91
Copyright © 2018 Pearson Education, Inc.
d.
Net Sales Revenue
$35,000
Cost of Goods Sold
23,500
Gross Profit
$11,500
Gross profit percentage = $11,500 / $35,000 = 32.9%
Diff: 3
LO: 5.5, 5.6
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: How Do We Use the Gross Profit Percentage to Evaluate Business Performance? (H1)
5.7 Learning Objective 5-7
1) Under the new revenue recognition standards, companies are required to identify the performance
obligations associated with each contract.
2) Under the new revenue recognition standards, companies recognize revenue when performance
obligations associated with contracts are identified.
3) A retailer sells, for cash, a television set with a two-year service contract. The retailer initially records
the cash received for the service contract as Unearned Revenue.
4) Revenue from contracts with multiple performance obligations is recognized as each performance
obligation is satisfied.
5) In a perpetual inventory system, multiple performance obligations ________.
A) represent one distinct performance obligation
B) may require the creation of an asset account, Unearned Revenue
C) result in revenue being recorded when the separate performance obligations are identified because
there is a binding contact
D) require the company to allocate the transaction price to each performance obligation
6) Complete Electronics Inc. sells a point-of-sale computer with a two-year service contract. Complete
collects $3,000 cash for the selling price of the computer and $576 for the two-year service contract. How
is revenue recognized?
A) Complete will record Sales Revenue of $3,576 when the computer is delivered to the customer.
B) Complete will record Sales Revenue of $1,788 per year for two years.
C) Complete will record Sales Revenue of $3,000 when the computer is delivered and Service Revenue of
$24 per month for 24 months.
D) Complete will record Sales Revenue of $3,000 when the computer is delivered and will record revenue
for the service contract as service calls are made.
7) Home Theater Company has the following transaction related to the sale of merchandise inventory.
June 1: Sold a home theater system (cost of $6,200) for $9,000 to a customer. The customer paid cash.
The sales price included a two-year service contract valued at $840.
Dec. 31: Recorded the amount of service contract earned.
Journalize the transactions of Home Theater assuming that the company uses the perpetual inventory
system. Do not record the cost of goods sold entry. Omit explanations.
1) Smaller businesses invest in a periodic inventory system because of the ability to determine quantities
of inventory on hand after each purchase and sale of merchandise inventory.
2) In a periodic inventory system, businesses must obtain a physical count of inventory to determine
quantities on hand.
3) If a merchandiser uses the periodic inventory system, it is necessary to conduct a physical count of
inventory to determine the quantity of inventory on hand.
4) Regarding the inventory system used by small retailers, which of the following statements is incorrect?
A) Some small retailers find it too expensive to invest in a perpetual inventory system.
B) To be competitive, small retailers must use a perpetual inventory system.
C) In a periodic inventory system, businesses must obtain a physical count of inventory to determine
quantities on hand.
D) Small retailers can use either the periodic or perpetual inventory system.
5) In a periodic inventory system, ________.
A) quantities of merchandise inventory on hand are updated after each sale and each purchase
B) the cost to invest in the system is greater than the cost to invest in a perpetual inventory system
C) the business is in violation of U.S. GAAP
D) businesses must obtain a physical count of inventory to determine quantities on hand
6) In a periodic inventory system, purchases, purchase discounts, and purchase returns and allowances
are recorded in the Merchandise Inventory account as and when they occur.
7) The Merchandise Inventory account is only used in a perpetual inventory system.
8) Purchase Discounts is a contra asset account.
9) When using a periodic inventory system, the Merchandise Inventory account will never be used when
recording purchases, purchase discounts, purchase returns, or sales of inventory.
10) A merchandiser purchased inventory on account for $17,000. In a periodic inventory system, the
journal entry to record the purchase would include ________.
