Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 5
Merchandising Operations
Review Questions
1. What is a merchandiser, and what is the name of the merchandise that it sells?
2. What are the two types of merchandisers? How do they differ?
Merchandisers are often identified as either wholesalers or retailers. A wholesaler is a
3. Describe the operating cycle of a merchandiser.
4. What is Cost of Goods Sold (COGS), and where is it reported?
5. How is gross profit calculated, and what does it represent?
6. What are the two types of inventory accounting systems? Briefly describe each.
The two types of inventory accounting systems are the periodic inventory system and the
7. What is an invoice?
An invoice is the seller’s request for payment from the buyer. It is also called a bill.
5-2
8. What account is debited when recording a purchase of inventory when using the perpetual
inventory system?
9. What would the credit terms of “2/10, n/EOM” mean?
10. What is a purchase return? How does a purchase allowance differ from a purchase return?
A purchase return is when businesses allow purchasers to return merchandise that is defective,
11. Describe FOB shipping point and FOB destination. When does the buyer take ownership of the
goods, and who typically pays the freight?
FOB shipping point means the buyer takes ownership (title) to the goods after the goods leave
12. How is the net cost of inventory calculated?
13. What are the two journal entries involved when recording the sale of inventory when using the
perpetual inventory system?
The two journal entries involved when recording the sale of inventory when using the perpetual
14. Under the new revenue recognition standard, how is the sale of inventory recorded?
15. Under the new revenue recognition standard, what must companies do at the end of the period
related to sales returns? Describe the journal entries that would be recorded.
Under the new revenue recognition standard, companies must estimate the amount of returns that
16. When granting a sales allowance is there a return of merchandise inventory from the customer?
Describe the journal entry(ies) that would be recorded.
17. What is freight out and how is it recorded by the seller?
18. What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for
inventory shrinkage.
Inventory shrinkage is the loss of inventory that occurs because of theft, damage, and errors.
19. What are the four steps involved in the closing process for a merchandising company?
The four-step closing process for a merchandising company are:
20. Describe the single-step income statement.
21. Describe the multi-step income statement.
22. What financial statement is merchandise inventory reported on, and in what section?
Merchandise inventory is shown as a current asset on the Balance Sheet.
5-4
23. What does the gross profit percentage measure, and how is it calculated?
The gross profit percentage measures the profitability of each sales dollar above the cost of
24A. When a company has a contract involving multiple performance obligations, how must the
company recognize revenue?
Companies that have contracts involving multiple performance obligations must allocate the
25B. What account is debited when recording a purchase of inventory when using a periodic inventory
system?
The Purchases account is debited when recording the purchase of inventory when using the
26B. When recording purchase returns and purchase allowances under the periodic inventory system,
what account is used?
The Purchase Returns and Allowances account is credited when recording purchase returns or
27B. What account is debited when recording the payment of freight in when using the periodic
inventory system?
28B. Describe the journal entry(ies) when recording a sale of inventory using the periodic inventory
system.
When recording sales of merchandise inventory using the periodic system you will debit Cash or
Accounts Receivable and credit Sales Revenue.
29B. Is an adjusting entry needed for inventory shrinkage when using the periodic inventory system?
Explain.
An adjusting entry is not needed for inventory shrinkage when using the periodic system. The
30B. Highlight the differences in the closing process when using the periodic inventory system rather
than the perpetual inventory system.
The two main differences in the closing entries are in the first two steps. With Step 1 in the
5-5
31B. Describe the calculation of cost of goods sold when using the periodic inventory system.
The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory plus
5-6
Short Exercises
S5-1 Comparing periodic and perpetual inventory systems
Learning Objective 1
For each statement below, identify whether the statement applies to the periodic inventory system,
the perpetual inventory system, or both.
a. Normally used for relatively inexpensive goods.
b. Keeps a running computerized record of merchandise inventory.
c. Achieves better control over merchandise inventory.
d. Requires a physical count of inventory to determine the quantities on hand.
e. Uses bar codes to keep up-to-the-minute records of inventory.
SOLUTION
a.
Periodic
S5-2 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Toys and More:
May 8
Toys and More buys $113,300 worth of MegoBlock toys on account with credit terms of
2/10, n/60.
12
Toys and More returns $11,250 of the merchandise to MegoBlock due to damage during
shipment.
15
Toys and More paid the amount due, less the return and discount.
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Toys and More?
5-7
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
May 8
Merchandise Inventory
113,300
Accounts Payable
113,300
Requirement 2
S5-3 Journalizing purchase transactions
Learning Objective 2
Consider the following transactions for Burlington Drug Store:
Feb. 2
Burlington buys $23,800 worth of inventory on account with credit terms of 2/15, n/30,
FOB shipping point.
4
Burlington pays a $50 freight charge.
9
Burlington returns $5,200 of the merchandise due to damage during shipment.
14
Burlington paid the amount due, less return and discount.
Requirements
1. Journalize the purchase transactions. Explanations are not required.
2. In the final analysis, how much did the inventory cost Burlington Drug Store?
5-8
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Feb. 2
Merchandise Inventory
23,800
Accounts Payable
23,800
Requirement 2
S5-4 Journalizing sales transactions
Learning Objective 3
Journalize the following sales transactions for Salem Sportswear. Explanations are not required. The
company estimates sales returns at the end of each month.
Jul. 1
Salem sold $20,000 of men’s sportswear for cash. Cost of goods sold is $10,000.
