CHAPTER 6
ACCOUNTING FOR MERCHANDISING BUSINESSES
EYE OPENERS
1. Merchandising businesses acquire merchandise for resale to customers. It is the
selling of merchandise, instead of a service,
that makes the activities of a merchandising
business different from the activities of a
service business.
2. Yes. Gross profit is the excess of (net) sales
over cost of merchandise sold. A net loss
arises when operating expenses exceed
gross profit. Therefore, a business can earn
a gross profit but incur operating expenses
in excess of this gross profit and end up with
a net loss.
3. a. Increase
c. Decrease
b. Increase
d. Decrease
4. Under the periodic system, the inventory
records do not show the amount available
for sale or the amount sold during the period. In contrast, under the perpetual system
of accounting for merchandise inventory,
each purchase and sale of merchandise is
recorded in the inventory and the cost of
merchandise sold accounts. As a result, the
amount of merchandise available for sale
and the amount sold are continuously (perpetually) disclosed in the inventory records.
5. The multiple-step form of income statement
contains conventional groupings for revenues and expenses, with intermediate balances, before concluding with the net income balance. In the single-step form, the
total of all expenses is deducted from the total of all revenues, without intermediate balances.
6. The major advantages of the single-step
form of income statement are its simplicity
and its emphasis on total revenues and total
expenses as the determinants of net income. The major objection to the form is that
such relationships as gross profit to sales
and income from operations to sales are not
as readily determinable as when the
multiple-step form is used.
7. Revenues from sources other than the principal activity of the business are classified as
other income. Examples would include rent
revenue and interest revenue.
8. Examples of such accounts include the following: Sales, Sales Discounts, Sales Returns and Allowances, Cost of Merchandise
Sold, Merchandise Inventory.
9. Sales to customers who use MasterCard or
VISA cards are recorded as cash sales.
10. The date of sale as shown by the date of the
invoice or bill.
11. a. 1% discount allowed if paid within 15
days of date of invoice; entire amount of
invoice due within 60 days of date of invoice.
b. Payment due within 30 days of date of
invoice.
c. Payment due by the end of the month in
which the sale was made.
12. a. A credit memo issued by the seller of
merchandise indicates the amount for
which the buyer's account is to be credited (credit to Accounts Receivable)
and the reason for the sales return or allowance.
b. A debit memo issued by the buyer of
merchandise indicates the amount for
which the seller's account is to be debited (debit to Accounts Payable) and
the reason for the purchases return or
allowance.
13. a. The buyer
b. The seller
14. Cost of Merchandise Sold would be debited;
Merchandise Inventory would be credited.
15. Loss from Merchandise Inventory Shrinkage
would be debited.
371
PRACTICE EXERCISES
PE 6–1A
$162,300 ($32,800 + $379,500 – $250,000)
PE 6–1B
$490,000 ($375,000 + $815,000 – $700,000)
PE 6–2A
Cost of merchandise sold:
Merchandise inventory, June 1....................
Purchases......................................................
Less: Purchases returns and allowances .. $ 11,000
Purchases discounts .........................
3,000
Net purchases ...............................................
Add freight in.................................................
Cost of merchandise purchased ............
Merchandise available for sale ....................
Less merchandise inventory, June 30 ........
Cost of merchandise sold ............................
$ 35,500
$384,000
14,000
$370,000
6,000
376,000
$411,500
40,500
$371,000
PE 6–2B
Cost of merchandise sold:
Merchandise inventory, August 1 ................
Purchases......................................................
Less: Purchases returns and allowances .. $20,000
Purchases discounts ......................... 10,000
Net purchases ...............................................
Add freight in.................................................
Cost of merchandise purchased ............
Merchandise available for sale ....................
Less merchandise inventory, August 31 ....
Cost of merchandise sold ............................
372
$120,000
$780,000
30,000
$750,000
5,000
755,000
$875,000
150,000
$725,000
PE 6–3A
a.
b.
Accounts Receivable ...................................................
Sales ........................................................................
41,000
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
22,500
Cash ..............................................................................
Sales Discounts ...........................................................
Accounts Receivable ..............................................
40,590
410
41,000
22,500
41,000
PE 6–3B
a.
b.
Accounts Receivable ...................................................
Sales ........................................................................
16,000
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
9,600
Cash ..............................................................................
Sales Discounts ...........................................................
Accounts Receivable ..............................................
15,680
320
16,000
9,600
16,000
PE 6–4A
a. $19,800. Purchase of $21,500 less the return of $1,500 less the discount of
$200 [($21,500 – $1,500) × 1%].
b. Accounts Payable
PE 6–4B
a. $4,410. Purchase of $8,000 less the return of $3,500 less the discount of
$90 [($8,000 – $3,500) × 2%)].
b. Merchandise Inventory
373
PE 6–5A
a. $8,910. Purchase of $13,150 less return of $4,150 less the discount of
$90 [($13,150 – $4,150) × 1%].
b. $27,458. Purchase of $32,100 less return of $5,000 less the discount of
$542 [($32,100 – $5,000) × 2%] plus $900 of shipping.
PE 6–5B
a. $6,735. Purchase of $9,000 less return of $2,500 less the discount of
$65 [($9,000 – $2,500) × 1%] plus $300 of shipping.
b. $6,958. Purchase of $7,500 less return of $400 less the discount of
$142 [($7,500 – $400) × 2%].
PE 6–6A
Saddlebag Co. journal entries:
Cash ($17,500 – $350 + $600)...............................................
Sales Discounts ($17,500 × 2%) ..........................................
Accounts Receivable—Bioscan Co. ($17,500 + $600) ..
17,750
350
18,100
Bioscan Co. journal entries:
Accounts Payable—Saddlebag Co. ($17,500 + $600) ........
Merchandise Inventory ($17,500 × 2%) ..........................
Cash ($17,500 – $350 + $600) .........................................
18,100
350
17,750
PE 6–6B
Santana Co. journal entries:
Cash ($6,000 – $800 – $104).................................................
Sales Discounts [($6,000 – $800) × 2%] ..............................
Accounts Receivable—Birch Co. ($6,000 – $800) .........
5,096
104
5,200
Birch Co. journal entries:
Accounts Payable—Santana Co. ($6,000 – $800) ..............
Merchandise Inventory [($6,000 – $800) × 2%]..............
Cash ($6,000 – $800 – $104) ...........................................
374
5,200
104
5,096
PE 6–7A
Oct.
31 Cost of Merchandise Sold ........................................
Merchandise Inventory .......................................
Inventory shrinkage ($975,000 – $894,750).
80,250
80,250
PE 6–7B
Apr.
30 Cost of Merchandise Sold ........................................
Merchandise Inventory .......................................
Inventory shrinkage ($120,500 – $115,850).
375
4,650
4,650
EXERCISES
Ex. 6–1
a. $318,000 ($795,000 – $477,000)
b. 40% ($318,000 ÷ $795,000)
c. No. If operating expenses are less than gross profit, there will be a net income. On the other hand, if operating expenses exceed gross profit, there will
be a net loss.
Ex. 6–2
$27,165 million ($35,934 million – $8,769 million)
Ex. 6–3
a. Purchases discounts, purchases returns and allowances
b. Freight in
c. Merchandise available for sale
d. Merchandise inventory (ending)
Ex. 6–4
a. Cost of merchandise sold:
Merchandise inventory,
December 1, 2009 .................................
Purchases...................................................
Less: Purchases returns and
allowances ....................................
Purchases discounts ......................
Net purchases ............................................
Add freight in..............................................
Cost of merchandise
purchased ........................................
Merchandise available for sale .................
Less merchandise inventory,
November 30, 2010 ...............................
Cost of merchandise sold .........................
b. $849,400 ($2,250,000 – $1,400,600)
376
$ 210,000
$1,400,000
$20,000
18,500
38,500
$1,361,500
14,100
1,375,600
$1,585,600
185,000
$1,400,600
Ex. 6–5
1. The schedule should begin with the August 1, 2009, not the July 31, 2010,
merchandise inventory.
2. Purchases returns and allowances and purchases discounts should be deducted from (not added to) purchases.
3. The result of subtracting purchases returns and allowances and purchases
discounts from purchases should be labeled ―net purchases.‖
4. Freight in should be added to net purchases to yield cost of merchandise
purchased.
5. The merchandise inventory at July 31, 2010, should be deducted from merchandise available for sale to yield cost of merchandise sold.
A correct cost of merchandise sold section is as follows:
Cost of merchandise sold:
Merchandise inventory, August 1, 2009 ...
Purchases...................................................
Less: Purchases returns and allowances
Purchases discounts ......................
Net purchases ............................................
Add freight in..............................................
Cost of merchandise purchased .........
Merchandise available for sale .................
Less merchandise inventory,
July 31, 2010 .........................................
Cost of merchandise sold .........................
$ 125,000
$975,000
$12,000
8,000
Ex. 6–6
a. Net sales: $5,105,000 ($5,280,000 – $100,000 – $75,000)
b. Gross profit: $2,105,000 ($5,105,000 – $3,000,000)
Ex. 6–7
a. Selling expense, (1), (2), (7), (8)
b. Administrative expense, (3), (5), (6)
c. Other expense, (4)
377
20,000
$955,000
13,500
968,500
$1,093,500
140,000
$ 953,500
Ex. 6–8
PAPER PLUS COMPANY
Income Statement
For the Year Ended June 30, 2010
Revenues:
Net sales ......................................................................
Rent revenue ...............................................................
Total revenues .........................................................
Expenses:
Cost of merchandise sold ..........................................
Selling expenses .........................................................
Administrative expenses ............................................
Interest expense ..........................................................
Total expenses ........................................................
Net income ..........................................................................
378
$6,500,000
100,000
$6,600,000
$4,000,000
750,000
500,000
30,000
5,280,000
$1,320,000
Ex. 6–9
1. Sales returns and allowances and sales discounts should be deducted from
(not added to) sales.
2. Sales returns and allowances and sales discounts should be deducted from
sales to yield "net sales" (not gross sales).
3. Deducting the cost of merchandise sold from net sales yields gross profit.
4. Deducting the total expenses from gross profit would yield income from operations (or operating income).
5. Interest revenue should be reported under the caption ―Other income‖ and
should be added to income from operations to arrive at net income.
6. The final amount on the income statement should be labeled net income, not
gross profit.
A correct income statement would be as follows:
ARMORTEC COMPANY
Income Statement
For the Year Ended February 28, 2010
Revenue from sales:
Sales ...........................................................
Less: Sales returns and allowances ........
Sales discounts ...............................
Net sales ................................................
Cost of merchandise sold ..............................
Gross profit......................................................
Expenses:
Selling expenses ........................................
Administrative expenses ...........................
Delivery expense........................................
Total expenses .....................................
Income from operations .................................
Other income:
Interest revenue .........................................
Net income .......................................................
379
$5,345,800
$120,000
60,000
180,000
$5,165,800
3,100,800
$2,065,000
$ 800,000
600,000
50,000
1,450,000
$ 615,000
40,000
$ 655,000
Ex. 6–10
a. $15,000 ($250,000 – $10,000 – $225,000)
b. $135,000 ($225,000 – $90,000)
c. $552,000 ($600,000 – $30,000 – $18,000)
d. $222,000 ($552,000 – $330,000)
e. $50,000 ($1,000,000 – $40,000 – $910,000)
f.
$623,500 ($910,000 – $286,500)
g. $539,000 ($520,000 + $11,500 + $7,500)
h. $520,000 ($400,000 + $120,000)
Ex. 6–11
a.
EL DORADO FURNISHINGS COMPANY
Income Statement
For the Year Ended March 31, 2010
Revenue from sales:
Sales ...........................................................
Less: Sales returns and allowances ........
Sales discounts ...............................
Net sales ................................................
Cost of merchandise sold ..............................
Gross profit......................................................
Expenses:
Selling expenses ........................................
Administrative expenses ...........................
Total expenses .....................................
Income from operations .................................
Other expense:
Interest expense ........................................
Net income .......................................................
$2,550,000
$160,000
40,000
200,000
$2,350,000
1,400,000
$ 950,000
$ 410,000
250,000
660,000
$ 290,000
15,000
$ 275,000
b. The major advantage of the multiple-step form of income statement is that relationships such as gross profit to sales are indicated. The major disadvantages are that it is more complex and the total revenues and expenses are not
indicated, as is the case in the single-step income statement.
380
Ex. 6–12
Balance Sheet Accounts
Income Statement Accounts
100
400
Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500
Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Store Supplies Expense
524 Delivery Expense
529 Miscellaneous Selling
Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Administrative Expense
600
Other Expense
610 Interest Expense
Assets
110 Cash
112 Accounts Receivable
114 Merchandise Inventory
115 Store Supplies
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
200
Liabilities
210 Accounts Payable
211 Salaries Payable
212 Notes Payable
300
Owner's Equity
310 Jim Frazee, Capital
311 Jim Frazee, Drawing
312 Income Summary
Note: The order of some of the accounts within subclassifications is somewhat
arbitrary, as in accounts 115–117 and accounts 521–524. In a new business, the
order of magnitude of balances in such accounts is not determinable in advance.
The magnitude may also vary from period to period.
381
Ex. 6–13
a.
b.
c.
d.
e.
Cash ..............................................................................
Sales ........................................................................
18,500
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
11,000
Accounts Receivable ...................................................
Sales ........................................................................
12,000
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
7,200
Cash ..............................................................................
Sales ........................................................................
115,200
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
70,000
Cash ..............................................................................
Sales ........................................................................
45,000
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
27,000
Credit Card Expense ....................................................
Cash .........................................................................
5,600
18,500
11,000
12,000
7,200
115,200
70,000
45,000
27,000
5,600
Ex. 6–14
It was acceptable to debit Sales for the $65,900. However, using Sales Returns
and Allowances assists management in monitoring the amount of returns so that
quick action can be taken if returns become excessive.
Accounts Receivable should also have been credited for $65,900. In addition,
Cost of Merchandise Sold should only have been credited for the cost of the merchandise sold, not the selling price. Merchandise Inventory should also have
been debited for the cost of the merchandise returned. The entries to correctly
record the returns would have been as follows:
Sales (or Sales Returns and Allowances) ..................
Accounts Receivable ..............................................
65,900
Merchandise Inventory ................................................
Cost of Merchandise Sold ......................................
40,000
382
65,900
40,000
Ex. 6–15
a. $24,750 [$25,000 – $250 ($25,000 × 1%)]
b.
Sales Returns and Allowances ...................................
Sales Discounts ......................................................
Cash .........................................................................
25,000
Merchandise Inventory ................................................
Cost of Merchandise Sold ......................................
15,000
250
24,750
15,000
Ex. 6–16
(1) Sold merchandise on account, $20,000.
(2) Recorded the cost of the merchandise sold and reduced the merchandise inventory account, $12,000.
(3) Accepted a return of merchandise and granted an allowance, $2,000.
(4) Updated the merchandise inventory account for the cost of the merchandise
returned, $1,000.
(5) Received the balance due within the discount period, $17,640. [Sale of
$20,000, less return of $2,000, less discount of $360 (2% × $18,000).]
Ex. 6–17
a. $12,500
b. $12,900
c. $125 ($12,500 × 1%)
d. $12,775 ($12,900 – $125)
Ex. 6–18
a. $7,644 [Purchase of $9,000, less return of $1,200, less discount of $156
[($9,000 – $1,200) × 2%)]
b. Merchandise Inventory
383
Ex. 6–19
Offer A is lower than offer B. Details are as follows:
List price ......................................................................
Less discount ..............................................................
A
$20,000
400
$19,600
Freight ..........................................................................
$19,600
B
$19,500
195
$19,305
400
$19,705
Ex. 6–20
(1) Purchased merchandise on account at a cost of $8,000.
(2) Paid freight, $250.
(3) An allowance or return of merchandise was granted by the creditor, $500.
(4) Paid the balance due within the discount period: debited Accounts Payable,
$7,500, and credited Merchandise Inventory for the amount of the discount,
$150, and Cash, $7,350.
Ex. 6–21
a.
b.
c.
Merchandise Inventory ................................................
Accounts Payable ...................................................
18,000
Accounts Payable ........................................................
Merchandise Inventory ...........................................
3,000
Accounts Payable ........................................................
Cash .........................................................................
Merchandise Inventory ...........................................
15,000
384
18,000
3,000
14,700
300
Ex. 6–22
a.
b.
c.
d.
e.
Merchandise Inventory ................................................
Accounts Payable—Presidio Co............................
25,000
Accounts Payable—Presidio Co. ................................
Cash .........................................................................
Merchandise Inventory ...........................................
25,000
Accounts Payable*—Presidio Co................................
Merchandise Inventory ...........................................
4,900
Merchandise Inventory ................................................
Accounts Payable—Presidio Co............................
4,000
Cash ..............................................................................
Accounts Payable—Presidio Co............................
900
25,000
24,500
500
4,900
4,000
900
*Note: The debit of $4,900 to Accounts Payable in entry (c) is the amount of cash
refund due from Presidio Co. It is computed as the amount that was paid for the
returned merchandise, $5,000, less the purchase discount of $100 ($5,000 × 2%).
The credit to Accounts Payable of $4,000 in entry (d) reduces the debit balance in
the account to $900, which is the amount of the cash refund in entry (e). The alternative entries below yield the same final results.
c.
d.
e.
Accounts Receivable—Presidio Co. ...........................
Merchandise Inventory ...........................................
4,900
Merchandise Inventory ................................................
Accounts Payable—Presidio Co............................
4,000
Cash ..............................................................................
Accounts Payable—Presidio Co. ................................
Accounts Receivable—Presidio Co. .....................
900
4,000
Ex. 6–23
a.
$14,200 ($15,000 – $800)
b. $9,024 [($10,000 – $1,200) – ($8,800 × 2%) + $400]
c.
$7,425 [($8,250 – $750) – ($7,500 × 1%)]
d. $2,575 [($2,900 – $400) – ($2,500 × 2%) + $125]
e.
$3,773 [$3,850 – ($3,850 × 2%)]
385
4,900
4,000
4,900
Ex. 6–24
a. At the time of sale
b. $13,750
c. $14,850 [$13,750 + ($13,750 × 8%)]
d. Sales Tax Payable
Ex. 6–25
a.
b.
Accounts Receivable ...................................................
Sales ........................................................................
Sales Tax Payable ($3,400 × 5%) ...........................
3,570
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
2,000
Sales Tax Payable ........................................................
Cash .........................................................................
41,950
3,400
170
2,000
41,950
Ex. 6–26
a.
b.
c.
Accounts Receivable—Bitone Co. .............................
Sales ........................................................................
23,400
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
14,000
Sales Returns and Allowances ...................................
Accounts Receivable—Bitone Co. ........................
4,400
Merchandise Inventory ................................................
Cost of Merchandise Sold ......................................
2,600
Cash ..............................................................................
Sales Discounts ...........................................................
Accounts Receivable—Bitone Co. ........................
18,620
380
386
23,400
14,000
4,400
2,600
19,000
Ex. 6–27
a.
b.
c.
Merchandise Inventory ................................................
Accounts Payable—Summit Co. ...........................
23,400
Accounts Payable—Summit Co. ................................
Merchandise Inventory ...........................................
4,400
Accounts Payable—Summit Co. ................................
Cash .........................................................................
Merchandise Inventory ...........................................
19,000
23,400
4,400
18,620
380
Ex. 6–28
a. debit
b. debit
c. debit
d. credit
e. debit
f.
debit
g. credit
Ex. 6–29
Cost of Merchandise Sold ...........................................
Merchandise Inventory ...........................................
Inventory shrinkage ($675,150 – $649,780).
25,370
25,370
Ex. 6–30
(b) Advertising Expense
(c) Cost of Merchandise Sold
(e) Sales
(f) Sales Discounts
(g) Sales Returns and Allowances
(i) Supplies Expense
Note: (j) Talia Greenly, Drawing is closed to Talia Greenly, Capital not Income
Summary.
387
Ex. 6–31
2010
Mar. 31
31
31
31
Sales ....................................................................
Income Summary...........................................
2,550,000
Income Summary ................................................
Sales Discounts .............................................
Sales Returns and Allowances ....................
Cost of Merchandise Sold ............................
Selling Expenses ...........................................
Administrative Expenses ..............................
Interest Expense ............................................
2,275,000
Income Summary ................................................
Ricardo Cepeda, Capital ...............................
275,000
Ricardo Cepeda, Capital ....................................
Ricardo Cepeda, Drawing .............................
50,000
Sales ....................................................................
Income Summary...........................................
313,540
Income Summary ................................................
Administrative Expenses ..............................
Cost of Merchandise Sold ............................
Interest Expense ............................................
Sales Discounts .............................................
Sales Returns and Allowances ....................
Selling Expenses ...........................................
Store Supplies Expense ...............................
411,685
Jessica Duerr, Capital ........................................
Income Summary...........................................
98,145
Jessica Duerr, Capital ........................................
Jessica Duerr, Drawing.................................
7,950
2,550,000
40,000
160,000
1,400,000
410,000
250,000
15,000
275,000
50,000
Ex. 6–32
2010
May 31
31
31
31
388
313,540
65,300
188,000
1,920
18,000
12,000
124,000
2,465
98,145
7,950
Appendix 1—Ex. 6–33
a. and c.
SALES JOURNAL
Invoice
No.
Date
2010
Aug.
7
12
23
30
93
94
95
96
Post.
Ref.
Account Debited
Wes McGill ......................
Joan Felt .........................
Paula Larkin ....................
Rajiv Kumar ....................




