CHAPTER 5
Accounting for Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Problems
Set A
Exercises
Problems
Set B
1. Describe the differences between a
service company and a merchandising
company.
1, 2, 3, 4, 5
1
2. Explain and complete the entries for
purchases under a perpetual inventory
system.
6, 7
2, 4, 5
1, 3, 4, 5,
6
1, 2, 3, *9.
*10
1, 2, 3, *9,
*10
3. Explain and complete the entries for
sales revenue under a perpetual
inventory system.
7, 8, 9
3, 4, 5
2, 3, 4, 5
1, 2, 3, *9,
*10
1, 2, 3, *9,
*10
4. Explain and perform the steps in the
accounting cycle for a merchandising
company.
10, 11, 12
6, 7
6, 7
4, 5, *11
4, 5, *11
5. Distinguish between and be able to
prepare both a multiple-step and a
single-step income statement.
13, 14, 15,
16
8, 9, 10
7, 8, 9, 10
3, 4, 5, 6, 7,
*10, *11
3, 4, 5, 6, 7,
*10, *11
6. Explain the importance of and be able
to calculate gross profit.
17
10, 11
10, 11
8
8
7. Calculate the inventory turnover and
days sales in inventory ratios.
18, 19, 20
11
10, 11
8
8
*8.
Describe and perform the accounting
for sales taxes (Appendix 5A).
*21, *22
*12
*12
*9, *10
*9, *10
*9.
Prepare a work sheet for a
merchandising company (Appendix
5B).
*23
*13
*13
*11
*11
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendices to each
chapter.
5-1
ASSIGNMENT CHARACTERISTIC TABLE
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize and post inventory transactions.
Moderate
30-40
2A
Journalize inventory transactions.
Moderate
20-30
3A
Journalize, post, and prepare partial income statement and
balance sheet.
Moderate
60-70
4A
Prepare financial statements and closing entries.
Moderate
30-40
5A
Prepare financial statements, adjusting and closing entries.
Moderate
40-50
6A
Classify the accounts of a merchandising company.
Simple
10-15
7A
Prepare correct multiple-step and single-step income statements.
Complex
50-60
8A
Calculate inventory ratios and comment.
Moderate
20-25
*9A
Journalize inventory transactions with sales tax.
Moderate
40-50
*10A
Journalize, post, and prepare trial balance and partial income
statement, with sales taxes.
Moderate
70-80
*11A
Complete work sheet, financial statements, adjusting and closing
entries, and post-closing trial balance.
Moderate
50-60
1B
Journalize and post inventory transactions.
Moderate
30-40
2B
Journalize inventory transactions.
Moderate
20-30
3B
Journalize, post, and prepare partial income statement and
balance sheet.
Moderate
60-70
4B
Prepare financial statements, adjusting entries, and closing
entries.
Moderate
30-40
5B
Prepare financial statements, adjusting entries and closing entries.
Moderate
40-50
6B
Classify the accounts of a merchandising company.
Simple
10-15
7B
Prepare correct multiple-step and single-step income statements.
Complex
50-60
8B
Calculate inventory ratios and comment.
Moderate
20-25
*9B
Journalize inventory transactions, with sales tax.
Moderate
40-50
*10B
Journalize, post, and prepare trial balance and partial income
statement, with sales taxes.
Moderate
70-80
*11B
Complete work sheet, financial statements, adjusting and closing
entries, and post-closing trial balance.
Moderate
50-60
Problem
Number
5-2
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
1. Describe the differences
between a service
company and a
merchandising
company.
Knowledge
Comprehension
Q5-1
Q5-4
Q5-2
Q5-5
Q5-3
Application
BE5-1
Analysis
Q5-6
Q5-7
BE5-2
BE5-4
BE5-5
E5-1
E5-3
E5-4
E5-6
P5-1A
P5-2A
BE5-3
BE5-4
BE5-5
E5-2
E5-3
E5-4
P5-1A
P5-2A
BE5-6
BE5-7
E5-6
E5-7
P5-4A
E5-5
2.
Explain and complete
the entries for
purchases under a
perpetual inventory
system.
3.
Explain and complete
the entries for sales
revenue under a
perpetual inventory
system.
Q5-8
Q5-7
Q5-9
4.
Explain and perform the
steps in the accounting
cycle for a
merchandising
company.
Q5-12
Q5-10
Q5-11
5.
Distinguish between and
be able to prepare both
a multiple-step and a
single-step income
statement.
Q5-14
P5-6A
P5-6B
Q5-15
Q5-16
6.
Explain the importance
of and be able to
calculate gross profit.
7.
Calculate the inventory
turnover and days sales
in inventory ratios.
Q5-18
Q5-13
BE5-8
BE5-9
BE5-10
E5-7
E5-9
E-10
P5-3A
P5-4A
P5-5A
Q5-17
BE5-10
Q5-19
Q5-20
*Q5-23
*BE5-13
P5-3A
*P5-9A
*P5-10A
P5-1B
P5-2B
P5-3B
*P5-9B
*P5-10B
P5-5A
*P5-11A
P5-4B
P5-5B
*P5-11B
E5-5
P5-7A
*P5-10A
*P5-11A
P5-3B
P5-4B
P5-5B
P5-7B
*P5-10B
*P5-11B
E5-8
BE5-11
E5-10
E5-11
P5-8A
P5-8B
BE5-11
E5-10
*8. Describe and perform
the accounting for sales
taxes (Appendix 5A).
*9. Prepare a work sheet for
a merchandising
company (Appendix 5B).
P5-3A
*P5-9A
*P5-10A
P5-1B
P5-2B
P5-3B
*P5-9B
*P5-10B
*Q5-21
*Q5-22
*BE5-12
*E5-12
*P5-11A
*P5-10B
*P5-11B
*E5-13
Broadening Your
Perspective
Evaluation
BYP5-6
BYP5-7
E5-11
P5-8A
P5-8B
*P5-9A
*P5-10A
*P5-9B
*P5-10B
BYP5-1
BYP 5-2
BYP5-3
BYP5-4
BYP5-5
5-3
Synthesis
ANSWERS TO QUESTIONS
1. The components of revenues and expenses differ as follows:
Merchandising
Service
Service Revenue, Fees
Earned, Rent Revenue,
Interest Revenue,
Investment Income, Gains
Revenue
Sales
Other
Revenue
Rent Revenue, Interest
Revenue, Investment
Income, Gains
Expenses
Cost of Goods Sold,
Operating Expenses
Other
Expense
Interest Expense, Losses
All expenses
2. The income measurement process in a merchandising company can
be summarized as follows:
Sales
Revenues
Less
Cost of
Goods
Sold
Equals
Gross
Profit
Less
Operating
Expenses
Equals
Net
Income
3. The normal operating cycle for a merchandising company is likely to
be longer than for a service company because inventory must first be
purchased and sold, and then the receivables must be collected.
4. Under a perpetual inventory system, inventory quantities and
amounts are updated continually. At any point in time, the Cost of
Goods Sold and Inventory accounts represent what has been sold to
date, and what remains.
Under a periodic inventory system, temporary accounts are used
to accumulate purchases of inventory throughout the period. The
cost of goods sold and inventory are determined only at the end of
the period (annually for example).
5-4
Questions Chapter 5 (Continued)
5. Computer technology enables perpetual inventory systems to be
used by any company that requires timely information about the
quantities of inventory on hand. It is more complex and costly to
maintain a perpetual inventory record of costs, so companies with
point of sale systems integrated with their inventory systems tend to
be larger.
6. The reason for recording the purchase of merchandise for resale in a
separate account is to enable a company to determine its gross
profit. This information is useful in setting prices.
7. The letters FOB mean free on board. FOB shipping point means that
the goods are placed free on board the carrier by the seller, and the
buyer pays the freight costs. FOB shipping point will result in a debit
to the Inventory account by the buyer.
FOB destination means that the goods are placed free on board to
the buyer’s place of business, and the seller pays the freight. FOB
destination will result in a debit to the Freight Out account by the
seller.
8. (a) The primary source documents are:
(1)
(2)
(3)
Cash sales—cash register tapes,
Credit sales—sales invoices, and
Sales returns and allowances—credit memoranda.
5-5
Questions Chapter 5 (Continued)
8.
(b)
Seller
Cash sales—
Cash...............................................
Sales........................................
Debit Credit
XXX
XXX
Cost of Goods Sold ......................
Merchandise Inventory ..........
XXX
Accounts Receivable....................
Sales........................................
XXX
Cost of Goods Sold ......................
Merchandise Inventory ..........
XXX
Sales returns
Sales Returns and Allowances....
& allowances –
Accounts Receivable or Cash
XXX
Merchandise Inventory.................
Cost of Goods Sold................
XXX
Merchandise Inventory...............
Cash........................................
XXX
Credit purchase— Merchandise Inventory...............
Accounts Payable .................
XXX
Purchase returns Cash or Accounts Payable ..........
& allowances –
Merchandise Inventory .........
XXX
Credit sales—
Purchaser
Cash purchase—
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
9. Sales returns are not debited directly to the Sales account because
this would not provide information on the cost of the goods returned.
This information can be useful in making decisions. Debiting returns
directly to sales may also cause problems in comparing sales for
different periods.
5-6
Questions Chapter 5 (Continued)
10. Disagree. The steps in the accounting cycle are the same for both a
merchandising company and a service enterprise.
11. A physical count is an important control feature. Using a perpetual
inventory system a company knows what should be on hand.
Performing a physical counts and checking it to the perpetual records
is necessary to detect any errors in record keeping and/or shortages
in stock.
12. Of the merchandising accounts, only Merchandise Inventory (ending)
will appear in the post-closing trial balance.
13. Gross profit .......................................................................
Less: Net income .............................................................
Operating expenses..........................................................
$580,000
0300,000
$280,000
14.
(a)
The operating activities part of the income statement has three
sections: sales revenues, cost of goods sold, and operating
expenses.
(b) The non-operating activities part consists of two sections: other
revenues and gains, and other expenses and losses.
15.
The functional groupings are selling and administrative. The problem
with functional groupings is that some expenses may relate to both,
and have to be allocated between the functions.
16.
The single-step income statement differs from the multiple-step
income statement in that (1) all data are classified into two
categories: Revenues and expenses; and (2) only one step,
subtracting total expenses from total revenues, is required in
determining net income (or net loss).
5-7
Questions Chapter 5 (Continued)
17.
Sales revenues..........................................................
Cost of goods sold ...................................................
Gross profit ...............................................................
Operating expenses .................................................
Net income ................................................................
$100,000
70,000
30,000
20,000
$ 10,000
Gross profit margin = $30,000 ÷ $100,000 = 30%
Profit margin = $10,000 ÷ $100,000 = 10%
18. Two ratios that help management determine whether or not there is
sufficient inventory on hand are Inventory turnover and days sales in
inventory
19. Managing inventory is critical to a company’s success. It is often the
largest current asset (inventory) and the largest expense (cost of
goods sold) on the income statement. Companies must manage the
quantity of inventory on hand to avoid excessive cost and to ensure
they can meet demand.
20. An increase in days sales in inventory would be viewed as a
deterioration because it means there is more inventory on hand in
relation to sales.
*21. Accounts Receivable....................................................
Sales .....................................................................
GST Payable.........................................................
PST Payable .........................................................
1,053
Cost of Goods Sold ......................................................
Merchandise Inventory .......................................
600
*22. Office Furniture [$2,000 + (8% x $2,000)] ....................
GST Recoverable ($2,000 x 7%)...................................
Accounts Payable ...............................................
2,160
140
*23. (a)
(b)
900
63
90
600
2,300
Merchandise inventory – Trial balance debit column; Adjusted
trial balance debit column; and Balance sheet debit column
Cost of goods sold – Trial balance debit column; Adjusted trial
balance debit column; and Income statement debit column
5-8
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a) Cost of goods sold = $43,500 ($75,000 – $31,500)
Operating expenses = $20,700 ($31,500 – $10,800)
(b) Gross profit = $38,000 ($108,000 – $70,000)
Operating expenses = $8,500 ($38,000 – $29,500)
(c) Sales = $181,500 ($71,900 + $109,600)
Net income = $70,100 ($109,600 – $39,500)
BRIEF EXERCISE 5-2
Rowen Company
(a) March 2 Merchandise Inventory ................................. 900,000
Accounts Payable ...................................
900,000
(b) March 6 Accounts Payable ......................................... 130,000
Merchandise Inventory ...........................
130,000
(c) March 31 Accounts Payable ($900,000 – $130,000).... 770,000
Cash .........................................................
770,000
5-9
BRIEF EXERCISE 5-3
Hunt Company
(a) March 2
(b) March 6
Accounts Receivable ................................... 900,000
Sales ......................................................
900,000
Cost of Goods Sold...................................... 600,000
Merchandise Inventory.........................
600,000
Sales Returns and Allowances ................... 130,000
Accounts Receivable............................
130,000
Merchandise Inventory ................................
Cost of Goods Sold ..............................
90,000
90,000
(c) March 31 Cash ($900,000 – $130,000) ......................... 770,000
Accounts Receivable............................
770,000
BRIEF EXERCISE 5-4
Keo Company
Nov. 12
Merchandise Inventory ...............................
Cash ......................................................
900
900
Mayo Company
Nov. 12
Cash..............................................................
Sales......................................................
900
Cost of Goods Sold .....................................
Merchandise Inventory ........................
700
5-10
900
700
BRIEF EXERCISE 5-5
March
Merchandise Inventory (20 X $25) .................
Accounts Payable ................................
500
Accounts Payable ...........................................
Merchandise Inventory (3 X $25) ........
75
March 21 Accounts Receivable (15 X $45) ....................