3
Salem sold $62,000 of women’s sportswear on account, credit terms are 3/10, n/30. Cost of
goods is $31,000.
5
Salem received a $4,500 sales return on damaged goods from the customer on July 1. Cost
of goods damaged is $2,250.
10
Salem receives payment from the customer on the amount due, less discount.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jul. 1
Cash
20,000
Sales Revenue
20,000
S5-5 Estimating sales returns
Learning Objective 3
On December 31, Jack Photography Supplies estimated that approximately 2% of merchandise sold
will be returned. Sales Revenue for the year was $80,000 with a cost of $48,000. Journalize the
adjusting entries needed to account for the estimated returns.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
1,600
Refunds Payable ($80,000 × 0.02)
1,600
S5-6 Journalizing purchase and sales transactions
Learning Objectives 2, 3
Suppose Piranha.com sells 3,500 books on account for $17 each (cost of these books is $35,700) on
October 10, 2018 to The Textbook Store. One hundred of these books (cost $1,020) were damaged
in shipment, so Piranha.com later received the damaged goods from The Textbook Store as sales
returns on October 13, 2018.
Requirements
1. Journalize The Textbook Store’s October 2018 transactions.
2. Journalize Piranha.com’s October 2018 transactions. The company estimates sales returns at the
end of each month.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 10
Merchandise Inventory (3,500 × $17)
59,500
Accounts Payable
59,500
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Oct. 10
Accounts Receivable
59,500
Sales Revenue (3,500 × $17)
59,500
5-11
S5-7 Journalizing purchase and sales transactions
Learning Objectives 2, 3
On November 4, 2018, Cain Company sold merchandise inventory on account to Tarin Wholesalers,
$12,000, that cost $4,800. Terms 3/10, n/30. On November 5, 2018, Tarin Wholesalers paid shipping
of $30. Tarin Wholesalers paid the balance to Cain Company on November 13, 2018.
Requirements
1. Journalize Tarin Wholesaler’s November transactions.
2. Journalize Cain Company’s November transactions.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 4
Merchandise Inventory
12,000
Accounts Payable
12,000
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Nov. 4
Accounts Receivable
11,640
Sales Revenue ($12,000 – ($12,000 × 0.03))
11,640
5-12
S5-8 Adjusting for inventory shrinkage
Learning Objective 4
Jeana’s Furniture’s unadjusted Merchandise Inventory account at year-end is $69,000. The physical
count of inventory came up with a total of $67,600. Journalize the adjusting entry needed to account
for inventory shrinkage.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
S5-9 Journalizing closing entries
Learning Objective 4
Rocky RV Center’s accounting records include the following accounts at December 31, 2018.
Cost of Goods Sold
$ 372,000
Accumulated Depreciation—Building
$ 38,000
Accounts Payable
16,000
Cash
47,000
Rent Expense
26,000
Sales Revenue
636,500
Building
113,000
Depreciation Expense—Building
13,000
Common Stock
115,000
Dividends
58,000
Retained Earnings
83,100
Interest Revenue
14,000
Merchandise Inventory
239,600
Notes Receivable
34,000
Requirements
1. Journalize the required closing entries for Rocky.
2. Determine the ending balance in the Retained Earnings account.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
636,500
Interest Revenue
14,000
Income Summary
650,500
Requirement 2
Use the following information to answer Short Exercises S5-10 and S5-11.
Camilia Communications reported the following figures from its adjusted trial balance for its first
year of business, which ended on July 31, 2018:
Cash
$ 2,900
Cost of Goods Sold
$ 18,700
Selling Expenses
1,400
Equipment, net
9,500
Accounts Payable
4,300
Accrued Liabilities
1,800
Common Stock
4,365
Net Sales Revenue
29,200
Notes Payable, long-term
500
Accounts Receivable
3,200
Merchandise Inventory
1,100
Interest Expense
65
Administrative Expenses
3,300
5-14
S5-10 Preparing a merchandiser’s income statement
Learning Objective 5
Prepare Camilia Communications’s multi-step income statement for the year ended July 31, 2018.
SOLUTION
CAMILIA COMMUNICATIONS
Income Statement
Year Ended July 31, 2018
S5-11 Preparing a merchandiser’s statement of retained earnings and balance sheet
Learning Objective 5
Requirements
1. Prepare Camilia Communications’s statement of retained earnings for the year ended July 31,
2018. Assume that there were no dividends declared during the year and that the business began
on August 1, 2017.
2. Prepare Camilia Communications’s classified balance sheet at July 31, 2018. Use the report
format.
SOLUTION
Requirement 1
CAMILIA COMMUNICATIONS
Statement of Retained Earnings
Requirement 2
CAMILIA COMMUNICATIONS
Balance Sheet
July 31, 2018
5-16
S5-12 Computing the gross profit percentage
Learning Objective 6
Macarthy Landscape Supply’s selected accounts as of December 31, 2018, follow. Compute the
gross profit percentage for 2018.
Selling Expenses
$ 12,900
Interest Revenue
900
Net Sales Revenue
134,700
Cost of Goods Sold
114,000
Administrative Expenses
10,200
SOLUTION
Net Sales Revenue
$ 134,700
S5A-13 Journalizing multiple performance obligations
Learning Objective 7 Appendix 5A
Journalize the following sales transactions for King Company. Explanations are not required.
Apr. 1
King Company sold merchandise inventory for $150. The cost of the inventory was
$90. The customer paid cash. King Company was running a promotion and the
customer received a $20 award at the time of sale that can be used at a future date on
any King Company merchandise.