Cost of Merchandise
Sold Dr.
Accts. Rec. Dr.
Merchandise
Sales Cr.
Inventory Cr.
15,500
11,000
11,500
23,000
61,000
(11)(41)
7,500
5,500
6,000
13,500
32,500
(51)(12)
b. and c.
PURCHASES JOURNAL
Date
Accounts Merchandise Other
Post. Payable
Inventory Accounts Post.
Ref.
Cr.
Dr.
Dr.
Ref. Amount
Account Credited
2010
Aug. 10 Royal Importers ..................... 
12 Royal Importers ..................... 
19 Royal Importers ..................... 
18,000
8,500
40,500
67,000
(21)
18,000
8,500
40,500
67,000
(12)
d.
Merchandise inventory, August 1 .....................................
Plus: August purchases ....................................................
Less: Cost of merchandise sold .......................................
Merchandise inventory, August 31 ...................................
$ 44,500
67,000
(32,500)
$ 79,000
OR
Quantity
3
3
2
2
Rug Style
Cost
10 by 8 Chinese*
8 by 12 Persian
8 by 10 Indian
10 by 12 Persian
*[($7,500 × 2) + $8,500]
389
$ 23,500
16,500
12,000
27,000
$ 79,000
Appendix 2—Ex. 6–34
(1)
(b) perpetual inventory system
(2)
(c)
both
(3)
(c)
both
(4)
(a)
periodic inventory system
(5)
(a)
periodic inventory system
(6)
(a)
periodic inventory system
(7)
(c)
both
(8)
(c)
both
(9)
(c)
both
(10)
(a)
periodic inventory system
Appendix 2—Ex. 6–35
(a) credit
(b) debit
(c) credit
(d) debit
(e) credit
(f) debit
(g) debit
390
Appendix 2—Ex. 6–36
Feb.
2
5
6
13
15
17
23
Purchases............................................................
Accounts Payable ..........................................
17,500
Freight In .............................................................
Cash................................................................
300
Accounts Payable ...............................................
Purchases Returns and Allowances ............
2,000
Accounts Receivable ..........................................
Sales ...............................................................
9,000
Delivery Expense ................................................
Cash................................................................
100
Accounts Payable ...............................................
Purchases Discounts ....................................
Cash................................................................
15,500
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable ....................................
8,820
180
17,500
300
2,000
9,000
100
310
15,190
9,000
Appendix 2—Ex. 6–37
Feb.
2
5
6
13
13
15
17
23
Merchandise Inventory .......................................
Accounts Payable ..........................................
17,500
Merchandise Inventory .......................................
Cash................................................................
300
Accounts Payable ...............................................
Merchandise Inventory .................................
2,000
Accounts Receivable ..........................................
Sales ...............................................................
9,000
Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
6,600
Delivery Expense ................................................
Cash................................................................
100
Accounts Payable ...............................................
Merchandise Inventory .................................
Cash................................................................
15,500
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable ....................................
8,820
180
391
17,500
300
2,000
9,000
6,600
100
310
15,190
9,000
Appendix 2—Ex. 6–38
Oct. 31
31
31
31
Merchandise Inventory .......................................
Sales ....................................................................
Purchases Discounts .........................................
Purchases Returns and Allowances .................
Income Summary...........................................
35,750
890,000
12,000
6,000
Income Summary ................................................
Merchandise Inventory .................................
Sales Discounts .............................................
Sales Returns and Allowances ....................
Purchases ......................................................
Freight In ........................................................
Salaries Expense ...........................................
Advertising Expense .....................................
Depreciation Expense ...................................
Miscellaneous Expense ................................
729,050
Income Summary ................................................
Lin Endsley, Capital ......................................
214,700
Lin Endsley, Capital ............................................
Lin Endsley, Drawing ....................................
30,000
392
943,750
43,800
5,000
10,000
560,000
8,000
80,000
16,500
4,000
1,750
214,700
30,000
Ex. 6–39
a. 2007:
1.88 {$90,837 ÷ [($52,263 + $44,482) ÷ 2]}
2006:
1.95 {$81,511 ÷ [($44,482 + $38,907) ÷ 2]}
b. These analyses indicate a decrease in the effectiveness in the use of the assets to generate profits. A comparison with similar companies or industry averages would be helpful in making a more definitive statement on the effectiveness of the use of the assets.
Note to Instructors: During 2006–2007, the U.S. economy slowed resulting in
a decrease in construction and building. This slowdown likely affected the
Home Depot’s sales and ratio of net sales to average total assets.
Ex. 6–40
a. 3.17 {$66,111 ÷ [($21,215 + $20,482) ÷ 2]}
b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry at a
much slower velocity than Kroger sells groceries. Thus, Kroger is able to
generate $3.17 of sales for every dollar of assets. Tiffany, however, is only
able to generate $0.94 in sales per dollar of assets. This difference is reasonable when one considers the sales rate for jewelry and the cost of holding jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its
slow sales velocity, relative to groceries, with higher gross profits, relative to
groceries.
Note to Instructors: For 2007, Kroger’s gross profit percentage (gross profit
divided by revenues) was 24.2%, while Tiffany’s gross profit percentage was
55.7%. Kroger’s ratio of operating income to revenues was 3.4%, while Tiffany’s ratio of operating income to revenues was 15.7%.
393
PROBLEMS
Prob. 6–1A
1.
CASE-IT CO.
Income Statement
For the Year Ended November 30, 2010
Revenue from sales:
Sales ...........................................................
Less: Sales returns and allowances ........
Sales discounts ...............................
Net sales ................................................
Cost of merchandise sold ..............................
Gross profit......................................................
Expenses:
Selling expenses:
Sales salaries expense ........................
Advertising expense.............................
Depreciation expense—store
equipment ........................................
Miscellaneous selling expense ...........
Total selling expenses ....................
Administrative expenses:
Office salaries expense .......................
Rent expense ........................................
Insurance expense ...............................
Depreciation expense—office
equipment ........................................
Office supplies expense ......................
Miscellaneous administrative expense
Total administrative expenses .......
Total expenses ...........................................
Income from operations .................................
Other expense:
Interest expense ........................................
Net income .......................................................
394
$2,703,600
$ 37,800
19,800
57,600
$2,646,000
1,926,000
$ 720,000
$378,000
50,900
8,300
2,000
$ 439,200
$ 73,800
39,900
22,950
16,200
1,650
1,900
156,400
595,600
$ 124,400
4,400
$ 120,000
Prob. 6–1A
Continued
2.
CASE-IT CO.
Statement of Owner’s Equity
For the Year Ended November 30, 2010
Gina Hennessy, capital, December 1, 2009 ......................
Net income for the year .....................................................
Less withdrawals ...............................................................
Increase in owner’s equity ................................................
Gina Hennessy, capital, November 30, 2010....................
395
$454,800
$120,000
45,000
75,000
$529,800
Prob. 6–1A
Continued
3.
CASE-IT CO.
Balance Sheet
November 30, 2010
Assets
Current assets:
Cash ............................................................
Accounts receivable ..................................
Merchandise inventory ..............................
Office supplies ...........................................
Prepaid insurance ......................................
Total current assets ................................
Property, plant, and equipment:
Office equipment........................................
Less accumulated depreciation .............
Store equipment.........................................
Less accumulated depreciation .............
Total property, plant, and
equipment .........................................
Total assets .....................................................
$ 37,700
111,600
180,000
5,000
12,000
$346,300
$115,200
49,500
$ 65,700
$311,500
87,500
224,000
289,700
$636,000
Liabilities
Current liabilities:
Accounts payable ......................................
Note payable (current portion)..................
Salaries payable .........................................
Total current liabilities ............................
Long-term liabilities:
Note payable (final payment due 2025) ....
Total liabilities .................................................
Owner’s Equity
Gina Hennessy, capital ...................................
Total liabilities and owner’s equity ................
396
$ 48,600
8,000
3,600
$ 60,200
46,000
$106,200
529,800
$636,000
Prob. 6–1A
4.
Concluded
a.
The multiple-step form of income statement contains various sections
for revenues and expenses, with intermediate balances, and concludes
with net income. In the single-step form, the total of all expenses is deducted from the total of all revenues. There are no intermediate balances.
b.
In the report form of balance sheet, the assets, liabilities, and owner’s
equity are presented in that order in a downward sequence. In the account form, the assets are listed on the left-hand side, and the liabilities
and owner’s equity are listed on the right-hand side.
397
Prob. 6–2A
1.
CASE-IT CO.
Income Statement
For the Year Ended November 30, 2010
Revenues:
Net sales ......................................................................
Expenses:
Cost of merchandise sold ..........................................
Selling expenses .........................................................
Administrative expenses ............................................
Interest expense ..........................................................
Total expenses ........................................................
Net income ..........................................................................
$2,646,000
$1,926,000
439,200
156,400
4,400
2,526,000
$ 120,000
2.
CASE-IT CO.
Statement of Owner’s Equity
For the Year Ended November 30, 2010
Gina Hennessy, capital, December 1, 2009 ......................
Net income for the year .....................................................
Less withdrawals ...............................................................
Increase in owner’s equity ................................................
Gina Hennessy, capital, November 30, 2010....................
398
$454,800
$120,000
45,000
75,000
$529,800
Prob. 6–2A
Continued
3.
CASE-IT CO.
Balance Sheet
November 30, 2010
Assets
Liabilities
Current assets:
Cash ......................................
$ 37,700
Accounts receivable ............
111,600
Merchandise inventory ........
180,000
Office supplies .....................
5,000
Prepaid insurance ................
12,000
Total current assets ..........
Property, plant, and equipment:
Office equipment .................. $115,200
Less accum. depreciation.
49,500 $ 65,700
Store equipment ...................
Less accum. depreciation.
Total property, plant,
and equipment..............
Total assets ..............................
$311,500
87,500
$346,300
224,000
289,700
$636,000
399
Current liabilities:
Accounts payable ........... $48,600
Note payable (current
portion) ..........................
8,000
Salaries payable ..............
3,600
Total current liabilities .
$ 60,200
Long-term liabilities:
Note payable (final
payment due 2025) .......
46,000
Total liabilities ....................
$106,200
Owner’s Equity
Gina Hennessy, capital .....
529,800
Total liabilities and
owner’s equity .................
$636,000
Prob. 6–2A
Concluded
4.
2010
Nov. 30 Sales ....................................................................
Income Summary...........................................
2,703,600
2,703,600
30 Income Summary ................................................
Sales Returns and Allowances ....................
Sales Discounts .............................................
Cost of Merchandise Sold ............................
Sales Salaries Expense ................................
Advertising Expense .....................................
Depreciation Expense—Store Equipment ...
Miscellaneous Selling Expense ...................
Office Salaries Expense ................................
Rent Expense .................................................
Insurance Expense ........................................
Depreciation Expense—Office Equipment ..
Office Supplies Expense ..............................
Miscellaneous Administrative Expense ......
Interest Expense ............................................
2,583,600
30 Income Summary ................................................
Gina Hennessy, Capital.................................
120,000
30 Gina Hennessy, Capital ......................................
Gina Hennessy, Drawing ..............................
45,000
400
37,800
19,800
1,926,000
378,000
50,900
8,300
2,000
73,800
39,900
22,950
16,200
1,650
1,900
4,400
120,000
45,000
Prob. 6–3A
Aug.
1 Accounts Receivable—Tomahawk Co. ............
Sales ...............................................................
12,500
1 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
7,500
2 Cash .....................................................................
Sales ...............................................................
Sales Tax Payable .........................................
21,400
2 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
13,100
5 Accounts Receivable—Epworth Company.......
Sales ...............................................................
30,000
5 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
19,500
8 Cash .....................................................................
Sales ...............................................................
Sales Tax Payable .........................................
12,305
8 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
7,000
13 Cash .....................................................................
Sales ...............................................................
8,000
13 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
5,000
14 Accounts Receivable—Osgood Co. .................
Sales ...............................................................
11,800
14 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
7,000
15 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Epworth Company
29,700
300
401
12,500
7,500
20,000
1,400
13,100
30,000
19,500
11,500
805
7,000
8,000
5,000
11,800
7,000
30,000
Prob. 6–3A
Concluded
Aug. 16 Sales Returns and Allowances ..........................
