EXERCISES
Exercise 4-1 (30 minutes)
Apr. 2 Merchandise Inventory ..........................................
Accounts Payable—Lyon ...............................
4,600
4,600
Purchased merchandise on credit.
3 Merchandise Inventory ..........................................
Cash .................................................................
300
300
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Lyon ......................................
Merchandise Inventory ...................................
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Lyon ......................................
Merchandise Inventory* .................................
Cash .................................................................
4,000
80
3,920
*[($4,600 - $600) x 2%]
Paid balance (less 2%) within discount period.
18 Merchandise Inventory .........................................
Accounts Payable—Frist ...............................
8,500
8,500
Purchased merchandise on credit.
21 Accounts Payable—Frist .......................................
Merchandise Inventory ..................................
1,100
1,100
Received an allowance on purchase.
28 Accounts Payable—Frist .......................................
Merchandise Inventory* .................................
Cash .................................................................
*[($8,500 - $1,100) x 2%]
Paid balance (less 2%) within discount period.
7,400
148
7,252
Exercise 4-2 (30 minutes)
1.
BUYER- Santa Fe Company
Credit Purchase
Merchandise Inventory ........................................
Accounts Payable .........................................
24,000
24,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ................................................
Merchandise Inventory* ...............................
Cash ...............................................................
24,000
720
23,280
*[24,000 x 3%]
Paid account payable within 3% discount period.
2.
SELLER – Mesa Company
Credit Sale
Accounts Receivable ...........................................
Sales...............................................................
24,000
24,000
Sold merchandise on account.
Cost of Goods Sold .............................................
Merchandise Inventory ................................
16,000
16,000
To record cost of sale.
Cash Collection
Cash .......................................................................
Sales Discounts ....................................................
Accounts Receivable ....................................
23,280
720
24,000
Collected account receivable.
3.
Amount borrowed to pay with discount ...............................
Annual rate of interest ...........................................................
Interest per year ......................................................................
$ 23,280
x 8%
$1,862.40
Interest per day ($1,862.40 / 365 days) ..................................
$
Savings from discount taken ($24,000 - $23,280) ................
Interest paid on 50-day loan (50 days x $5.10) .....................
Net savings from borrowing to pay in discount period ..........
$ 720.00
(255.00)
$ 465.00
5.10
Exercise 4-3 (10 minutes)
1.
2.
3.
4.
5.
J
A
B
F
E
6.
7.
8.
9.
10.
D
G
H
I
C
Exercise 4-4 (30 minutes)
May 5
Accounts Receivable ........................................... 21,000
Sales ...............................................................
21,000
Sold merchandise on credit (1,500 x $14).
5
Cost of Goods Sold .............................................. 15,000
Merchandise Inventory .................................
15,000
To record cost of sale (1,500 x $10).
a.
May 7
Sales Returns and Allowances ...........................
Accounts Receivable ....................................
2,800
2,800
Accepted a return from a customer (200 x $14).
7
Merchandise Inventory ........................................
Cost of Goods Sold ......................................
2,000
2,000
Returned merchandise to inventory (200 x $10).
b.
May 8
Sales Returns and Allowances ............................
Accounts Receivable .....................................
600
600
Granted allowance for damaged merchandise.
c.
May 15 Sales Returns and Allowances ............................
Accounts Receivable .....................................
680
680
Granted allowance for mis-colored merchandise
and accepted a return from a customer for the
mis-colored merchandise [$120 + (40 x $14)].
15 Merchandise Inventory .........................................
Cost of Goods Sold .......................................
Returned merchandise to inventory (40 x $10).
400
400
Exercise 4-5 (15 minutes)
May 5
Merchandise Inventory ......................................... 21,000
Accounts Payable ..........................................
21,000
Purchased merchandise on credit (1,500 x $14).
a.
May 7
Accounts Payable .................................................
Merchandise Inventory ..................................
2,800
2,800
Returned unwanted merchandise (200 x $14).
b.
May 8
Accounts Payable .................................................
Merchandise Inventory ..................................
600
600
To record allowance for damaged merchandise.
c.