May 15
The customer uses the $20 award when purchasing merchandise inventory for $30. The
cost of the inventory was $18. The customer paid cash.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Apr. 1
Cash
150
Sales Revenue ($150 − $20)
130
5-17
S5A-13, cont.
S5B-14 Journalizing purchase transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Consider the following transactions for Garman Packing Supplies:
Apr. 10
Garman Packing Supplies buys $175,000 worth of merchandise inventory on account with
credit terms of 1/10, n/30.
12
Garman returns $15,200 of the merchandise to the vendor due to damage during shipment.
19
Garman paid the amount due, less the return and discount.
Requirements
1. Journalize the purchase transactions assuming Garman Packing Supplies uses the periodic
inventory system. Explanations are not required.
2. What is the amount of net purchases?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Apr. 10
Purchases
175,000
Accounts Payable
175,000
Requirement 2
5-18
S5B-15 Journalizing sales transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Journalize the following sales transactions for Sanborn Camera Store using the periodic inventory
system. Explanations are not required.
Dec. 3
Sanborn sold $41,900 of camera equipment on account, credit terms are 3/15, n/EOM.
17
Sanborn receives payment from the customer on the amount due less the discount.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Dec. 3
Accounts Receivable
40,643
Sales Revenue ($41,900 – ($41,900 × 0.03))
40,643
S5B-16 Journalizing closing entries—periodic inventory system
Learning Objective 8 Appendix 5B
D & T Printing Supplies’s accounting records include the following accounts at December 31, 2018.
Purchases
$ 185,200
Accumulated Depreciation—Building
$ 21,000
Accounts Payable
7,700
Cash
18,100
Rent Expense
8,600
Sales Revenue
257,800
Building
42,800
Depreciation Expense—Building
4,700
Common Stock
55,000
Dividends
26,500
Retained Earnings
30,400
Interest Expense
1,900
Merchandise Inventory, Beginning
119,000
Merchandise Inventory, Ending
102,100
Notes Payable
11,300
Purchase Returns and Allowances
20,700
Purchase Discounts
2,900
Requirements
1. Journalize the required closing entries for D & T Printing Supplies assuming that D & T uses the
periodic inventory system.
2. Determine the ending balance in the Retained Earnings account.
5-19
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
257,800
Purchase Returns and Allowances
20,700
Requirement 2
5-20
S5B-17 Computing cost of goods sold in a periodic inventory system
Learning Objective 8 Appendix 5B
M Wholesale Company began the year with merchandise inventory of $5,000. During the year, M
purchased $93,000 of goods and returned $6,600 due to damage. M also paid freight charges of
$1,200 on inventory purchases. At year-end, M’s ending merchandise inventory balance stood at
$17,200. Assume that M uses the periodic inventory system. Compute M’s cost of goods sold for the
year.
SOLUTION
Beginning Merchandise Inventory
$ 5,000
5-21
Exercises
For all exercises, assume the perpetual inventory system is used unless stated otherwise. Round
all numbers to the nearest whole dollar unless stated otherwise.
E5-18 Using accounting vocabulary
Learning Objectives 1, 2, 3
Match the accounting terms with the corresponding definitions.
1. Credit Terms
2. FOB Destination
3. Invoice
4. Cost of Goods Sold
5. Purchase Allowance
6. FOB Shipping Point
7. Wholesaler
8. Purchase Discount
9. Retailer
a. The cost of the merchandise inventory that the business has sold to
customers.
b. An amount granted to the purchaser as an incentive to keep goods that are
not “as ordered.”
c. A type of merchandiser that buys merchandise either from a manufacturer
or a wholesaler and then sells those goods to consumers.
d. A situation in which the buyer takes ownership (title) at the delivery
destination point.
e. A type of merchandiser that buys goods from manufacturers and then sells
them to retailers.
f. A discount that businesses offer to purchasers as an incentive for early
payment.
g. A situation in which the buyer takes title to the goods after the goods leave
the seller’s place of business.
h. The terms of purchase or sale as stated on the invoice.
i. A seller’s request for cash from the purchaser.
SOLUTION
1.
h
2.
d
E5-19 Journalizing purchase transactions from an invoice
Learning Objective 2
3. Oct. 1 Cash $769.35
Kingston Tires received the following invoice from a supplier (Fields Distribution, Inc.):
Requirements
1. Journalize the transaction required by Kingston Tires on September 23, 2018. Do not round
numbers to the nearest whole dollar. Assume tires are purchased on account.
2. Journalize the return on Kingston’s books on September 28, 2018, of the D39–X4 Radials, which
were ordered by mistake. Do not round numbers to the nearest whole dollar.
3. Journalize the payment on October 1, 2018, to Fields Distribution, Inc. Do not round numbers to
the nearest whole dollar.
SOLUTION
Requirements 1, 2, and 3
Date
Accounts and Explanation
Debit
Credit
Sep. 23
Merchandise Inventory
929.60
Accounts Payable
929.60
5-23
E5-20 Journalizing purchase transactions
Learning Objective 2
July 24 Merch. Inv. $64 CR
Howie Jewelers had the following purchase transactions. Journalize all necessary transactions.
Explanations are not required.
Jun. 20
Purchased inventory of $5,100 on account from Sanders Diamonds, a jewelry importer.
Terms were 2/15, n/45, FOB shipping point.