Accounts Receivable—Osgood Co. ............
1,800
16 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
1,000
18 Accounts Receivable—Horton Company .........
Sales ...............................................................
6,850
18 Accounts Receivable—Horton Company .........
Cash................................................................
210
18 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
4,100
24 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Osgood Co. ............
9,900
100
28 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Horton Company ....
6,923
137
31 Delivery Expense ................................................
Cash................................................................
2,100
31 Cash .....................................................................
Accounts Receivable—Tomahawk Co. .......
12,500
3 Credit Card Expense ..........................................
Cash................................................................
980
10 Sales Tax Payable ...............................................
Cash................................................................
1,750
Sept.
402
1,800
1,000
6,850
210
4,100
10,000
7,060
2,100
12,500
980
1,750
Prob. 6–4A
Oct.
1 Merchandise Inventory .......................................
Accounts Payable—Wood Co. ....................
15,900
5 Merchandise Inventory .......................................
Accounts Payable—Davis Co. .....................
14,150
10 Accounts Payable—Wood Co. ..........................
Cash................................................................
Merchandise Inventory .................................
15,900
13 Merchandise Inventory .......................................
Accounts Payable—Folts Co. ......................
8,000
14 Accounts Payable—Folts Co. ...........................
Merchandise Inventory .................................
1,500
18 Merchandise Inventory .......................................
Accounts Payable—Lakey Company ...........
12,250
18 Merchandise Inventory .......................................
Cash................................................................
180
19 Merchandise Inventory .......................................
Accounts Payable—Noman Co. ..................
11,150
23 Accounts Payable—Folts Co. ...........................
Cash................................................................
Merchandise Inventory .................................
6,500
29 Accounts Payable—Noman Co. ........................
Cash................................................................
Merchandise Inventory .................................
11,150
31 Accounts Payable—Lakey Company ................
Cash................................................................
12,250
31 Accounts Payable—Davis Co. ..........................
Cash................................................................
14,150
403
15,900
14,150
15,590
310
8,000
1,500
12,250
180
11,150
6,435
65
10,927
223
12,250
14,150
Prob. 6–5A
Dec.
3 Merchandise Inventory .......................................
Accounts Payable—Hillsboro Co. ...............
[$38,000 – ($38,000 × 25%)] = $28,500;
$28,500 + $900 = $29,400.
29,400
5 Merchandise Inventory .......................................
Accounts Payable—Deepwater Co. ............
18,750
6 Accounts Receivable—Zion Co. .......................
Sales ...............................................................
[$27,000 – ($27,000 × 35%)] = $17,550.
17,550
6 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
14,000
7 Accounts Payable—Deepwater Co. ..................
Merchandise Inventory .................................
3,000
13 Accounts Payable—Hillsboro Co. ....................
Cash................................................................
Merchandise Inventory .................................
29,400
15 Accounts Payable—Deepwater Co. ..................
Cash................................................................
Merchandise Inventory .................................
15,750
16 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Zion Co. ..................
17,199
351
19 Cash .....................................................................
Sales ...............................................................
58,000
19 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
34,800
22 Accounts Receivable—Smith River Co. ...........
Sales ...............................................................
15,400
22 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
9,000
23 Cash .....................................................................
Sales ...............................................................
33,600
404
29,400
18,750
17,550
14,000
3,000
28,830
570
15,435
315
17,550
58,000
34,800
15,400
9,000
33,600
Prob. 6–5A
Concluded
Dec. 23 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
20,000
28 Sales Returns and Allowances ..........................
Accounts Receivable—Smith River Co. ......
2,400
28 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
1,400
31 Credit Card Expense ..........................................
Cash................................................................
1,750
405
20,000
2,400
1,400
1,750
Prob. 6–6A
1.
Nov.
2 Accounts Receivable—Bonita Company ..........
Sales ...............................................................
16,000
2 Accounts Receivable—Bonita Company ..........
Cash................................................................
375
2 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
10,000
8 Accounts Receivable—Bonita Company ..........
Sales ...............................................................
24,750
8 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
14,850
8 Delivery Expense ................................................
Cash................................................................
640
12 Sales Returns and Allowances ..........................
Accounts Receivable—Bonita Company.....
5,750
12 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
3,000
12 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Bonita Company.....
16,055
320
23 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Bonita Company.....
18,810
190
24 Accounts Receivable—Bonita Company ..........
Sales ...............................................................
13,200
24 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
8,000
30 Cash .....................................................................
Accounts Receivable—Bonita Company.....
13,200
406
16,000
375
10,000
24,750
14,850
640
5,750
3,000
16,375
19,000
13,200
8,000
13,200
Prob. 6–6A
Concluded
2.
Nov.
2 Merchandise Inventory .......................................
Accounts Payable—Sycamore Company ....
$16,000 + $375 = $16,375.
16,375
8 Merchandise Inventory .......................................
Accounts Payable—Sycamore Company ....
24,750
12 Accounts Payable—Sycamore Company .........
Merchandise Inventory .................................
5,750
12 Accounts Payable—Sycamore Company .........
Cash................................................................
Merchandise Inventory .................................
16,375
23 Accounts Payable—Sycamore Company .........
Cash................................................................
Merchandise Inventory .................................
19,000
24 Merchandise Inventory .......................................
Accounts Payable—Sycamore Company ....
13,200
26 Merchandise Inventory .......................................
Cash................................................................
290
30 Accounts Payable—Sycamore Company .........
Cash................................................................
13,200
407
16,375
24,750
5,750
16,055
320
18,810
190
13,200
290
13,200
Appendix 2—Prob. 6–7A
Oct. 1
5
10
13
14
18
18
19
23
29
31
31
Purchases............................................................
Freight In .............................................................
Accounts Payable—Wood Co. ....................
15,500
400
Purchases............................................................
Accounts Payable—Davis Co. .....................
14,150
Accounts Payable—Wood Co. ...........................
Cash................................................................
Purchases Discounts ....................................
15,900
Purchases............................................................
Accounts Payable—Folts Co. ......................
8,000
Accounts Payable—Folts Co. ...........................
Purchases Returns and Allowances ............
1,500
Purchases............................................................
Accounts Payable—Lakey Company ...........
12,250
Freight In .............................................................
Cash................................................................
180
Purchases............................................................
Accounts Payable—Noman Co. ..................
11,150
Accounts Payable—Folts Co. ...........................
Cash................................................................
Purchases Discounts ....................................
6,500
Accounts Payable—Noman Co. ........................
Cash................................................................
Purchases Discounts ....................................
11,150
Accounts Payable—Lakey Company ................
Cash................................................................
12,250
Accounts Payable—Davis Co. ..........................
Cash................................................................
14,150
408
15,900
14,150
15,590
310
8,000
1,500
12,250
180
11,150
6,435
65
10,927
223
12,250
14,150
Appendix 2—Prob. 6–8A
Dec.
3
5
6
7
13
15
16
19
22
23
28
31
Purchases............................................................
Freight In .............................................................
Accounts Payable—Hillsboro Co. ...............
[$38,000 – ($38,000 × 25%)] = $28,500.
28,500
900
Purchases............................................................
Accounts Payable—Deepwater Co. ............
18,750
Accounts Receivable—Zion Co. .......................
Sales ...............................................................
[$27,000 – ($27,000 × 35%)] = $17,550.
17,550
Accounts Payable—Deepwater Co. ..................
Purchases Returns and Allowances ............
3,000
Accounts Payable—Hillsboro Co. ....................
Cash................................................................
Purchases Discounts ....................................
29,400
Accounts Payable—Deepwater Co. ..................
Cash................................................................
Purchases Discounts ....................................
15,750
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Zion Co. ..................
17,199
351
Cash .....................................................................
Sales ...............................................................
58,000
Accounts Receivable—Smith River Co. ...........
Sales ...............................................................
15,400
Cash .....................................................................
Sales ...............................................................
33,600
Sales Returns and Allowances ..........................
Accounts Receivable—Smith River Co. .....
2,400
Credit Card Expense ..........................................
Cash................................................................
1,750
409
29,400
18,750
17,550
3,000
28,830
570
15,435
315
17,550
58,000
15,400
33,600
2,400
1,750
Appendix 2—Prob. 6–9A
1.
Nov. 2
2
8
8
12
12
23
24
30
Accounts Receivable—Bonita Company ..........
Sales ...............................................................
16,000
Accounts Receivable—Bonita Company ..........
Cash................................................................
375
Accounts Receivable—Bonita Company ..........
Sales ...............................................................
24,750
Delivery Expense ................................................
Cash................................................................
640
Sales Returns and Allowances ..........................
Accounts Receivable—Bonita Company.....
5,750
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Bonita Company.....
16,055
320
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Bonita Company.....
18,810
190
Accounts Receivable—Bonita Company ..........
Sales ...............................................................
13,200
Cash .....................................................................
Accounts Receivable—Bonita Company.....
13,200
410
16,000
375
24,750
640
5,750
16,375
19,000
13,200
13,200
Appendix 2—Prob. 6–9A
Concluded
2.
Nov. 2
8
12
12
23
24
26
30
Purchases............................................................
Freight In .............................................................
Accounts Payable—Sycamore Company ....
16,000
375
Purchases............................................................
Accounts Payable—Sycamore Company ....
24,750
Accounts Payable—Sycamore Company .........
Purchases Returns and Allowances ............
5,750
Accounts Payable—Sycamore Company .........
Cash................................................................
Purchases Discounts ....................................
16,375
Accounts Payable—Sycamore Company .........
Cash................................................................
Purchases Discounts ....................................
19,000
Purchases............................................................
Accounts Payable—Sycamore Company ....
13,200
Freight In .............................................................
Cash................................................................
290
Accounts Payable—Sycamore Company .........
Cash................................................................
13,200
411
16,375
24,750
5,750
16,055
320
18,810
190
13,200
290
13,200
Appendix 2—Prob. 6–10A
1. Periodic inventory system. Andover Company uses a periodic inventory system since it maintains accounts for purchases, purchases returns and allowances, purchases discounts, and freight in.
2. See page 413.
412
Appendix 2—Prob. 6–10A
Continued
2.
ANDOVER COMPANY
Income Statement
For the Year Ended June 30, 2010
Revenue from sales:
Sales ............................................................
$2,212,900
Less: Sales returns and allowances .........
$ 20,000
Sales discounts ................................
18,750
38,750
Net sales .................................................
$2,174,150
Cost of merchandise sold:
Merchandise inventory, July 1, 2009 .........
$ 175,450
Purchases.................................................... $1,073,000
Less: Purchases returns and allowances
12,000
Purchases discounts .......................
9,000
Net purchases ........................................ $1,052,000
Add freight in...............................................
21,800
Cost of merchandise purchased ..........
1,073,800
Cost of merchandise available for sale ....
$1,249,250
Less merchandise inventory, June 30, 2010
188,200
Cost of merchandise sold ...............................
1,061,050
Gross profit.......................................................
$1,113,100
Expenses:
Selling expenses:
Sales salaries expense ......................... $ 312,500
Advertising expense..............................
110,000
Delivery expense ...................................
18,000
Depreciation expense—store equip. ..
11,800
Miscellaneous selling expense ............
21,400
Total selling expenses .....................
$ 473,700
Administrative expenses:
Office salaries expense ........................ $ 200,000
Rent expense .........................................