Sales ......................................................
675
Cost of Goods Sold (15 x $25) .......................
Merchandise Inventory ........................
375
March
3
6
500
75
675
375
Quantity: 20 – 3 – 15 = 2 units remaining
Cost:
$500 - $75 - $375 = $50
Proof: 2 units x $25 = $50
BRIEF EXERCISE 5-6
Aug.
31
Cost of Goods Sold (Inventory shrinkage) ..
Merchandise Inventory
($98,000 – $97,100) ..............................
900
900
BRIEF EXERCISE 5-7
July
31
Sales .................................................................
Prasad, Capital .....................................
180,000
Prasad, Capital.................................................
Sales Returns and Allowances ...........
Cost of Goods Sold ..............................
102,000
180,000
2,000
100,000
Ending capital balance (not required):
$150,000 + $180,000 - $102,000 = $228,000
Merchandise Inventory is a balance sheet (permanent) account and is not
closed.
5-11
BRIEF EXERCISE 5-8
HULDA COMPANY
Income Statement (Partial)
For the Month Ended October 31, 2003
Sales revenues
Sales ($300,000 + $100,000) ..............................................
Less: Sales returns and allowances ...............................
Net sales .............................................................................
$400,000
30,000
$370,000
BRIEF EXERCISE 5-9
(1) Multiple-Step Income Statement
Item
a.
b.
c.
d.
Section
Gain on sale of equipment
Interest expense
Cost of goods sold
Rent revenue
Other revenues and gains
Other expenses and losses
Cost of goods sold
Other revenues and gains
(2) Single-Step Income Statement
Item
a.
b.
c.
d.
Section
Gain on sale of equipment
Interest expense
Cost of goods sold
Rent revenue
Revenues
Expenses
Expenses
Revenues
5-12
BRIEF EXERCISE 5-10
(a) Net sales = $485,000 ($500,000 – $15,000)
(b) Gross profit = $145,000 ($485,000 – $340,000)
(c) Net income = $35,000 ($145,000 - $70,000- $40,000)
BRIEF EXERCISE 5-11
(a) Gross profit margin = 45% [($550,000 – $300,000) ÷ $550,000]
(b) Inventory turnover = 12 times ($300,000 ÷ $25,000)
(c) Days sales in inventory = 30 days (365 ÷ 12)
*BRIEF EXERCISE 5-12
Merchandise Inventory...................................................
Supplies [$1,000 + ($1,000 X 10%)] ...............................
GST Recoverable [($8,000 + $1,000) X 7%]...................
Accounts Payable ...................................................
8,000
1,100
630
9,730
*BRIEF EXERCISE 5-13
(a) Cash: Trial balance debit column; Adjusted trial balance debit column;
Balance sheet debit column.
(b) Merchandise Inventory: Trial balance debit column; Adjusted trial
balance debit column; Balance sheet debit column.
(c) Sales: Trial balance credit column; Adjusted trial balance credit column;
Income statement credit column.
(d) Cost of Goods Sold: Trial balance debit column; Adjusted trial balance
debit column; Income statement debit column.
5-13
SOLUTIONS TO EXERCISES
EXERCISE 5-1
1.
2.
3.
4.
5.
April 5
April 6
April 7
April 8
May
2
Merchandise Inventory.................................. 18,000
Accounts Payable ...................................
Merchandise Inventory..................................
Cash..........................................................
900
900
Equipment ...................................................... 26,000
Accounts Payable ...................................
Accounts Payable ..........................................
Merchandise Inventory ..................... .....
26,000
3,000
Accounts Payable ($18,000 – $3,000)........... 15,000
Cash..........................................................
5-14
18,000
3,000
15,000
EXERCISE 5-2
(a) Pippen Company
1.
2.
3.
Dec.
Dec.
3
8
Dec. 13
Accounts Receivable................................
Sales ....................................................
400,000
Cost of Goods Sold ..................................
Merchandise Inventory. ....................
320,000
Sales Returns and Allowances................
Accounts Receivable .........................
20,000
Cash ($400,000 – $20,000)........................
Accounts Receivable .........................
380,000
Merchandise Inventory.............................
Accounts Payable ..............................
400,000
Accounts Payable .....................................
Merchandise Inventory ......................
20,000
Accounts Payable .....................................
Cash.....................................................
380,000
400,000
320,000
20,000
380,000
(b) Thomas Co.
1.
2.
3.
Dec.
Dec.
3
8
Dec. 13
5-15
400,000
20,000
380,000
EXERCISE 5-3
Sept. 6
10
12
14
20
Merchandise Inventory (60 X $20) .........................
Accounts Payable............................................
1,200
Accounts Payable (2 X $20)....................................
Merchandise Inventory ...................................
40
Accounts Receivable (26 X $30) ............................
Sales .................................................................
780
Cost of Goods Sold (26 X $20) ...............................
Merchandise Inventory ...................................
520
Sales Returns and Allowances ..............................
Accounts Receivable ......................................
30
Merchandise Inventory ...........................................
Cost of Goods Sold .........................................
20
Accounts Receivable (30 X $30) ............................
Sales .................................................................
900
Cost of Goods Sold (30 X $20) ...............................
Merchandise Inventory ...................................
600
5-16
1,200
40
780
520
30
20
900
600
EXERCISE 5-4
Sept. 2
5
8
12
20
30
Merchandise Inventory (90 X $15) .........................
Accounts Payable............................................
1,350
Accounts Payable ...................................................
Merchandise Inventory ...................................
60
Accounts Receivable ..............................................
Sales (50 x $25)................................................
1,250
Cost of Goods Sold.................................................
Merchandise Inventory (50 x $15) ..................
750
Accounts Receivable ..............................................
Sales (30 x $25)................................................
750
Cost of Goods Sold.................................................
Merchandise Inventory (30 x $15) ..................
450
Merchandise Inventory (15 x $16)..........................
Accounts Payable............................................
240
Cost of Goods Sold (Inventory Loss)....................
Merchandise Inventory ...................................
15*
1,350
60
1,250
750
750
450
240
15
10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records;
30 desk sets per count = 1 missing
* Note: We assumed that the missing desk set had a cost of $15. It could
also have been assumed to be $16, from the September 20 purchase.
5-17
EXERCISE 5-5
1.
2.
3.
4.
Sales Returns and Allowances .........................................
Sales ............................................................................
150
Supplies ..............................................................................
Cash ....................................................................................
Accounts Payable ......................................................
Merchandise Inventory ..............................................
250
250
Sales....................................................................................
Merchandise Inventory ..............................................
50
Cash ....................................................................................
Merchandise Inventory ..............................................
270
5-18
150
250
250
50
270
EXERCISE 5-6
(a) Jun. 10
11
12
July
7
15
15
(b) July 31
31
Merchandise Inventory .....................................
Accounts Payable .....................................
5,000
Merchandise Inventory .....................................
Cash............................................................
300
Accounts Payable .............................................
Merchandise Inventory .............................
500
5,000
300
500
Accounts Payable ($5,000 – $500)..................
Cash............................................................
4,500
Cash ..................................................................
Sales ...........................................................
8,500
Cost of Goods Sold ($5,000 + $300 - $500) ....
Merchandise Inventory .............................
4,800
Sales..................................................................
Capital ........................................................
8,500
Capital ...............................................................
Cost of Goods Sold ...................................
4,800
5-19
4,500
8,500
4,800
8,500
4,800
EXERCISE 5-7
(a)
CECILIE COMPANY
Income Statement (Partial)
For the Year Ended October 31, 2003
Sales revenues
Sales .....................................................................................
Less: Sales returns and allowances.................................
Net sales...............................................................................
$900,000
24,000
$876,000
Note: Freight Out is a selling expense.
(b) Closing entries:
Oct.
31
31
Sales ........................................................... 900,000
Capital .................................................
Capital.........................................................
Sales Returns and Allowances .........
Freight Out ..........................................
5-20
900,000
36,000
24,000
12,000
EXERCISE 5-8
Sales
Less: Sales returns
Net sales
Less: Cost of goods sold
Gross profit
Less: Operating expenses
Net income
Natural
Cosmetics
$90,000
(a) 16,000
74,000
64,000
10,000
6,000
(b) $ 4,000
Mattar
Grocery
(c) $100,000
6,000
94,000
(d) 72,000
22,000
(e) 12,000
$ 10,000
Allied
Wholesalers
$144,000
12,000
(f) 132,000
(g) 108,000
24,000
18,000
(h) $ 6,000
(a) Sales..........................................................................
*Sales returns ............................................................
Net sales ...................................................................
$90,000
(16,000)
$74,000
(b) Gross profit ..............................................................
Operating expenses.................................................
*Net income ..............................................................
$10,000
(6,000)
$ 4,000
(c) *Sales ........................................................................
Sales returns ............................................................
Net sales ...................................................................
$100,000
(6,000)
$ 94,000
(d) Net sales ...................................................................
*Cost of goods sold .................................................
Gross profit ..............................................................
$94,000
(72,000)
$22,000
(e) Gross profit ..............................................................
*Operating expenses ...............................................
Net income................................................................
$22,000
(12,000)
$10,000
(f)
Sales..........................................................................
Sales returns ............................................................
*Net sales..................................................................
$144,000
(12,000)
$132,000
(g) Net sales ...................................................................
*Cost of goods sold .................................................
Gross profit ..............................................................
$132,000
(108,000)
$ 24,000
(h) Gross profit ..............................................................
Operating expenses.................................................
*Net income ..............................................................
$24,000
(18,000)
$ 6,000
5-21
EXERCISE 5-9
(a)
CHEVALIER COMPANY
Income Statement
For the Year Ended December 31, 2002
Net sales ......................................................................
Cost of goods sold .....................................................
Gross profit .................................................................
Operating expenses
Selling expenses.................................................
Administrative expenses....................................
Total operating expenses ...........................
Income from operations.............................................
Other revenues and gains
Interest revenue ..................................................
Other expenses and losses
Interest expense..................................... $70,000
Loss on sale of equipment..................... 10,000
Net income ..................................................................
(b)
$2,359,000
00,989,000
1,370,000
$690,000
0435,000
1,125,000
245,000
$45,000
80,000
35,000
$ 210,000
CHEVALIER COMPANY
Income Statement
For the Year Ended December 31, 2002
Revenues
Net sales..............................................................
Interest revenue ..................................................
Total revenues..............................................
Expenses
Cost of goods sold .............................................
Selling expenses ................................................
Administrative expenses ...................................
Interest expense .................................................
Loss on sale of equipment ................................
Total expenses ............................................
Net income ..................................................................
5-22
$2,359,000
0 45,000
2,404,000
$989,000
690,000
435,000
70,000
0010,000
2,194,000
$ 210,000
EXERCISE 5-10
(a)
JETFORM CORPORATION
Income Statement
For the Year Ended April 30, 2000
(in thousands)
Revenues
Revenue from products and services.................
Interest revenue ....................................................
Gain on sale of assets ..........................................
Other income.........................................................
Total revenues.................................................
Expenses
Cost of products and services .............................
Sales and marketing expenses ............................
General and administrative expenses .................
Amortization expense ...........................................
Income tax expense ..............................................
Total expenses ................................................
Net loss...........................................................................
5-23
$94,317
2,868
1,813
295
$ 99,293
$24,426
45,097
26,485
10,300
1,086
107,394
($ 8,101)
EXERCISE 5-10 (Continued)
(b)
JETFORM CORPORATION
Income Statement
For the Year Ended April 30, 2000
(in thousands)
Revenue from products and services.......................
Cost of products and services ..................................
Gross profit .................................................................
Operating expenses
Sales and marketing expenses..........................
General and administrative expenses
(including amortization expense) ..............
Total operating expenses ...........................
Loss from operations .................................................
Other revenues and gains
Interest revenue ..................................................
Gain on sale of assets........................................
Other income ......................................................
Other expenses and losses
Income tax expense* ...........................................
Net loss.........................................................................
$ 94,317
00, 24,426
69,891
$45,097
0 36,785
81,882
(11,991)
$2,868
1,813
295
4,976
1,086
3,890
($ 8,101)
*Note to Instructor: You may wish to explain that income tax expense is
usually presented differently (following an income (or loss) before income
taxes caption) in corporate income statements.
5-24
EXERCISE 5-10 (Continued)
(c) Gross profit margin = 74% ($69,891 ÷ $94,317)
Profit margin = (8.6%) ($8,101 ÷ $94,317)
Inventory turnover = 22 times ($24,426 ÷ $1,111)
Days sales in inventory = 17 days (365 ÷ 22)
These results are misleading and likely overly high. The revenue
includes revenue from services, in addition to products. Revenue from
services does not have the same level of cost as does revenue from
products. In other words, the revenue and costs from services does
not have any “cost of goods sold” nor “inventory.” No further
breakdown is available on Jetform’s financial statements. These ratios
are still useful in determining trends, when compared against similar
calculations for prior years.
5-25
EXERCISE 5-11
Inventory turnover
2000 = 7.3 times [$1,298,606 ÷ ($193,831 + $160,092) ÷ 2]
1999 = 7.5 times [$1,546,723 ÷ ($160,092 + $254,690) ÷ 2]
Days sales in inventory
2000 = 50 days (365 ÷ 7.3)
1999 = 49 days (365 ÷ 7.5)
Gross profit margin
2000 = 23% [($1,683,142 - $1,298,606) ÷ $1,683,142]
1999 = 21% [($1,960,274 - $1,546,723) ÷ $1,960,274]
The gross profit margin has improved, increasing from 21% in 1999 to 23%
in 2000. The inventory turnover and days sales in inventory are basically
unchanged from one year to the next.