20
Paid freight charges, $400.
Jul. 4
Returned $600 of inventory to Sanders.
14
Paid Sanders Diamonds, less return.
16
Purchased inventory of $3,500 on account from Southboro Diamonds, a jewelry importer.
Terms were 2/10, n/EOM, FOB destination.
18
Received a $300 allowance from Southboro Diamonds for damaged but usable goods.
24
Paid Southboro Diamonds, less allowance and discount.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jun. 20
Merchandise Inventory
5,100
Accounts Payable
5,100
E5-21 Journalizing sales transactions
Learning Objective 3
Journalize the following sales transactions for Antique Mall. Explanations are not required. The
company estimates sales returns at the end of each month.
Jan. 4
Sold $16,000 of antiques on account, credit terms are n/30. Cost of goods is $8,000.
8
Received a $300 sales return on damaged goods from the customer. Cost of goods damaged
is $150.
13
Antique Mall received payment from the customer on the amount due from Jan. 4, less the
return.
20
Sold $4,900 of antiques on account, credit terms are 1/10, n/45, FOB destination. Cost of
goods is $2,450.
20
Antique Mall paid $70 on freight out.
29
Received payment from the customer on the amount due from Jan. 20, less the discount.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 4
Accounts Receivable
16,000
Sales Revenue
16,000
5-25
E5-22 Journalizing purchase and sales transactions
Learning Objectives 2, 3
Journalize the following transactions for Soul Art Gift Shop. Explanations are not required.
Feb. 3
Purchased $3,300 of merchandise inventory on account under terms 3/10, n/EOM and FOB
shipping point.
7
Returned $900 of defective merchandise purchased on February 3.
9
Paid freight bill of $400 on February 3 purchase.
10
Sold merchandise inventory on account for $4,700. Payment terms were 2/15, n/30. These
goods cost the company $2,350.
12
Paid amount owed on credit purchase of February 3, less the return and the discount.
28
Received cash from February 10 customer in full settlement of their debt.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Feb. 3
Merchandise Inventory
3,300
Accounts Payable
3,300
5-26
Use the following information to answer Exercises E5-23 through E5-25.
The adjusted trial balance of Quality Office Systems at March 31, 2018, follows:
E5-23 Journalizing closing entries
Learning Objective 4
2. Ending Retained Earnings Balance $47,200
Requirements
1. Journalize the required closing entries at March 31, 2018.
2. Set up T-accounts for Income Summary; Retained Earnings; and Dividends. Post the closing
entries to the T-accounts, and calculate their ending balances.
3. How much was Quality Office’s net income or net loss?
5-27
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Sales Revenue
235,700
Income Summary
235,700
Requirement 2
Income Summary
Retained Earnings
Clos. 2 151,950
235,700 Clos. 1
4,950 Adj. Bal.
83,750 Bal.
Clos. 4 41,500
83,750 Clos. 3
Requirement 3
Net Income = $235,700 – $151,950 = $83,750
5-28
E5-24 Preparing a single-step income statement
Learning Objective 5
Net Income $83,750
Prepare Quality Office’s single-step income statement for the year ended March 31, 2018.
SOLUTION
QUALITY OFFICE SYSTEMS
Income Statement
Year Ended March 31, 2018
E5-25 Preparing a multi-step income statement
Learning Objective 5
Gross Profit $128,150
Prepare Quality Office’s multi-step income statement for the year ended March 31, 2018.
5-29
SOLUTION
QUALITY OFFICE SYSTEMS
Income Statement
Year Ended March 31, 2018
E5-26 Journalizing adjusting entries including estimating sales returns
Learning Objectives 3, 4
Emerson St. Book Shop’s unadjusted Merchandise Inventory at June 30, 2018 was $5,200. The cost
associated with the physical count of inventory on hand on June 30, 2018, was $4,900. In addition,
Emerson St. Book Shop estimated approximately $1,000 of merchandise sold will be returned with a
cost of $400.
Requirements
1. Journalize the adjustment for inventory shrinkage.
2. Journalize the adjustment for estimated sales returns.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
5-30
Requirement 2
Date
Accounts and Explanation
Debit
Credit
E5-27 Computing the gross profit percentage
Learning Objective 6
Crazy Cookies earned net sales revenue of $66,000,000 in 2018. Cost of goods sold was
$39,600,000, and net income reached $7,000,000, the company’s highest ever. Compute the
company’s gross profit percentage for 2018.
SOLUTION
Net Sales Revenue
$ 66,000,000
E5A-28 Journalizing multiple performance obligations and sales transactions
Learning Objectives 3, 7 Appendix 5A
Journalize the following sales transactions for Morris Supply. Explanations are not required.
Mar. 1
Morris Supply sold merchandise inventory for $3,000. The cost of the inventory was
$1,800. The customer paid cash. Morris Supply was running a promotion and the customer
received a $150 award at the time of sale that can be used at a future date on any Morris
Supply merchandise.
3
Sold $6,000 of supplies on account. Credit terms are 2/10, n/45, FOB destination. Cost of
goods is $3,600.
10
Received payment from the customer on the amount due from March 3, less the discount.
Apr. 15
The customer used the $150 award when purchasing merchandise inventory for $200, the
cost of the inventory was $120. The customer paid cash.
5-31
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Mar. 1
Cash
3,000
Sales Revenue ($3,000 − $150)
2,850
Unearned Revenue
150
E5B-29 Journalizing purchase transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Lawrence Appliances had the following purchase transactions. Journalize all necessary transactions
using the periodic inventory system. Explanations are not required.