62,500
Insurance expense ................................
6,000
Office supplies expense .......................
4,600
Depreciation expense—office equip. ..
3,000
Miscellaneous administrative expense
11,700
Total administrative expenses ........
287,800
Total expenses ............................................
761,500
Income from operations ..................................
$ 351,600
Other income and expense:
Rent revenue ...............................................
$ 12,500
Less interest expense ................................
1,500
11,000
Net income ........................................................
$ 362,600
413
Appendix 2—Prob. 6–10A
Concluded
3.
Merchandise Inventory ................................................
Sales ..............................................................................
Purchases Returns and Allowances ..........................
Purchases Discounts ...................................................
Rent Revenue ...............................................................
Income Summary ....................................................
188,200
2,212,900
12,000
9,000
12,500
Income Summary .........................................................
Merchandise Inventory ...........................................
Sales Returns and Allowances ..............................
Sales Discounts ......................................................
Purchases................................................................
Freight In .................................................................
Sales Salaries Expense ..........................................
Advertising Expense ..............................................
Delivery Expense ....................................................
Depreciation Expense—Store Equipment ............
Miscellaneous Selling Expense .............................
Office Salaries Expense .........................................
Rent Expense ..........................................................
Insurance Expense .................................................
Office Supplies Expense ........................................
Depreciation Expense—Office Equipment ...........
Miscellaneous Administrative Expense ................
Interest Expense .....................................................
2,072,000
Income Summary .........................................................
Vanessa Andover, Capital ......................................
362,600
Vanessa Andover, Capital ...........................................
Vanessa Andover, Drawing ....................................
37,500
414
2,434,600
175,450
20,000
18,750
1,073,000
21,800
312,500
110,000
18,000
11,800
21,400
200,000
62,500
6,000
4,600
3,000
11,700
1,500
362,600
37,500
Prob. 6–1B
1.
DRAPERY LAND CO.
Income Statement
For the Year Ended July 31, 2010
Revenue from sales:
Sales ...........................................................
Less: Sales returns and allowances ........
Sales discounts ...............................
Net sales ................................................
Cost of merchandise sold ..............................
Gross profit......................................................
Expenses:
Selling expenses:
Sales salaries expense ........................
Advertising expense.............................
Depreciation expense—store
equipment ........................................
Miscellaneous selling expense ...........
Total selling expenses ....................
Administrative expenses:
Office salaries expense .......................
Rent expense ........................................
Depreciation expense—office
equipment ........................................
Insurance expense ...............................
Office supplies expense ......................
Miscellaneous administrative
expense ............................................
Total administrative expenses .......
Total expenses ...........................................
Income from operations .................................
Other expense:
Interest expense ........................................
Net income .......................................................
415
$3,855,000
$ 69,300
65,700
135,000
$3,720,000
2,325,000
$1,395,000
$519,600
131,400
19,200
4,800
$ 675,000
$252,450
94,050
38,100
11,700
3,200
5,500
405,000
1,080,000
$ 315,000
15,000
$ 300,000
Prob. 6–1B
Continued
2.
DRAPERY LAND CO.
Statement of Owner’s Equity
For the Year Ended July 31, 2010
Tanya Xavier, capital, August 1, 2009 ...............................
Net income for the year .....................................................
Less withdrawals ...............................................................
Increase in owner’s equity ................................................
Tanya Xavier, capital, July 31, 2010 ..................................
416
$1,312,250
$300,000
105,000
195,000
$1,507,250
Prob. 6–1B
Continued
3.
DRAPERY LAND CO.
Balance Sheet
July 31, 2010
Assets
Current assets:
Cash ............................................................
Accounts receivable ..................................
Merchandise inventory ..............................
Office supplies ...........................................
Prepaid insurance ......................................
Total current assets ................................
Property, plant, and equipment:
Office equipment........................................
Less accumulated depreciation .............
Store equipment.........................................
Less accumulated depreciation .............
Total property, plant, and
equipment ........................................
Total assets .....................................................
$161,250
363,000
525,000
16,800
10,200
$1,076,250
$255,000
138,400
$116,600
$759,000
102,600
656,400
773,000
$1,849,250
Liabilities
Current liabilities:
Accounts payable ......................................
Note payable (current portion)..................
Salaries payable .........................................
Total current liabilities ............................
Long-term liabilities:
Note payable (final payment due 2020) ....
Total liabilities .................................................
Owner’s Equity
Tanya Xavier, capital .......................................
Total liabilities and owner’s equity ................
417
$166,800
16,800
7,200
$ 190,800
151,200
$ 342,000
1,507,250
$1,849,250
Prob. 6–1B
4.
a.
b.
Concluded
The multiple-step form of income statement contains various sections
for revenues and expenses, with intermediate balances, and concludes
with net income. In the single-step form, the total of all expenses is deducted from the total of all revenues. There are no intermediate balances.
In the report form of balance sheet, the assets, liabilities, and owner’s
equity are presented in that order in a downward sequence. In the account form, the assets are listed on the left-hand side, and the liabilities
and owner’s equity are listed on the right-hand side.
418
Prob. 6–2B
1.
DRAPERY LAND CO.
Income Statement
For the Year Ended July 31, 2010
Revenues:
Net sales ......................................................................
Expenses:
Cost of merchandise sold ..........................................
Selling expenses .........................................................
Administrative expenses ............................................
Interest expense ..........................................................
Total expenses ........................................................
Net income ..........................................................................
$3,720,000
$2,325,000
675,000
405,000
15,000
3,420,000
$ 300,000
2.
DRAPERY LAND CO.
Statement of Owner’s Equity
For the Year Ended July 31, 2010
Tanya Xavier, capital, August 1, 2009...............................
Net income for the year .....................................................
Less withdrawals ...............................................................
Increase in owner’s equity ................................................
Tanya Xavier, capital, July 31, 2010 ..................................
419
$1,312,250
$300,000
105,000
195,000
$1,507,250
Prob. 6–2B
Continued
3.
DRAPERY LAND CO.
Balance Sheet
July 31, 2010
Assets
Liabilities
Current assets:
Cash ......................................
$161,250
Accounts receivable ............
363,000
Merchandise inventory ........
525,000
Office supplies .....................
16,800
Prepaid insurance ................
10,200
Total current assets ..........
$1,076,250
Property, plant, and equipment:
Office equipment ............... $255,000
Less accumulated
depreciation ....................
138,400 $116,600
Current liabilities:
Accounts payable ........... $166,800
Note payable
(current portion) ...........
16,800
Salaries payable ..............
7,200
Total current
liabilities ........................
$ 190,800
Long-term liabilities:
Note payable (final
payment due 2020) .......
151,200
Total liabilities ....................
$ 342,000
Store equipment ...................
Less accumulated
depreciation .......................
Total property, plant,
and equipment..............
Total assets ..............................
Owner’s Equity
Tanya Xavier, capital .........
$759,000
102,600
1,507,250
656,400
773,000
$1,849,250
420
Total liabilities and
owner’s equity .................
$1,849,250
Prob. 6–2B
Concluded
4.
2010
July 31
31
31
31
Sales ....................................................................
Income Summary...........................................
3,855,000
Income Summary ................................................
Sales Returns and Allowances ....................
Sales Discounts .............................................
Cost of Merchandise Sold ............................
Sales Salaries Expense ................................
Advertising Expense .....................................
Depreciation Expense—Store Equipment ...
Miscellaneous Selling Expense ...................
Office Salaries Expense ................................
Rent Expense .................................................
Depreciation Expense—Office Equipment ..
Insurance Expense ........................................
Office Supplies Expense ..............................
Miscellaneous Administrative Expense ......
Interest Expense ............................................
3,555,000
Income Summary ................................................
Tanya Xavier, Capital ....................................
300,000
Tanya Xavier, Capital ..........................................
Tanya Xavier, Drawing ..................................
105,000
421
3,855,000
69,300
65,700
2,325,000
519,600
131,400
19,200
4,800
252,450
94,050
38,100
11,700
3,200
5,500
15,000
300,000
105,000
Prob. 6–3B
Jan.
2 Accounts Receivable—Oakley Co. ...................
Sales ...............................................................
8,000
2 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
4,500
3 Cash .....................................................................
Sales ...............................................................
Sales Tax Payable .........................................
23,544
3 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
13,000
4 Accounts Receivable—Rawlins Co. .................
Sales ...............................................................
7,500
4 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
4,200
5 Cash .....................................................................
Sales ...............................................................
Sales Tax Payable .........................................
10,800
5 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
6,000
12 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Oakley Co. .............
7,920
80
14 Cash .....................................................................
Sales ...............................................................
6,000
14 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
3,200
16 Accounts Receivable—Keystone Co. ..............
Sales ...............................................................
16,500
16 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
10,000
18 Sales Returns and Allowances ..........................
Accounts Receivable—Keystone Co. .........
2,000
18 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
1,200
422
8,000
4,500
21,800
1,744
13,000
7,500
4,200
10,000
800
6,000
8,000
6,000
3,200
16,500
10,000
2,000
1,200
Prob. 6–3B
Jan.
Feb.
Concluded
19 Accounts Receivable—Cooney Co. .................
Sales ...............................................................
15,750
19 Accounts Receivable—Cooney Co. .................
Cash................................................................
400
19 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
9,500
26 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Keystone Co. .........
14,355
145
28 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Cooney Co. ............
15,835
315
31 Cash .....................................................................
Accounts Receivable—Rawlins Co. ............
7,500
31 Delivery Expense ................................................
Cash................................................................
3,875
3 Credit Card Expense ..........................................
Cash................................................................
1,150
15 Sales Tax Payable ...............................................
Cash................................................................
3,600
423
15,750
400
9,500
14,500
16,150
7,500
3,875
1,150
3,600
Prob. 6–4B
Jan.
1 Merchandise Inventory .......................................
Accounts Payable—Guinn Co. ....................
13,600
3 Merchandise Inventory .......................................
Accounts Payable—Cybernet Co. ...............
18,300
4 Merchandise Inventory .......................................
Accounts Payable—Berry Co. .....................
22,000
6 Accounts Payable—Berry Co. ..........................
Merchandise Inventory .................................
3,500
13 Accounts Payable—Cybernet Co. ....................
Cash................................................................
Merchandise Inventory .................................
18,300
14 Accounts Payable—Berry Co. ..........................
Cash................................................................
Merchandise Inventory .................................
18,500
19 Merchandise Inventory .......................................
Accounts Payable—Cleghorne Co. .............
18,000
19 Merchandise Inventory .......................................
Cash................................................................
500
20 Merchandise Inventory .......................................
Accounts Payable—Lenn Co. ......................
10,000
30 Accounts Payable—Lenn Co. ...........................
Cash................................................................
Merchandise Inventory .................................
10,000
31 Accounts Payable—Guinn Co. .........................
Cash................................................................
13,600
31 Accounts Payable—Cleghorne Co. ..................
Cash................................................................
18,000
424
13,600
18,300
22,000
3,500
17,940
360
18,130
370
18,000
500
10,000
9,900
100
13,600
18,000
Prob. 6–5B
Apr.
3 Merchandise Inventory .......................................
Accounts Payable—Prescott Co. ................
[$42,000 – ($42,000 × 40%)] = $25,200.
25,200
4 Cash .....................................................................
Sales ...............................................................
