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Chapter Five
Challenge Exercise 1
Information related to Pagnucci Co. is presented below.
2. On April 6 paid freight costs of $500 on merchandise purchased from Mockingbird.
4. On April 8, returned damaged merchandise to Mockingbird Company and was granted a $3,000 credit for
returned merchandise.
5. On April 15 paid the amount due to Mockingbird Company in full.
Instructions:
(a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under a perpetual
inventory system.
(b) On April 20, Pagnucci sold 60% of the goods purchased from Mockingbird. What amount would they record
Challenge Exercise 1 – Solution
a) (1) April 5 Inventory ............................................................. 20,000
Accounts Payable ..................................... 20,000
(3) April 7 Equipment ........................................................... 29,000
Accounts Payable ..................................... 29,000
(5) April 15 Accounts Payable ............................................... 17,000
($20,000 – $3,000)
Inventory ................................................... 340
[($20,000 – $3,000) X 2%]
Challenge Exercise 1 – Solution (Continued)
b) The cost of the goods acquired is $17,160 ($20,000 + $500 - $3,000 - $340). The cost of goods sold would
c) If the $500 was paid on April 6 to ship goods to a customer, the account debited in the entry would be
Freight-Out or Delivery Expense instead of Inventory. When freight is paid to ship goods to a customer, it is
d) May 4 Accounts Payable ........................................................... 17,000
Challenge Exercise 2
On September 1, Rhea Office Supply had an inventory of 30 calculators at a cost of $20 each. The company
uses a perpetual inventory system. During September, the following transactions occurred.
Sept. 6 Purchased 70 calculators at $22 each from Danny Co. for cash.
9 Paid freight of $70 on calculators purchased from Danny Co.
10 Returned 2 calculators to Danny Co. for $46 credit (including freight) because they did not meet
specifications.
12 Sold 33 calculators (30 costing $20, and 3 costing $23 including freight) for $33 each to Great Big
Book Store, terms n/30.
14 Granted credit of $33 to Great Big Book Store for the return of one calculator that was not ordered.
20 Sold 40 calculators costing $23 for $33 each to Bush’s Card Shop, terms n/30.
Instructions:
a) Journalize the September transactions.
b) What amount would Rhea report as net sales in the September income statement?
c) What amount would Rhea report as gross profit in the September income statement?
Challenge Exercise 2 – Solution
a)
Sept. 6 Inventory (70 X $22) .............................................................. 1,540
Cash ............................................................................. 1,540
Challenge Exercise 2 – Solution (Continued)
20 Accounts Receivable (40 X $33) ........................................... 1,320
Sales ........................................................................... 1,320
Challenge Exercise 3
Presented below are transactions related to Stealer’s Company.
1. On December 3, Stealer’s Company sold $400,000 of merchandise to Sharif Co., terms 2/10, n/30, FOB
shipping point.
The cost of the merchandise sold was $240,000.
2. On December 8, Sharif Co. was granted an allowance of $19,000 for merchandise purchased on December
3.
3. On December 13, Stealer’s Company received the balance due from Sharif Co.
Instructions:
(a) Prepare the journal entries to record these transactions on the books of Stealer’s Company using a
perpetual inventory system.
(b) Assume that Stealer’s Company received the balance due from Sharif 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.
(c) 1) What is the difference between a Sales Return and a Sales Allowance? 2) How would the journal entry
on December 8 be different if it was a Sales Return instead of a Sales Allowance?
Challenge Exercise 3 – Solution
(a) 1. Dec. 3 Accounts Receivable ......................................... 400,000
Sales Revenue ......................................... 400,000
2. Dec. 8 Sales Returns and Allowances .......................... 19,000
Accounts Receivable ................................ 19,000
3. Dec. 13 Cash ($381,000 – $7,620) ................................. 373,380
(b) Cash….. ............................................................................................. 381,000
(c) 1) In a sales return, the customer returns merchandise to the seller and receives either a credit on
Challenge Exercise 4
Presented below is financial information for two different companies.
Viet Namese
Company Company
Sales revenue $180,000 $ (e)
Sales discounts 2,000 2,500
Sales returns (a) 5,000
Net sales 171,000 200,000
Cost of goods sold 103,000 (f)
Gross profit (b) 80,000
Operating expenses 45,000 (g)
Income from operations (c) 51,000
Other revenues (expenses) 4,000 (h)
Net income (d) 49,000
Instructions:
(a) Determine the missing amounts above.
(b) Determine the gross profit rates. (Round to one decimal place.)
Challenge Exercise 4– Solution
a) (*missing amount)
a. Sales revenue ......................................................................................... $ 180,000)
Sales discounts ...................................................................................... (2,000)
Challenge Exercise 4 – Solution(Continued)
e. *Sales revenue ......................................................................................... $207,500
Sales discounts ...................................................................................... -2,500
f. Net sales ................................................................................................. $200,000)
*Cost of goods sold .................................................................................. 120,000)
Gross profit .............................................................................................. $ 80,000)
(b) Viet Company
Gross profit ÷ Net sales = $68,000 ÷ $171,000 = 39.8%
Challenge Exercise 5
The trial balance of Alexei Company at the end of its fiscal year, August 31, 2014, includes these accounts:
Inventory $20,000; Purchases $169,000; Sales Revenue $220,000; Freight-In $5,000; Sales Discounts $3,200;
Sales Returns and Allowances $3,800; Freight-Out $1,500; Purchase Discounts $2,900 and Purchase Returns
and Allowances $2,400. The ending Inventory is $27,000.
Instructions:
(a) Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).
(b) Compute Alexei’s gross profit and gross profit rate.
Challenge Exercise 5– Solution
(a) Inventory, September 1, 2013 ............................................................. $ 20,000
Purchases………… .................................................................................. $169,000
(b) Net Sales – Cost of Goods Sold = Gross Profit
Challenge Exercise 6
This information relates to Borkowski Co.
1. On April 5 purchased merchandise from D. Munez Company for $30,000, terms 2/10, net/30, FOB shipping
point.
2. On April 6 paid freight costs of $1,200 on merchandise purchased from D. Munez Company.
3. On April 7 purchased equipment on account for $44,000.
4. On April 8 returned some of April 5 merchandise to D. Munez Company which cost $3,200.
5. On April 15 paid the amount due to D. Munez Company in full.
Instructions:
(a) Prepare the journal entries to record these transactions on the books of Borkowski Co. using a periodic
inventory system.
(b) Assume that Borkowski Co. paid the balance due to D. Munez Company on May 4 instead of April 15.
Prepare the journal entry to record this payment.
(c) Assume Borkowski sold some of the goods purchased to a customer. How would the entries be different if
Borkowski used the periodic method or the perpetual method?
Challenge Exercise 6– Solution
(a) 1. April 5 Purchases ......................................................... 30,000
Accounts Payable ...................................... 20,000
3. April 7 Equipment ......................................................... 44,000
Accounts Payable ...................................... 44,000
4. April 8 Accounts Payable ............................................. 3,200
5. April 15 Accounts Payable ............................................. 26,800
($30,000 – $3,200)
(b) May 4 Accounts Payable ............................................. 26,800
(c) When using the periodic method, the sale of goods to a customer requires only one entry, to record the
actual sale. Accounts Receivable is debited and Sales Revenue is credited for the selling price. When using