Sep. 4
Purchased inventory of $6,900 on account from Max Appliance Wholesale, an appliance
wholesaler. Terms were 3/15, n/30, FOB shipping point.
4
Paid freight charges, $480.
10
Returned $300 of inventory to Max.
17
Paid Max Appliance Wholesale, less return and discount.
20
Purchased inventory of $3,900 on account from MY Appliance, an appliance wholesaler. Terms
were 1/10, n/45, FOB destination.
22
Received a $400 allowance from MY Appliance for damaged but usable goods.
29
Paid MY Appliance, less allowance and discount.
5-32
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Sept. 4
Purchases
6,900
Accounts Payable
6,900
E5B-30 Journalizing sales transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Journalize the following sales transactions for Straight Shot Archery using the periodic inventory
system. Explanations are not required. The company estimates sales returns and allowances at the
end of each month.
Aug. 1
Sold $6,500 of equipment on account, credit terms are 1/10, n/30.
8
Straight Shot received payment from the customer on the amount due from August 1, less
the discount.
15
Sold $3,100 of equipment on account, credit terms are n/45, FOB destination.
15
Straight Shot paid $90 on freight out.
20
Straight Shot negotiated a $500 allowance on the goods sold on August 15.
24
Received payment from the customer on the amount due from August 15, less the
allowance.
5-33
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Aug. 1
Accounts Receivable
6,435
Sales Revenue ($6,500 – ($6,500 × 0.01))
6,435
E5B-31 Journalizing purchase and sales transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Journalize the following transactions for Master Bicycles using the periodic inventory system.
Explanations are not required.
Nov. 2
Purchased $3,400 of merchandise inventory on account under terms 2/10, n/EOM and FOB
shipping point.
6
Returned $800 of defective merchandise purchased on November 2.
8
Paid freight bill of $100 on November 2 purchase.
10
Sold merchandise inventory on account for $6,100. Payment terms were 3/15, n/45.
11
Paid amount owed on credit purchase of November 2, less the return and the discount.
22
Received cash from November 10 customer in full settlement of their debt, less the
discount.
5-34
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Nov. 2
Purchases
3,400
Accounts Payable
3,400
5-35
E5B-32 Journalizing closing entries—periodic inventory system
Learning Objective 8 Appendix 5B
2. Ending Retained Earnings Balance $71,100
Ocean Life Boat Supply uses the periodic inventory method. The adjusted trial balance of Ocean
Life Boat Supply at December 31, 2018, follows:
Requirements
1. Journalize the required closing entries at December 31, 2018. Assume ending Merchandise
Inventory is $54,300.
2. Set up T-accounts for Income Summary; Retained Earnings; and Dividends. Post the closing
entries to the T-accounts, and calculate their ending balances.
3. How much was Ocean Life’s net income or net loss?
5-36
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
315,800
Interest Revenue
3,400
Requirement 2
Income Summary
Retained Earnings
Requirement 3
5-37
E5B-33 Computing cost of goods sold in a periodic inventory system
Learning Objective 8 Appendix 5B
Clink Electric uses the periodic inventory system. Clink reported the following selected amounts at
May 31, 2018:
Merchandise Inventory, June 1, 2017
$ 16,000
Freight In
$ 6,000
Merchandise Inventory, May 31, 2018
21,500
Net Sales Revenue
138,000
Purchases
81,000
Common Stock
32,000
Purchase Discounts
3,000
Retained Earnings
17,000
Purchase Returns and Allowances
6,600
Compute the following for Clink:
a. Cost of goods sold.
b. Gross profit.
SOLUTION
Requirement a
Beginning Merchandise Inventory
$ 16,000
Purchases
$ 81,000
5-38
Problems (Group A)
For all problems, assume the perpetual inventory system is used unless stated otherwise. Round
all numbers to the nearest whole dollar unless stated otherwise.
P5-34A Journalizing purchase and sale transactions
Learning Objectives 2, 3
Journalize the following transactions that occurred in September 2018 for Aquamarines. No
explanations are needed. Identify each accounts payable and accounts receivable with the vendor or
customer name. Aquamarines estimates sales returns at the end of each month.
Sep. 3
Purchased merchandise inventory on account from Sharpner Wholesalers, $5,500. Terms
2/15, n/EOM, FOB shipping point.
4
Paid freight bill of $85 on September 3 purchase.
4
Purchased merchandise inventory for cash of $1,600.
6
Returned $1,300 of inventory from September 3 purchase.
8
Sold merchandise inventory to Herman Company, $5,700, on account. Terms 2/15, n/35.
Cost of goods, $2,565.
9
Purchased merchandise inventory on account from Tucker Wholesalers, $6,000. Terms
3/10, n/30, FOB destination.
10
Made payment to Sharpner Wholesalers for goods purchased on September 3, less return
and discount.
12
Received payment from Herman Company, less discount.
13
After negotiations, received a $500 allowance from Tucker Wholesalers.
15
Sold merchandise inventory to Jerome Company, $2,800, on account. Terms n/EOM. Cost
of goods, $1,200.
22
Made payment, less allowance, to Tucker Wholesalers for goods purchased on September
9.
23
Jerome Company returned $200 of the merchandise sold on September 15. Cost of goods,
$80.
