Chapter 11
Preparing a Worksheet for a Merchandise Company Using the
Perpetual Method
Chapter Overview
This chapter explains how to adjust the value of the inventory on hand to the value of the inventory on the
balance sheet and prepare a worksheet for a merchandising company using a perpetual inventory system.
In a perpetual inventory system, the balance of inventory on hand is continually, or perpetually, updated
every time that there is a transaction that affects the Merchandise Inventory account. A perpetual system
keeps continual track of each type of inventory item by recording units on hand at the beginning, units
sold, and the current balance after each purchase or sale.
Learning Objectives
After studying Chapter 11, your students should gain proficiency in the following:
2. Preparing a Worksheet for a Merchandise Company.
Chapter 11 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Periodic Inventory 1 5 Easy
2 Perpetual Inventory 1 5 Easy
3 Periodic Inventory 1 5 Easy
Concept Checks
1 Adjustment for Merchandise Inventory 1 10 Easy
2 Adjustment for Unearned Fees 1 15 Easy
3 Worksheet 2 10 Easy
4 Merchandise Inventory Adjustment 1 10 Easy
Exercises (Set A)
11A-1 Account Balances 1 10 Easy
11A-2 Computations 1 15 Easy
11A-3 Transaction Analysis 1 10 Easy
11A-5 Worksheet 2 20 Medium
Exercises (Set B)
11B-1 Account Balances 1 10 Easy
Problems (Set A)
11A-1 Computations 1 30 Medium
11A-2 Worksheet 1, 2 60 Medium
11A-3 Worksheet 1, 2 60 Medium
11A-4 Worksheet 1, 2 60 Medium
Problems (Set B)
11B-1 Computations 1 30 Medium
Financial Report Problem
Reading Amazon’s Annual Report 1 10 Easy
Keeping It Real
Suarez Computer Center 1, 2 60 Hard
Learning Unit 11–1: Adjustments for Merchandise Inventory Using
the Perpetual Method, Unearned Rent, Supplies Used, Insurance
Expired, Depreciation Expense, and Salaries Accrued
Summary: The Merchandise Inventory account shows the goods that a merchandise company has
available to sell to customers. Companies have several ways to keep track of the cost of goods sold (the
total cost of the goods sold to customers) and the quantity of inventory on hand. The two systems are the
periodic inventory system and perpetual inventory system. The perpetual inventory system is an
inventory system that keeps continual track of each type of inventory unit by recording units on hand at
the beginning, units sold, and the current balance after each sale or purchase.
Key Concepts: Cost of goods sold, perpetual inventory system, beginning merchandise inventory
(beginning inventory).
Lecture Outline:
Adjustments for merchandise inventory: Businesses can choose either to track the cost of goods sold
using a perpetual inventory system or a periodic inventory system:
1. Perpetual inventory system continually updates the balance of inventory on hand.
2. Adjusting entries to update the value of the inventory to the value of the inventory actually on
hand:
a. Adjusting journal entry for inventory shrinkage:
3. Adjusting entries are required when rent is received in advance of earning the rent. Unearned
Rent is a liability account which is used to record rent received in advance. When rent is earned,
then the amount earned needs to be credited to Rent Revenue and debited to Unearned Rent.
Teaching Tips/Strategy: Use the Success Coach LU 11-1 to discuss the key concepts of this unit. For
class demonstration use Concept Checks #1, #2, #4, Exercises 11A-1, 11A-2, and 11A-3. To fully assess
the understanding and mastery of this unit, assign Problem 11A-1.
Use the “10-Minute Quiz” questions #2 and #3 to reinforce concepts.
Learning Unit 11-2: Worksheets for Merchandise Companies Using
the Perpetual Inventory Method
Summary: In this unit we prepare a worksheet for Art’s Wholesale Clothing Company. For convenience,
we reproduce the company’s chart of accounts in Figure 11.3, and Figure 11.4 which shows the trial
balance that was prepared from Art’s Wholesale ledger. In looking at the trial balance, we see many new
titles that did not appear in the trial balance which we completed for a service company in Chapter 5.
Examples are mortgage payable, interest expense, and unearned revenue. Mortgage Payable is a
liability account that records the increases and decreases in the amount of debt owed on a mortgage.
Interest Expense is a non-operating expense categorized as Other Expense. Unearned Revenue is a
liability account that records receipt of payment for goods and services in advance of delivery. Unearned
rent is a particular example of this general type of account.
Key Concepts: Mortgage payable, interest expense, unearned revenue.
Lecture Outline:
A worksheet similar to the one used for service businesses is completed.