A) a debit to Purchases for $17,000 and a credit to Accounts Payable for $17,000
B) a debit to Accounts Payable for $17,000 and a credit to Purchases for $17,000
C) a debit to Merchandise Inventory for $17,000 and a credit to Accounts Payable for $17,000
D) a debit to Accounts Payable for $17,000 and a credit to Merchandise Inventory for $17,000
11) A merchandiser returned inventory worth $1,900 that was purchased on account. In a periodic
inventory system, the journal entry to record the return would include ________.
A) a debit to Purchase Returns and Allowances for $1,900 and a credit to Accounts Payable for $1,900
B) a debit to Accounts Payable for $1,900 and a $1,900 credit to Purchase Returns and Allowances
C) a debit to Purchases for $1,900 and a credit to Accounts Payable for $1,900
D) a debit to Accounts Payable for $1,900 and a credit to Purchases for $1,900
12) Which of the following is the correct journal entry for freight paid on goods purchased by a
merchandiser using the periodic inventory system?
A)
Purchases
Accounts Payable
XX
B)
Merchandise Inventory
Cash
XX
C)
Freight In
Cash
XX
D)
Freight Expense
Cash
XX
13) Which of the following is the correct journal entry for a return of goods that were purchased on
account under the periodic inventory system?
A)
Purchase Returns and
Allowances
Accounts Payable
XX
B)
Accounts Payable
Merchandise Inventory
XX
C)
Accounts Payable
Purchase Returns and
Allowances
XX
D)
Merchandise Inventory
Accounts Payable
XX
14) Business Office Supplies, Inc. uses the periodic inventory system. On February 1, the corporation
purchased inventory on account for $20,000. The terms of invoice were 4/10, n/30. The amount due was
paid on February 9. Which of the following journal entries correctly records the payment in the books of
Business Office Supplies?
A)
Accounts Payable
20,000
Purchase Discounts
800
Cash
19,200
B)
Accounts Payable
20,000
Cash
20,000
C)
Accounts Payable
20,000
Purchases
20,000
D)
Accounts Payable
20,000
Merchandise Inventory
800
Cash
19,200
15) Dublin, Inc. uses the periodic inventory system. On February 1, the corporation purchased inventory
on account for $16,000. The terms were 4/10, n/30. On February 2, it returned damaged goods worth $600
to the supplier. Give the journal entry for the payment if the invoice is paid after the discount period.
(Round your answers to the nearest dollar.)
A)
Accounts Payable
16,000
Cash
15,360
Purchase Discounts
640
B)
Cash
16,000
Accounts Payable
16,000
C)
Accounts Payable
15,400
Cash
15,400
D)
Cash
15,360
Purchase Discounts
640
Accounts Payable
16,000
16) When using the periodic inventory system, the Merchandise Inventory account is ________.
A) not used
B) never used when recording purchase discounts, or returns of inventory
C) replaced on the balance sheet with the Purchases account
D) updated after each sale
17) Under the periodic inventory system, which of the following statements is correct?
A) During the period, the business records the cost of all inventory bought in the Merchandise Inventory
account.
B) Purchase Returns and Allowances and Purchase Discounts are contra expense accounts.
C) Freight in is debited to the Purchases account.
D) Purchase discounts are recorded as credits to the Purchases account.
18) The following transactions apply to a company that uses a periodic inventory system. For each
transaction, state which accounts are used and whether the account is debited or credited. All
transactions involve the purchase of inventory.
Transaction
Accounts Used/ Is the account debited or
credited?
Purchase of inventory on
account
Prior to payment, returned
inventory to the seller
Payment of freight bill
Transaction
Accounts Used/ Is the account debited or
credited?
Purchase of inventory on
account
Purchases – debited
Accounts Payable – credited
Prior to payment, returned
inventory to the seller
Accounts Payable – debited
Purchase Returns and Allowances – credited
Payment of freight bill
Freight In – debited
Cash – credited
Diff: 2
LO: 5-8
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Purchases of Merchandise Inventory