May 15 Accounts Payable .................................................
Merchandise Inventory ..................................
680
680
To record allowance for mis-colored goods and
return of mis-colored merchandise
$120 + (40 x $14).
Exercise 4-6 (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11 Merchandise Inventory ........................................ 40,000
Accounts Payable ..........................................
40,000
Purchased merchandise on credit.
11 Merchandise Inventory ........................................
Cash ................................................................
345
345
Paid shipping charges on purchased
merchandise.
12 Accounts Payable .................................................
Merchandise Inventory .................................
1,400
1,400
Returned unacceptable merchandise.
20 Accounts Payable ................................................. 38,600
Merchandise Inventory* ................................
Cash ................................................................
Paid balance within the 3% discount period.
*($38,600 x .03).
1,158
37,442
Exercise 4-6 — continued
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ...........................................
Sales...............................................................
40,000
40,000
Sold merchandise on account.
11 Cost of Goods Sold ..............................................
Merchandise Inventory .................................
30,000
30,000
To record cost of sale.
13 Sales Returns and Allowances ...........................
Accounts Receivable ....................................
1,400
1,400
Accepted a return from a customer.
13 Merchandise Inventory .......................................
Cost of Goods Sold ......................................
800
800
Returned goods to inventory.
21 Cash .......................................................................
Sales Discounts ....................................................
Accounts Receivable ....................................
37,442
1,158
38,600
Collected account receivable.
Exercise 4-7 (20 minutes)
In today’s competitive world, organizations must concentrate on meeting their
customers’ needs and avoiding dissatisfaction. If these needs are not met and
dissatisfaction grows, the customers will deal with other companies or entities.
One measure of dissatisfaction of customers is the amount of sold goods that are
later returned. Customer dissatisfaction needs to be understood and then dealt
with promptly to encourage them to remain loyal. The reasons for the return also
need to be determined to allow the problem to be avoided in the future. For
example, the returns might arise from product defects, shipping damage,
misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their
dollar amount. In addition, managers can set goals for reducing the dollar
amount of sales returns. Both objectives can be helped by having the company’s
accounting system record the sales value of returned goods in a separate contra
account instead of the Sales account. This approach captures the information at
the time of the return and allows it to be easily reported.
While a company’s sales return record is important for managers, it is also
valuable information for external decision makers. This information can help
external users identify organizations focusing on customer satisfaction and
product quality. Although management might choose to report the amount of
sales returns as evidence of sales satisfaction, their amount is rarely reported in
financial statements provided to investors, creditors, and other external users.
Exercise 4-8 (30 minutes)
Note: The original missing numbers are blocked.
Sales ............................
(a)
(b)
(c)
(d)
(e)
$62,000
$43,500
$46,000
$79,000
$25,600
Cost of goods sold
Merch. inv. (beg.) .......
Total cost of merch.
purchases .................
8,000
17,050
7,500
8,000
4,560
38,000
1,950
43,750
32,000
6,600
Merch. inv. (end.) .......
(11,950)
(3,000)
(9,000)
(6,600)
(4,160)
Cost of goods sold ....
34,050
16,000
42,250
33,400
7,000
Gross profit .................
27,950
27,500
3,750
45,600
18,600
Expenses .....................
10,000
10,650
12,150
3,600
6,000
Net income (loss) ........
$17,950
$16,850
$ (8,400)
$42,000
$12,600
Explanations:
a. Find merchandise inventory (ending) by subtracting cost of goods sold from goods
available for sale. Find gross profit as the difference between the sales and cost of
goods sold. Find net income as the gross profit less the expenses.
b. Find total cost of merchandise purchases by finding the number that makes the total
equal the cost of goods sold. Find gross profit from sales less cost of goods sold.
c. Find cost of goods sold from sales less gross profit. Find cost of merchandise
purchases by finding the number to make the calculation equal cost of goods sold.
d. Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of
goods sold.
e. Find merchandise inventory (ending) by subtracting cost of goods sold from goods
available for sale. Find gross profit from sales less cost of goods sold. Find net
income as gross profit less expenses.
