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Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-41
Answers to Multiple Choice Questions
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-42
BRIEF EXERCISES
Be. 207
Presented here are the components in Rowland Company’s income statement. Determine the
missing amounts.
Sales Cost of Gross Operating Net
Revenue_ Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $56,000 $59,000 $48,000 (d)
Be. 208
On September 4, Roberta’s Knickknacks buys merchandise on account from Dolan Company.
The selling price of the goods is $900 and the cost of goods is $600. Both companies use the
perpetual inventory systems Journalize the transactions on the books of both companies.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-43
Solution 208 (5 min.)
Be. 209
Menke Company is a furniture retailer and uses the perpetual inventory system. On January 14,
2014, Menke purchased merchandise inventory at a cost of $45,000. Credit terms were 2/10,
n/30. The inventory was sold on account for $60,000 on January 21, 2014. Credit terms were
1/10, n/30. The accounts payable was settled on January 23, 2014, and the accounts receivables
were settled on January 30, 2014. Prepare journal entries to record each of these transactions.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-44
Be. 210
Prepare the journal entries to record the following transactions on Markowitz Company’s books
using a perpetual inventory system. On February 6, Markowitz Company sold $105,000 of
merchandise to the Lyman Company, terms 2/10, net /30. The cost of the merchandise sold was
$70,000. On February 8, the Lyman Company returned $14,000 of the merchandise purchased
on February 6. The cost of the merchandise returned was $7,000. On February 16 Markowitz
Company received the balance due from the Lyman Company.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Be. 211
Lovett Company provides this information for the month of November, 2014: sales on credit
$140,000; cash sales $50,000; sales discount $2,000; and sales returns and allowances $8,000.
Prepare the sales revenues section of the income statement based on this information.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 211 (5 min.)
Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-45
Be. 212
Assume that Mitchell Company uses a periodic inventory system and has these account
balances: Purchases $570,000; Purchase Returns and Allowances $14,000; Purchases
Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods
purchased.
Be. 213
Assume that Mitchell Company uses a periodic inventory system and has these account
balances: Purchases $620,000; Purchase Returns and Allowances $25,000; Purchases
Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of
$55,000; and net sales of $750,000. Determine the amounts to be reported for cost of goods sold
and gross profit.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-46
Be. 214
Horner Corporation reported net sales of $150,000, cost of goods sold of $96,000, operating
expenses of $35,000, other expenses of $10,000, net income of $9,000. Calculate the following
values. 1. Profit margin. 2. Gross profit rate.
EXERCISES
Ex. 215
Sue Cole is a new accountant with Simon Company. Simon purchased merchandise on account
for $9,000. The credit terms are 1/10, n/30. Sue has talked with the company's banker and knows
that she could earn 6% on any money invested in the company's savings account.
Instructions
(a) Should Sue pay the invoice within the discount period or should she keep the $9,000 in the
savings account and pay at the end of the credit period? Support your recommendation with
a calculation showing which action would be best.
(b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of
$9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ex. 216
This information relates to Sherper Co.
1. On April 5 purchased merchandise from Newport Company for $22,000, terms 2/10, n/10.
2. On April 6 paid freight costs of $900 on merchandise purchased from Newport.
3. On April 7 purchased equipment on account for $26,000.
Merchandising Operations
FOR INSTRUCTOR USE ONLY
5-47
Ex. 216 (Cont.)
4. On April 8 returned some of April 5 merchandise to Newport Company which cost $2,000.
5. On April 15 paid the amount due to Newport Company in full.
Instructions
(a) Prepare the journal entries to record the transactions listed above on the books of Sherper
Co. Sherper Co. uses a perpetual inventory system.
(b) Assume that Sherper Co. paid the balance due to Newport Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.
Ex. 217
(a) Bazil Company purchased merchandise on account from Office Suppliers for $62,000, with
terms of 1/10, n/30. During the discount period, Bazil returned some merchandise and paid
$59,400 as payment in full. Bazil uses a perpetual inventory system. Prepare the journal
entries that Bazil Company made to record the:
(1) purchase of merchandise.
(2) return of merchandise.
(3) payment on account.
(b) Weaver Company sold merchandise to Moore Company on account for $84,000 with credit
terms of ?/10, n/30. The cost of the merchandise sold was $63,000. During the discount
period, Moore Company returned $4,000 of merchandise and paid its account in full (minus
the discount) by remitting $78,400 in cash. Both companies use a perpetual inventory
system. Prepare the journal entries that Weaver Company made to record the:
(1) sale of merchandise.
(2) return of merchandise.
(3) collection on account.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-48
Ex. 218
June 4 Black Company purchased $9,000 worth of merchandise, terms n/30 from Hayes
Company. The cost of the merchandise was $6,300.
12 Black returned $500 worth of goods to Hayes for full credit. The goods had a cost of
$350 to Hayes.
12 Black paid the account in full.
Merchandising Operations
FOR INSTRUCTOR USE ONLY
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Ex. 218 (Cont.)
