CHAPTER 5
Accounting for Merchandising Operations
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 5-6
Aug. 31Cost of Goods Sold (Inventory shrinkage) ...................................
Merchandise Inventory
($98,000 – $97,100) ..............................................
900
900
BRIEF EXERCISE 5-7
July 31Sales
................................................................................. 180,000
Prasad, Capital .....................................................
Prasad, Capital ...................................................................
Sales Returns and Allowances ............................
180,000
102,000
2,000
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.
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
SOLUTIONS TO EXERCISES
EXERCISE 5-1
1.
2.
3.
4.
April 5 Merchandise Inventory ................................................................
Accounts Payable .....................................................
18,000
April 6 Merchandise Inventory ................................................................
Cash ...........................................................................
900
18,000
900
April 7 Equipment ........................................................................ 26,000
Accounts Payable .....................................................
26,000
April 8 Accounts Payable ........................................................................
Merchandise Inventory ...................................... ......
3,000
Accounts Payable ($18,000 – $3,000) ..............................
Cash ...........................................................................
15,000
Sept. 6Merchandise Inventory (60 X $20) ...........................................................
Accounts Payable ...............................................................
1,200
5.
May
2
3,000
15,000
EXERCISE 5-3
10
12
14
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
40
780
520
30
20
20
Accounts Receivable (30 X $30) ..................................................
Sales ....................................................................................
900
Cost of Goods Sold (30 X $20) .....................................................
Merchandise Inventory .......................................................
600
900
600
EXERCISE 5-5
1.
2.
3.
4.
Sales Returns and Allowances .................................................................
Sales ..................................................................................................
150
Supplies ......................................................................................................
Cash ..................................................................................................... 250
Accounts Payable .............................................................................
Merchandise Inventory.....................................................................
250
150
250
250
Sales ....................................................................................................... 50
Merchandise Inventory.....................................................................
50
Cash ..................................................................................................... 270
Merchandise Inventory.....................................................................
270
EXERCISE 5-6
(a)
Jun. 10Merchandise Inventory...................................................................
Accounts Payable .......................................................
11
12
15
(b)
July
31
31
5,000
Merchandise Inventory .........................................................
Cash .............................................................................
300
Accounts Payable .................................................................
Merchandise Inventory ...............................................
500
July 7Accounts Payable ($5,000 – $500) ................................................. .
Cash .............................................................................
15
5,000
300
500
4,500
4,500
Cash .................................................................................... 8,500
Sales.............................................................................
8,500
Cost of Goods Sold ($5,000 + $300 - $500)........................ .
Merchandise Inventory ...............................................
4,800
4,800
Sales .................................................................................... 8,500
Capital ..........................................................................
8,500
Capital .................................................................................. .
Cost of Goods Sold .....................................................
4,800
4,800
EXERCISE 5-8
Sales
Less: Sales returns
Net sales
Less: Cost of goods sold
Gross profit
Less: Operating expenses
Net income
(a)
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
Sales ............................................................................................... $90,000
*Sales returns ..................................................................................
Net sales .........................................................................................
Allied
Wholesalers
$144,000
12,000
(f) 132,000
(g) 108,000
24,000
18,000
(h) $ 6,000
(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 ................................................................................ $144,000
Sales returns ..................................................................................
*Net sales ........................................................................................
(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
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a)
April
5
13
17
20
22
24
28
Merchandise Inventory–Custom Sedans
(3 x $24,000) ..........................................................................
Accounts Payable .......................................................
72,000
Merchandise Inventory–Recreation Vehicles
(2 x $28,000) ..........................................................................
Accounts Payable .......................................................
56,000
72,000
56,000
Accounts Receivable ............................................................
Sales (4 x $28,500) .......................................................
114,000
Cost of Goods Sold (4 x $24,000).........................................
Merchandise Inventory–Custom Sedans ...................
96,000
Merchandise Inventory–Convertibles
(2 x $26,000) ..........................................................................
Accounts Payable .......................................................
114,000
96,000
52,000
52,000
Accounts Payable .................................................................
Merchandise Inventory–Convertibles ........................
26,000
Accounts Receivable ............................................................
Sales (3 x $34,000) .......................................................
102,000
Cost of Goods Sold (3 x $28,000).........................................
Merchandise Inventory–Recreation Vehicles ............
84,000
84,000
Accounts Receivable ............................................................
Sales.............................................................................