5-26
*EXERCISE 5-12
Sept. 2
5
8
12
20
30
Merchandise Inventory (90 X $15) ...............
GST Recoverable ($1,350 x 7%) ...................
Accounts Payable..................................
1,350.00
94.50
Accounts Payable .........................................
Merchandise Inventory .........................
GST Recoverable...................................
64.20
Accounts Receivable ....................................
Sales (50 x $25)......................................
GST Payable ($1,250 x 7%) ...................
1,337.50
Cost of Goods Sold.......................................
Merchandise Inventory (50 x $15) ........
750.00
Accounts Receivable ....................................
Sales (30 x $25)......................................
GST Payable ($750 x 7%) ......................
802.50
Cost of Goods Sold.......................................
Merchandise Inventory (30 x $15) ........
450.00
Merchandise Inventory (15 x $16)................
GST Recoverable ($240 x 7%) ......................
Accounts Payable..................................
240.00
16.80
1,444.50
60.00
4.20
Cost of Goods Sold (Inventory Loss)..........
Merchandise Inventory .........................
1250.00
87.50
750.00
750.00
52.50
450.00
256.80
15.00*
15.00
10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records;
30 desk sets per count = 1 missing
* Note: We assumed that the missing desk set had a cost of $15. It could
also have been assumed to be $16, from the September 20 purchase.
There is no GST effect of this loss.
5-27
*EXERCISE 5-13
(a)
Accounts
Adjusted
Trial Balance
Debit
Cash
Merchandise Inven.
Sales
Sales Returns
Cost of Goods Sold
Rent Expense
Credit
Income
Statement
Debit
Credit
9,000
80,000
Balance
Sheet
Debit
Credit
9,000
80,000
450,000
10,000
250,000
42,000
450,000
10,000
250,000
42,000
(b) The accounts appearing in the post-closing trial balance are the balance
sheet accounts of Cash ($9,000) and Merchandise Inventory ($80,000).
5-28
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a)
April 5
13
17
20
22
24
28
Merchandise Inventory–Custom Sedans
(3 x $24,000)....................................................... 72,000
Accounts Payable .....................................
72,000
Merchandise Inventory–Recreation Vehicles
(2 x $28,000)....................................................... 56,000
Accounts Payable .....................................
56,000
Accounts Receivable ........................................ 114,000
Sales (4 x $28,500).....................................
114,000
Cost of Goods Sold (4 x $24,000) .................... 96,000
Merchandise Inventory–Custom Sedans
96,000
Merchandise Inventory–Convertibles
(2 x $26,000)....................................................... 52,000
Accounts Payable .....................................
52,000
Accounts Payable ............................................. 26,000
Merchandise Inventory–Convertibles .....
26,000
Accounts Receivable ........................................ 102,000
Sales (3 x $34,000).....................................
102,000
Cost of Goods Sold (3 x $28,000) .................... 84,000
Merchandise Inventory–Recreation Vehicles
84,000
Accounts Receivable ........................................ 31,000
Sales ...........................................................
31,000
Cost of Goods Sold........................................... 26,000
Merchandise Inventory–Convertibles .....
26,000
5-29
PROBLEM 5-1A (Continued)
(b)
Merchandise Inventory
–Custom Sedans
Bal. 96,000
96,000
72,000
72,000
Merchandise Inventory
–Convertibles
Bal. 78,000
26,000
52,000
26,000
78,000
Merchandise Inventory
–Recreation Vehicles
Bal. 56,000
84,000
56,000
28,000
Cost of Goods Sold
96,000
84,000
26,000
206,000
5-30
PROBLEM 5-2A
GENERAL JOURNAL
Date
Account Titles
July 1
Merchandise Inventory (50 x $30) ........... 120
Accounts Payable ............................. 201
1,500
Accounts Receivable (40 x $50) .............. 112
Sales................................................... 401
2,000
Cost of Goods Sold (40 x $30) ................. 505
Merchandise Inventory ..................... 120
1,200
Accounts Payable ..................................... 201
Cash ................................................... 101
1,500
Cash ........................................................... 101
Accounts Receivable ........................ 112
2,000
Accounts Receivable (30 x $50) .............. 112
Sales................................................... 401
1,500
Cost of Goods Sold (30 x $30) ................. 505
Merchandise Inventory ..................... 120
900
Merchandise Inventory ($1,700 + $100) .. 120
Accounts Payable ............................. 201
Cash ................................................... 101
1,800
Accounts Payable ..................................... 201
Merchandise Inventory ..................... 120
300
Cash ........................................................... 101
Accounts Receivable ........................ 112
1,500
3
9
12
17
18
20
21
Ref. Debit
5-31
Credit
1,500
2,000
1,200
1,500
2,000
1,500
900
1,700
100
300
1,500
PROBLEM 5-2A (Continued)
Date
Account Titles
July 22
Accounts Receivable (40 x $50) .............. 112
Sales................................................... 401
2,000
Cost of Goods Sold (40 x $30) ................. 505
Merchandise Inventory ..................... 120
1,200
Accounts Payable ($1,700 - $300) ........... 210
Cash ................................................... 101
1,400
Sales Returns and Allowances................ 412
Accounts Receivable ........................ 112
250
Merchandise Inventory............................. 120
Cost of Goods Sold .......................... 505
150
30
31
Ref. Debit
5-32
Credit
2,000
1,200
1,400
250
150
PROBLEM 5-3A
(a)
GENERAL JOURNAL
Date
Apr. 2
4
5
6
14
16
18
20
23
Account Titles
Ref. Debit
Merchandise Inventory............................. 120 4,900
Accounts Payable ............................. 201
Accounts Receivable................................ 112
Sales................................................... 401
5,000
Cost of Goods Sold .................................. 505
Merchandise Inventory ..................... 120
4,000
Freight Out................................................. 644
Cash ................................................... 101
200
Accounts Payable ..................................... 201
Merchandise Inventory ..................... 120
300
Merchandise Inventory............................. 120
Cash ................................................... 101
4,400
Cash ........................................................... 101
Merchandise Inventory ..................... 120
500
Merchandise Inventory............................. 120
Accounts Payable ............................. 201
4,200
Merchandise Inventory............................. 120
Cash ................................................... 101
100
Cash ........................................................... 101
Sales................................................... 401
6,400
Cost of Goods Sold .................................. 505
Merchandise Inventory ..................... 120
5,200
5-33
J1
Credit
4,900
5,000
4,000
200
300
4,400
500
4,200
100
6,400
5,200
PROBLEM 5-3A (Continued)
(a) (Continued)
Date
Apr. 26
27
28
29
30
J2
Credit
Account Titles
Ref. Debit
Merchandise Inventory ............................. 120 2,300
Cash .................................................... 101
Accounts Payable ($4,900 - $300) ............ 201
Cash .................................................... 101
4,600
Cash............................................................ 101
Accounts Receivable......................... 112
5,000
Sales Returns and Allowances................. 412
Cash .................................................... 101
90
Merchandise Inventory ............................. 120
Cost of Goods Sold ........................... 505
60
Accounts Receivable ................................ 112
Sales.................................................... 401
3,700
Cost of Goods Sold ................................... 505
Merchandise Inventory...................... 120
3,000
2,300
4,600
5,000
90
60
3,700
3,000
(b)
Cash
Date
Apr.
No. 101
Explanation
1
5
14
16
20
23
26
27
28
29
Balance
Ref.
9
J1
J1
J1
J1
J1
J2
J2
J2
J2
5-34
Debit
Credit
Balance
200
4,400
500
100
6,400
2,300
4,600
5,000
90
9,000
8,800
4,400
4,900
4,800
11,200
8,900
4,300
9,300
9,210
PROBLEM 5-3A (Continued)
(b) (Continued)
Accounts Receivable
Date
Apr.
Explanation
4
28
30
No. 112
Ref.
J1
J2
J2
Debit
Credit
5,000
5,000
3,700
Merchandise Inventory
Date
Apr.
Explanation
2
4
6
14
16
18
20
23
26
29
30
Ref.
J1
J1
J1
J1
J1
J1
J1
J1
J2
J2
J2
Apr.
Explanation
2
6
18
27
5,000
0
3,700
No. 120
Debit
Credit
4,900
4,000
300
4,400
500
4,200
100
5,200
2,300
60
3,000
Accounts Payable
Date
Balance
Balance
4,900
900
600
5,000
4,500
8,700
8,800
3,600
5,900
5,960
2,960
No. 201
Ref.
J1
J1
J1
J2
5-35
Debit
Credit
4,900
300
4,600
4,200
Balance
4,900
4,600
8,800
4,200
PROBLEM 5-3A (Continued)
(b) (Continued)
M. Nisson, Capital
Date
Explanation
Apr.
1
Balance
No. 301
Ref.
Debit
Credit
Balance
9
9,000
Sales
No. 401
Date
Apr.
Explanation
4
23
30
Ref.
Debit
Credit
J1
J1
J2
Balance
5,000
6,400
3,700
Sales Returns and Allowances
Date
Explanation
Apr. 29
No. 412
Ref.
Debit
J2
Credit
Apr.
Explanation
4
23
29
30
90
No. 505
Ref.
J1
J1
J2
J2
Debit
Credit
Apr.
60
3,000
4,000
9,200
9,140
12,140
No. 644
Explanation
5
Balance
4,000
5,200
Freight Out
Date
Balance
90
Cost of Goods Sold
Date
5,000
11,400
15,100
Ref.
J1
5-36
Debit
200
Credit
Balance
200
PROBLEM 5-3A (Continued)
(c)
NISSON DISTRIBUTING COMPANY
Income Statement (Partial)
For the Month Ended April 30, 2003
Sales revenues
Sales ................................................................................
Less: Sales returns and allowances............................
Net sales..........................................................................
Cost of goods sold ................................................................
Gross profit ............................................................................
(d)
$15,100
90
15,010
12,140
$ 2,870
NISSON DISTRIBUTING COMPANY
Balance Sheet (Partial)
April 30, 2003
Assets
Current assets
Cash.................................................................................
Accounts receivable.......................................................
Merchandise inventory ..................................................
Total current assets ...............................................
5-37
$ 9,210
3,700
2,960
15,870
PROBLEM 5-4A
Adjusting entries—not required:
Dec. 31
Insurance Expense ..................................................
Prepaid Insurance .............................................
Amortization Expense .............................................
Accumulated Amortization—Store Equipment
Rent Expense ...........................................................
Rent Payable ....................................................
(a)
800
800
3,000
3,000
500
WORLD ENTERPRISES
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales .........................................................................
Less: Sales returns and allowances .....................
Net sales ...................................................................
Cost of goods sold ..........................................................
Gross profit ....................................................................
Operating expenses
Salaries expense .....................................
$31,600
Amortization expense .............................
3,000
Rent expense ($6,100 + $500).................
6,600
Insurance expense .................................
000800
Total operating expenses..................................
Net income .......................................................................
$238,500
4 4,600
233,900
177,000
56,900
.. 42,000
$14,900
WORLD ENTERPRISES
Statement of Owner’s Equity
For the Year Ended December 31, 2002
R. Roger, Capital, January 1 ...........................................
Add: Net income ..............................................................
R. Roger, Capital, December 31 .....................................
5-38
$50,300
14,900
$65,200
500
PROBLEM 5-4A (Continued)
(a) (Continued)
WORLD ENTERPRISES
Balance Sheet
December 31, 2002
Assets
Current assets
Cash ..................................................................................
Accounts receivable .......................................................
Merchandise inventory....................................................
Prepaid insurance ($1,800 – $800)..................................
Total current assets .................................................
$ 14,000
30,600
27,500
1,000
73,100
Capital assets
Equipment .......................................................... $42,000
Less: Accumulated amortization – Equipment 12,000
30,000
Total assets..............................................................
$103,100
Liabilities and Owner's Equity
Current liabilities
Accounts payable ($34,400 + $500)................................ $ 34,900
Sales taxes payable .........................................................
3,000
Total current liabilities.....................................................
37,900
Owner's equity
R. Roger, Capital ..............................................................
65,200
Total liabilities and owner's equity ......................... $103,100
5-39
PROBLEM 5-4A (Continued)
(b) Dec. 31
31
Sales............................................................
R. Roger, Capital ................................
238,500
R. Roger, Capital ........................................
Sales Returns and Allowances .........
Cost of Goods Sold ............................
Salaries Expense................................
Rent Expense......................................
Insurance Expense.............................
Amortization Expense........................
223,600
5-40
238,500
4,600
177,000
31,600
6,600
800
3,000
PROBLEM 5-5A
(a)
DAIGLE DEPARTMENT STORE
Income Statement
For the Year Ended November 30, 2003
Sales revenues
Sales........................................................................................
$850,000
Less: Sales returns and allowances ...................................
10,000
Net sales .................................................................................
840,000
Cost of goods sold ........................................................................
633,220
Gross profit ..................................................................................
206,780
Operating expenses
Selling expenses
Salaries expense ($139,000 X 70%)
$97,300
Sales commissions expense............
12,750
Amortization expense—building
9,500
Delivery expense ..............................
8,200
Insurance expense ($9,000 x 50%)
4,500
Amortization expense—
delivery equipment........................
00 4,000
Total selling expenses .............
$136,250
Administrative expenses
Salaries expense ($139,000 X 30%) .
$41,700
Utilities expense ................................
10,600
Insurance expense ($9,000 x 50%) ..
4,500
Property tax expense ........................
3,500
Total administrative expenses .
0 60,300
Total operating expenses..
196,550
Income from operations.....................................................
10,230
Other revenues and gains
Interest revenue ..........................................................
$5,000
Other expenses and losses
Interest expense..........................................................
