
14
4
10
7
11
1
12
6
2
15
13
9
Cost of goods sold
Subsidiary ledger
Contra revenue account
Purchase returns
FOB destination
Periodic inventory system
Sales allowance
Gross profit
Non-operating activities
FOB shipping point
Perpetual inventory system
Merchandise inventory
Profit margin
Sales discount
EXERCISE 5-2
(a)
Mar.
1
2
3
21
Merchandise Inventory .....................................
Accounts Payable .........................................
9,000
Merchandise Inventory ......................................
Cash ...............................................................
155
Accounts Payable ..............................................
Merchandise Inventory .................................
1,000
Merchandise Inventory .....................................
Accounts Payable .........................................
13,000
9,000
155
1,000
13,000
22
(FOB destination point means the seller pays
the freight, therefore no entry required here.)
23
Accounts Payable ..............................................
Merchandise Inventory .................................
400
Accounts Payable ($9,000 – $1,000) .................
Cash ...............................................................
8,000
Accounts Payable ($13,000 – $400) ..................
Merchandise Inventory
($12,600 × 2%) ........................................
Cash........................................................
12,600
30
31
400
8,000
252
12,348
EXERCISE 5-2 (Continued)
(b)
Mar.
Merchandise Inventory
1
9,000
2
155
Mar.
3
21
13,000
23
31
1,000
400
252
20,503
Cash payments:
March 2
March 30
March 31
Total cash payments for inventory in March
$
155
8,000
12,348
$20,503
EXERCISE 5-3
(a)
Mar.
1
Accounts Receivable ........................................
Sales ..............................................................
9,000
Cost of Goods Sold .............................................
Merchandise Inventory ................................
3,960
9,000
3,960
2
(FOB shipping point means the buyer pays
the freight, therefore no entry required here.)
3
Sales Returns and Allowances ..........................
Accounts Receivable ..................................
1,000
Merchandise Inventory ......................................
Cost of Goods Sold .......................................
440
Accounts Receivable .........................................
Sales ..............................................................
13,000
Cost of Goods Sold .............................................
Merchandise Inventory ................................
5,720
Freight Out ...........................................................
Cash ...............................................................
170
Sales Returns and Allowances ..........................
Accounts Receivable ..................................
400
Cash ($9,000 – $1,000) ........................................
Accounts Receivable ...................................
8,000
Cash .....................................................................
Sales Discount ($12,600 × 2%) ............................
Accounts Receivable ($13,000 – $400) .......
12,348
252
12,600
21
22
23
30
31
1,000
440
13,000
5,720
170
400
8,000
EXERCISE 5-3 (Continued)
(b)
Sales ($9,000 + $13,000)
Less: Sales return ($1,000 + $400)
Less: Sales discount
Net sales
$20,348
Cost of goods sold ($3,960 + $5,720)
Less: Returns to inventory
Cost of goods sold
Net sales (above)
Less: Cost of goods sold (above)
Gross profit
$11,108
$22,000
1,400
252
$9,680
440
$9,240
$20,348
9,240
EXERCISE 5-4
(a)
Apr.
5
6
8
May
(b)
Apr.
4
5
Merchandise Inventory .............................
Accounts Payable ...............................
12,000
Merchandise Inventory .............................
Cash......................................................
300
Accounts Payable .....................................
Merchandise Inventory .......................
1,800
Accounts Payable
($12,000 – $1,800) ......................................
Cash......................................................
(c)
300
1,800
10,200
10,200
Accounts Receivable................................
12,000
Sales............................................................
Cost of Goods Sold ....................................
Merchandise Inventory .......................
May
12,000
8,500
8,500
6
No entry required.
8
Sales Returns and Allowances .................
Accounts Receivable ..........................
1,800
Cash ($12,000 – $1,800) ............................
Accounts Receivable ..........................
10,200
4
Gross profit
= $1,700
= ($12,000 – $1,800 – $8,500)
12,000
1,800
10,200
EXERCISE 5-5
(a)
Dec.
3
4
8
13
(b)
Dec.
3
32,000
Cost of Goods Sold ....................................
Merchandise Inventory. ......................
18,000
Freight Out..................................................
Cash......................................................
650
Sales Returns and Allowances .................
Accounts Receivable ..........................
1,800
Merchandise Inventory .............................
Cost of Goods Sold ..............................
990
Cash ($30,200 × 98%) ................................
