5–1
CHAPTER 5
ACCOUNTING FOR RETAIL BUSINESSES
DISCUSSION QUESTIONS
1. Retail businesses acquire merchandise for resale to customers. It is the selling of merchandise, instead of a
service, that makes the activities of a retail business different from the activities of a service business.
4. a. 1% discount allowed if paid within 15 days of date of invoice; entire amount of invoice due within 60
5. Sales to customers who use MasterCard or VISA cards are recorded as cash sales.
6. a. A credit memo issued by the seller of merchandise indicates the amount for which the buyer’s account
8. Answers should include any three of the following: Sales, Cost of Goods Sold, Inventory, Estimated
Returns Inventory, and Customer Refunds Payable.
10. Loss from Inventory Shrinkage would be debited.
CHAPTER 5 Accounting for Retail Businesses
BASIC EXERCISES
BE 5–1
BE 5–2
BE 5–3
a.
Accounts Receivable
17,820
Sales [$18,000 – ($18,000 1%)]
17,820
Cost of Goods Sold
10,800
Inventory
10,800
17,820
17,820
CHAPTER 5 Accounting for Retail Businesses
BE 5–5 (Concluded)
Blue Star Co. journal entries:
Inventory
111,560
Accounts Payable—Shore Co.
111,560
{[$112,000 – ($112,000 2%)] + $1,800}.
Accounts Payable—Shore Co.
111,560
Cash
111,560
BE 5–6
a.
Dec.
31
Cost of Goods Sold
23,250
Inventory
23,250
Inventory shrinkage
($1,333,150 – $1,309,900).
b.
Dec.
31
Sales
125,000
Customer Refunds Payable
125,000
31
Estimated Returns Inventory
80,000
Cost of Goods Sold
80,000
BE 5–7
a.
20Y2
20Y3
CHAPTER 5 Accounting for Retail Businesses
5–4
EXERCISES
Ex. 5–1
Ex. 5–2
Ex. 5–3
Balance Sheet Accounts
Income Statement Accounts
100
Assets
400
Revenues
110
Cash
410
Sales
112
Accounts Receivable
500
Expenses
114
Inventory
510
Cost of Goods Sold
115
Estimated Returns Inventory
520
Sales Salaries Expense
116
Store Supplies
521
Advertising Expense
117
Office Supplies
522
Depreciation Expense—
118
Prepaid Insurance
Store Equipment
120
Land
523
Store Supplies Expense
123
Store Equipment
524
Delivery Expense
124
Accumulated Depreciation—
529
Miscellaneous Selling
Store Equipment
Expense
125
Office Equipment
530
Office Salaries Expense
126
Accumulated Depreciation—
531
Rent Expense
Office Equipment
532
Depreciation Expense—
200
Liabilities
Office Equipment
210
Accounts Payable
533
Insurance Expense
211
Customer Refunds Payable
534
Office Supplies Expense
212
Salaries Payable
539
Miscellaneous
213
Notes Payable
Administrative Expense
300
Stockholders’ Equity
600
Other Income
310
Common Stock
610
Interest Revenue
311
Retained Earnings
700
Other Income
312
Dividends
710
Interest Expense
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–4
b. Inventory
Ex. 5–5
The offer of Supplier One is lower than the offer of Supplier Two. Details are as follows:
Supplier One
Supplier Two
List price
$34,800
$35,000
Discount
(348)
(700)
$34,452
$34,300
Freight
200
Net cost
$34,452
$34,500
Ex. 5–6
a.
(1) Purchased merchandise on account net of discount, $13,860 [$14,000 –
Ex. 5–7
a.
Inventory [$48,000 – ($48,000 2%)]
47,040
Accounts Payable
47,040
b.
Accounts Payable [$7,500 – ($7,500 2%)]
7,350
Inventory
7,350
Accounts Payable
39,690
Cash
39,690
d.
Accounts Payable
Inventory ($40,500 2%)
Cash ($48,000 – $7,500)
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–8
a.
Inventory [$36,000 – ($36,000 1%)]
35,640
Accounts Payable—Schell Co.
35,640
b.
Accounts Payable—Schell Co.
35,640
Cash
35,640
Accounts Payable*—Schell Co. [$9,000 – ($9,000 1%)]
e.
c.
Accounts Receivable—Schell Co.
e.
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–9 (Concluded)
c.
Cash
475,000
Sales
475,000
Cost of Goods Sold
280,000
Inventory
280,000
d.
Cash
63,000
Sales
63,000
Cost of Goods Sold
39,000
Inventory
39,000
Credit Card Expense
18,130
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–11 (Concluded)
c.
20Y4
Jan.
7
Cash
14,210
Accounts Receivable—Beasley Co.