25
Sold merchandise inventory to Small for $1,800 on account that cost $738. Terms of 3/10,
n/30 was offered, FOB shipping point. As a courtesy to Small, $40 of freight was added to
the invoice for which cash was paid by Aquamarines.
29
Received payment from Small, less discount.
30
Received payment from Jerome Company, less return.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Sep. 3
Merchandise Inventory
5,500
Accounts Payable—Sharpner Wholesalers
5,500
9
Merchandise Inventory
6,000
Accounts Payable—Tucker Wholesalers
6,000
10
Accounts Payable—Sharpner Wholesalers ($5,500 – $1,300)
4,200
Cash ($4,200 – $84)
4,116
Merchandise Inventory ($4,200 × 0.02)
84
5-40
P5-34A, cont.
Sep. 23
Refunds Payable
200
Accounts Receivable—Jerome Company
200
Merchandise Inventory
80
Estimated Returns Inventory
80
P5-35A Journalizing purchase and sale transactions
Learning Objectives 2, 3
Journalize the following transactions that occurred in November 2018 for Julie’s Fun World. No
explanations are needed. Identify each accounts payable and accounts receivable with the vendor or
customer name. Julie’s Fun World estimates sales returns at the end of each month.
Nov. 4
Purchased merchandise inventory on account from Vera Company, $5,000. Terms 3/10, n/EOM,
FOB shipping point.
6
Paid freight bill of $100 on November 4 purchase.
8
Returned half the inventory purchased on November 4 from Vera Company.
10
Sold merchandise inventory for cash, $1,100. Cost of goods, $400. FOB destination.
11
Sold merchandise inventory to Geary Corporation, $11,100, on account, terms of 2/10, n/EOM.
Cost of goods, $6,105. FOB shipping point.
12
Paid freight bill of $20 on November 10 sale.
13
Sold merchandise inventory to Caldwell Company, $9,500, on account, terms of n/45. Cost of
goods, $5,225. FOB shipping point.
14
Paid the amount owed on account from November 4, less return and discount.
17
Received defective inventory as a sales return from the November 13 sale, $500. Cost of goods,
$275.
18
Purchased inventory of $3,600 on account from Rainman Corporation. Payment terms were 2/10,
n/30, FOB destination.
20
Received cash from Geary Corporation, less discount.
26
Paid amount owed on account from November 18, less discount.
28
Received cash from Caldwell Company, less return.
29
Purchased inventory from Sandra Corporation for cash, $12,300, FOB shipping point. Freight in
paid to shipping company, $170.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Nov. 4
Merchandise Inventory
5,000
Accounts Payable—Vera Company
5,000
5-42
P5-35A, cont.
Nov.11
Accounts Receivable—Geary Corporation
10,878
Sales Revenue ($11,100 – ($11,100 × 0.02))
10,878
14
Accounts Payable—Vera Company ($5,000 – $2,500)
2,500
Cash ($2,500 – $75)
2,425
Merchandise Inventory ($2,500 × 0.03)
75
17
Refunds Payable
500
Accounts Receivable—Caldwell Company
500
28
Cash
9,000
Accounts Receivable—Caldwell Company ($9,500 –
$500)
9,000
29
Merchandise Inventory
12,300
Cash
12,300
Merchandise Inventory
170
Cash
170
5-43
P5-36A Preparing a multi-step income statement, journalizing closing entries, and preparing a
post-closing trial balance
Learning Objectives 4, 5
1. Operating Income $67,900
The adjusted trial balance of Rachael Rey Music Company at June 30, 2018, follows:
Requirements
1. Prepare Rachael Rey’s multi-step income statement for the year ended June 30, 2018.
2. Journalize Rachael Rey’s closing entries.
3. Prepare a post-closing trial balance as of June 30, 2018.
5-44
SOLUTION
Requirement 1
RACHAEL REY’S MUSIC COMPANY
Income Statement
Year Ended June 30, 2018
Net Sales Revenue
$ 184,000
Cost of Goods Sold
85,500
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Jun. 30
Sales Revenue
184,000
Income Summary
184,000
P5-36A, cont.
Requirement 3
RACHAEL REY’S MUSIC COMPANY
Post-Closing Trial Balance
June 30, 2018
Account Title
Balance
Debit
Credit
Cash
$ 4,000
Accounts Receivable
38,400
5-46
P5-37A Journalizing adjusting entries, preparing adjusted trial balance, and preparing multi-
step income statement
Learning Objectives 4, 5
2. Total Credits $463,300
The unadjusted trial balance for Trudel Electronics Company at March 31, 2018, follows:
Requirements
1. Journalize the adjusting entries using the following data:
a. Interest revenue accrued, $200.
b. Salaries (Selling) accrued, $2,300.
c. Depreciation Expense—Equipment (Administrative), $1,300.
d. Interest expense accrued, $1,500.
e. A physical count of inventory was completed. The ending Merchandise Inventory should
have a balance of $45,200.
f. Trudel estimates that approximately $6,000 of merchandise sold will be returned with a cost
of $1,200.
2. Prepare Trudel Electronics’s adjusted trial balance as of March 31, 2018.
3. Prepare Trudel Electronics’s multi-step income statement for year ended March 31, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Interest Receivable
200
Interest Revenue
200
5-48
P5-37A, cont.
Requirement 2
TRUDEL ELECTRONICS COMPANY
Adjusted Trial Balance
March 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 4,000
Accounts Receivable
38,800
Interest Receivable
200
Merchandise Inventory
45,200
P5-37A, cont.