1. The initial balances from the general ledger are added to the worksheet.
2. Similar to the adjusting entries for a service business, adjusting entries are calculated to represent
the changes during the period.
a. Mortgage payable – a liability account showing the amount owed on a mortgage.
b. Interest expense – the cost of borrowing money. Businesses making loan payments pay a
portion of the amount borrowed (principal) and the interest charged by the institution
from which they borrowed the funds.
c. Unearned revenue – a liability account that records the amount owed for goods and
services received in advance of delivery of those services. When cash is received, cash is
debited and the liability “unearned” is credited.
The journal entry when cash is received for rent paid in advance is:
The journal adjusting entry for the portion of the rent earned during the year:
Dr. Unearned Rent XX
Cr. Rent Revenue (Earned) XX
d. The journal entry to adjust the supplies account ending balance to actual supplies on hand
at the end of period is:
Dr. Supplies expense XX
Cr. Supplies (asset account) XX
e. The journal entry needed when insurance expires during the year is:
Dr. Insurance expense XX
Cr. Prepaid insurance XX
f. The adjusting entry to reflect the depreciation expense for the accounting period is:
Dr. Depreciation expense XX
Cr. Accumulated depreciation XX
g. The adjusting entry for salaries accrued (employees work earned but not paid) since the
The next step in the worksheet is to fill out the balance sheet and income statement columns. After
adjusting the merchandise inventory accounts, the ending inventory balance is carried to the balance sheet
column in the worksheet.
Teaching Tips/Strategy: Use the Success Coach LU 11-2 to discuss the key concepts regarding the
worksheet. As a group-based activity, assign Exercises 11A-4 and 11B-4. Then regroup students to grade
or peer review each other’s worksheet. The peer review will consist of a list of the items completed
correctly and common items with which the students have challenges.
Use the “Ten-Minute Quiz” questions #1, #4, #5, #6, #7, #8, #9 and #10 to reinforce the concepts.
Name Date Section
CHAPTER 11
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. If supplies of $800 are showing as the balance in the supplies account and $300 of supplies have
been used during the period, what is the adjusting entry?
a. debit supplies and credit supplies expense for $300
b. debit supplies expense and credit supplies for $300
c. debit supplies and credit supplies expense for $500
d. debit supplies expense and credit supplies for $500
2. The adjusting entry to record inventory shrinkage:
a. debits merchandise inventory and credits cost of goods sold
b. debits cost of goods sold and credits merchandise inventory
c. debits merchandise inventory and credits sales
d. debits sales and credits merchandise inventory
3. The adjusting entry to increases in inventory value when actual inventory on hand is greater than
inventory on balance sheet:
a. debits merchandise inventory and credits cost of goods sold
b. debits cost of goods sold and credits merchandise inventory
c. debits merchandise inventory and credits sales
d. debits sales and credits merchandise inventory
4. If supplies of $800 are showing as the balance in the supplies account and the physical count of
supplies shows $300 on hand, what is the adjusting entry?
a. debit supplies and credit supplies expense for $300
b. debit supplies expense and credit supplies for $300
c. debit supplies and credit supplies expense for $500
d. debit supplies expense and credit supplies for $500
5. If 6 months of rent totaling $6,000 was received 4 months ago, what is the adjusting entry?
a. debit unearned rent and credit rent revenue for $2,000
b. debit rent revenue and credit unearned rent for $2,000
c. debit unearned rent and credit rent revenue for $4,000
d. debit rent revenue and credit unearned rent for $4,000
6. If $5,300 of insurance was prepaid and $2,700 has expired, what is the adjusting entry?
a. debit insurance expense and credit prepaid insurance for $2,600
b. debit prepaid insurance and credit insurance expense for $2,600
c. debit insurance expense and credit prepaid insurance for $2,700
d. debit prepaid insurance and credit insurance expense for $2,700
7. What is the entry to record $1,300 of depreciation for the year?
a. debit depreciation expense and credit prepaid depreciation
b. debit depreciation expense and credit accumulated depreciation
c. debit prepaid depreciation and credit depreciation expense
d. debit accumulated depreciation and credit prepaid depreciation
8. What is the adjusting entry to record salaries accrued of $770?
a. debit salaries payable and credit salaries expense
b. debit salaries payable and credit accrued salaries
c. debit salaries expense and credit prepaid salaries
d. debit salaries expense and credit salaries payable
9. When completing the worksheet:
a. ending inventory is carried to the balance sheet columns
b. ending inventory is carried to the income statement columns
c. beginning inventory is carried to the balance sheet columns
d. beginning inventory is carried to the income statement columns
10. When completing the worksheet:
a. net income is added to the debit column of the balance sheet
b. net income is added to the credit column of the balance sheet
c. net income does not appear on the worksheet
d. net income is added to the credit column of the income statement
Answer Key to Chapter 11 Quiz