8,000 000 3,000
Net income ..........................................................................
$ 7,230
5-41
PROBLEM 5-5A (Continued)
(a) (Continued)
DAIGLE DEPARTMENT STORE
Statement of Owner's Equity
For the Year Ended November 30, 2003
B. Daigle, Capital, December 1, 2002 ................................................
Add: Net income ...............................................................................
Less: Drawings ..................................................................................
B. Daigle, Capital, November 30, 2003..............................................
5-42
$84,200
7,230
91,430
012,000
$79,430
PROBLEM 5-5A (Continued)
(a) (Continued)
DAIGLE DEPARTMENT STORE
Balance Sheet
November 30, 2003
Assets
Current assets
Cash .............................................................................
$008,000
Accounts receivable ...................................................
11,770
Merchandise inventory...............................................
36,200
Prepaid insurance.......................................................
4,500
Total current assets ............................................
60,470
Capital assets
Land ...................................................
$50,000
Building.............................................. $125,000
Less: Accumulated amortization—
building ............................ 00 41,800 83,200
Delivery equipment ........................... $57,000
Less: Accumulated amortization—
delivery equipment .............
19,680 037,320
Total capital assets ...................
0170,520
Total assets................................................................... $230,990
Liabilities and Owner's Equity
Current liabilities
Accounts payable ........................................................ $ 47,310
Property taxes payable................................................
3,500
Sales commissions payable .......................................
4,750
Current portion of mortgage .......................................
6,000
Total current liabilities .........................................
61,560
Long-term liabilities
Mortgage payable ........................................................ 0 90,000
Total liabilities ......................................................
151,560
Owner's equity
B. Daigle, Capital.......................................................... 0 79,430
Total liabilities and owner's equity............................. $230,990
5-43
PROBLEM 5-5A (Continued)
(b) Nov. 30
30
30
30
(c) Nov. 30
Nov. 30
30
Amortization Expense–Delivery Equip .......
Amortization Expense–Building ..................
Accum. Amortiz.–Delivery ....................
Accum. Amortiz.–Building....................
4,000
9,500
Insurance Expense .......................................
Prepaid Expense ...................................
9,000
Property Tax Expense ..................................
Property Tax Payable............................
3,500
Sales Commissions Expense ......................
Sales Commissions Payable ................
4,750
4,000
9,500
9,000
3,500
4,750
Sales............................................................... 850,000
Interest Revenue ...........................................
5,000
B. Daigle, Capital ...................................
B. Daigle, Capital........................................... 847,770
Sales Returns and Allowances ............
Cost of Goods Sold ...............................
Salaries Expense...................................
Amortization Expense—Delivery
Equipment...........................................
Delivery Expense...................................
Sales Commission Expense.................
Amortization Expense—Store
Equipment...........................................
Insurance Expense................................
Property Tax Expense...........................
Utilities Expense....................................
Interest Expense....................................
B. Daigle, Capital............................................
B. Daigle, Drawings................................
5-44
855,000
10,000
633,220
139,000
4,000
8,200
12,750
9,500
9,000
3,500
10,600
8,000
12,000
12,000
PROBLEM 5-6A
Account
Accounts Payable
Statement
Balance Sheet
Classification
Current Liabilities
Accounts Receivable
Balance Sheet
Current Assets
Accumulated Amortization
–Office Building
Balance Sheet
Capital Assets
(Contra Account)
Accumulated Amortization
–Store Equipment
Balance Sheet
Capital Assets
(Contra Account)
Advertising Expense
Income Statement
Selling Expenses
Amortization Expense
–Office Building
Income Statement
Administrative Expenses
Amortization Expense
–Store Equipment
Income Statement
Selling Expenses
Cash
Balance Sheet
Current Assets
Swirsky, Capital
Balance Sheet
Owner’s Equity
Freight Out
Income Statement
Selling Expenses
Swirsky, Drawings
Statement of
Owner’s Equity
Drawings
Income Tax Expense
Income Statement
Other Expenses
Income Tax Payable
Balance Sheet
Current Liabilities
Insurance Expense
Income Statement
Administrative Expenses
Interest Expense
Income Statement
Other Expenses
Interest Payable
Balance Sheet
Current Liabilities
5-45
Account
Statement
Classification
Land
Balance Sheet
Capital Assets
Merchandise Inventory
Balance Sheet
Current Assets
Mortgage Payable
Balance Sheet
Long-Term Liability
Office Building
Balance Sheet
Capital Assets
Prepaid Insurance
Balance Sheet
Current Assets
Salaries Expense
–Office Staff
Income Statement
Administrative Expenses
Salaries Expense
–Store Staff
Income Statement
Selling Expenses
Salaries Payable
Balance Sheet
Current Liabilities
Sales Returns and
Allowances
Income Statement
Contra Revenue
Store Equipment
Balance Sheet
Capital Assets
Utilities Expense–Office
Income Statement
Administrative Expenses
Utilities Expense–Store
Income Statement
Selling Expenses
Wages Payable
Balance Sheet
Current Liabilities
5-46
PROBLEM 5-7A
(a)
MCGRATH COMPANY
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales.........................................................................
$800,000
Less: Sales returns and allowances ....................
30,000
Net sales ..................................................................
770,000
Cost of goods sold .........................................................
555,000
Gross profit .....................................................................
215,000
Operating expenses
Selling expenses
Sales salaries expense
($80,000 + $16,000) ........................... $96,000
Delivery expense ...............................
30,000
Advertising expense .........................
10,000
Sales commissions expense............
6,000 $142,000
Administrative expenses
Office salaries expense .................... $27,000
Rent expense .....................................
24,000
Utilities expense ................................
12,000
Amortization expense—office equip.
8,000
71,000
Total operating expenses.......................................
213,000
Income from operations.................................................
2,000
Other revenues and gains
Rent revenue ...........................................................
$40,000
Other expenses and losses
Interest expense......................................................
2,000
38,000
Net income ......................................................................
$ 40,000
5-47
PROBLEM 5-7A (Continued)
(b)
MCGRATH COMPANY
Income Statement
For the Year Ended December 31, 2002
Revenues
Net sales .................................................................. $770,000
Rent revenue ...........................................................
40,000
Expenses
Cost of sales............................................................ $555,000
Selling expenses
($80,000 + $16,000 + $30,000 + $10,000 + $6,000) 142,000
Administrative
($27,000 + $24,000 + $12,000 + $8,000) ................
71,000
Interest expense......................................................
2,000
Net income ......................................................................
5-48
$810,000
770,000
$ 40,000
PROBLEM 5-8A
(a)
2000
Gross profit
margin
Inventory turnover
Days sales in
inventory
1999
19.5%
23.8%
($949,263 - $764,198) ÷
$949,263
($808,251 – $615,827) ÷
$808,251
3.5 times
3.3 times
$764,198 ÷ [($225,958 +
$212,382) ÷ 2]
$615,827 ÷ [($212,382 +
$164,557) ÷ 2]
104.3 days
110.6 days
365 days ÷ 3.5 times
365 days ÷ 3.3 times
(b) IPSCO’s gross profit margin declined in 2000. However, its management
of its inventories improved. It’s inventory turned over (sold) faster in
2000 and the number of days sales in inventory declined from 110.6 days
to 104.3 days. This means that IPSCO is not holding its inventory for as
long in 2000, as it did in 1999. The faster you sell your inventory, the
faster the company will collect cash/receivables, the lower its carrying
costs, and the reduced risk of inventory obsolescence.
5-49
*PROBLEM 5-9A
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Sept. 2 GST Recoverable......................................
Merchandise Inventory ............................
Accounts Payable.............................
4,200
60,000
4 Merchandise Inventory ............................
Cash...................................................
02,000
5 Accounts Payable ....................................
Merchandise Inventory ....................
GST Recoverable ..............................
07,490
6 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
23,520
Cost of Goods Sold..................................
Merchandise Inventory ....................
15,000
15 GST Recoverable......................................
Supplies [$4,000 + (5% x $4,000)] ...........
Cash...................................................
280
4,200
18 GST Recoverable......................................
Merchandise Inventory ............................
Cash...................................................
420
6,000
22 Accounts Receivable ...............................
Sales ..................................................
GST Payable (7% x $28,000) ............
PST Payable (5% x $28,000).............
31,360
Cost of Goods Sold..................................
Merchandise Inventory ....................
20,000
5-50
Credit
64,200
02,000
07,000
490
21,000
1,470
1,050
15,000
04,480
06,420
28,000
1,960
1,400
20,000
*PROBLEM 5-9A (Continued)
Date
Account Titles and Explanation
Sept. 27 Delivery Equipment
[$30,000 + (5% x $30,000)] .......................
GST Recoverable (7% x $30,000) ............
Accounts Payable.............................
Ref.
Debit
31,500
2,100
33,600
28 Accounts Payable ($64,200 – $7,490) .....
Cash...................................................
56,710
30 Cash...........................................................
Accounts Receivable .......................
23,520
00,
5-51
Credit
0
56,710
23,520
*PROBLEM 5-10A
(a)
GENERAL JOURNAL
Date
Account Titles and Explanation
J1
Ref.
Debit
April 4 GST Recoverable....................................
Merchandise Inventory ..........................
Accounts Payable...........................
114
120
201
42.00
600.00
6 Merchandise Inventory ..........................
Cash.................................................
120
101
060.00
8 Accounts Receivable .............................
Sales ................................................
GST Payable....................................
PST Payable ....................................
112
401
214
215
1,053.00
Cost of Goods Sold ................................
Merchandise Inventory ..................
505
120
630.00
10 Accounts Payable ..................................
Merchandise Inventory ..................
GST Recoverable ($40 X 7%)........
201
120
114
042.80
11 GST Recoverable....................................
Merchandise Inventory ..........................
Cash.................................................
114
120
101
21.00
300.00
14 GST Recoverable....................................
Merchandise Inventory ..........................
Accounts Payable...........................
114
120
201
49.00
700.00
15 Cash.........................................................
Merchandise Inventory ..................
GST Recoverable ............................
101
120
114
053.50
17 Merchandise Inventory ..........................
Cash.................................................
120
101
070.00
5-52
Credit
642.00
060.00
900.00
63.00
90.00
630.00
040.00
2.80
321.00
749.00
050.00
3.50
070.00
*PROBLEM 5-10A (Continued)
(a) (Continued)
J2
Date
Account Titles and Explanation
Ref.
Debit
April 18 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
112
401
214
215
936.00
Cost of Goods Sold.................................. 505
Merchandise Inventory .................... 120
560.00
20 Cash........................................................... 101
Accounts Receivable ....................... 112
500.00
214
215
412
112
2.10
3.00
30.00
Merchandise Inventory ........................... 120
Cost of Goods Sold .......................... 505
25.00
29 Accounts Payable .................................... 201
Cash................................................... 101
599.20
112
401
214
215
1,170.00
Cost of Goods Sold.................................. 505
Merchandise Inventory .................... 120
730.00
30 Cash........................................................... 101
Accounts Receivable ....................... 112
1,200.00
27 GST Payable .............................................
PST Payable..............................................
Sales Returns and Allowances ...............
Accounts Receivable .......................
30 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
5-53
Credit
800.00
56.00
80.00
560.00
500.00
035.10
25.00
599.20
1,000.00
70.00
100.00
730.00
1,200.00
*PROBLEM 5-10A (Continued)
(b)
Cash
No. 101
Date
Apr.
Explanation
1
6
11
15
17
20
29
30
Balance
Ref.
9
J1
J1
J1
J1
J2
J2
J2
Debit
Credit
060.00
321.00
053.50
070.00
500.00
599.20
1,200.00
Accounts Receivable
Explanation
Apr.
8
18
20
27
30
30
Ref.
J1
J2
J2
J2
J2
J2
Apr.
Explanation
4
10
11
14
15
2,500.00
2,440.00
2,119.00
2,172.50
2,102.50
2,602.50
2,003.30
3,203.30
No. 112
Debit
Credit
1,053.00
936.00
1,053.00
1,989.00
500.00 1,489.00
035.10 1,453.90
2,623.90
1,200.00 1,423.90
1,170.00
GST Recoverable
Date
Balance
Balance
No. 114
Ref.
J1
J1
J1
J1
J1
5-54
Debit
Credit
42.00
21.00
49.00
2.80
3.50
Balance
42.00
39.20
60.20
109.20
105.70
*PROBLEM 5-10A (Continued)
(b) (Continued)
Merchandise Inventory
Date
Apr.
Explanation
1
4
6
8
10
11
14
15
17
18
27
30
Balance
No. 120
Ref.
9
J1
J1
J1
J1
J1
J1
J1
J1
J2
J2
J2
Debit
Credit
600.00
60.00
630.00
40.00
300.00
700.00
50.00
70.00
560.00
25.00
730.00
Accounts Payable
Date
Apr.
Explanation
4
10
14
29
Apr.
Ref.
J1
J1
J1
J2
Debit
Credit
Balance
642.00
42.80
599.20
642.00
599.20
749.00 1,348.20
749.00
No. 214
Explanation
8
18
27
30
3,500.00
4,100.00
4,160.00
3,530.00
3,490.00
3,790.00
4,490.00
4,440.00
4,510.00
3,950.00
3,975.00
3,245.00
No. 201
GST Payable
Date
Balance
Ref.
J1
J2
J2
J2
5-55
Debit
Credit
63.00
56.00
2.10
70.00
Balance
63.00
119.00
116.90
186.90
*PROBLEM 5-10A (Continued)
(b) (Continued)
PST Payable
Date
Apr.
No. 215
Explanation
8
18
27
30
Ref.