Requirement 3
TRUDEL ELECTRONICS COMPANY
Income Statement
Year Ended March 31, 2018
Net Sales Revenue
$ 276,500
5-50
P5-38A Preparing a single-step income statement, preparing a multi-step income statement,
and computing the gross profit percentage
Learning Objectives 5, 6
2. Operating Income $93,120
The records of Farm Quality Steak Company list the following selected accounts for the quarter
ended April 30, 2018:
Interest Revenue
$ 400
Accounts Payable
$ 17,700
Merchandise Inventory
45,000
Accounts Receivable
38,200
Notes Payable, long-term
54,000
Accumulated Depreciation—
Equipment
37,700
Salaries Payable
2,800
Common Stock
30,000
Net Sales Revenue
298,000
Retained Earnings
5,380
Rent Expense (Selling)
15,100
Dividends
25,000
Salaries Expense (Administrative)
2,000
Cash
7,100
Office Supplies
6,500
Cost of Goods Sold
154,960
Unearned Revenue
13,100
Equipment
132,000
Interest Expense
2,100
Interest Payable
1,700
Depreciation Expense—Equipment
(Administrative)
1,320
Rent Expense (Administrative)
7,100
Utilities Expense (Administrative)
4,600
Salaries Expense (Selling)
6,000
Delivery Expense (Selling)
3,800
Utilities Expense (Selling)
10,000
Requirements
1. Prepare a single-step income statement.
2. Prepare a multi-step income statement.
3. M. Doherty, manager of the company, strives to earn a gross profit percentage of at least 50%.
Did Farm Quality achieve this goal? Show your calculations.
5-51
SOLUTION
Requirement 1
FARM QUALITY STEAK COMPANY
Income Statement
Quarter Ended April 30, 2018
Revenues:
Net Sales Revenue
$ 298,000
5-52
P5-38A, cont.
Requirement 2
FARM QUALITY STEAK COMPANY
Income Statement
Quarter Ended April 30, 2018
Net Sales Revenue
$ 298,000
Administrative Expenses:
Depreciation Expense—Equipment
1,320
Utilities Expense
4,600
Rent Expense
7,100
Salaries Expense
2,000
Requirement 3
Farm Quality Steak Company did not achieve the goal of a gross profit percentage of 50%, it was
only 48%
Net Sales Revenue
$ 298,000
5-53
P5B-39A Journalizing purchase and sale transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Journalize the following transactions that occurred in March 2018 for Double Company. Assume
Double uses the periodic inventory system. No explanations are needed. Identify each accounts
payable and accounts receivable with the vendor or customer name. Double estimates sales returns at
the end of each month.
Mar. 3
Purchased merchandise inventory on account from Sidecki Wholesalers, $5,500. Terms
2/15, n/EOM, FOB shipping point.
4
Paid freight bill of $70 on March 3 purchase.
4
Purchased merchandise inventory for cash of $1,100.
6
Returned $900 of inventory from March 3 purchase.
8
Sold merchandise inventory to Herrick Company, $3,400, on account. Terms 1/15, n/35.
9
Purchased merchandise inventory on account from Tex Wholesalers, $5,600. Terms 2/10,
n/30, FOB destination.
10
Made payment to Sidecki Wholesalers for goods purchased on March 3, less return and
discount.
12
Received payment from Herrick Company, less discount.
13
After negotiations, received a $500 allowance from Tex Wholesalers.
15
Sold merchandise inventory to Jesper Company, $1,700, on account. Terms n/EOM.
22
Made payment, less allowance, to Tex Wholesalers for goods purchased on March 9.
23
Jesper Company returned $300 of the merchandise sold on March 15.
25
Sold merchandise inventory to Salter for $1,000 on account. Terms of 1/10, n/30 was
offered, FOB shipping point.
29
Received payment from Salter, less discount.
30
Received payment from Jesper Company, less return.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Mar. 3
Purchases
5,500
Accounts Payable—Sidecki Wholesalers
5,500
5-54
P5B-39A, cont.
8
Accounts Receivable—Herrick Company
3,366
Sales Revenue ($3,400 – ($3,400 × 0.01))
3,366
9
Purchases
5,600
Accounts Payable—Tex Wholesalers
5,600
5-55
P5B-40A Preparing a multi-step income statement and journalizing closing entries
Learning Objective 8 Appendix 5B
1. Gross Profit $192,600
Triton Department Store uses a periodic inventory system. The adjusted trial balance of Triton
Department Store at December 31, 2018, follows:
Requirements
1. Prepare Triton Department Store’s multi-step income statement for the year ended December 31,
2018. Assume ending Merchandise Inventory is $36,300.
2. Journalize Triton Department Store’s closing entries.
5-56
SOLUTION
Requirement 1
TRITON DEPARTMENT STORE
Income Statement
Year Ended December 31, 2018
P5B-40A, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
374,000
Purchase Returns and Allowances
109,000
Purchase Discounts
6,400
Merchandise Inventory (ending)
36,300
Income Summary
525,700
5-58
P5-41B Journalizing purchase and sale transactions
Learning Objectives 2, 3
Journalize the following transactions that occurred in February 2018 for Oceanic. No explanations
are needed. Identify each accounts payable and accounts receivable with the vendor or customer
name. Oceanic estimates sales returns at the end of each month.
Feb. 3
Purchased merchandise inventory on account from Silton Wholesalers, $5,200. Terms 2/15,
n/EOM, FOB shipping point.