31,000
Cost of Goods Sold...............................................................
Merchandise Inventory–Convertibles ........................
26,000
26,000
102,000
31,000
26,000
PROBLEM 5-1A (Continued)
(b)
Merchandise Inventory
–Custom Sedans
Bal. 96,000
72,000
72,000
96,000
Merchandise Inventory
–Recreation Vehicles
Bal. 56,000
56,000
28,000
84,000
Merchandise Inventory
–Convertibles
Bal. 78,000
52,000
78,000
26,000
26,000
Cost of Goods Sold
96,000
84,000
26,000
206,000
PROBLEM 5-2A
GENERAL JOURNAL
Date
July
Account Titles
1
3
9
12
17
Ref.
Debit
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
Credit
1,500
2,000
1,200
1,500
2,000
1,500
900
Date
Account Titles
18
20
21
Ref.
Debit
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
Credit
1,700
100
300
1,500
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
Credit
2,000
1,200
1,400
250
150
PROBLEM 5-5A
(a)
DAIGLE DEPARTMENT STORE
Income Statement
For the Year Ended November 30, 2003
Sales revenues
Sales ..............................................................................................................
Less: Sales returns and allowances ............................................................
Net sales .........................................................................................................
Cost of goods sold ..................................................................................................
Gross profit
.....................................................................................................
Operating expenses
Selling expenses
Salaries expense ($139,000 X 70%)
$97,300
Sales commissions expense .......... ................
12,750
Delivery expense ..............................................
8,200
Insurance expense ($9,000 x 50%) .
4,500
Amortization expense—delivery equipment
00 4,000
Total selling expenses ............................
$126,750
Administrative expenses
Amortization expense—building ....
$9,500
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 ...............
Total operating expenses ....
Income from operations ..............................................................................
Other revenues and gains
Interest revenue ..................................................................... $5,000
Other expenses and losses
Interest expense ....................................................................... 8,000
Net income ...................................................................................................
(a) (Continued)
$850,000
10,000
840,000
633,220
206,780
0 69,800
196,550
10,230
000 3,000
$ 7,230
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...........................................................................
$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 ..............................................................................
Property taxes payable ......................................................................
Sales commissions payable ..............................................................
Current portion of mortgage .............................................................
Total current liabilities .............................................................
Long-term liabilities
Mortgage payable ...............................................................................
Total liabilities ..........................................................................
Owner's equity
B. Daigle, Capital .............................................................................. 0
Total liabilities and owner's equity ...................................................
$ 47,310
3,500
4,750
6,000
61,560
0 90,000
151,560
79,430
$230,990
PROBLEM 5-5A (Continued)
(b)
Nov.30Amortization Expense–Delivery Equip ....................................
Amortization Expense–Building .....................................
Accum. Amortiz.–Delivery .....................................
Accum. Amortiz.–Building .....................................
30
30
30
(c)
Nov.30Sales
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
850,000
Interest Revenue ..............................................................
B. Daigle, Capital ....................................................
Nov.30B. Daigle, Capital .......................................................................
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.....................................................
30
4,000
9,500
B. Daigle, Capital ...............................................................
B. Daigle, Drawings .................................................
9,000
3,500
4,750
5,000
855,000
847,770
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 5-7A
(a)
MCGRATH COMPANY
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
($80,000 + $16,000) ...........................................
$96,000
Delivery expense ...............................................
30,000
Advertising expense .........................................
10,000
Sales commissions expense ............................
6,000
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 ............................................................
Income from operations ........................................................................
Other revenues and gains
Rent revenue ................................................................................
Other expenses and losses
Interest expense ...........................................................................
Net income .............................................................................................
$800,000
30,000
770,000
555,000
215,000
$142,000
213,000
2,000
$40,000
2,000
$ 40,000
38,000
PROBLEM 5-7A (Continued)
(b)
MCGRATH COMPANY
Income Statement
For the Year Ended December 31, 2002
Revenues
Net sales .......................................................................................
Rent revenue ................................................................................
Expenses
Cost of sales.................................................................................
Selling expenses
($80,000 + $16,000 + $30,000 + $10,000 + $6,000) ......................
Administrative
($27,000 + $24,000 + $12,000 + $8,000) ......................................
Interest expense ...........................................................................
Net income .............................................................................................
$770,000
40,000
$810,000
$555,000
142,000
71,000
2,000
$ 40,000
770,000
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.