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Exercise 4-7 (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 ……………………………. 345
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ……………………………….. 40,000
Sales …………………………………………………. 40,000
Sold merchandise on account.
11 Cost of Goods Sold ………………………………….. 30,000
Exercise 4-8 (30 minutes)
Merchandise Inventory
Balance, Dec. 31, 2012 …………..
25,000
Purchase discounts received ……..……………………
1,700
Invoice cost of purchases ……..
192,500
Purchase returns and allow. ……….………………….
4,000
Returns by customers …………..
2,100
Cost of sales transactions ………….……………….
196,000
Transportation–in ………………….
2,900
Shrinkage ………………………………….……………………
800
Balance, Dec. 31, 2013
20,000
Cost of sales transactions……..
Inventory shrinkage
recorded in December 31,
2013, adjusting entry …………..
196,000
800
Returns by customers and
restored to inventory ……………….………….
2,100
Balance, Dec. 31, 2013
194,700
Exercise 4-9 (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
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 …………. 17,500
Exercise 4-10 (30 minutes)
Note: The original missing numbers are blocked.
(a)
(b)
(c)
(d)
(e)
Sales ……………………….
$62,000
$43,500
$46,000
$79,000
$25,600
Cost of goods sold
Merch. inv. (beg.) …….
8,000
17,050
7,500
8,000
4,560
Total cost of merch.
purchases ……………..
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
available for sale. Find gross profit from sales less cost of goods sold. Find net
income as gross profit less expenses.
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
As a result of this error:
• Return on assets would be understated (numerator impact outweighs
the denominator impact).
Exercise 4-12 (20 minutes)
See the solution explanation in Exercise 4-11. As a result of this error:
Exercise 4-13 (15 minutes)
Case X
Case Y
Case Z
Current ratio computation
Current assets ……………………
$5,200
$3,500
$7,300
Current liabilities ………………..
$2,200
$1,200
$3,750
Current ratio ……………………….
2.36
2.92
1.95
Acid-test ratio computation
Cash …………………………………..
$2,000
$ 110
$1,000
Short-term investments ………
0
0
600
Current receivables …………….
350
590
700
Quick assets ………………………
$2,350
$ 700
$2,300
Current liabilities ………………..
$2,200
$1,200
$3,750
Acid-test ratio …………………….
1.07
0.58
0.61
Interpretation:
Case X has the highest acid-test ratio and a healthy current ratio. Since Case
X has enough current assets to cover its current liabilities by more than two
times and enough liquid assets to cover its current liabilities by more than one
time, Case X appears to be in the best position to meet its short-term
obligations.
Specifically, Case Y exhibits the superior ability to meet current year
obligations using the current ratio and Case X has the superior ability to meet
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Exercise 4-14 (20 minutes)
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 ………………………… 30
Instructor note: This second entry changes if the goods returned are defective. In this
case the returned inventory is recorded at its estimated value, not its cost. To illustrate, if
the goods (costing $130) returned are defective and estimated to be worth, say, $50, the
following entry is made: Dr. Merchandise Inventory for $50, Dr. Loss from Defective
Merchandise for $80, and Cr. Cost of Goods Sold for $130.
Exercise 4-15 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only
Sales (gross) ……………………………………………………… $200,000
Exercise 4-16A (30 minutes)
Apr. 2 Purchases …………………………………………………. 4,600
Accounts Payable—Lyon …………………….. 4,600
Purchased merchandise on credit.
3 Transportation–In ……………………………………….. 300
Cash …………………………………………………… 300
Paid shipping charges on purchased
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Exercise 4-17A (30 minutes)
1. BUYER – Santa Fe Company
Credit Purchase
Purchases ………………………………………………… 24,000
Accounts Payable ………………………………. 24,000
Purchased merchandise on credit.
2. SELLER – Mesa Company
Credit Sale
Accounts Receivable ………………………………… 24,000
Sales ………………………………………………….. 24,000
Sold merchandise on account.
Exercise 4-18A (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11 Purchases ……………………………………………….. 40,000
Accounts Payable ……………………………… 40,000
Purchased merchandise on credit.
11 Transportation–In ……………………………………… 345
2. Entries for Troy Corporation (SELLER):
May 11 Accounts Receivable ……………………………….. 40,000
Sales …………………………………………………. 40,000
Sold merchandise on account.
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Exercise 4-19A (20 minutes)
Periodic Inventory System
1)
Nov. 1 Purchases …………………………………………………. 1,500
Accounts Payable ……………………………….. 1,500
To record purchases on credit.
2)
Nov. 5 Accounts Payable ……………………………………… 1,500
Purchases Discount* …………………………... 30
6)
Nov. 16 Sales Returns and Allowances …………………… 300
Accounts Receivable …………………………... 300
To record return of merchandise sold on credit.
Exercise 4-20 (20 minutes)
L´Oréal
Income Statement (€ millions)
For Year Ended December 31, 2011
Net sales ……………………………………………………………………….. €20,343.1
Cost of sales ………………………………………………………………….. 5,851.5
Gross profit…………………………..…………………………………… 14,491.6
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PROBLEM SET A
Problem 4-1A (40 minutes)
July 1 Merchandise Inventory ………………………………. 6,000
Accounts Payable—Boden ………………….. 6,000
Purchased goods on credit, terms 1/15, n/30.
2 Accounts Receivable—Creek……………………… 900
Sales …………………………………………………… 900
Sold goods on credit, terms 2/10, n/60.
2 Cost of Goods Sold ……………………………………. 500
Accounts Receivable—Creek ………………. 900
Collected receivable within the discount period.
Problem 4-1A (Concluded)
July 16 Accounts Payable—Boden …………………………. 6,000
Merchandise Inventory (1%) ………………… 60
Cash …………………………………………………… 5,940
Paid payable within discount period.
19 Accounts Receivable—Art …………………………. 1,200
Sales …………………………………………………… 1,200
Sold goods on credit, terms 2/15, n/60.
19 Cost of Goods Sold ……………………………………. 800
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Problem 4-2A (40 minutes)
Aug. 1 Merchandise Inventory ………………………………. 7,500
Accounts Payable—Arotek ………………….. 7,500
Purchased goods on credit, terms 1/10, n/30.
4 Accounts Payable—Arotek ………………………… 200
Cash …………………………………………………… 200
Paid freight for Arotek.
5 Accounts Receivable—Laird ………………………. 5,200
Sales …………………………………………………… 5,200
Received a credit memorandum for August 8
purchase.