18,200
4 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
11,000
5 Merchandise Inventory .......................................
Accounts Payable—Stafford Co. .................
21,900
6 Accounts Payable—Prescott Co. .....................
Merchandise Inventory .................................
6,000
11 Accounts Receivable—Logan Co. ....................
Sales ...............................................................
[$8,500 – ($8,500 × 20%)] = $6,800.
6,800
11 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
4,500
13 Accounts Payable—Prescott Co. .....................
Cash................................................................
Merchandise Inventory .................................
19,200
14 Cash .....................................................................
Sales ...............................................................
60,000
14 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
36,000
15 Accounts Payable—Stafford Co. ......................
Cash................................................................
Merchandise Inventory .................................
21,900
21 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Logan Co. ..............
6,732
68
24 Accounts Receivable—Alma Co. ......................
Sales ...............................................................
9,200
425
25,200
18,200
11,000
21,900
6,000
6,800
4,500
18,816
384
60,000
36,000
21,474
426
6,800
9,200
Prob. 6–5B
Apr.
Concluded
24 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
5,500
28 Credit Card Expense ..........................................
Cash................................................................
1,800
30 Sales Returns and Allowances ..........................
Accounts Receivable—Alma Co. ................
1,200
30 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
720
426
5,500
1,800
1,200
720
Prob. 6–6B
1.
Aug.
1 Accounts Receivable—Boulder Co. .................
Sales ...............................................................
28,600
1 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
17,000
2 Delivery Expense ................................................
Cash................................................................
500
5 Accounts Receivable—Boulder Co. .................
Sales ...............................................................
18,000
5 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
10,800
6 Sales Returns and Allowances ..........................
Accounts Receivable—Boulder Co. ............
1,600
6 Merchandise Inventory .......................................
Cost of Merchandise Sold ............................
960
15 Accounts Receivable—Boulder Co. .................
Sales ...............................................................
36,200
15 Accounts Receivable—Boulder Co. .................
Cash................................................................
900
15 Cost of Merchandise Sold ..................................
Merchandise Inventory .................................
19,600
16 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Boulder Co. ............
26,460
540
25 Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Boulder Co. ............
36,738
362
31 Cash .....................................................................
Accounts Receivable—Boulder Co. ............
18,000
427
28,600
17,000
500
18,000
10,800
1,600
960
36,200
900
19,600
27,000
37,100
18,000
Prob. 6–6B
Concluded
2.
Aug.
1 Merchandise Inventory .......................................
Accounts Payable—Salem Company ..........
28,600
5 Merchandise Inventory .......................................
Accounts Payable—Salem Company ..........
18,000
6 Accounts Payable—Salem Company................
Merchandise Inventory .................................
1,600
9 Merchandise Inventory .......................................
Cash................................................................
350
15 Merchandise Inventory .......................................
Accounts Payable—Salem Company ..........
$36,200 + $900 = $37,100.
37,100
16 Accounts Payable—Salem Company................
Cash................................................................
Merchandise Inventory .................................
27,000
25 Accounts Payable—Salem Company................
Cash................................................................
Merchandise Inventory .................................
37,100
31 Accounts Payable—Salem Company................
Cash................................................................
18,000
428
28,600
18,000
1,600
350
37,100
26,460
540
36,738
362
18,000
Appendix 2—Prob. 6–7B
Jan. 1
3
4
6
13
14
19
19
20
30
31
31
Purchases............................................................
Accounts Payable—Guinn Co. ....................
13,600
Purchases............................................................
Freight In .............................................................
Accounts Payable—Cybernet Co. ...............
18,000
300
Purchases............................................................
Accounts Payable—Berry Co. .....................
22,000
Accounts Payable—Berry Co. ..........................
Purchases Returns and Allowances ............
3,500
Accounts Payable—Cybernet Co. ....................
Cash................................................................
Purchases Discounts ....................................
18,300
Accounts Payable—Berry Co. ..........................
Cash................................................................
Purchases Discounts ....................................
18,500
Purchases............................................................
Accounts Payable—Cleghorne Co. .............
18,000
Freight In .............................................................
Cash................................................................
500
Purchases............................................................
Accounts Payable—Lenn Co. ......................
10,000
Accounts Payable—Lenn Co. ...........................
Cash................................................................
Purchases Discounts ....................................
10,000
Accounts Payable—Guinn Co. .........................
Cash................................................................
13,600
Accounts Payable—Cleghorne Co. ..................
Cash................................................................
18,000
429
13,600
18,300
22,000
3,500
17,940
360
18,130
370
18,000
500
10,000
9,900
100
13,600
18,000
Appendix 2—Prob. 6–8B
Apr.
3
4
5
6
11
13
14
15
21
24
28
30
Purchases............................................................
Accounts Payable—Prescott Co. ................
[$42,000 – ($42,000 × 40%)] = $25,200.
25,200
Cash .....................................................................
Sales ...............................................................
18,200
Purchases............................................................
Freight In .............................................................
Accounts Payable—Stafford Co. .................
21,300
600
Accounts Payable—Prescott Co. .....................
Purchases Returns and Allowances ............
6,000
Accounts Receivable—Logan Co. ....................
Sales ...............................................................
[$8,500 – ($8,500 × 20%)] = $6,800.
6,800
Accounts Payable—Prescott Co. .....................
Cash................................................................
Purchases Discounts ....................................
19,200
Cash .....................................................................
Sales ...............................................................
60,000
Accounts Payable—Stafford Co. ......................
Cash................................................................
Purchases Discounts ....................................
21,900
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Logan Co. ..............
6,732
68
Accounts Receivable—Alma Co. ......................
Sales ...............................................................
9,200
Credit Card Expense ..........................................
Cash................................................................
1,800
Sales Returns and Allowances ..........................
Accounts Receivable—Alma Co. ................
1,200
430
25,200
18,200
21,900
6,000
6,800
18,816
384
60,000
21,474
426
6,800
9,200
1,800
1,200
Appendix 2—Prob. 6–9B
1.
Aug. 1
2
5
6
15
15
16
25
31
Accounts Receivable—Boulder Co. .................
Sales ...............................................................
28,600
Delivery Expense ................................................
Cash................................................................
500
Accounts Receivable—Boulder Co. .................
Sales ...............................................................
18,000
Sales Returns and Allowances ..........................
Accounts Receivable—Boulder Co. ............
1,600
Accounts Receivable—Boulder Co. .................
Sales ...............................................................
36,200
Accounts Receivable—Boulder Co. .................
Cash................................................................
900
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Boulder Co. ............
26,460
540
Cash .....................................................................
Sales Discounts ..................................................
Accounts Receivable—Boulder Co. ............
36,738
362
Cash .....................................................................
Accounts Receivable—Boulder Co. ............
18,000
431
28,600
500
18,000
1,600
36,200
900
27,000
37,100
18,000
Appendix 2—Prob. 6–9B
Concluded
2.
Aug. 1
5
6
9
15
16
25
31
Purchases............................................................
Accounts Payable—Salem Company ..........
28,600
Purchases............................................................
Accounts Payable—Salem Company ..........
18,000
Accounts Payable—Salem Company................
Purchases Returns and Allowances ............
1,600
Freight In .............................................................
Cash................................................................
350
Purchases............................................................
Freight In .............................................................
Accounts Payable—Salem Company ..........
36,200
900
Accounts Payable—Salem Company................
Cash................................................................
Purchases Discounts ....................................
27,000
Accounts Payable—Salem Company................
Cash................................................................
Purchases Discounts ....................................
37,100
Accounts Payable—Salem Company................
Cash................................................................
18,000
432
28,600
18,000
1,600
350
37,100
26,460
540
36,738
362
18,000
Appendix 2—Prob. 6–10B
1. Periodic inventory system. Triple Creek Company uses a periodic inventory
system since it maintains accounts for purchases, purchases returns and allowances, purchases discounts, and freight in.
2. See page 434.
433
Appendix 2—Prob. 6–10B
Continued
2.
TRIPLE CREEK COMPANY
Income Statement
For the Year Ended October 31, 2010
Revenue from sales:
Sales ............................................................
Less: Sales returns and allowances .........
Sales discounts ................................
Net sales .................................................
Cost of merchandise sold:
Merchandise inventory, November 1, 2009
Purchases....................................................
Less: Purchases returns and allows. ......
Purchases discounts .......................
Net purchases ........................................
Add freight in...............................................
Cost of merchandise purchased ..........
Cost of merchandise available for sale ....
Less merchandise inventory, Oct. 31, 2010
Cost of merchandise sold ...............................
Gross profit.......................................................
Expenses:
Selling expenses:
Sales salaries expense .........................
Advertising expense..............................
Delivery expense ...................................
Depreciation expense—store equip. ..
Miscellaneous selling expense ............
Total selling expenses .....................
Administrative expenses:
Office salaries expense ........................
Rent expense .........................................
Insurance expense ................................
Office supplies expense .......................
Depreciation expense—office equip. ..
Miscellaneous administrative expense
Total administrative expenses ........
Total expenses ............................................
Income from operations ..................................
Other income and expense:
Rent revenue ...............................................
Less interest expense ................................
Net income ........................................................
434
$1,106,400
$ 10,000
9,300
19,300
$1,087,100
$ 87,700
$536,500
6,000
4,500
$526,000
10,900
536,900
$624,600
94,100
530,500
$ 556,600
$156,250
55,000
9,000
5,900
10,700
$236,850
$100,000
31,250
3,000
2,300
1,500
5,850
143,900
380,750
$ 175,850
$
6,250
750
5,500
$ 181,350
Appendix 2—Prob. 6–10B
Concluded
3.
Merchandise Inventory ................................................
Sales ..............................................................................
Purchases Returns and Allowances ..........................
Purchases Discounts ...................................................
Rent Revenue ...............................................................
Income Summary ....................................................
94,100
1,106,400
6,000
4,500
6,250
Income Summary .........................................................
Merchandise Inventory ...........................................
Sales Returns and Allowances ..............................
Sales Discounts ......................................................
Purchases................................................................
Freight In .................................................................
Sales Salaries Expense ..........................................
Advertising Expense ..............................................
Delivery Expense ....................................................
Depreciation Expense—Store Equipment ............
Miscellaneous Selling Expense .............................
Office Salaries Expense .........................................
Rent Expense ..........................................................
Insurance Expense .................................................
Office Supplies Expense ........................................
Depreciation Expense—Office Equipment ...........
Miscellaneous Administrative Expense ................
Interest Expense .....................................................
1,035,900
Income Summary .........................................................
Shawn Hayes, Capital .............................................
181,350
Shawn Hayes, Capital ..................................................
Shawn Hayes, Drawing ..........................................
18,750
435
1,217,250
87,700
10,000
9,300
536,500
10,900
156,250
55,000
9,000
5,900
10,700
100,000
31,250
3,000
2,300
1,500
5,850
750
181,350
18,750
COMPREHENSIVE PROBLEM 2
1., 2., 6., and 9.
Cash
110
Date
Item
Post.
Ref.
2010
July 1
1
4
7
10
13
15
16
19
19
21
21
26
28
29
30
31
Balance ...................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................