Sales Discount ($30,200 × 2%) ..................
Accounts Receivable
($32,000 – $1,800) ................................
29,596
604
Merchandise Inventory .............................
Accounts Payable ...............................
32,000
32,000
18,000
650
1,800
990
30,200
32,000
4
No entry required.
8
Accounts Payable .....................................
Merchandise Inventory .......................
1,800
Accounts Payable .....................................
Merchandise Inventory
($30,200 × 2%) ......................................
Cash......................................................
30,200
13
(c)
Accounts Receivable................................
Sales......................................................
Gross profit
1,800
= $12,586
= ($32,000 – $18,000 – $1,800 + $990 – $604)
604
29,596
EXERCISE 5-6
(a)
June
10 Merchandise Inventory ...............................
Accounts Payable .................................
4,000
11 Merchandise Inventory ...............................
Cash........................................................
375
12 Accounts Payable .......................................
Merchandise Inventory .........................
200
4,000
375
200
20 Accounts Payable ($4,000 – $200) .... 3,800
Merchandise Inventory
($3,800 × 2%) ..........................................
Cash ($3,800 × 98%) ..............................
July
15 Cash .............................................................
Sales........................................................
15 Cost of Goods Sold
($4,000 + $375 – $200 – $76) .......................
Merchandise Inventory .........................
(b)
July
76
3,724
9,275
9,275
4,099
4,099
15 Freight Out....................................................
Cash........................................................
350
17 Sales Returns and Allowances ...................
Cash........................................................
500
31 Sales .............................................................
Income Summary ..................................
9,275
31 Income Summary ........................................
Cost of Goods Sold ................................
Freight Out ..............................................
Sales Returns and Allowances ..............
4,949
31 Income Summary ($9,275 – $4,949) .. 4,326
Pele, Capital...........................................
350
500
9,275
4,099
350
500
4,326
EXERCISE 5-7
(a)
(b)
Beginning inventory
Inventory purchase
Freight in
450
Cost of goods available for sale
Number of tables available for sale
Average cost per table
$13,950
150
$ 93.00
Beginning inventory, in units
Tables purchased, Nov. 3
Tables sold, Nov. 19
Tables returned, Nov. 21
Ending balance in inventory subledger, in units
Number of tables per the inventory count
Adjustment required
Nov. 30
(c)
$
0
13,500
Cost of Goods Sold ...............................
Merchandise Inventory .........................
0
150
(45)
5
110
109
1
93
93
Nov. 1:
Nov. 3:
Beginning balance
Purchase of merchandise
Freight in
Nov. 19: Sale of merchandise (45 tables × $93)
Nov. 21: Return of merchandise (5 tables × $93)
Nov. 30: Balance before adjustment
Nov. 30: Adj. for missing table
Nov. 30: Balance
$ 0
13,500
450
(4,185)
465
10,230
(93)
$10,137
Cost of goods available for sale (above)
Less: Ending inventory (109 tables × $93)
Cost of goods sold
$13,950
10,137
$ 3,813
EXERCISE 5-7 (Continued)
(d)
Sales (45 tables × $170)
Less: Sales return (5 tables × $170)
Less: Sales discount (2% × [$7,650 – $850])
Net sales
$6,664
$7,650
850
136
Net sales (above)
Less: Cost of goods sold (above)
Gross profit (loss)
$6,664
3,813
$2,851
EXERCISE 5-8
Sales
Sales returns and
allowances
Net sales
Cost of goods sold
Gross profit
Operating expenses
Profit from
operations
Other expenses
Profit
Natural
Cosmetics
$215,000
Mattar
Grocery
(e) $360,000
SE
Footwear
$275,000
(a) 14,000
201,000
99,000
(b) 102,000
45,000
25,000
335,000
(f) 140,000
195,000
(g) 122,000
20,000
(i) 255,000
(j) 105,000
150,000
95,000
(c) 57,000
5,000
(d) $52,000
(h) 73,000
10,000
$63,000
(k) 55,000
(l) 14,000
$41,000
(a) Sales................................................................................................
Less: *Sales returns and allowances ......................................................
Net sales .........................................................................................
$215,000
(14,000)
$201,000
(b)
Net sales .........................................................................................
Less: cost of goods sold ................................................................
*Gross profit ....................................................................................
$201,000
(99,000)
$102,000
(c)
Gross profit .....................................................................................