J1
J2
J2
J2
Debit
Credit
90.00
80.00
3.00
100.00
B. J. Evert, Capital
Date
Apr.
Explanation
1
Balance
Ref.
Debit
Credit
9
Balance
6,000.00
No. 401
Date
Explanation
8
18
30
Ref.
Debit
J1
J2
J2
Credit
Date
Explanation
Apr. 27
No. 412
Ref.
J2
Debit
Credit
030.00
Explanation
8
18
27
30
Balance
0,030.00
Cost of Goods Sold
Date
Balance
900.00 0,900.00
800.00 1,700.00
1,000.00 2,700.00
Sales Returns and Allowances
Apr.
90.00
170.00
167.00
267.00
No. 301
Sales
Apr.
Balance
No. 505
Ref.
J1
J2
J2
J2
5-56
Debit
630.00
560.00
730.00
Credit
Balance
0,630.00
1,190.00
25.00 1,165.00
1,895.00
*PROBLEM 5-10A (Continued)
(c)
B. J.'S TENNIS SHOP
Trial Balance
April 30, 2003
Debit
Cash ................................................................
Accounts Receivable .....................................
GST Recoverable ...........................................
Merchandise Inventory ..................................
Accounts Payable ..........................................
GST Payable ...................................................
PST Payable ...................................................
B. J. Evert, Capital .........................................
Sales................................................................
Sales Returns and Allowances .....................
Cost of Goods Sold .......................................
Credit
$3,203.30
1,423.90
105.70
3,245.00
$ 749.00
186.90
267.00
6,000.00
02,700.00
30.00
1,895.00
$9,902.90
00000000
$9,902.90
(d)
B. J.'S TENNIS SHOP
Income Statement (Partial)
For the Month Ended April 30, 2003
Sales revenues
Sales ........................................................................................
Less: Sales returns and allowances....................................
Net sales..................................................................................
Cost of goods sold ........................................................................
Gross profit ....................................................................................
5-57
$2,700
30
2,670
1,895
775
*PROBLEM 5-11A
(a)
METIS WHOLESALE COMPANY
Work Sheet
For the Year Ended December 31, 2002
Account Titles
Trial Balance
Dr.
33,400
Cash
37,600
Accounts Receivable
92,400
Merchandise Inventory
92,000
Land
197,000
Buildings
Accum. Amortization
83,500
Equipment
Accum. Amortization
Notes Payable
Accounts Payable
G. Metis, Capital
10,000
G. Metis, Drawings
Sales
712,100
Cost of Goods Sold
69,800
Salaries Expense
9,400
Utilities Expense
5,900
Repair Expense
7,200
Gas and Oil Expense
Insurance Expense
0,00 3,500
Totals
1,353,800
Amort. Expense—Bldings
Amort. Expense— Equip.
Interest Expense
Interest Payable
Totals
Net Income
Totals
Adjustments
Cr.
Dr.
Cr.
(3) 2,400
Adjusted
Trial Balance
Dr.
Cr.
Dr.
Balance Sheet
Cr.
33,400
37,600
90,000
92,000
197,000
(1) 10,000
54,000
Income
Statement
Dr.
33,400
37,600
90,000
92,000
197,000
64,000
64,000
83,500
(1) 9,000
42,400
50,000
37,500
267,800
83,500
51,400
50,000
37,500
267,800
51,400
50,000
37,500
267,800
10,000
902,100
10,000
902,100
902,100
(3) 2,400
714,500
69,800
9,400
5,900
7,200
3,500
714,500
69,800
9,400
5,900
7,200
3,500
(1) 10,000
(1) 9,000
(2) 4,000
000000
0025,400
10,000
9,000
4,000
(2) 04,000 00000000
25,400 1,376,800
10,000
9,000
4,000
0000000
0833,300
068,800
902,100
00000000
1,353,800
0,004,000
1,376,800
0000000
902,100
0000000
00902,100
0000000
543,500
0000000
543,500
Key: (1) Amortization expense—buildings, (1) Amortization expense—equipment, (2) Interest payable., (3) Inventory adjustment.
5-58
Cr.
004,000
474,700
068,800
543,500
*PROBLEM 5-11A (Continued)
(b)
METIS WHOLESALE COMPANY
Income Statement
For the Year Ended December 31, 2002
Sales ..................................................................................................... $902,100
Cost of goods sold ..............................................................................
714,500
Gross profit ........................................................................................
187,600
Operating expenses
Selling expenses
Salaries expense ($69,800 X 80%) ..... $55,840
Gas and oil expense............................ 0007,200
Total selling expenses ................
$63,040
Administrative expenses
Salaries expense ($69,800 X 20%) ..... $13,960
Amortization expense—buildings ..... 10,000
Utilities expense ..................................
9,400
Amortization expense—equipment ...
9,000
Repair expense....................................
5,900
Insurance expense ..............................
3,500
Total administrative expenses ...
00 51,760
Total operating expenses..................................... 0 114,800
Income from operations......................................................................
72,800
Other expenses and losses
Interest expense .......................................................................... 00 4,000
Net income ........................................................................................... $ 68,800
METIS WHOLESALE COMPANY
Statement of Owner’s Equity
For the Year Ended December 31, 2002
G. Metis, Capital January 1 ................................................................. $267,800
Add: Net income ..................................................................................
68,800
............................................................................................................... 336,600
Less: Drawings ....................................................................................
10,000
G. Metis, Capital December 31 ........................................................... $326,600
5-59
*PROBLEM 5-11A (Continued)
(b) (Continued)
METIS WHOLESALE COMPANY
Balance Sheet
December 31, 2002
Assets
Current assets
Cash ..............................................................................................
Accounts receivable ....................................................................
Merchandise inventory ................................................................
Total current assets..............................................................
$ 33,400
37,600
90,000
161,000
Capital assets
Land............................................................
$ 92,000
Buildings.................................................... $197,000
Less: Accumulated amortization............. (64,000) 133,000
Equipment..................................................
83,500
Less: Accumulated amortization............. (51,400)
32,100 257,100
Total assets .......................................................................... $418,100
Liabilities and Owner’s Equity
Current liabilities
Notes payable...............................................................................
Accounts payable ........................................................................
Interest payable............................................................................
Total liabilities ......................................................................
$ 50,000
37,500
4,000
91,500
Owner’s Equity
G. Metis Capital ............................................................................
Total liabilities and owner’s equity....................................
326,600
$418,100
5-60
*PROBLEM 5-11A (Continued)
(c)
(d)
Dec. 31 Amortization Expense–Building......... 10,000
Accum. Amortiz.–Building...........
10,000
Amortization Expense–Equipment.....
Accum. Amortiz.–Equipment.......
9,000
9,000
Interest Expense ..................................
Interest payable ............................
4,000
Cost of Goods Sold .............................
Merchandise Inventory ................
2,400
4,000
2,400
Dec. 31 Sales .................................................... 902,100
G. Methis, Capital ........................
902,100
G. Metis, Capital .................................. 833,300
Cost of Goods Sold .....................
Salaries Expense .........................
Utilities Expense..........................
Repair Expense............................
Gas and Oil Expense...................
Insurance Expense......................
Amortization Expense–Buildings
Amortization Expense–Equipment
Interest Expense..........................
714,500
69,800
9,400
5,900
7,200
3,500
10,000
9,000
4,000
G. Metis, Capital ..................................
G. Metis, Drawings ......................
5-61
10,000
10,000
*PROBLEM 5-11A (Continued)
(e)
METIS WHOLESALE COMPANY
Post-Closing Trial Balance
December 31, 2002
Cash ..............................................................
Accounts Receivable ...................................
Merchandise Inventory ................................
Land...............................................................
Buildings .......................................................
Accumulated Amortization—Buildings ......
Equipment.....................................................
Accumulated Amortization—Equipment....
Notes Payable...............................................
Accounts Payable ........................................
Interest Payable............................................
G. Metis, Capital ...........................................
Totals
5-62
Debit
$ 33,400
37,600
90,000
92,000
197,000
Credit
$ 64,000
83,500
00000 00
$533,500
51,400
50,000
37,500
4,000
326,600
$533,500
PROBLEM 5-1B
(a)
June 5
13
17
Merchandise Inventory–Jet Runners
(2 x $22,000)...................................................
Accounts Payable .................................
44,000
Merchandise Inventory–Skiffs
(2 x $25,000)...................................................
Accounts Payable .................................
50,000
22
23
24
50,000
Accounts Receivable (4 x $26,500).............. 106,000
Sales .......................................................
Cost of Goods Sold (4 x $22,000) ................
Merchandise Inventory–Jet Runners ..
18
44,000
Merchandise Inventory–Skiffs
(2 x $26,000)...................................................
Accounts Payable .................................
88,000
88,000
52,000
52,000
Accounts Payable .........................................
Merchandise Inventory–Skiffs .............
26,000
Accounts Receivable (2 x $33,000)..............
Sales .......................................................
66,000
Cost of Goods Sold (2 x $27,000) ...............
Merchandise Inventory–Power ............
54,000
Accounts Receivable (3 x $29,000)..............
Sales .......................................................
87,000
Cost of Goods Sold (3 x $24,000) ................
Merchandise Inventory–Skiffs .............
72,000
5-63
106,000
26,000
66,000
54,000
87,000
72,000
PROBLEM 5-1B (Continued)
(b)
Merchandise Inventory–
Jet Runners
Bal. 88,000
88,000
44,000
44,000
Merchandise Inventory–
Skiffs
Bal. 72,000
26,000
50,000
72,000
52,000
76,000
Merchandise Inventory–
Power
Bal. 54,000
54,000
0
Cost of Goods Sold
88,000
54,000
72,000
214,000
5-64
PROBLEM 5-2B
GENERALJOURNAL
Date
Account Titles
June 1
Merchandise Inventory (130 x $5) ............ 120
Accounts Payable .............................. 201
650
Merchandise Inventory.............................. 120
Cash .................................................... 101
50
Accounts Receivable (140 x $10) ............. 112
Sales.................................................... 401
1,400
Cost of Goods Sold (140 x $6) .................. 505
Merchandise Inventory ...................... 120
840
Accounts Payable ...................................... 201
Merchandise Inventory ...................... 120
50
Accounts Payable ...................................... 201
Cash .................................................... 101
600
Cash ............................................................ 101
Accounts Receivable ......................... 112
1,400
Accounts Receivable (120 x $10) ............. 112
Sales.................................................... 401
1,200
Cost of Goods Sold ................................... 505
Merchandise Inventory ...................... 120
682
Merchandise Inventory (120 x $5) ............ 120
Accounts Payable .............................. 201
600
Cash ............................................................ 101
Accounts Receivable ......................... 112
1,200
3
6
9
15
17
20
24
Ref. Debit
5-65
Credit
650
50
1,400
840
50
600
1,400
1,200
682
600
1,200
PROBLEM 5-2B (Continued)
Date
Account Titles
June 26
Accounts Payable ..................................... 201
Cash ................................................... 101
600
Accounts Receivable (110 x $10) ............ 112
Sales................................................... 401
1,100
Cost of Goods Sold .................................. 505
Merchandise Inventory ..................... 120
609
Sales Returns and Allowances................ 412
Accounts Receivable ........................ 112
150
Merchandise Inventory............................. 120
Cost of Goods Sold .......................... 505
75
28
30
Ref. Debit
5-66
Credit
600
1,100
609
150
75
PROBLEM 5-3B
(a)
GENERAL JOURNAL
Date
May
Account Titles and Explanation
J1
Ref.
Debit
1 Merchandise Inventory ............................ 120
Accounts Payable............................. 201
5,000
2 Accounts Receivable ............................... 112
Sales .................................................. 401
4,000
Cost of Goods Sold.................................. 505
Merchandise Inventory .................... 120
3,000
5 Accounts Payable .................................... 201
Merchandise Inventory .................... 120
0,200
7 Freight Out ................................................ 644
Cash .................................................. 101
200
11 Supplies .................................................... 126
Cash................................................... 101
0,900
12 Merchandise Inventory ............................ 120
Cash................................................... 101
2,400
15 Cash .......................................................... 101
Merchandise Inventory .................... 120
0,230
17 Merchandise Inventory ............................ 120
Accounts Payable............................. 201
1,900
19 Merchandise Inventory ............................ 120
Cash................................................... 101
0,250
5-67
Credit
5,000
4,000
3,000
0,200
200
0,900
2,400
0,230
1,900
0,250
PROBLEM 5-3B (Continued)
(a) (Continued)
J2
Date
Account Titles and Explanation
Ref.
Debit
May 24 Cash ........................................................
Sales ................................................
101
401
6,200
Cost of Goods Sold................................
Merchandise Inventory ..................
505
120
4,340
25 Merchandise Inventory ..........................
Accounts Payable...........................
120
201
1,000
27 Cash .......................................................
Accounts Receivable .....................
101
112
4,000
0,0
29 Sales Returns and Allowances .............
Cash.................................................
412
101
0,100
Merchandise Inventory ..........................
Cost of Goods Sold ........................
120
505
70
30 Accounts Payable ($5,000 – $200) ........
Cash.................................................
201
101
4,800
31 Accounts Receivable .............................
Sales ................................................
112
401
1,600
Cost of Goods Sold................................
Merchandise Inventory ..................
505
120
1,000
5-68
Credit
6,200
4,340
1,000
4,000
0,100
70
4,800
1,600
1,000
PROBLEM 5-3B (Continued)
(b)
Cash
No. 101
Date
May
Explanation
1
7
11
12
15
19
24
27
29
30
Balance
Ref.
9
J1
J1
J1
J1
J1
J2
J2
J2
J2
Debit
Credit
200
900
2,400
230
250
6,200
4,000
100
4,800
Accounts Receivable
Date
May
Explanation
2
27
31
Ref.