20
20
20
20
20
20
20
20
20
21
21
21
21
21
21
21
Balance
Dr.
Cr.
Dr.
............
............
............
26,500
80,000
............
............
18,620
............
............
............
17,600
............
............
............
40,700
............
.............
5,000
600
.............
.............
39,200
7,500
.............
36,000
18,000
1,100
.............
3,000
38,000
2,400
.............
17,820
63,600
............
............
............
............
............
............
............
............
............
............
............
............
............
............
............
78,400
Accounts Receivable
2010
July 1
6
7
14
16
20
21
21
30
30
Balance ...................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
Cr.
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
112

20
20
20
20
21
21
21
21
21
............
25,000
............
............
............
40,000
1,100
............
18,750
............
436
.............
.............
26,500
6,000
19,000
.............
.............
17,600
.............
41,100
153,900
............
............
............
............
............
............
............
............
128,550
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
Comp. Prob. 2
Continued
Merchandise Inventory
115
Date
Item
Post.
Ref.
Dr.
Cr.
Dr.
Balance
2010
July 1
3
4
6
10
13
14
19
20
21
24
26
30
31
31
Balance ...................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
.................................
Adjusting .................

20
20
20
20
20
20
20
21
21
21
21
21
21
22
............
40,000
600
............
............
............
4,500
36,000
............
20,000
............
1,800
............
............
............
.............
.............
.............
15,000
50,000
800
.............
.............
25,000
.............
2,000
.............
11,250
180
11,220
602,400
............
............
............
............
............
............
............
............
............
............
............
............
601,070
589,850
Prepaid Insurance
2010
July 1
31
Balance ...................
Adjusting .................
Balance ...................
.................................
Adjusting .................