Exercise 4-9 (30 minutes)
Balance, Dec. 31, 2007..............
Invoice cost of purchases ........
Returns by customers ..............
Transportation-in ......................
Balance, Dec. 31, 2008
Merchandise Inventory
25,000
Purchase discounts received ..................................................
1,700
192,500
Purchase returns and allow. ....................................................
4,000
2,100
Cost of sales transactions .......................................................
196,000
2,900
Shrinkage ..................................................................................
800
20,000*
Cost of Goods Sold
Cost of sales transactions ....... 196,000
Returns by customers and
Inventory shrinkage
restored to inventory .............................................................
2,100
recorded in December 31,
2008, adjusting entry ..............
800
Balance, Dec. 31, 2008
194,700
Exercise 4-10 (25 minutes)
Adjusting entries
Dec. 31 Sales Salaries Expense ................................... 1,700
Salaries Payable........................................
1,700
To record accrued salaries.
Dec. 31 Selling Expenses .............................................. 3,000
Prepaid Selling Expenses ........................
3,000
To record expired prepaid selling expenses.
Dec. 31 Cost of Goods Sold .......................................... 1,550
Merchandise Inventory .............................
1,550
To record inventory shrinkage
($30,000 - $28,450).
Closing entries
Dec. 31 Sales .............................................................. 529,000
Income Summary ...................................
529,000
To close temporary accounts with
credit balances.
Dec. 31 Income Summary .......................................... 444,750
Sales Returns and Allowances .............
Sales Discounts .....................................
Cost of Goods Sold ($212,000 + $1,550) .....
Sales Salaries Exp. ($48,000 + $1,700) ........
Utilities Expense ....................................
Selling Expenses ($36,000 + $3,000) ...........
Administrative Expenses ......................
17,500
5,000
213,550
49,700
15,000
39,000
105,000
To close temporary accounts with debit
balances.
Dec. 31 Income Summary ..........................................
Retained Earnings .................................
84,250
84,250
To close Income Summary account.
Dec. 31 Retained Earnings .........................................
Dividends ................................................
To close the dividends account.
33,000
33,000
Exercise 4-11 (20 minutes)
The employee’s oversight in omitting these goods from the physical count would
cause the cost of the physical count of ending inventory to be understated.
Therefore, the comparison of the perpetual inventory records with the physical
count would incorrectly indicate an additional shrinkage of $3,000. An entry
would be made to debit Cost of Goods Sold and credit Merchandise Inventory for
this amount. As a result, the company’s ending inventory, current assets, total
assets, equity, and net income would all be understated by $3,000.
As a result of this error:

Return on assets would be understated (numerator impact outweighs the
denominator impact).

Debt ratio would be overstated because its denominator would be
understated.

Current ratio would be understated because its numerator would be
understated.

Profit margin (net income/sales) would be understated because the net income
would be understated.

Acid-test ratio would be unaffected because inventory is not a quick asset.
Exercise 4-12 (15 minutes)
Case X
Case Y
Case Z
Current ratio computation
Current assets ........................
Current liabilities ....................
Current ratio ............................
$5,200
$2,200
2.36
$3,500
$1,200
2.92
$7,300
$3,750
1.95
Cash .........................................
Short-term investments .........
Current receivables ................
Quick assets ...........................
$ 900
0
0
$ 900
$ 810
0
1,090
$1,900
$1,000
600
700
$2,300
Current liabilities ....................
$2,200
$1,200
$3,750
Acid-test ratio .........................
0.41
1.58
0.61
Acid-test ratio computation
Interpretation:
Case Y has the highest current ratio. Case Y also has the highest acid-test ratio.
Based on this analysis, Case Y appears to be in the best position to meet its
short-term obligations.
Exercise 4-13A (20 minutes)
Part a - Periodic
1)
Nov. 1 Purchases .......................................................... 1,500
Accounts Payable ......................................
1,500
To record purchases on credit.
2)
Nov. 5 Accounts Payable ............................................. 1,500
Purchases Discount ..................................
Cash ............................................................
30
1,470
To record cash payment in discount period.