Instructions
Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’
records. Assume use of the perpetual inventory system for both companies.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 218 (15-20 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-50
Ex. 219
On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150
each. During the month of October the following transactions occurred. Assume Kile uses a
perpetual inventory system.
Oct. 4 Purchased 180 bicycles at a cost of $145 each from the Nixon Bicycle Company,
terms 2/10, n/30.
5 Paid freight of $1,000 on the October 4 purchase.
6 Sold 10 bicycles from the October 1 inventory to Team America for $250 each, terms
2/10, n/30.
7 Received credit from the Nixon Bicycle Company for the return of 8 defective bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Nixon Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Merchandising Operations
FOR INSTRUCTOR USE ONLY
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Ex. 220
On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each.
The company uses a perpetual inventory system. During September, the following transactions
and events occurred.
Sept. 4 Purchased 50 backpacks at $25 each from Sievert, terms 2/10, n/30.
6 Received credit of $100 for the return of 4 backpacks purchased on September 4 that
were defective.
9 Sold 25 backpacks for $40 each to Lilly Books, terms 2/10, n/30.
13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30.
14 Paid Sievert in full, less discount.
Instructions
Journalize the September transactions for Pennington Supply.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-52
Ex. 221
Petersen Book Store entered into the transactions listed below. In the journal provided, prepare
Petersen’s necessary entries, assuming use of the perpetual inventory system.
July 6 Purchased $1,600 of merchandise on credit, terms n/30.
8 Returned $100 of the items purchased on July 6.
9 Paid freight charges of $90 on the items purchased July 6.
19 Sold merchandise on credit for $4,400, terms 1/10, n/30. The merchandise had an
inventory cost of $2,700.
22 Of the merchandise sold on July 19, $300 of it was returned. The items had cost
the store $150.
28 Received payment in full from the customer of July 19.
31 Paid for the merchandise purchased on July 6.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 221 (15-20 min.)
Merchandising Operations
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Ex. 222
Presented here are selected transactions for the Leiss Company during April. Leiss uses the
perpetual inventory system.
April 1 Sold merchandise to Mann Company for $4,000, terms 2/10, n/30. The
merchandise sold had a cost of $2,500.
2. Purchased merchandise from Wild Corporation for $8,000, terms 1/10, n/30.
4 Purchased merchandise from Ryan Company for $1,000, n/30.
10 Received payment from Mann Company for purchase of April 1 less appropriate
discount.
11 Paid Wild Corporation for April 2 purchase.
Instructions
Journalize the April transactions for Leiss Company.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 223
Norman Company completed the following transactions in October: Norman uses a perpetual
inventory system.
Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection
Oct. 3 $ 800 2/10, n/30 Oct. 8
Oct. 11 1,500 3/10, n/30 Oct. 14 $ 300 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,200 Oct. 29
Oct. 21 1,700 2/10, n/60 Oct. 23 400 Oct. 27
Oct. 23 6,000 2/10, n/30 Oct. 27 500 Oct. 28
Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,000.
(2) Oct. 23 sales return. The merchandise returned had a cost of $200.
(3) Oct. 28 collection.
Merchandising Operations
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Ex. 224
The following transactions are for Kale Company.
(1) On December 3 Kale Company sold $500,000 of merchandise to Thomson Co., terms 1/10,
n/10. The cost of the merchandise sold was $320,000.
(2) On December 8 Thomson Co. was granted an allowance of $20,000 for merchandise
purchased on December 3.
(3) On December 13 Kale Company received the balance due from Thomson Co.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Kale Company.
Kale uses a perpetual inventory system.
(b) Assume that Kale Company received the balance due from Thomson Co. on January 2 of
the following year instead of December 13. Prepare the journal entry to record the receipt of
payment on January 2.
Ex. 225
Instructions
State the missing items identified by ?.
1. Gross profit - Operating expenses = ?
2. Cost of goods sold + Gross profit = ?
3. Sales revenue - (? + ?) = Net sales
4. Income from operations + ? - ? = Net income
5. Net sales - Cost of goods sold = ?
Ans: N/A, LO: 4, Bloom: K, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
5-56
Solution 225 (5 min.)
Ex. 226
Financial information is presented here for two companies.
King Company Queen Company
Sales revenue $56,000 ?
Sales returns and allowances ? 5,000
Net sales 50,000 80,000
Cost of goods sold 33,000 ?
Gross profit ? 32,000
Operating expenses 12,000 ?
Net income ? 14,000
Instructions
(a) Compute the missing amounts.
(b) Calculate the profit margin and the gross profit rate for each company.
Merchandising Operations
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Ex. 227
The following information is available for Quayle Company:
Sales revenue $618,000
Sales returns and allowances 20,000
Cost of goods sold 398,000
Operating expenses 114,000
Interest expense 19,000
Interest revenue 20,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended
December 31, 2014.
2. Compute the profit margin.