22
............
............
.............
12,500
16,800
4,300
Balance ...................
.............
.............
117

21
22
............
2,400
............
.............
.............
9,100
11,400
13,800
4,700
Store Equipment
2010
July 1
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
116
Store Supplies
2010
July 1
29
31
Cr.
.............
.............
.............
123

............
437
.............
469,500
.............
Comp. Prob. 2
Continued
Accumulated Depreciation—Store Equipment
124
Date
Item
Post.
Ref.
Dr.
Cr.
Dr.
Balance
Cr.
2010
July 1
31
Balance ...................
Adjusting .................

22
............
............
.............
18,800
............
............
56,700
75,500
Accounts Payable
2010
July 1
3
13
19
21
24
31
Balance ...................
.................................
.................................
.................................
.................................
.................................
.................................
210

20
20
20
21
21
21
............
............
40,000
18,000
............
2,000
18,000
.............
40,000
.............
.............
20,000
.............
.............
............
............
............
............
............
............
............
Salaries Payable
2010
July 31
Adjusting .................
96,600
.............
.............
.............
.............
.............
78,600
211
22
............
7,100
............
Rocky Hansen, Capital
7,100
310
2009
Aug. 1
Balance ...................

............
.............
............
2010
July 31
31
Closing ....................
Closing ....................
23
23
............
135,000
693,800
.............
............
.............
............ 1,114,100
Rocky Hansen, Drawing
2010
July 1
31
Balance ...................
Closing ....................
555,300
311

23
............
............
438
.............
135,000
135,000
—
.............
—
Comp. Prob. 2
Continued
Income Summary
312
Date
Item
Post.
Ref.
2010
July 31
31
31
Closing ....................
Closing ....................
Closing ....................
23
23
23
Balance
Dr.
Cr.
............ 3,384,850
2,691,050
.............
693,800
.............
Dr.
............
............
—
Sales
2010
July 1
6
10
20
30
31
Balance ...................
.................................
.................................
.................................
.................................
Closing ....................

20
20
21
21
23
............
............
............
............
............
3,384,850
.............
25,000
80,000
40,000
18,750
.............
............ 3,221,100
............
.............
............
.............
............
.............
............ 3,384,850
—
—
Balance ...................
.................................
.................................
Closing ....................
411

20
21
23
............
6,000
3,000
............
.............
.............
.............
101,700
92,700
............
101,700
—
Sales Discounts
2010
July 1
16
30
31
.............
.............
—
410
Sales Returns and Allowances
2010
July 1
14
26
31
Cr.
Balance ...................
.................................
.................................
Closing ....................
.............
.............
.............
—
412

20
21
23
............
380
400
............
439
.............
.............
.............
60,180
59,400
............
60,180
—
.............
.............
.............
—
Comp. Prob. 2
Continued
Cost of Merchandise Sold
510
Date
Item
Post.
Ref.
2010
July 1
6
10
14
20
26
30
31
31
Balance ...................
.................................
.................................
.................................
.................................
.................................
.................................
Adjusting .................
Closing ....................

20
20
20
21
21
21
22
23
Balance
Dr.
Cr.
............
.............
15,000
.............
50,000
.............
............
4,500
25,000
.............
............
1,800
11,250
.............
11,220
.............
............ 1,729,170
Dr.
1,623,000
............
............
............
............
............
1,717,950
1,729,170
—
Sales Salaries Expense
2010
July 1
28
31
31
Balance ...................
.................................
Adjusting .................
Closing ....................
Balance ...................
.................................
Closing ....................

21
22
23
............
22,800
4,400
............
.............
.............
.............
362,000
334,800
357,600
362,000
—
Adjusting .................
Closing ....................

20
23
............
7,500
............
.............
.............
88,500
81,000
88,500
—
Adjusting .................
Closing ....................
.............
.............
—
522
22
23
18,800
............
.............
18,800
18,800
—
Store Supplies Expense
2010
July 31
31
.............
.............
.............
—
521
Depreciation Expense
2010
July 31
31
.............
.............
.............
.............
.............
.............
.............
.............
—
520
Advertising Expense
2010
July 1
15
31
Cr.
.............
—
523
22
23
9,100
............
440
.............
9,100
9,100
—
.............
—
Comp. Prob. 2
Continued
Miscellaneous Selling Expense
529
Date
Item
Post.
Ref.
Dr.
Cr.
Balance
2010
July 1
31
Balance ...................
Closing ....................

23
............
............
.............
12,600
Dr.
12,600
—
Office Salaries Expense
2010
July 1
28
31
31
Balance ...................
.................................
Adjusting .................
Closing ....................
Balance ...................
.................................
Closing ....................

21
22
23
............
15,200
2,700
............
.............
.............
.............
200,000
182,100
197,300
200,000
—
Adjusting .................
Closing ....................

20
23
............
5,000
............
.............
.............
88,700
83,700
88,700
—
Balance ...................
Closing ....................
.............
.............
—
532
22
23
12,500
............
.............
12,500
12,500
—
Miscellaneous Administrative Expense
2010
July 1
31
.............
.............
.............
—
531
Insurance Expense
2010
July 31
31
.............
—
530
Rent Expense
2010
July 1
1
31
Cr.