J1
J2
J2
May
Explanation
1
2
5
12
15
17
19
24
25
29
31
5,000
4,800
3,900
1,500
1,730
1,480
7,680
11,680
11,580
6,780
No. 112
Debit
Credit
4,000
4,000
1,600
Merchandise Inventory
Date
Balance
Balance
04,000
00,000
01,600
No. 120
Ref.
J1
J1
J1
J1
J1
J1
J1
J2
J2
J2
J2
5-69
Debit
Credit
5,000
3,000
200
2,400
230
1,900
250
4,340
1,000
70
1,000
Balance
5,000
2,000
1,800
4,200
3,970
5,870
6,120
1,780
2,780
2,850
1,850
PROBLEM 5-3B (Continued)
(b) (Continued)
Supplies
Date
No. 126
Explanation
May 11
Ref.
J1
Debit
Credit
0,900
00,900
Accounts Payable
Date
May
Explanation
1
5
17
25
30
No. 201
Ref.
J1
J1
J1
J2
J2
Debit
Credit
May
Explanation
1
Balance
0,200
1,900
1,000
4,800
05,000
04,800
6,700
7,700
2,900
No. 301
Ref.
Debit
Credit
9
Balance
05,000
Sales
No. 401
Date
May
Balance
5,000
S. Eagle, Capital
Date
Balance
Explanation
2
24
31
Ref.
Debit
J1
J2
J2
Credit
4,000
6,200
1,600
Sales Returns and Allowances
Date
May 29
Explanation
Balance
04,000
10,200
11,800
No. 412
Ref.
J2
5-70
Debit
0,100
Credit
Balance
00,100
PROBLEM 5-3B (Continued)
(b) (Continued)
Cost of Goods Sold
Date
May
No. 505
Explanation
2
24
29
31
Ref.
J1
J2
J2
J2
Debit
Credit
3,000
4,340
70
1,000
Freight Out
Date
May
(c)
Ref.
J1
Debit
Credit
0,200
Balance
00,200
EAGLE HARDWARE STORE
Income Statement (Partial)
For the Month Ended May 31, 2003
Sales revenues
Sales ..............................................................................
Less: Sales returns and allowances..........................
Net sales........................................................................
Cost of goods sold ..............................................................
Gross profit ..........................................................................
(d)
03,000
07,340
07,270
8,270
No. 644
Explanation
7
Balance
$11,800
100
11,700
8,270
3,430
EAGLE HARDWARE STORE
Balance Sheet (Partial)
May 31, 2003
Assets
Current assets
Cash...............................................................................
Accounts receivable ....................................................
Merchandise inventory ................................................
Supplies ........................................................................
Total current assets .............................................
5-71
$ 6,780
1,600
1,850
900
$11,130
PROBLEM 5-4B
Adjusting entries—not required:
Dec. 31
(a)
Cost of Goods Sold (Inventory Loss).....................
Merchandise Inventory .....................................
100
Insurance Expense ..................................................
Prepaid Insurance .............................................
900
Amortization Expense .............................................
Accumulated Amortization—Building ............
4,000
Amortization Expense .............................................
Accumulated Amortization—Store Equipment
2,850
Property Tax Expense .............................................
Property Tax Payable .......................................
6,000
100
900
4,000
2,850
GLOBAL ENTERPRISES
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales ............................................................................ $243,700
Less: Sales returns and allowances ........................ 4 4,800
Net sales ......................................................................
238,900
Cost of goods sold ($180,300 + $100)...............................
180,400
Gross profit .......................................................................
58,500
Operating expenses
Salaries expense ...................................... $31,600
Utilities expense ...................................... 5,100
Amortization expense ($4,000 + $2,850) 6,850
Property tax expense ............................. 6,000
Insurance expense .................................
900
Total operating expenses..............................
50,450
Net income .......................................................................... $ 8,050
5-72
6,000
PROBLEM 5-4B (Continued)
(a) (Continued)
GLOBAL ENTERPRISES
Statement of Owner’s Equity
For the Year Ended December 31, 2002
T. Brown, Capital, January 1..............................................
$50,000
Add: Net income .................................................................
8,050
T. Brown, Capital, December 31 ........................................
$58,050
5-73
PROBLEM 5-4B (Continued)
(a) (Continued)
GLOBAL ENTERPRISES
Balance Sheet
December 31, 2002
Assets
Current assets
Cash ............................................................................................
Accounts receivable ..................................................................
Merchandise inventory...............................................................
Prepaid insurance ($1,900 – $900).............................................
Total current assets ............................................................
$ 13,000
31,700
28,000
1,000
73,700
Capital assets
Land .........................................................
$ 30,000
Building.................................................... $150,000
Less: Accumulated amortization
–Building ($18,750 + $4,000) ..................
22,750
127,250
Store equipment...................................... $45,000
Less: Accumulated amortization
–Store Equipment ($9,100 + $2,850)......
11,950
33,050 190,300
Total assets.......................................................................... $264,000
Liabilities and Owner's Equity
Current liabilities
Accounts payable .......................................................................
Sales taxes payable ....................................................................
Property tax payable...................................................................
Current portion of mortgage payable........................................
Total current liabilities................................................................
$ 34,700
4,000
6,000
5,000
49,700
Long-term liabilities
Mortgage payable........................................................................
Total liabilities .....................................................................
156,250
205,950
Owner's equity
T. Brown, Capital.........................................................................
Total liabilities and owner's equity ....................................
58,050
$264,000
5-74
PROBLEM 5-4B (Continued)
(b) Dec. 31
31
Sales............................................................
T. Brown, Capital ................................
243,700
T. Brown, Capital........................................
Sales Returns and Allowances .........
Cost of Goods Sold ............................
Salaries Expense................................
Utilities Expense.................................
Insurance Expense.............................
Property Tax Expense........................
Amortization Expense........................
235,650
5-75
243,700
4,800
180,400
31,600
5,100
900
6,000
6,850
PROBLEM 5-5B
(a)
VEITCH DEPARTMENT STORE
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales...........................................................................................
Less: Sales returns and allowances ......................................
Net sales ....................................................................................
Cost of goods sold ...........................................................................
Gross profit .......................................................................................
Operating expenses
Selling expenses
Sales salaries expense .....................
$76,000
Sales commissions expense............
15,500
Amortization expense — equipment
13,300
Utilities expense ($11,000 X 60%) ....
6,600
Insurance expense ($7,200 X 60%) .. 000 4,320
Total selling expenses ..............
$115,720
Administrative expenses
Office salaries expense ....................
$32,000
Amortization expense — building ...
10,400
Property taxes expense ....................
4,800
Utilities expense ($11,000 X 40%) ....
4,400
Insurance expense ($7,200 X 40%) .. 000 2,880
Total administrative expenses
0054,480
Total operating expenses
Income from operations.....................................................
Other revenues and gains
Interest revenue ..........................................................
Other expenses and losses
Interest expense..........................................................
Net income ..........................................................................
5-76
$624,000
8,000
616,000
427,200
188,800
0 170,200
18,600
$ 4,000
11,000 00 07,000
$ 11,600
PROBLEM 5-5B (Continued)
(a) (Continued)
VEITCH DEPARTMENT STORE
Statement of Owner's Equity
For the Year Ended December 31, 2002
S. Veitch, Capital, January 1..............................................................
Add: Net income ...............................................................................
Less: Drawings ..................................................................................
S. Veitch, Capital, December 31 ........................................................
5-77
$226,600
0 11,600
238,200
0 28,000
$210,200
PROBLEM 5-5B (Continued)
(a) (Continued)
VEITCH DEPARTMENT STORE
Balance Sheet
December 31, 2002
Assets
Current assets
Cash .............................................................................................
Accounts receivable ...................................................................
Merchandise inventory...............................................................
Prepaid insurance.......................................................................
Total current assets ............................................................
Capital assets
Land ...........................................................
$ 50,000
Building...................................................... $190,000
Less: Accum. amortization—building....
52,500 137,500
Equipment ................................................. $110,000
Less: Accum. amortization—equipment
42,900 00 67,100
Total assets........................................
$023,000
50,300
72,500
0 2,400
148,200
0254,600
$402,800
Liabilities and Owner's Equity
Current liabilities
Accounts payable ......................................................................
Mortgage payable due next year ..............................................
Property taxes payable..............................................................
Sales commissions payable .....................................................
Interest payable..........................................................................
Sales taxes payable ...................................................................
Total current liabilities .......................................................
Long-term liabilities
Mortgage payable (less current portion) .................................
Total liabilities ....................................................................
Owner's equity
S. Veitch, Capital........................................................................
Total liabilities and owner's equity ...................................
5-78
$089,300
20,000
4,800
4,500
0008,000
00 06,000
132,600
00 60,000
192,600
0210,200
$402,800
PROBLEM 5-5B (Continued)
(b) Dec. 31
31
31
31
31
31
31
Amortization Expense—Building .................... 10,400
Accumulated Amortization—Building .....
10,400
Amortization Expense—Equipment ................ 13,300
Accumulated Amortization—Equipment.
13,300
Insurance Expense ........................................... 7,200
Prepaid Insurance .....................................
7,200
Interest Expense ................................................. 8,000
Interest Payable.........................................
8,000
Property Taxes Expense .................................... 4,800
Property Taxes Payable............................
4,800
Sales Commissions Expense ............................ 4,500
Sales Commissions Payable ....................
4,500
Cost of Goods Sold (Inventory Loss).............. 2,500
Merchandise Inventory .............................
2,500
5-79
PROBLEM 5-5B (Continued)
(c) Dec. 31
31
31
Sales............................................................... 624,000
Interest Revenue ...........................................
4,000
S. Veitch, Capital ...................................
628,000
S. Veitch, Capital ........................................... 616,400
Cost of Goods Sold ...............................
Sales Returns and Allowances ............
Office Salaries Expense........................
Sales Salaries Expense ........................
Sales Commissions Expense...............
Property Taxes Expense.......................
Utilities Expense....................................
Amortization Expense—Building.........
Amortization Expense—Equipment.....
Insurance Expense................................
Interest Expense....................................
427,200
8,000
32,000
76,000
15,500
4,800
11,000
10,400
13,300
7,200
11,000
S. Veitch, Capital ...........................................
S. Veitch, Drawings ...............................
5-80
28,000
28,000
PROBLEM 5-6B
Account
Accumulated Depreciation
Statement
Balance Sheet
Classification
Capital Assets
(Contra Account)
Cash and Time Deposits
Balance Sheet
Current Assets
Cost of Sales
Income Statement
Cost of Goods Sold
Depreciation Expense
Income Statement
Operating Expenses
(Administrative
Expenses)
Income Taxes Expense
Income Statement
Other Expenses (or
Income Tax Expense)
Interest Expense
Income Statement
Other Expenses
Inventories–Aluminum
Balance Sheet
Current Assets
Inventories–Other Supplies
Balance Sheet
Current Assets
Inventories–Raw Materials
Balance Sheet
Current Assets
Operating Income
Income Statement
Operating Income
Other Expenses
Income Statement
Other Expenses
Payables
Balance Sheet
Current Liabilities
Property, Plant, and
Equipment
Balance Sheet
Capital Assets
Receivables
Balance Sheet
Current Assets
Sales
Income Statement
Revenue
Selling, Administrative and
General Expenses
Income Statement
Operating Expenses
5-81
PROBLEM 5-7B
(a)
TAO COMPANY
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales ($702,000 - $10,000) ....................................................... $692,000
Less: Sales returns and allowances .....................................
4,100
Net sales ...................................................................................
687,900
Cost of goods sold ..........................................................................
470,000
Gross profit ......................................................................................
217,900
Operating expenses
Selling expenses
Sales salaries expense ..................
$76,000
Freight out.......................................
17,200
Advertising expense ......................
10,000
Amortization expense—store equip.
7,500
Sales commissions expense
($6,500 + $1,000).........................
7,500 $118,200
Administrative expenses
Office salaries expense .................
$19,000
Rent expense ($16,000 - $1,250) ...
14,750
Utilities expense .............................
8,000
Insurance expense ($7,000 - $1,200)
5,800
47,550
Total operating expenses..........
165,750
Income from operations..................................................
52,150
Other revenues and gains
Interest revenue .......................................................
$5,300
Other expenses and losses
Interest expense.......................................................
4,000
1,300
Net income .......................................................................
$ 53,450
Reconciliation
Net Income as prepared by bookkeeper.........................................
Sales revenue unearned ..................................................................
Insurance expense applicable to 2003 ...........................................
Rent expense applicable to 2003 ....................................................
Sales commission expense applicable to 2002 .............................
Drawings............................................................................................
As adjusted .......................................................................................
5-82
$50,000
(10,000)
1,200
1,250
(1,000)
12,000
$53,450
PROBLEM 5-7B (Continued)
(b)
TAO COMPANY
Income Statement
For the Year Ended December 31, 2002
Revenues
Net sales ..............................................................
Interest revenue ..................................................
Total revenue ...............................................
Expenses
Cost of goods sold .............................................
Selling expenses (1) ...........................................
Administrative expenses (2) ..............................
Interest expense..................................................
Total expenses ............................................
Net income ..................................................................
$687,900
5,300
$693,200
$470,000
118,200
47,550
4,000
639,750
$ 53,450
(1) Selling expenses
Sales salaries expense .......................................
Freight out............................................................
Advertising expense ...........................................
Amortization expense—store equipment ..........
Sales commissions expense ($6,500 + $1,000)
Total.....................................................................