Less: Operating expenses .............................................................
*Profit from operations ...................................................................
$102,000
(45,000)
$ 57,000
(d)
Profit from operations ....................................................................
Less: Other expenses .....................................................................
*Profit...............................................................................................
$57,000
(5,000)
$52,000
(e)
*Sales ..............................................................................................
Less: Sales returns and allowances ..............................................
Net sales .........................................................................................
$360,000
(25,000)
$335,000
EXERCISE 5-8 (Continued)
(f)
Net sales .........................................................................................
*Cost of goods sold .......................................................................
Gross profit .....................................................................................
$335,000
(140,000)
$195,000
(g)
Gross profit .....................................................................................
*Operating expenses ....................................................................
Profit from operations (from (h)) ...................................................
$195,000
(122,000)
$73,000
(h)
*Profit from operations ...................................................................
Less: Other expenses .....................................................................
Profit ................................................................................................
$73,000
(10,000)
$63,000
(i)
Sales................................................................................................
Less : Sales returns .........................................................................
*Net sales .......................................................................................
$275,000
(20,000)
$255,000
(j)
Net sales .........................................................................................
Less: *Cost of goods sold ..............................................................
Gross profit .....................................................................................
$255,000
(105,000)
$150,000
(k)
Gross profit .....................................................................................
Less: Operating expenses .............................................................
*Profit from operations ...................................................................
$150,000
(95,000)
$55,000
(l)
Profit from operations ....................................................................
Less: *Other expenses ...................................................................
Profit ................................................................................................
$55,000
(14,000)
$41,000
EXERCISE 5-9
(a)
LEFEBVRE COMPANY
Income Statement
Year Ended December 31, 2014
Revenues
Net sales ($1,980,000 – $59,400 – $9,900) .................
Interest revenue ..........................................................
Rent revenue...............................................................
Total revenues .......................................................
Expenses
Cost of goods sold ......................................................
Salaries expense ........................................................
Advertising expense ..................................................
Depreciation expense ...............................................
Freight-out ...................................................................
Insurance expense.....................................................
Interest expense .........................................................
Total expenses ......................................................
Profit ...............................................................................
$1,910,700
10,000
24,000
1,944,700
$851,500
650,000
55,000
45,000
25,000
15,000
10,500
1,652,000
$ 292,700
EXERCISE 5-9 (Continued)
(b)
LEFEBVRE COMPANY
Income Statement
Year Ended December 31, 2014
Sales ......................................................................................................
Less: Sales returns and allowances....................................... $59,400
Sales discounts.......................................................... 9,900
Net sales................................................................................................
Cost of goods sold ...............................................................................
Gross profit ............................................................................................
Operating expenses
Salaries expense ........................................................ $650,000
Advertising expenses .................................................
55,000
Depreciation expense ...............................................
45,000
Freight-out ...................................................................
25,000
Insurance expense.....................................................
15,000
Total operating expenses ....................................................................
Profit from operations .....................................................................
Other revenues
Interest revenue ......................................... $10,000
Rent revenue..............................................
24,000
34,000
Other expenses
Interest expense .........................................................
10,500
Profit .......................................................................................................
$1,980,000
69,300
1,910,700
851,500
1,059,200
790,000
269,200
23,500
$ 292,700
EXERCISE 5-9 (Continued)
(c)
Dec. 31
Sales ...........................................................
1,980,000
Interest Revenue .......................................
10,000
Rent Revenue ............................................
24,000
Income Summary ..................................
2,014,000
31 Income Summary ......................................
1,721,300
Sales Returns and Allowances ..........................
Sales Discounts ..................................................
Cost of Goods Sold ............................................
Salaries Expense ................................................
Advertising Expenses ........................................
Depreciation Expense .......................................
Freight-out ..........................................................
Insurance Expense ............................................
Interest Expense.................................................
59,400
9,900
851,500
650,000
55,000
45,000
25,000
15,000
10,500
31 Income Summary
($2,014,000 – $1,721,300) ...................... 292,700
C. Lefebvre, Capital ..............................
292,700
31 C. Lefebvre, Capital .......................................... 150,000
C. Lefebvre, Drawings ...........................
150,000
LEFEBVRE COMPANY
Post-closing Trial Balance
December 31, 2014
Debit
Cash ............................................................................
$ 75,700
Notes receivable ...........................................................
100,000
Merchandise inventory .................................................