23
.............
—
539
............
............
441
.............
7,800
7,800
—
.............
—
Comp. Prob. 2
1. and 2.
Date
2010
July
Continued
JOURNAL
Post.
Ref.
Description
1
3
4
6
6
7
10
10
13
14
14
15
16
19
19
PAGE 20
Debit
Rent Expense ...........................................
Cash ....................................................
531
110
5,000
Merchandise Inventory............................
Accounts Payable—Belmont Co. .....
115
210
40,000
Merchandise Inventory............................
Cash ....................................................
115
110
600
Accounts Receivable—Modesto Co. ....
Sales....................................................
112
410
25,000
Cost of Merchandise Sold ......................
Merchandise Inventory ......................
510
115
15,000
Cash..........................................................
Accounts Receivable—Yuba Co. .....
110
112
26,500
Cash..........................................................
Sales....................................................
110
410
80,000
Cost of Merchandise Sold ......................
Merchandise Inventory ......................
510
115
50,000
Accounts Payable—Belmont Co. ..........
Cash ....................................................
Merchandise Inventory ......................
210
110
115
40,000
Sales Returns and Allowances ..............
Accounts Receivable—Modesto Co.
411
112
6,000
Merchandise Inventory............................
Cost of Merchandise Sold .................
115
510
4,500
Advertising Expense ...............................
Cash ....................................................
521
110
7,500
Cash..........................................................
Sales Discounts .......................................
Accounts Receivable—Modesto Co.
110
412
112
18,620
380
Merchandise Inventory............................
Cash ....................................................
115
110
36,000
Accounts Payable—Bakke Co. ..............
Cash ....................................................
210
110
18,000
442
Credit
5,000
40,000
600
25,000
15,000
26,500
80,000
50,000
39,200
800
6,000
4,500
7,500
19,000
36,000
18,000
Comp. Prob. 2
Continued
JOURNAL
Date
2010
July 20
20
21
21
21
24
26
26
28
29
30
30
30
31
PAGE 21
Post.
Ref.
Description
Debit
Accounts Receivable—Reedley Co. ......
Sales....................................................
112
410
40,000
Cost of Merchandise Sold ......................
Merchandise Inventory ......................
510
115
25,000
Accounts Receivable—Reedley Co. ......
Cash ....................................................
112
110
1,100
Cash..........................................................
Accounts Receivable—Owen Co. ....
110
112
17,600
Merchandise Inventory............................
Accounts Payable—Nye Co. .............
115
210
20,000
Accounts Payable—Nye Co. ..................
Merchandise Inventory ......................
210
115
2,000
Sales Returns and Allowances ..............
Cash ....................................................
411
110
3,000
Merchandise Inventory............................
Cost of Merchandise Sold .................
115
510
1,800
Sales Salaries Expense ..........................
Office Salaries Expense ..........................
Cash ....................................................
520
530
110
22,800
15,200
Store Supplies .........................................
Cash ....................................................
117
110
2,400
Accounts Receivable—Whitetail Co. ....
Sales....................................................
112
410
18,750
Cost of Merchandise Sold ......................
Merchandise Inventory ......................
510
115
11,250
Cash..........................................................
Sales Discounts .......................................
Accounts Receivable—Reedley Co.
110
412
112
40,700
400
Accounts Payable—Nye Co. ..................
Cash ....................................................
Merchandise Inventory ......................
210
110
115
18,000
443
Credit
40,000
25,000
1,100
17,600
20,000
2,000
3,000
1,800
38,000
2,400
18,750
11,250
41,100
17,820
180
Comp. Prob. 2
Continued
3.
SOUTH COAST BOARDS CO.
Unadjusted Trial Balance
July 31, 2010
Debit
Balances
Cash ............................................................................
Accounts Receivable .................................................
Merchandise Inventory ..............................................
Prepaid Insurance ......................................................
Store Supplies ............................................................
Store Equipment ........................................................
Accumulated Depreciation—Store Equipment ........
Accounts Payable ......................................................
Salaries Payable .........................................................
Rocky Hansen, Capital...............................................
Rocky Hansen, Drawing ............................................
Sales ............................................................................
Sales Returns and Allowances .................................
Sales Discounts .........................................................
Cost of Merchandise Sold .........................................
Sales Salaries Expense .............................................
Advertising Expense ..................................................
Depreciation Expense ................................................
Store Supplies Expense ............................................
Miscellaneous Selling Expense ................................
Office Salaries Expense ............................................
Rent Expense .............................................................
Insurance Expense ....................................................
Miscellaneous Administrative Expense ...................
444
Credit
Balances
78,400
128,550
601,070
16,800
13,800
469,500
56,700
78,600
555,300
135,000
3,384,850
101,700
60,180
1,717,950
357,600
88,500
12,600
197,300
88,700
7,800
4,075,450
4,075,450
Comp. Prob. 2
4. and 6.
Date
Continued
JOURNAL
PAGE 22
Post.
Ref.
Description
Debit
Credit
Adjusting Entries
2010
July 31
31
31
31
31
Cost of Merchandise Sold ......................
Merchandise Inventory ......................
Inventory shrinkage
($601,070 –$589,850).
510
115
11,220
Insurance Expense ..................................
Prepaid Insurance ..............................
Insurance expired.
532
116
12,500
Store Supplies Expense..........................
Store Supplies ....................................
Supplies used ($13,800 – $4,700).
523
117
9,100
Depreciation Expense .............................
Accum. Depr.—Store Equipment ......
Store equipment depreciation.
522
124
18,800
Sales Salaries Expense ..........................
Office Salaries Expense ..........................
Salaries Payable .................................
Accrued salaries.
520
530
211
4,400
2,700
445
11,220
12,500
9,100
18,800
7,100
Comp. Prob. 2
Continued
7.
SOUTH COAST BOARDS CO.
Adjusted Trial Balance
July 31, 2010
Debit
Balances
Cash ............................................................................
Accounts Receivable .................................................
Merchandise Inventory ..............................................
Prepaid Insurance ......................................................
Store Supplies ............................................................
Store Equipment ........................................................
Accumulated Depreciation—Store Equipment ........
Accounts Payable ......................................................
Salaries Payable .........................................................
Rocky Hansen, Capital...............................................
Rocky Hansen, Drawing ............................................
Sales ............................................................................
Sales Returns and Allowances .................................
Sales Discounts .........................................................
Cost of Merchandise Sold .........................................
Sales Salaries Expense .............................................
Advertising Expense ..................................................
Depreciation Expense ................................................
Store Supplies Expense ............................................
Miscellaneous Selling Expense ................................
Office Salaries Expense ............................................
Rent Expense .............................................................
Insurance Expense ....................................................
Miscellaneous Administrative Expense ...................
446
Credit
Balances
78,400
128,550
589,850
4,300
4,700
469,500
75,500
78,600
7,100
555,300
135,000
3,384,850
101,700
60,180
1,729,170
362,000
88,500
18,800
9,100
12,600
200,000
88,700
12,500
7,800
4,101,350
4,101,350
Comp. Prob. 2
8.
Continued
SOUTH COAST BOARDS CO.
Income Statement
For the Year Ended July 31, 2010
Revenue from sales:
Sales ...........................................................
Less: Sales returns and allowances ........
Sales discounts ...............................
Net sales ................................................
Cost of merchandise sold ..............................
Gross profit......................................................
Expenses:
Selling expenses:
Sales salaries expense ........................
Advertising expense.............................
Depreciation expense ..........................
Store supplies expense .......................
Miscellaneous selling expense ...........
Total selling expenses ....................
Administrative expenses:
Office salaries expense .......................
Rent expense ........................................
Insurance expense ...............................
Miscellaneous administrative expense
Total administrative expenses .......
Total expenses ...........................................
Net income .......................................................
$3,384,850
$101,700
60,180
161,880
$3,222,970
1,729,170
$1,493,800
$362,000
88,500
18,800
9,100
12,600
$ 491,000
$200,000
88,700
12,500
7,800
309,000
800,000
$ 693,800
SOUTH COAST BOARDS CO.
Statement of Owner’s Equity
For the Year Ended July 31, 2010
Rocky Hansen, capital, August 1, 2009 ............................
Net income for the year .....................................................
Less withdrawals ...............................................................
Increase in owner’s equity ................................................
Rocky Hansen, capital, July 31, 2010 ...............................
447
$ 555,300
$693,800
135,000
558,800
$1,114,100
Comp. Prob. 2
Continued
SOUTH COAST BOARDS CO.
Balance Sheet
July 31, 2010
Assets
Current assets:
Cash .................................................................................
Accounts receivable .......................................................
Merchandise inventory ...................................................
Prepaid insurance ...........................................................
Store supplies .................................................................
Total current assets ..................................................
Property, plant, and equipment:
Store equipment..............................................................
Less accumulated depreciation ...............................
Total property, plant, and equipment .................
Total assets ..........................................................................
Liabilities
Current liabilities:
Accounts payable ...........................................................
Salaries payable ..............................................................
Total liabilities ...........................................................
Owner’s Equity
Rocky Hansen, capital .........................................................
Total liabilities and owner’s equity .....................................
448
$ 78,400
128,550
589,850
4,300
4,700
$ 805,800
$469,500
75,500
394,000
$1,199,800
$ 78,600
7,100
$
85,700
1,114,100
$1,199,800
Comp. Prob. 2
9.
Continued
JOURNAL
Date
PAGE 23
Post.
Ref.
Description
Debit
Credit
Closing Entries
2010
July 31
31
31
31
Sales .........................................................
Income Summary ...............................
410
312
3,384,850
Income Summary.....................................
Sales Returns and Allowances .........
Sales Discounts .................................
Cost of Merchandise Sold .................
Sales Salaries Expense .....................
Advertising Expense ..........................
Depreciation Expense........................
Store Supplies Expense ....................
Miscellaneous Selling Expense ........
Office Salaries Expense ....................
Rent Expense .....................................
Insurance Expense ............................
Miscellaneous Administrative Exp. .
312
411
412
510
520
521
522
523
529
530
531
532
539
2,691,050
Income Summary.....................................
Rocky Hansen, Capital ......................
312
310
693,800
Rocky Hansen, Capital ............................
Rocky Hansen, Drawing ....................
310
311
135,000
449
3,384,850
101,700
60,180
1,729,170
362,000
88,500
18,800
9,100
12,600
200,000
88,700
12,500
7,800
693,800
135,000
Comp. Prob. 2
Continued
10.
SOUTH COAST BOARDS CO.
Post-Closing Trial Balance
July 31, 2010
Debit
Balances
Cash ....................................................................................
Accounts Receivable .........................................................
Merchandise Inventory ......................................................
Prepaid Insurance ..............................................................
Store Supplies ....................................................................
Store Equipment ................................................................
Accumulated Depreciation—Store Equipment ................
Accounts Payable ..............................................................
Salaries Payable .................................................................
Rocky Hansen, Capital.......................................................
78,400
128,550
589,850
4,300
4,700
469,500
1,275,300
450
Credit
Balances
75,500
78,600
7,100
1,114,100
1,275,300
Comp. Prob. 2
Concluded
5. Optional.
This solution is applicable only if the end-of-period spreadsheet (work sheet) is used.
1
A
B
C
D
E
F
SOUTH COAST BOARDS CO.
2
End-of-Period Spreadsheet (Work Sheet)
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
G
H
I
J
K
For the Year Ended July 31, 2010
Unadjusted
Trial Balance
Account Title
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Insurance
Store Supplies
Store Equipment
Acc. Depr.—Store Equipment
Accounts Payable
Salaries Payable
Rocky Hansen, Capital
Rocky Hansen, Drawing
Sales
Sales Returns and Allow.
Sales Discounts
Cost of Merchandise Sold
Sales Salaries Expense
Advertising Expense
Depreciation Expense
Store Supplies Expense
Misc. Selling Expense
Office Salaries Expense
Rent Expense
Insurance Expense
Misc. Admin. Expense
Dr.
78,400
128,550
601,070
16,800
13,800
469,500
Adjustments
Cr.
Dr.
Cr.
(a) 11,220
(b) 12,500
(c) 9,100
56,700
78,600
Adjusted
Trial Balance
Dr.
78,400
128,550
589,850
4,300
4,700
469,500
(d) 18,800
(e) 7,100
Cr.
101,700
60,180
1,717,950
357,600
88,500
(d) 18,800
(c) 9,100
12,600
197,300
88,700
(e)
2,700
(b) 12,500
4,075,450
58,720
58,720
Net income
451
101,700
60,180
1,729,170
362,000
88,500
18,800
9,100
12,600
200,000
88,700
12,500
7,800
4,101,350
Cr.
135,000
3,384,850
(a) 11,220
(e) 4,400
Dr.
78,400
128,550
589,850
4,300
4,700
469,500
75,500
78,600
7,100
555,300
135,000
3,384,850
7,800
4,075,450
Dr.
Balance
Sheet
75,500
78,600
7,100
555,300
555,300
135,000
Cr.
Income
Statement
4,101,350
3,384,850
101,700
60,180
1,729,170
362,000
88,500
18,800
9,100
12,600
200,000
88,700
12,500
7,800
2,691,050
693,800
3,384,850
3,384,850
1,410,300
3,384,850
1,410,300
716,500
693,800
1,410,300
SPECIAL ACTIVITIES
Activity 6–1
Standards of Ethical Conduct for Management Accountants requires management accountants to perform in a competent manner and to comply with relevant
laws, regulations, and technical standards. If Lydia DeLay intentionally subtracted the discount with knowledge that the discount period had expired, she
would have behaved in an unprofessional manner. Such behavior could eventually jeopardize Tropical Connection Company's buyer/supplier relationship with
Midwest Seed Co.
Activity 6–2
Sergio Alzono is correct. The accounts payable due suppliers could be included
on the balance sheet at an amount of $118,000 ($98,000 + $20,000). This is the
amount that will be expected to be paid to satisfy the obligation (liability) to suppliers. However, this is proper only if The Encore Video Store Co. has a history of
taking all purchases discounts, has a properly designed accounting system to
identify available discounts, and has sufficient liquidity (cash) to pay the accounts payable within the discount period. In this case, The Encore Video Store
Co. apparently meets these criteria, since it has a history of taking all available
discounts, as indicated by Suzie Engel. Thus, The Encore Video Store Co. could
report total accounts payable of $118,000 on its balance sheet. Merchandise Inventory would also need to be reduced by the discount of $2,000 in order to maintain consistency in approach.
452
Activity 6–3
1. If Ted doesn’t need the stereo immediately (by the next day), Sound Unlimited
offers the best buy, as shown below.
Sound Unlimited:
List price ...............................................................................
Shipping and handling (not including next-day air) ..........
Total .......................................................................................
$499.99
13.99
$513.98
Classic Audio:
List price ...............................................................................
Sales tax (6%) .......................................................................
Total .......................................................................................
$490.00
29.40
$519.40
Even if the 1% cash discount offered by Classic Audio is considered, Sound
Unlimited still offers the best buy, as shown below.
List price ...............................................................................
Less 1% cash discount ........................................................
Subtotal .................................................................................
Sales tax (6%) .......................................................................
Total .......................................................................................
$490.00
4.90
$485.10
29.11
$514.21
If Ted needs the stereo immediately (the next day), then Classic Audio has the
best price. This is because a shipping and handling charge of $24.99 would
be added to the Sound Unlimited price, as shown below.
Sound Unlimited list price ...................................................
Next-day freight charge .......................................................
Total .......................................................................................
$499.99
24.99
$524.98
Since both Sound Unlimited and Classic Audio will accept Ted’s VISA, the
ability to use a credit card would not affect the buying decision. Classic Audio
will, however, allow Ted to pay his bill in three installments (the first due immediately). This would allow Ted to save some interest charges on his VISA
for two months. If we assume that Ted would have otherwise used his VISA
and that Ted’s VISA carries an interest of 1.5% per month on the unpaid balance, the potential interest savings would be calculated as follows:
453
Activity 6–3 Concluded
Classic Audio price (see previous page) ............................
Less first installment (down payment) ...............................
Remaining balance ...............................................................
$519.40
173.14
$346.26
Interest for first month at 1.5% ............................................
($346.26 × 1.5%)
$
Remaining balance ($346.26 + $5.19) .................................
Less second installment ......................................................
Remaining balance ...............................................................
$351.45
173.13
$178.32
Interest for second month at 1.5% ......................................
($178.32 × 1.5%)
$
5.19
2.67
The total interest savings would be $7.86 ($5.19 + $2.67). This interest savings
would be enough to just offset the price advantage of Sound Unlimited, as
shown below, resulting in a $2.44 price advantage ($513.98 – $511.54) to
Classic Audio.
Classic Audio price (see above)..........................................
Less interest savings ...........................................................
Total .......................................................................................
$519.40
7.86
$511.54
2. Other considerations in buying the stereo include the ability to have the stereo repaired locally by Classic Audio. In addition, Classic Audio employees
would presumably be available to answer questions on the operation and installation of the stereo. In addition, if Ted purchased the stereo from Classic
Audio, he would have the stereo the same day rather than the next day, which
is the earliest that Sound Unlimited could deliver the stereo.
454
Activity 6–4
1.
ENNIS PARTS COMPANY
Projected Income Statement
For the Year Ended March 31, 2011
Revenues:
Net sales (a) .................................................................
Interest revenue ..........................................................
Total revenues .........................................................
Expenses:
Cost of merchandise sold (b) .....................................
Selling expenses (c)....................................................
Administrative expenses (d) ......................................
Interest expense ..........................................................
Total expenses ........................................................
Net income ..........................................................................
$460,000
5,000
$465,000
$299,000
36,750
24,500
7,500
367,750
$ 97,250
Notes:
(a) Projected net sales
[$400,000 + (15% × $400,000)] ................................
$460,000
(b) Projected cost of merchandise sold
($460,000 × 65%) ......................................................
$299,000
(c) Total selling expenses for year ended
March 31, 2010 .........................................................
Add: Increase in store supplies expense
($6,000 × 15%) ............................................
Increase in miscellaneous selling expense
($1,500 × 15%) ............................................
Less delivery expenses ..............................................
Projected total selling expenses ...............................
(d) Total administrative expenses for year ended
March 31, 2010 .........................................................
Add: Increase in office supplies expense
($1,000 × 15%) ............................................
Increase in miscellaneous administrative
expense ($500 × 15%) ................................
Projected total administrative expenses ...................
455
$ 45,000
$900
225
1,125
(9,375)
$ 36,750
$ 24,275
$150
75
225
$ 24,500
Activity 6–4 Concluded
2.
a.
Yes. The proposed change will increase net income from $68,225 to
$97,250, a change of $29,025.
b.
Possible concerns related to the proposed changes include the following:
The primary concern is with the accuracy of the estimates used for projecting the effects of the proposed changes. If the increase in sales does
not materialize, Ennis Parts Company could incur significant costs of
carrying excess inventory stocked in anticipation of increasing sales. At
the same time it is incurring these additional inventory costs, cash collections from customers will be reduced by the amount of the discounts.
This could create a liquidity problem for Ennis Parts Company.
Another concern arises from the proposed change in shipping terms so
as to eliminate all shipments of merchandise FOB destination, thereby
eliminating delivery expenses. Ennis Parts Company assumes that this
change will have no effect on sales. However, some (perhaps a significant number of) customers may object to this change and may seek other vendors with more favorable shipping terms. Hence, an unanticipated
decline in sales could occur because of this change.
As with any business decision, risks (concerns) such as those mentioned above must be thoroughly considered before final action is taken.
Activity 6–5
Note to Instructors: The purpose of this activity is to familiarize students with the
variety of possible purchase prices for a fairly common household item. Students
should report several alternative prices when they consider the source of the
purchase and the other factors that affect the purchase, e.g., delivery, financing,
warranties, etc.
456