$ 76,000
17,200
10,000
7,500
7,500
$118,200
(2) Administrative expenses
Office salaries expense .......................................
Rent expense ($16,000 - $1,250) .........................
Utilities expense...................................................
Insurance expense ($7,000 - $1,200)..................
Total ......................................................................
$19,000
14,750
8,000
5,800
$47,550
Reconciliation
Net income as prepared by bookkeeper...........................................
Sales revenue unearned ....................................................................
Insurance expense applicable to 2003 .............................................
Rent expense applicable to 2003 ......................................................
Sales commission expense applicable to 2002 ...............................
Drawings..............................................................................................
As adjusted .........................................................................................
5-83
$50,000
(10,000)
1,200
1,250
(1,000)
12,000
$53,450
PROBLEM 5-8B
(a)
8 Months Ended
December 31, 1999
Gross profit margin
Inventory turnover
85.3%
57.1%
($74,314 – $10,931) ÷
$74,314
($1,472 – $631) ÷ $1,472
1.64 times
0.25 times
$10,931 ÷ [($4,966 +
$8,330) ÷ 2]
$631 ÷ [($4,966 + $0) ÷ 2]
1,460 days
Days sales in inventory 148 days
Current ratio
Year Ended
April 30 1999
365 days x 8/12 ÷ 1.64
times
365 days ÷ 0.25 times
1.42:1
1.15:1
$1,973,457 ÷ $1,390,850
$298,499 ÷ $259,851
(b) SAM’s current ratio of more than 1 to 1 indicates that SAM does not
have a liquidity problem. Its current assets are more than its current
liabilities. It appears to managing inventory better in its second year of
operations, with a substantial reduction of days sales in inventory. The
inventory ratios for the year ended April 1999 are probably reflective of
the start up phase of the company.
5-84
*PROBLEM 5-9B
GENERAL JOURNAL
Date
Oct.
Account Titles and Explanation
Ref.
Debit
1 GST Recoverable......................................
Merchandise Inventory ............................
Accounts Payable.............................
5,250
75,000
3 Merchandise Inventory ............................
Cash...................................................
01,800
5 Accounts Payable ....................................
Merchandise Inventory ....................
GST Recoverable..............................
06,420
8 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
24,640
Cost of Goods Sold..................................
Merchandise Inventory ....................
16,000
12 GST Recoverable......................................
Supplies ($5,000 + $250)..........................
Cash...................................................
350
5,250
15 GST Recoverable......................................
Merchandise Inventory ............................
Cash...................................................
350
5,000
18 Accounts Receivable ...............................
Sales ..................................................
GST Payable (7% x $ 30,000) ...........
PST Payable (5% x $ 30,000) ...........
33,600
Cost of Goods Sold..................................
Merchandise Inventory ....................
23,000
5-85
Credit
80,250
01,800
06,000
420
22,000
1,540
1,100
16,000
05,600
05,350
30,000
2,100
1,500
23,000
*PROBLEM 5-9B (Continued)
Date
Account Titles and Explanation
Oct. 20 Delivery Equipment
[$44,000 + (5% x $ 44,000)] ......................
GST Recoverable (7% x $44,000) ............
Accounts Payable.............................
Ref.
Debit
46,200
3,080
049,280
25 Accounts Payable ($80,250 – $6,420) .....
Cash...................................................
73,830
27 Cash ..........................................................
Accounts Receivable .......................
24,640
00,
5-86
Credit
0
73,830
24,640
*PROBLEM 5-10B
(a)
GENERAL JOURNAL
Date
May
Account Titles and Explanation
J1
Ref.
Debit
4 GST Recoverable...................................... 114
Merchandise Inventory ............................ 120
Accounts Payable............................. 201
49.00
700.00
6 Merchandise Inventory ............................ 120
Cash................................................... 101
055.00
8 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
112
401
214
215
936.00
Cost of Goods Sold .................................. 505
Merchandise Inventory .................... 120
600.00
9 Accounts Payable .................................... 201
Merchandise Inventory .................... 120
GST Recoverable ($45 X 7%).......... 114
048.15
14 GST Recoverable ($400 x 7%) ................. 114
Merchandise Inventory ............................ 120
Cash................................................... 101
28.00
400.00
16 GST Recoverable...................................... 114
Merchandise Inventory ............................ 120
Accounts Payable............................. 201
42.00
600.00
18 Merchandise Inventory ............................ 120
Cash................................................... 101
075.00
21 Cash .......................................................... 101
Merchandise Inventory .................... 120
GST Recoverable.............................. 114
058.85
5-87
Credit
749.00
055.00
800.00
56.00
80.00
600.00
045.00
3.15
428.00
642.00
075.00
055.00
3.85
*PROBLEM 5-10B (Continued)
J2
(a) (Continued)
Date
Account Titles and Explanation
Ref.
Debit
May 23 Cash ..........................................................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
101
401
214
215
1,053.00
Cost of Goods Sold.................................. 505
Merchandise Inventory .................... 120
675.00
25 Cash .......................................................... 101
Accounts Receivable ....................... 112
400.00
900.00
63.00
90.00
675.00
400.00
214
215
412
112
2.45
3.50
35.00
Merchandise Inventory ........................... 120
Cost of Goods Sold .......................... 505
25.00
29 Accounts Payable ($749.00 - $ 48.15)..... 201
Cash................................................... 101
700.85
27 GST Payable .............................................
PST Payable.............................................
Sales Returns and Allowances ...............
Accounts Receivable .......................
040.95
25.00
700.85
112
401
214
215
1,755.00
Cost of Goods Sold.................................. 505
Merchandise Inventory .................... 120
1,125.00
30 Accounts Receivable ...............................
Sales ..................................................
GST Payable......................................
PST Payable ......................................
Credit
1,500.00
105.00
150.00
1,125.00
31 Cash .......................................................... 101
Accounts Receivable ....................... 112
5-88
800.00
800.00
*PROBLEM 5-10B (Continued)
(b)
Cash
No. 101
Date
May
Explanation
1
6
14
18
21
23
25
29
31
Balance
Ref.
9
J1
J1
J1
J1
J2
J2
J2
J2
Debit
Credit
055.00
428.00
075.00
058.85
1,053.00
400.00
700.85
800.00
Accounts Receivable
Date
May
Explanation
8
25
27
30
31
Ref.
J1
J2
J2
J2
J2
May
Explanation
4
9
14
16
21
3,000.00
2,945.00
2,517.00
2,442.00
2,500.85
3,553,85
3,953.85
3,253.00
4,053.00
No. 112
Debit
Credit
936.00
936.00
400.00
536.00
0440.95
495.05
2,250.05
800.00 1,450.05
1,755.00
GST Recoverable
Date
Balance
Balance
No. 114
Ref.
J1
J1
J1
J1
J1
5-89
Debit
Credit
49.00
3.15
28.00
42.00
3.85
Balance
49.00
45.85
73.85
115.85
112.00
*PROBLEM 5-10B (Continued)
(b) (Continued)
Merchandise Inventory
Date
May
Explanation
1
4
6
8
9
14
16
18
21
23
27
30
Balance
No. 120
Ref.
9
J1
J1
J1
J1
J1
J1
J1
J1
J2
J2
J2
Debit
Credit
May
Explanation
4
9
16
29
1,850.00
2,550.00
2,605.00
2,005.00
1,960.00
2,360.00
2,960.00
3,035.00
2,980.00
2,305.00
2,330.00
1,205.00
700.00
55.00
600.00
45.00
400.00
600.00
75.00
55.00
675.00
25.00
1,125.00
Accounts Payable
Date
Balance
No. 201
Ref.
J1
J1
J1
J2
Debit
Credit
749.00
48.15
700.85
749.00
700.85
642.00 1,342.85
642.00
GST Payable
Date
May
No. 214
Explanation
8
23
27
30
Balance
Ref.
J1
J2
J2
J2
5-90
Debit
Credit
56.00
63.00
2.45
105.00
Balance
56.00
119.00
116.55
221.55
*PROBLEM 5-10B (Continued)
(b) (Continued)
PST Payable
Date
May
No. 215
Explanation
8
23
27
30
Ref.
J1
J2
J2
J2
Debit
Credit
80.00
90.00
3.50
150.00
J. Nejedly, Capital
Date
May
Explanation
1
Balance
Ref.
Debit
Credit
9
Balance
4,850.00
No. 401
Date
Explanation
8
23
30
Ref.
Debit
J1
J2
J2
Credit
Date
Explanation
May 27
No. 412
Ref.
J2
Debit
Credit
035.00
Explanation
8
23
27
30
Balance
0,035.00
Cost of Goods Sold
Date
Balance
800.00 800.00
900.00 1,700.00
1,500.00 3,200.00
Sales Returns and Allowances
May
80.00
170.00
166.50
316.50
No. 301
Sales
May
Balance
No. 505
Ref.
J1
J2
J2
J2
5-91
Debit
600.00
675.00
1,125.00
Credit
Balance
0,600.00
1,275.00
25.00 1,250.00
2,375.00
*PROBLEM 5-10B (Continued)
(c)
JANA'S TENNIS SHOP
Trial Balance
May 31, 2003
Debit
Cash ...........................................................
Accounts Receivable................................
GST Recoverable ......................................
Merchandise Inventory.............................
Accounts Payable.....................................
GST Payable..............................................
PST Payable ..............................................
J. Nejedly, Capital .....................................
Sales ..........................................................
Sales Returns and Allowances................
Cost of Goods Sold ..................................
Credit
$4,053.00
1,450.05
112.00
1,205.00
$ 642.00
221.55
316.50
4,850.00
03,200.00
35.00
2,375.00
$9,230.05
00000000
$9,230.05
(d)
JANA'S TENNIS SHOP
Income Statement (Partial)
For the Month Ended May 31, 2003
Sales revenues
Sales .......................................................................................
Less: Sales returns and allowances...................................
Net sales.................................................................................
Cost of goods sold .......................................................................
Gross profit ...................................................................................
5-92
$3,200
35
3,165
2,375
790
*PROBLEM 5-11B
(a)
BRENNAN FASHION CENTRE
Work Sheet
For the Year Ended November 30, 2003
Account Titles
Trial Balance
Dr.
Cash
Accounts Receivable
Merchandise Inventory
Store Supplies
Land
Building
Accumulated Amortization
Delivery Equipment
Accumulated Amortization
Mortgage Payable
Accounts Payable
Sales Taxes Payable
L. Brennan, Capital
L. Brennan, Drawings
Sales
Sales Returns and Allow.
Cost of Goods Sold
Salaries Expense
Advertising Expense
Utilities Expense
Repair Expense
Delivery Expense
Rent Expense
Totals
Supplies Expense
Amort. Expense—Bldg.
Amort. Expense—Equip.
Interest Expense
Interest Payable
Property Tax Expense
Property Tax Payable
Totals
Net Loss
Totals
Adjustments
Cr.
Dr.
16,700
40,700
48,000
5,500
60,000
85,000
Adj. Trial Balance
Cr.
(4) 3,000
(1) 2,000
17,000
Dr.
Cr.
Dr.
Balance Sheet
Cr.
Dr.
16,700
40,700
45,000
3,500
60,000
85,000
16,700
40,700
45,000
3,500
60,000
85,000
21,250
48,000
16,000
51,000
48,500
7,000
161,000
48,000
24,000
51,000
48,500
7,000
161,000
(2) 8,000
12,000
24,000
51,000
48,500
7,000
161,000
12,000
750,300
12,000
750,300
4,200
497,500
(4)
140,000
26,400
14,000
12,100
16,700
24,000
00000000
1,050,800 0,01,050,800
(1)
(2)
(2)
(3)
3,000
2,000
4,250
8,000
4,000
(3) 4,000
(5) 5,000
000000
26,250
(5) 05,000
26,250
5-93
Cr.
21,250
(2) 4,250
48,000
Income Statement
750,300
4,200
500,500
140,000
26,400
14,000
12,100
16,700
24,000
4,200
500,500
140,000
26,400
14,000
12,100
16,700
24,000
2,000
4,250
8,000
4,000
0,
5,000
00000000
1,072,050
2,000
4,250
8,000
4,000
0
4,000
0,005,000
1,072,050
4,000
5,000
00000 0
761,150
00 0000
761,150
0000000
750,300
010,850
761,150
0000000
310,900
00010,850
321,750
005,000
321,750
0000000
321,750
*PROBLEM 5-11B (Continued)
Key: (1) Supplies expense; (2) Amortization expense—building & equipment; (3) Interest payable; (4) Inventory adjustment; (5) Property tax
payable
5-94
*PROBLEM 5-11B (Continued)
(b)
BRENNAN FASHION CENTRE
Income Statement
For the Year Ended November 30, 2003
Sales revenues
Sales.............................................................................................. $750,300
Less: Sales returns and allowances ..........................................
4,200
Net sales ....................................................................................... 746,100
Cost of goods sold .............................................................................. 500,500
Gross profit ........................................................................................ 245,600
Operating expenses
Selling expenses
Salaries expense ($140,000 X 70%)
$98,000
Advertising expense .......................... 26,400
Rent expense ($24,000 x 80%) .......... 19,200
Store supplies expense .....................
2,000
Delivery expense ................................ 0016,700
Utilities expense ($14,000 x 80%) ..... 11,200
Total selling expenses ...............
$173,500
Administrative expenses
Salaries expense ($140,000 X 30%) .. $42,000
Repair expense................................... 12,100
Amortization expense—equipment ..
8,000
Property tax expense .........................
5,000
Rent expense ($24,000 x 20%) .......... 000 4,800
Amortization expense—building ......
4,250
Utilities expense ($14,000 x 20%) .....