70,000
Equipment ......................................................................
450,000
Accumulated depreciation—equipment ...................
Unearned revenue ........................................................
Notes payable ...............................................................
C. Lefebvre, capital.......................................................
Totals .............................................................. $695,700
$695,700
Credit
$135,000
8,000
175,000
377,700
EXERCISE 5-11
(a)
Gross profit margin
2012 = 35.7% [($13,909 – $8,939) ÷ $13,909]
2011 = 35.5% [($13,864 – $8,939) ÷ $13,864]
2010 = 35.2% [($13,568 – $8,790) ÷ $13,568]
Profit margin
2012 = 1.1% [$149 ÷ $13,909]
2011 = 1.2% [$168 ÷ $13,864]
2010 = 2.3% [$312 ÷ $13,568]
(b)
Profit margin (Profit from operations)
2012 = 4.2% [$582 ÷ $13,909]
2011 = 4.7% [$646 ÷ $13,864]
2010 = 5.8% [$784 ÷ $13,568]
(c)
The gross profit margin has increased slightly from 2010 to 2012, from 35.2% to 35.7%. The profit
margin has decreased from 2.3% in 2010 to 1.1% in 2012. The profit margin based on profit from
operations also weakened from 5.8% in 2010 to 4.2% in 2012.
EXERCISE 4-10
(a)
Working Capital = Current Assets − Current Liabilities
Fiscal years ending:
Jan. 2, 2010: $2,441,973 − $1,706,541 = $735,432
Jan. 1, 2011: $2,542,820 − $1,527,567 = $1,015,253
Dec. 31, 2011: $2,695,647 − $1,776,238 = $919,409
Current Ratio = Current Assets ÷ Current Liabilities
Jan. 2, 2010: $2,441,973 ÷ $1,706,541 = 1.43:1
Jan. 1, 2011: $2,542,820 ÷ $1,527,567 = 1.66:1
Dec. 31, 2011: $2,695,647 ÷ $1,776,238 = 1.52:1
Acid-test ratio = (Cash + Accounts receivable) ÷ Current
Liabilities
Jan. 2, 2010: ($44,391 + $470,935) ÷ $1,706,541 = 0.30:1
Jan. 1, 2011: ($64,354 + $432,089) ÷ $1,527,567 = 0.32:1
Dec. 31, 2011: ($118,566 + $493,338) ÷ $1,776,238 = 0.34:1
(b)
Shoppers Drug Mart’s short-term debt-paying ability (current ratio) has deteriorated in the fiscal
year ending December 31, 2011 compared to the previous fiscal year. The immediately
preceding year was a vast improvement from its preceding fiscal year ending January 2, 1010.
On the other, Shopper’s immediate short-term liquidity (acid-test ratio) has improved steadily
over the last two years. The excess of the current assets over the current liabilities (working
capital) is substantial at each fiscal year-end.
SOLUTIONS TO PROBLEMS
PROBLEM 5-3A
GENERAL JOURNAL
Date
Sept.
Account Titles and Explanation
1
Merchandise Inventory...................................
Accounts Payable .....................................
J1
Debit
45,000
45,000
2
(FOB destination means the seller pays
the freight, therefore no entry required here.)
5
Accounts Payable...........................................
Merchandise Inventory .............................
3,000
Accounts Receivable .....................................
Sales ...........................................................
70,000
15
Cost of Goods Sold
($45,000 – $3,000) ............................................
Merchandise Inventory .............................
16
17
25
30
3,000
70,000
42,000
42,000
Freight-Out .......................................................
Cash ...........................................................
1,800
Sales Returns and Allowances ......................
Accounts Receivable ...............................
5,000
Merchandise Inventory...................................
Cost of Goods Sold ....................................
3,000
Sales Discounts ($65,000 × 2%) ......................
Cash ($65,000 – $1,300) ..................................
Accounts Receivable
($70,000 – $5,000) ......................................
1,300
63,700
Accounts Payable ($45,000 – $3,000) 42,000
Cash ...........................................................
Credit
1,800
5,000
3,000
65,000
42,000
PROBLEM 5-3A (Continued)
Oct.
1
2
3
10
11
Merchandise Inventory...................................
Accounts Payable .....................................
52,000
Merchandise Inventory...................................
Cash ...........................................................
1,100
Accounts Payable...........................................
Merchandise Inventory .............................
