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CHAPTER 5
SOLUTIONS TO EXERCISES—SET B
EXERCISE 5-1B
(2) April 6 Inventory .......................................... 700
Cash .......................................... 700
(4) April 8 Accounts Payable ............................ 3,600
Inventory ................................... 3,600
(5) April 15 Accounts Payable
($16,000 – $3,600) ......................... 12,400
EXERCISE 5-2B
Sept. 6 Inventory ......................................................... 3,300
1-2
EXERCISE 5-2B (Continued)
Sept. 12 Accounts Receivable .................................... 690
Sales Revenue ....................................... 690
Cost of Goods Sold ....................................... 520
EXERCISE 5-3B
(a) (1) Dec. 3 Accounts Receivable ................... 900,000
(3) Dec. 13 Cash ($850,000 – $8,500) ............. 841,500
(b) Cash ....................................................................... 850,000
EXERCISE 5-4B
(a) June 10 Inventory .................................................. 10,000
Accounts Payable ............................ 10,000
(b) June 10 Accounts Receivable ................................... 10,000
Sales Revenue ...................................... 10,000
Cost of Goods Sold ...................................... 5,500
Inventory ............................................... 5,500
11 No entry
EXERCISE 5-5B
WEDGE COMPANY
Income Statement (Partial)
For the Year Ended October 31, 2014
Sales
Sales revenue ..................................................... $1,050,000
EXERCISE 5-6B
(a) STORM CO.
Income Statement
For the Month Ended January 31, 2014
Sales
Sales revenue ............................................. $380,000
Less: Sales returns and
allowances ....................................... $30,000
Sales discounts ............................... 8,000 38,000
Net sales ...................................................... 342,000
EXERCISE 5-6B (Continued)
(b) STORM CO.
Comprehensive Income Statement
For the Month Ended January 31, 2014
Net income .......................................................... $ 14,250
(c) Profit margin =
$14,250
$342,000
= 4.2%
EXERCISE 5-7B
(a) Martin Company
Sales revenue ........................................................................ $ 90,000
*Sales returns ($90,000 – $87,000) ........................................ (3,000)
Net sales ................................................................................ $ 87,000
1-6
EXERCISE 5-7B (Continued)
(b)
Martin
Knoppe
Profit margin
$14,620 ÷ $87,000 = 16.8%
$17,000 ÷ $100,000 = 17%
(c) Knoppe has a slightly higher profit margin than Martin. Each dollar of net
sales by Knoppe results in 17 cents of net income compared to only 16.8
EXERCISE 5-8B
(a) YOCUM COMPANY
Income Statement
For the Year Ended December 31, 2014
Net sales .............................................. $2,150,000
Cost of goods sold ............................. 1,037,000
Gross profit ......................................... 1,113,000
Operating expenses
Salaries and wages expense ...... $415,000
EXERCISE 5-8B (Continued)
(b) Profit margin: $122,500 ÷ $2,150,000 = 5.7%
(c) During the current year Yocum had a loss on the sale of property,
plant, and equipment of $83,500. This loss is not part of operating
EXERCISE 5-9B
(a) THE CLOROX COMPANY
Income Statement
For the Year Ended June 30, 2014
(amounts in millions)
Net sales .............................................................. $5,273
Cost of goods sold ............................................. 3,098
Gross profit ......................................................... 2,175
(b) Gross profit rate: $2,175 ÷ $5,273 = .412
Profit margin: $450 ÷ $5,273 = .085
1-10
EXERCISE 5-9B (Continued)
(c) THE CLOROX COMPANY
Income Statement
For the Year Ended June 30, 2014
(amounts in millions)
Net sales* ............................................................ $6,328
Cost of goods sold** .......................................... 3,718
Income from operations .................................... 977
Other revenues and gains
Other income .............................................. 9
Other expenses and losses
Interest expense ......................................... 168 159
Income before income taxes ............................. 818
The gross profit rate remained unchanged at 41.2%. This result would
be expected since advertising expenses are not part of cost of goods
sold.
EXERCISE 5-10B
Inventory, September 1, 2013 .................................... $ 18,700
Purchases ................................................................... $154,000
Less: Purchase returns and allowances ................ 5,000
EXERCISE 5-11B
(a) $1,510 ($1,600 – $90) (g) $8,000 ($290 + $7,710)
(b) $1,650 (1,510 + $140) (h) $340 ($8,050 – $7,710)
EXERCISE 5-12B
(a) Earnings have high quality if they provide a full and transparent depiction
of how a company performed.
EXERCISE 5-12B (Continued)
(c) In order to identify potential aggressive accounting techniques one
should examine the factors that are causing net income to differ from net
cash provided by operating activities. Many of these differences would
*EXERCISE 5-13B
(a) (1) April 5 Purchases .......................................... 42,000
Accounts Payable .................... 42,000
(3) April 7 Equipment .......................................... 30,000
Accounts Payable .................... 30,000
(4) April 8 Accounts Payable .............................. 13,600
(5) April 15 Accounts Payable
($42,000 – $13,600) ......................... 28,400