14,210
($18,130 – $3,920).
Ex. 5–12
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–15
a. $30,400 ($32,000 – $1,600)
Ex. 5–16
a.
Accounts Receivable—Balboa Co.
254,500
Sales
254,500
Cost of Goods Sold
152,700
Inventory
152,700
Accounts Receivable—Balboa Co.
Estimated Returns Inventory
224,500
224,500
a.
254,500
254,500
Accounts Payable—Showcase Co.
Inventory
Accounts Payable—Showcase Co.
224,500
Cash
224,500
CHAPTER 5 Accounting for Retail Businesses
Ex. 5–18
Ex. 5–19
a.
Accounts Receivable
684,800
Sales
640,000
Sales Tax Payable ($640,000 7%)
44,800
Cost of Goods Sold
385,000
Inventory
385,000
61,750
Cash
61,750
CHAPTER 5 Accounting for Retail Businesses
5–11
Ex. 5–23
20Y8
Dec.
31
Sales
98,800
Customer Refunds Payable
98,800
($12,350,000 0.8%).
31
Estimated Returns Inventory
48,000
Cost of Goods Sold
48,000
Ex. 5–24
a.
20Y1
Dec.
31
Sales
27,000
Customer Refunds Payable
27,000
($1,800,000 1.5%).
31
Estimated Returns Inventory
16,000
Cost of Goods Sold
16,000
b.
20Y2
Feb.
3
Customer Refunds Payable
5,000
Cash
5,000
3
Inventory
3,100
Estimated Returns Inventory
3,100
Ex. 5–25
Ex. 5–26
a. $625,000 ($735,000 – $110,000)
CHAPTER 5 Accounting for Retail Businesses
5–12
Ex. 5–27
a.
Royal Furnishings Company
Income Statement
For the Year Ended March 31, 20Y9
Sales
$ 8,245,000
Cost of goods sold
(5,500,000)
Gross profit
$ 2,745,000
Expenses:
Selling expenses
$575,000
Administrative expenses
435,000
Total expenses
(1,010,000)
Operating income
$ 1,735,000
Other revenue and expense:
Interest expense
(15,000)
Net income
$ 1,720,000
b. The major advantage of the multiple-step form of income statement is that relationships
Ex. 5–28
a. 1. Deducting the cost of goods sold from sales yields gross profit (not
operating income).
CHAPTER 5 Accounting for Retail Businesses
5–13
Ex. 5–28 (Concluded)
b. A corrected income statement would be as follows:
Curbstone Company
Income Statement
For the Year Ended August 31, 20Y5
Sales
$ 8,595,000
Cost of goods sold
(6,110,000)
Gross profit
$ 2,485,000
Expenses:
Selling expenses
$800,000
Administrative expenses
575,000
Delivery expense
425,000
Total expenses
(1,800,000)
Operating income
$ 685,000
Other revenue and expense:
Interest revenue
45,000
Net income
$ 730,000
Ex. 5–29
Custom Wire & Tubing Company
Income Statement
For the Year Ended April 30, 20Y2
Revenues:
Sales
$ 9,332,500
Rent revenue
60,000
Total revenues
$ 9,392,500
Expenses:
Cost of goods sold
$6,100,000
Selling expenses
1,250,000
Administrative expenses
740,000
Interest expense
25,000
Total expenses
(8,115,000)
Net income
$ 1,277,500
CHAPTER 5 Accounting for Retail Businesses
5–14
Ex. 5–30
Ex. 5–31
20Y9
Closing Entries
Mar.
31
Sales
8,245,000
Cost of Goods Sold
5,500,000
Selling Expenses
575,000
Administrative Expenses
435,000
Interest Expense
15,000
Retained Earnings
1,720,000
31
Retained Earnings
175,000
Dividends
175,000
Ex. 5–32
Closing Entries
July
31
Sales
1,437,000
Administrative Expenses
440,000
Cost of Goods Sold
775,000
Interest Expense
6,000
Selling Expenses
160,000
Store Supplies Expense
21,500
Retained Earnings
34,500
31
Retained Earnings
15,000
Dividends
15,000
CHAPTER 5 Accounting for Retail Businesses
Appendix 1 Ex. 5–33
a.
Accounts Receivable—Bernard Retail Inc.
15,000
Sales
15,000
Cost of Goods Sold
8,000
Inventory
8,000
14,700
15,000
c.
a.
7,000
7,000
CHAPTER 5 Accounting for Retail Businesses
5–16
Appendix 1 Ex. 5–36
20Y4
July
6
Cash
1,470
Allowance for Sales Discounts ($1,500 2%)
30
Accounts Receivable—Mark Bishop
1,500
Appendix 1 Ex. 5–37
a.