2,800
Total administrative expenses
78,950
Total operating expenses
0 252,450
Loss from operations ..........................................................................
6,850
Other expenses and losses
Interest expense .......................................................................... 00 04,000
Net loss................................................................................................. $ 10,850
5-95
*PROBLEM 5-11B (Continued)
(b) (Continued)
BRENNAN FASHION CENTRE
Statement of Owner’s Equity
For the Year Ended November 30, 2003
L. Brennan, Capital, December 1.....................................
Less: Net loss .................................................................
Drawings................................................................
L. Brennan, Capital, November 30 ..................................
5-96
$161,000
$10,850
12,000
22,850
$138,150
*PROBLEM 5-11B (Continued)
(b) (Continued)
BRENNAN FASHION CENTRE
Balance Sheet
November 30, 2003
Assets
Current assets
Cash ..............................................................................................
Accounts receivable ....................................................................
Store supplies ..............................................................................
Merchandise inventory ................................................................
Total current assets .............................................................
$ 16,700
40,700
3,500
45,000
105,900
Capital assets
Land..........................................................
$60,000
Building....................................................
$85,000
Less: Accumulated amortization...........
21,250
63,750
Equipment................................................
$48,000
Less: Accumulated amortization...........
24,000
24,000 147,750
Total assets ........................................................................... $253,650
Liabilities and Owner’s Equity
Current liabilities
Accounts payable ........................................................................
Sales taxes payable .....................................................................
Property tax payable....................................................................
Interest payable............................................................................
Current portion of mortgage payable.........................................
Total current liabilities.........................................................
$ 48,500
7,000
5,000
4,000
30,000
94,500
Long-term liabilities
Mortgage payable.........................................................................
Total liabilities ......................................................................
21,000
115,500
Owner’s Equity
L. Brennan, Capital ......................................................................
Total liabilities and owner’s equity.....................................
138,150
$253,650
5-97
*PROBLEM 5-11B (Continued)
(c)
(d)
Nov. 30
Nov. 30
Store Supplies Expense ...................
Store Supplies ............................
2,000
Amortization Expense–Building ......
Accum. Amortiz.–Building.........
4,250
Amortization Expense–Equipment..
Accum. Amortiz.–Equipment.....
8,000
Cost of Goods Sold...........................
Inventory .....................................
3,000
Interest Expense ...............................
Interest payable ..........................
4,000
Property Tax Expense ......................
Property Tax Payable .................
5,000
Sales..................................................
L. Brennan, Capital....................
750,300
2,000
4,250
8,000
3,000
4,000
5,000
750,300
L. Brennan, Capital .......................... 761,150
Cost of Goods Sold ...................
Salaries Expense .......................
Advertising Expense .................
Utilities Expense........................
Repair Expense..........................
Delivery Expense.......................
Rent Expense.............................
Amortization Expense–Building
Amortization Expense–Equipment
Interest Expense........................
Property Tax Expense...............
Supplies Expense......................
Sales Returns and Allowances
L. Brennan, Capital ..........................
L. Brennan, Drawings................
5-98
500,500
140,000
26,400
14,000
12,100
16,700
24,000
4,250
8,000
4,000
5,000
2,000
4,200
12,000
12,000
*PROBLEM 5-11B (Continued)
(e)
BRENNAN FASHION CENTRE
Post-Closing Trial Balance
November 30, 2003
Cash ..............................................................
Accounts Receivable ...................................
Merchandise Inventory ................................
Store Supplies ..............................................
Land...............................................................
Building ........................................................
Accumulated Amortization—Building........
Equipment.....................................................
Accumulated Amortization—Equipment....
Mortgage Payable ........................................
Accounts Payable ........................................
Property Tax Payable...................................
Sales Taxes Payable ....................................
Interest Payable............................................
L. Brennan, Capital ......................................
Totals
5-99
Debit
$ 16,700
40,700
45,000
3,500
60,000
85,000
Credit
$ 21,250
48,000
00 00000
$298,900
24,000
51,000
48,500
5,000
7,000
4,000
138,150
$298,900
BYP 5-1 FINANCIAL REPORTING PROBLEM
(a) The Second Cup is involved in merchandising―selling at the retail
level through its corporate-owned stores, and at the wholesale level to
its franchise operators and third parties (other companies). It is also
involved in the production (roasting and blending) of coffees, and is
therefore to some extent a manufacturer.
(b) Systemwide sales include retail sales of all corporate-owned and
franchised stores (based on sales information reported by store
operators) and product sales to third parties. Total revenues include
revenues from sales in corporate stores, franchise revenues (fees and
royalties) from store operators, and product sales to third parties (refer
to Note 2).
(c) 100% of revenue in 2000 was generated by operations in Canada.
(d) No information is provided on the cost of goods sold, gross profit, or
regular operating expenses. After reporting Total Revenue, the next
item reported on the income statement is "Earnings before Interest,
Taxes, Depreciation, Amortization, and Unusual Items". The missing
information would contain the Cost of Goods Sold, Gross Profit, and
Operating Expenses.
(e) For competitive reasons, The Second Cup does not want to disclose
detailed information regarding its operations―such as that referred to
in part (d) above. Additionally, the company feels that this information
is not very meaningful when presented on a consolidated (combined)
basis with the results of other companies.
5-100
BYP 5-2 FINANCIAL REPORTING PROBLEM
(a) 1. Sales returns and allowances........................Sales
2. Freight out .......................................................Front-line expenses
(b) Gross profit margin
2000 = 41% ($127,824 ÷ $314,547)
1999 = 40% ($114,238 ÷ $283,401)
Inventory turnover
2000 = 2.4 times [$186,723 ÷ ($76,982 + $81,468) ÷ 2]
1999 = 2.5 times [$169,163 ÷ ($60,108 + $76,982) ÷ 2]
Days sales in inventory
2000 = 152 days (365 days ÷ 2.4)
1999 = 146 days (365 days ÷ 2.5)
Mark’s Work Wearhouse’s gross margin is slightly below its forecast
in both years 2000 (41% compared to a forecasted range of 41.1% 41.2%) and in 1999 (40% compared to a forecasted range of 40.6% 40.7%). This, however, is an insignificant difference.
It’s inventory turnover is slightly better than that forecasted in 1999
and is on target as forecasted in 2000 (forecasted goal of 2.1 - 2.4
times over the two years).
Even though it’s inventory turnover (and days sales in inventory) are
within forecast, the company’s sales, gross margin, and net earnings
are still slightly below that forecasted. The difference is not
substantial, though, and not likely to be of significant concern.
5-101
BYP 5-3 GLOBAL FOCUS
(a)
Carrefour
(in billions of euros)
Wal-Mart
(in billions of US
dollars)
(€51.9 - €40.8)
€51.9
= 21.4%
($165.0 - $129.7)
$165.0
= 21.4%
Inventory turnover
€40.8 ÷ €4.6
=8.9 times
$129.7 ÷ $18.4
= 7.0 times
Days sales in
inventory
365 days ÷ 8.9
= 41 days
365 days ÷ 7.0
= 52 days
Gross profit margin
Based on these ratios, it would appear the companies achieve the
same markup from the gross profit margin. However, Carrefour
appears to be more efficient in controlling its inventory. It is selling its
inventory more often than Wal-Mart (its inventory turns over 8.9 times
a year compared to Wal-Mart’s 7 times a year) and correspondingly
has less stock on hand (41 days compared to Wal-Mart’s 52 days). In
spite of less stock on hand, it is able to maintain the same gross profit
margin of Wal-Mart, which means its operating costs are likely lower
because of reduced carrying costs.
(b) Current ratio
€12.3 ÷ €10.1
= 1.22:1
$24.4 ÷ $25.8
= 0.95:1
Both companies report low current ratios. This is not surprising since
in recent years most large companies have tried to reduce costs and
limit the amount of current assets that they hold.
(c) Ratios improve our ability to compare these two companies that report
financial information using different currencies. However, other factors
can still reduce our ability to compare them. The two companies might
classify items quite differently. Also, different accounting standards in
the two countries might result in dramatically different results under
the same circumstances.
5-102
BYP 5-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
5-103
BYP 5-5 COLLABORATIVE LEARNING ACTIVITY
(a) 1.
FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2003
Net sales [$700,000 + ($700,000 X 6%)] ........
Cost of goods sold ($742,000 X 75%)* .........
Gross profit ($742,000 X 25%)** ....................
Operating expenses
Selling expenses .................................... $100,000
Administrative expenses .......................
25,000
Total operating expenses...............
Net income ......................................................
$742,000
556,500
185,500
125,000
$ 60,500
**Alternatively: Net sales, $742,000 – Gross profit, $185,500
**25% = ($154,000 ÷ $700,000) + 3%
2.
FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2003
Net sales..........................................................
Cost of goods sold.........................................
Gross profit.....................................................
Operating expenses
Selling expenses ....................................
Administrative expenses .......................
Net income ......................................................
$700,000
546,000
154,000
$72,000*
25,000*
97,000
$ 57,000
*$100,000 – $30,000 – ($30,000 X 40%) + ($700,000 X 2%) = $72,000
5-104
BYP 5-5 (Continued)
(b) Kathy’s proposed changes will increase net income by $31,500. John’s
proposed changes will reduce operating expenses by $28,000 and
result in a corresponding increase in net income. Thus, if the choice is
between Kathy’s plan and John’s plan, Kathy’s plan should be
adopted. While John’s plan will increase net income, it may also have
an adverse effect on sales personnel. Under John’s plan, sales
personnel will be taking a cut of $16,000 in compensation [$60,000 –
($30,000 + $14,000)].
(c)
FEDCO DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2003
Net sales ..............................................................
Cost of goods sold .............................................
Gross profit .........................................................
Operating expenses
Selling expenses .........................................
Administrative expenses ............................
Total operating expenses ...................
Net income...........................................................
$742,000
556,500
185,500
$72,840*
25,000*
97,840
$ 87,660
*$72,000 + 2% X ($742,000 – $700,000) = $72,840
If both plans are implemented, net income will be $58,660 ($87,660 –
$29,000) higher than the 2001 results. This is an increase of over 200%.
Given the size of the increase, John’s plan to compensate sales
personnel might be modified so that they would not have to take a pay
cut. For example, if sales commissions were 3%, the compensation cut
would be reduced to $7,740 [$60,000 – ($30,000 – ($742,000 X 3%))].
5-105
BYP 5-6 COMMUNICATION ACTIVITY
MEMORANDUM
TO:
PRESIDENT, THE GREAT CANADIAN SNOWBOARD COMPANY
FROM:
SUBJECT: REVENUE RECOGNITION
DATE:
As you know, the financial statements for The Great Canadian
Snowboarding Company are prepared in accordance with generally
accepted accounting principles. One of these principles is the revenue
recognition principle, which provides that revenues should be recognized
when they are earned.
Typically, sales revenues are earned when the goods are transferred from
the buyer to the seller. At this point, the sales transaction is completed and
the sales price is established. Thus, in the typical situation, revenue on the
snowboard ordered by Dexter is earned at event No. 7, when Dexter picks
up the snowboard.
The circumstances pertaining to this sale may seem to you to be atypical
because Dexter has ordered a specific kind of snowboard. From an
accounting standpoint, this would be true only if you could not reasonably
expect to sell this snowboard to another customer. In such case, it would
be proper under generally accepted accounting principles to recognize
sales revenue when you have completed the snowboard for Dexter.
Whether Dexter makes a down payment with the purchase order is
irrelevant in recognizing sales revenue because at this time, you have not
done anything to earn the revenue. A down payment may be an indication
of Dexter’s “good faith.” However, its effect on your financial statements is
limited entirely to recognizing the down payment as unearned revenue.
If you have further questions about the accounting for this sale, please let
me know.
5-106
BYP 5-7 ETHICS CASE
(a) Rita Pelzer, as a new employee, is placed in a position of responsibility
and is pressured by her supervisor to continue delaying payments to
creditors. Delaying payment is not an unethical practice. Companies
can pay their bills late, but they do risk incurring interest charges or
impairing their credit ratings. What is unethical is lying and blaming
the late payment on the mail room or post office in order to avoid
interest charges or affecting the company’s credit rating.
Rita’s dilemma is to decide whether to (1) delay payments and place
inappropriate blame for these late payments on the mail room and / or
post office, or (2) risk offending her boss and possibly lose the job she
just assumed.
(b) The stakeholders (affected parties) are:
Rita Pelzer, the assistant controller.
Jamie Caterino, the controller.
Yorkshire Stores, the company.
Creditors of Yorkshire Stores (suppliers).
Mail room / post office employees (those assigned the blame).
(c) Rita’s alternatives:
1. Tell the controller (her boss) that she will prepare and mail
creditors’ cheques to take advantage of the full credit period but
will not delay mailing the cheques beyond their due dates. This
may offend her boss and may jeopardize her continued
employment.
2. Tell the controller (her boss) that she will be happy to delay the
payment four days but will not blame others for this delay when
asked. This is contrary to current practice and may also offend her
boss and jeopardize her continued employment.
3. Join the team and continue the practice of delaying payments and
lay blame on others for the delay.
5-107
BYP 5-7 (Continued)
(c) (Continued)
4. Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to Jamie. The
company may not condone this practice. Rita definitely has a
choice, but probably not without consequence. To continue the
practice of lying is definitely unethical. If Rita submits to this
request, she may be asked to perform other unethical tasks. If Rita
stands her ground and refuses to participate in this unethical
practice, she probably won’t be asked to do other unethical
things—if she isn’t fired. Maybe nobody has ever challenged
Jamie’s unethical behaviour and his reaction may be one of
respect rather than anger and retribution. Being ethically
compromised is no way to start a new job.
5-108