2,000
Accounts Payable ($52,000 – $2,000) 50,000
Cash ($50,000 – $1,000) ...........................
Merchandise Inventory ($50,000 × 2%) ...
Accounts Receivable .....................................
Sales ...........................................................
52,000
1,100
2,000
49,000
1,000
83,500
83,500
Cost of Goods Sold
($52,000 + $1,100 – $2,000 – $1,000) .. 50,100
Merchandise Inventory .............................
50,100
12
(FOB shipping point means the buyer pays
the freight, therefore no entry required here.)
17
Sales Returns and Allowances .......................
Accounts Receivable ...............................
1,500
Cash .................................................................
Accounts Receivable
($83,500 – $1,500) ......................................
(No discount as not received within 10 days)
82,000
31
1,500
82,000
PROBLEM 5-4A
(a)
GENERAL JOURNAL
Date
July
Account Titles and Explanation
1
Merchandise Inventory (50 × $30) .....................
Accounts Payable .........................................
Debit
1,500
1,500
2
(FOB destination means the seller pays
the freight, therefore no entry required here.)
4
Accounts Payable ..............................................
Merchandise Inventory .................................
150
Accounts Receivable (45 × $55).......................
Sales ...............................................................
2,475
Cost of Goods Sold (45 × $30) ............................
Merchandise Inventory .................................
1,350
Sales Returns and Allowances ...........................
Accounts Receivable ..................................
275
Merchandise Inventory (5 × $30) .......................
Cost of Goods Sold........................................
150
Merchandise Inventory (60 × $27.50) ...............
Accounts Payable .........................................
1,650
Merchandise Inventory ......................................
Cash ...............................................................
150
10
12
15
18
Credit
150
2,475
1,350
275
150
1,650
150
PROBLEM 5-4A (Continued)
(a) (Continued)
July
21
23
30
31
Accounts Receivable (54 × $55)........................
Sales ...............................................................
2,970
Cost of Goods Sold (54 × $30) ............................
Merchandise Inventory .................................
1,620
Sales Returns and Allowances ...........................
Accounts Receivable ..................................
110
Accounts Payable ..............................................
Cash ($1,500 – $150) .....................................
1,350
Cash ($2,475 – $275) ...........................................
Accounts Receivable ..................................
2,200
2,970
1,620
110
1,350
2,200
PROBLEM 5-5A
(a)
GENERAL JOURNAL
Date
June
Account Titles and Explanation
1
Merchandise Inventory ......................................
Accounts Payable .........................................
J1
Debit
9,000
9,000
2
(FOB destination means the seller pays
the freight, therefore no entry required here.)
5
Accounts Receivable .........................................
Sales ...............................................................
12,000
Cost of Goods Sold .............................................
Merchandise Inventory .................................
7,540
Sales Returns and Allowances ...........................
Accounts Receivable ...................................
950
Merchandise Inventory ......................................
Cost of Goods Sold........................................
595
6
Credit
12,000
7,540
950
595
6
7
10
10
12
Freight Out ...........................................................
Cash ...............................................................
290
Supplies................................................................
Cash ...............................................................
800
Merchandise Inventory ......................................
Accounts Payable .........................................
4,300
Merchandise Inventory ......................................
Cash ...............................................................
100
Accounts Payable ..............................................
Merchandise Inventory .................................
300
290
800
4,300
100
300
PROBLEM 5-5A (Continued)
(a) (Continued)
June 14
Accounts Payable ..............................................
Merchandise Inventory ($9,000 × 1%) .........
Cash ($9,000 − $90) .......................................
9,000
90
15
Cash ($11,050 − $221).........................................
Sales Discounts ($11,050 × 2%) ..........................
Accounts Receivable ($12,000 – $950) .......
10,829
221
11,050
19
Cash .....................................................................
Sales ...............................................................
7,250
Cost of Goods Sold .............................................
Merchandise Inventory .................................
4,570
Accounts Payable ($4,300 − $300) ....................
Merchandise Inventory ($4,000 × 2%) .........
Cash ($4,000 − $80) .......................................
4,000
80
Sales Returns and Allowances ...........................
Cash ...............................................................
500
Accounts Receivable .........................................
Sales ...............................................................
4,280
Cost of Goods Sold .............................................
Merchandise Inventory .................................
2,700
20
25
30
8,910
7,250
4,570
3,920
500
4,280
2,700
PROBLEM 5-7A
(a)
Dec.