Aug.
5
Accounts Receivable—M. Quinn
7,500
Sales
7,500
5
Cost of Goods Sold
4,200
Inventory
4,200
9
Accounts Receivable—R. Busch
4,000
Sales
4,000
9
Cost of Goods Sold
2,100
Inventory
2,100
15
Cash
7,350
Sales ($7,500 2%)
150
Accounts Receivable—M. Quinn
7,500
20
Accounts Receivable—S. Mooney
6,000
Sales
6,000
20
Cost of Goods Sold
3,300
Inventory
3,300
25
Cash
4,000
Accounts Receivable—R. Busch
4,000
31
Cash
6,000
Accounts Receivable—S. Mooney
6,000
CHAPTER 5 Accounting for Retail Businesses
5–17
Appendix 1 Ex. 5–37 (Concluded)
b.
20Y8
Aug.
5
Accounts Receivable
7,350
Sales [$7,500 – ($7,500 2%)]
7,350
5
Cost of Goods Sold
4,200
Inventory
4,200
9
Accounts Receivable
3,960
Sales [$4,000 – ($4,000 1%)]
3,960
9
Cost of Goods Sold
2,100
Inventory
2,100
15
Cash
7,350
Accounts Receivable
7,350
20
Accounts Receivable
6,000
Sales
6,000
20
Cost of Goods Sold
3,300
Inventory
3,300
25
Cash
4,000
Accounts Receivable
3,960
Sales
40
31
Cash
6,000
Accounts Receivable
6,000
c. Gross method: $17,350 ($7,500 + $4,000 – $150 + $6,000)
CHAPTER 5 Accounting for Retail Businesses
5–18
Appendix 2 Ex. 5–38
a. credit
Appendix 2 Ex. 5–39
Jan.
2
Purchases
18,200
Accounts Payable
18,200
5
Freight In
190
Cash
190
6
Accounts Payable
2,750
Purchases Returns and Allowances
2,750
13
Accounts Receivable
36,927
Sales
36,927
[$37,300 – ($37,300 1%)].
15
Delivery Expense
215
Cash
215
17
Accounts Payable
15,450
Purchases Discounts
309
Cash
15,141
[($18,200 – $2,750) 2%].
23
Cash
36,927
Accounts Receivable
36,927
Appendix 2 Ex. 5–40
a. Purchases discounts, purchases returns and allowances
CHAPTER 5 Accounting for Retail Businesses
5–19
Appendix 2 Ex. 5–41
a. Cost of goods sold:
Inventory, May 1, 20Y7
$ 380,000
Cost of merchandise purchased:
Purchases
$3,800,000
Purchases returns and allowances
(150,000)
Purchases discounts
(80,000)
Freight in
16,600
Total cost of merchandise purchased
3,586,600
Inventory available for sale
$3,966,600
Inventory, April 30, 20Y8
(415,000)
Cost of goods sold before estimated returns
$3,551,600
Estimated returns
(11,600)
Cost of goods sold
$3,540,000
Appendix 2 Ex. 5–42
Cost of goods sold:
Inventory, November 1
$ 28,000
Cost of merchandise purchased:
Purchases
$475,000
Purchases returns and allowances
(15,000)
Purchases discounts
(9,000)
Freight in
7,000
Total cost of merchandise purchased
458,000
Inventory available for sale
$486,000
Inventory, November 30
(31,500)
Cost of goods sold before estimated returns
$454,500
Estimated returns
(14,500)
Cost of goods sold
$440,000
CHAPTER 5 Accounting for Retail Businesses
5–20
Appendix 2 Ex. 5–43
Cost of goods sold:
Inventory, July 1
$ 190,850
Cost of merchandise purchased:
Purchases
$1,126,000
Purchases returns and allowances
(46,000)
Purchases discounts
(23,000)
Freight in
17,500
Total cost of merchandise purchased
1,074,500
Inventory available for sale
$1,265,350
Inventory, July 31
(160,450)
Cost of goods sold before estimated returns
$1,104,900
Estimated returns
(34,900)
Cost of goods sold
$1,070,000
Appendix 2 Ex. 5–44
1. The schedule should begin with the June 1, 20Y4, not the May 31, 20Y5, inventory.
Cost of goods sold:
Inventory, June 1, 20Y4
$ 91,300
Cost of merchandise purchased:
Purchases
$1,110,000
Purchases returns and allowances
(55,000)
Purchases discounts
(30,000)
Freight in
22,000
Cost of merchandise purchased
1,047,000
Inventory available for sale
$1,138,300
Inventory, May 31, 20Y5
(105,000)
Cost of goods sold before estimated returns
$1,033,300
Estimated returns
(43,300)
Cost of goods sold
$ 990,000