3)
Nov. 7 Cash ....................................................................
Purchases Returns and Allowances ........
196
196
To record check received for return of purchases
previously paid for with discount already taken.
4)
Nov. 10 Transportation-In ...............................................
Cash ............................................................
90
90
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable ........................................ 1,600
Sales............................................................
1,600
To record sale of merchandise on credit. ..........
6)
Nov. 16 Sales Returns and Allowances ........................
Accounts Receivable .................................
300
300
To record return of merchandise sold on credit.
Part b - Perpetual
1)
Nov. 1 Merchandise Inventory ..................................... 1,500
Accounts Payable ......................................
1,500
To record merchandise purchases on credit.
2)
Nov. 5 Accounts Payable ............................................. 1,500
Merchandise Inventory ..............................
Cash ............................................................
To record cash payment in discount period.
30
1,470
Exercise 4-13A (Continued)
3)
Nov. 7 Cash ....................................................................
Merchandise Inventory ..............................
196
196
To record check received for return of purchases
previously paid for with discount already taken.
4)
Nov. 10 Merchandise Inventory .....................................
Cash ............................................................
90
90
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable ........................................ 1,600
Sales............................................................
1,600
To record sale of merchandise on credit.
Nov. 13 Cost of Goods Sold ..........................................
Merchandise Inventory ..............................
800
800
To record cost of merchandise sold.
6)
Nov. 16 Sales Returns and Allowances ........................
Accounts Receivable .................................
300
300
To record return of merchandise sold on credit.
Nov. 16 Merchandise Inventory .....................................
Cost of Goods Sold ...................................
To record cost of merchandise returned.
150
150
Exercise 4-14A (30 minutes)
Apr. 2 Purchases .......................................................... 4,600
Accounts Payable—Lyon ..........................
4,600
Purchased merchandise on credit.
3 Transportation-In ...............................................
Cash ............................................................
300
300
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Lyon .................................
Purchases Returns & Allowances ............
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Lyon ................................. 4,000
Purchases Discounts ................................
Cash ............................................................
80
3,920
Paid balance (less 2%) within discount period.
18 Purchases .......................................................... 8,500
Accounts Payable—Frist ..........................
8,500
Purchased merchandise on credit.
21 Accounts Payable—Frist .................................. 1,100
Purchases Returns & Allowances ............
1,100
Received an allowance on purchase.
28 Accounts Payable—Frist .................................. 7,400
Purchases Discounts ................................
Cash ............................................................
Paid balance (less 2%) within discount period.
148
7,252
Exercise 4-15A (30 minutes)
1.
BUYER – Santa Fe
Credit Purchase
Purchases ......................................................... 24,000
Accounts Payable .....................................
24,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ............................................ 24,000
Purchases Discounts ...............................
Cash ...........................................................
720
23,280
Paid account payable within 3% discount period.
2.
SELLER - Mesa
Credit Sale
Accounts Receivable ....................................... 24,000
Sales...........................................................
24,000
Sold merchandise on account.
Cash Collection
Cash ................................................................... 23,280
Sales Discounts ................................................
720
Accounts Receivable ................................
Collected account receivable.
24,000
Exercise 4-16A (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11 Purchases ........................................................ 40,000
Accounts Payable ....................................
40,000
Purchased merchandise on credit.
11 Transportation-In .............................................
Cash ..........................................................
345
345
Paid shipping charges on purchased
merchandise.
12 Accounts Payable ...........................................
Purchases Returns and Allowances ......
1,400
1,400
Returned unacceptable merchandise.
20 Accounts Payable ........................................... 38,600
Purchases Discounts ..............................
Cash ..........................................................
1,158
37,442
Paid balance within the 3% discount period.
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ...................................... 40,000
Sales..........................................................
40,000
Sold merchandise on account.
13 Sales Returns and Allowances ......................
Accounts Receivable ...............................
1,400
1,400
Accepted a return from a customer.
21 Cash .................................................................. 37,442
Sales Discounts ............................................... 1,158
Accounts Receivable ...............................
Collected account receivable.
38,600