31
31
31
31
31
31
31
(c)
Supplies Expense ..............................................
Supplies ($2,950 − $750) .............................
2,200
Insurance Expense ............................................
Prepaid Insurance .......................................
$3,000 × 10/12
2,500
Depreciation Expense ......................................
Accumulated Depreciation
—Equipment ................................................
Accumulated Depreciation
—Furniture ....................................................
14,500
Interest Expense ................................................
Interest Payable...........................................
675
Unearned Revenue ...........................................
Sales ($4,000 − $975) ...................................
3,025
Cost of Goods Sold ...........................................
Merchandise Inventory ...............................
1,750
Cost of Goods Sold
[($37,050 − $1,750) − $32,750] ..........................
Merchandise Inventory ...............................
Dec. 31
31
2,220
2,500
10,000
4,500
675
3,025
1,750
2,550
2,550
Sales .........................................................
Income Summary ..............................
268,025
Income Summary ....................................
Sales Returns and Allowances ..........
Sales Discounts ..................................
Cost of Goods Sold ............................
Interest Expense.................................
Salaries Expense ................................
Utilities Expense..................................
Supplies Expense ...............................
Insurance Expense ............................
Depreciation Expense .......................
230,375
2,500
268,025
3,275
157,300
7,550
35,450
5,100
2,200
2,500
14,500
31
31
Income Summary ....................................
S. Kim, Capital ....................................
37,650
S. Kim, Capital..........................................
S. Kim, Drawings .................................
48,000
37,650
48,000
PROBLEM 5-8A
(a)
2011
2010
2009
Gross
profit
margin
11.64%
12.82%
8.82%
($28,748 – $25,401) ÷
$28,748
($23,465 – $20,456) ÷
$23,465
($16,876 – $15,387) ÷
$16,876
Profit
margin
3.54%
4.27%
(2.68)%
$1,018 ÷ $28,748
$1,003 ÷ $23,465
$(453) ÷ $16,876
Current
ratio
1.42:1
1.51:1
1.47:1
$8,146 ÷ $5,724
$7,485 ÷ $4,968
$6,233 ÷ $4,232
(b)
Magna International’s gross profit margin and profit margin have improved over the three years
from 2009 to 2011. Both ratios showed a significant increase from 2009 to 2010 and a slight
decrease from 2010 to 2011 for an overall increase in profitability over the three year period.
The current ratio increased in 2010 but subsequently decreased in 2011 below the 2009 level for
an overall decrease in liquidity.
PROBLEM 4-7A
(a)
Amounts in thousands
June 25,
2011
$28,698
Dec. 25,
2010
$25,406
1,686
391
385
Acid-test assets
33,489
29,089
25,791
Inventories
36,789
28,964
41,163
426
901
381
Current assets
$70,704
$58,954
$67,335
Payables and accruals
$16,010
$11,024
$19,650
Income taxes payable
583
278
1,097
Other current liabilities
3,586
1,536
3,659
$20,179
$12,838
$24,406
Cash and cash equivalents
Accounts receivable
Prepaid expenses
Current liabilities
Dec. 24,
2011
$31,803
(b)
Amounts in thousands
Dec. 24, 2011
June 25, 2011
Dec. 25, 2010
Working Capital
$70,704 − $20,179
= $50,525
$58,954 − $12,838
= $46,116
$67,335 − $24,406
= $42,929
Current Ratio
$70,704 ÷ $20,179
= 3.50:1
$58,954
÷ $12,838
= 4.59:1
$67,335 ÷
Acid-test
Ratio
$33,489 ÷ $20,179
= 1.66:1
$29,089
÷ $12,838
= 2.27:1
$24,406
= 2.76:1
$25,791 ÷
$24,406
= 1.06:1
PROBLEM 4-7A (Continued)
(c)
The acid-test ratio is a measure of the company’s immediate short-term liquidity. The current ratio
is a measure of the short-term debt-paying ability. Finally, working capital is the excess of current
assets over current liabilities. If the amount is negative, the term used is a working capital
deficiency.
Danier Leather demonstrates very strong short-term liquidity and debt-paying ability at each
point in time. Any current ratio in excess of 2:1 or acid-test ratio in excess of 1:1 is considered
very strong. Although each ratio has deteriorated in the period from June 25, 2011 to December
24, 2011, they remain very strong.