4
Paid freight bill of $70 on February 3 purchase.
4
Purchased merchandise inventory for cash of $1,500.
6
Returned $900 of inventory from February 3 purchase.
8
Sold merchandise inventory to Herenda Company, $5,600, on account. Terms 3/15, n/35. Cost of
goods, $2,352.
9
Purchased merchandise inventory on account from Teddy Wholesalers, $7,000. Terms 1/10, n/30,
FOB destination.
10
Made payment to Silton Wholesalers for goods purchased on February 3, less return and discount.
12
Received payment from Herenda Company, less discount.
13
After negotiations, received a $500 allowance from Teddy Wholesalers.
15
Sold merchandise inventory to Jordon Company, $3,400, on account. Terms n/EOM. Cost of
goods, $1,496.
22
Made payment, less allowance, to Teddy Wholesalers for goods purchased on February 9.
23
Jordon Company returned $1,000 of the merchandise sold on February 15. Cost of goods, $440.
25
Sold merchandise inventory to Smith for $1,700 on account that cost $663. Terms of 2/10, n/30
were offered, FOB shipping point. As a courtesy to Smith, $70 of freight was added to the invoice
for which cash was paid by Oceanic.
27
Received payment from Smith, less discount.
28
Received payment from Jordon Company, less return.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Feb. 3
Merchandise Inventory
5,200
Accounts Payable—Silton Wholesalers
5,200
P5-41B, cont.
13
Accounts Payable—Teddy Wholesalers
500
Merchandise Inventory
500
15
Accounts Receivable—Jordon Company
3,400
Sales Revenue
3,400
Cost of Goods Sold
1,496
Merchandise Inventory
1,496
22
Accounts Payable—Teddy Wholesalers ($7,000 – $500)
6,500
Cash
6,500
5-60
P5-42B Journalizing purchase and sale transactions
Learning Objectives 2, 3
Journalize the following transactions that occurred in January 2018 for Sylvia’s Amusements. No
explanations are needed. Identify each accounts payable and accounts receivable with the vendor or
customer name. Sylvia estimates sales returns at the end of each month.
Jan. 4
Purchased merchandise inventory on account from Vanderbilt Company, $7,000. Terms
1/10, n/EOM, FOB shipping point.
6
Paid freight bill of $100 on January 4 purchase.
8
Returned half the inventory purchased on January 4 from Vanderbilt Company.
10
Sold merchandise inventory for cash, $1,600. Cost of goods, $640. FOB destination.
11
Sold merchandise inventory to Graceland Corporation, $10,800, on account, terms of 1/10,
n/EOM. Cost of goods, $5,400. FOB shipping point.
12
Paid freight bill of $60 on January 10 sale.
13
Sold merchandise inventory to Cabbell Company, $9,500, on account, terms of n/45. Cost
of goods, $5,225. FOB shipping point.
14
Paid the amount owed on account from January 4, less return and discount.
17
Received defective inventory as a sales return from the January 13 sale, $600. Cost of
goods, $300.
18
Purchased inventory of $4,600 on account from Roberts Corporation. Payment terms were
3/10, n/30, FOB destination.
20
Received cash from Graceland Corporation, less discount.
26
Paid amount owed on account from January 18, less discount.
28
Received cash from Cabbell Company, less return.
29
Purchased inventory from Sandra Corporation for cash, $11,600, FOB shipping point.
Freight in paid to shipping company, $240.
5-61
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 4
Merchandise Inventory
7,000
Accounts Payable—Vanderbilt Company
7,000
Cost of Goods Sold
5,400
Merchandise Inventory
5,400
12
Delivery Expense
60
Cash
60
P5-42B, cont.
Jan. 18
Merchandise Inventory
4,600
Accounts Payable—Roberts Corporation
4,600
20
Cash
10,692
Accounts Receivable—Graceland Corporation
10,692
5-63
P5-43B Preparing a multi-step income statement, journalizing closing entries, and preparing a
post-closing trial balance
Learning Objectives 4, 5
1. Operating Income $59,800
The adjusted trial balance of Rockin Robbin Dance Company at April 30, 2018, follows:
Requirements
1. Prepare Rockin Robbin’s multi-step income statement for the year ended April 30, 2018.
2. Journalize Rockin Robbin’s closing entries.
3. Prepare a post-closing trial balance as of April 30, 2018.
SOLUTION
Requirement 1
ROCKIN ROBBIN DANCE COMPANY
Income Statement
Year Ended April 30, 2018
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Apr. 30
Sales Revenue
178,500
Income Summary
178,500
5-65
P5-43B, cont.
Requirement 3
ROCKIN ROBBIN DANCE COMPANY
Post-Closing Trial Balance
April 30, 2018
Account Title
Balance
Debit
Credit
Cash
$ 4,400
5-66
P5-44B Journalizing adjusting entries, preparing adjusted trial balance, and preparing multi-
step income statement
Learning Objectives 4, 5
2. Total Credits $480,345
The unadjusted trial balance for Tuttle Electronics Company follows:
Requirements
1. Journalize the adjusting entries using the following data:
a. Interest revenue accrued, $550.
b. Salaries (Selling) accrued, $2,800.
c. Depreciation Expense—Equipment (Administrative), $1,295.
d. Interest expense accrued, $1,500.
e. A physical count of inventory was completed. The ending Merchandise Inventory should
have a balance of $45,300.
5-67
f. Tuttle estimates that approximately $6,200 of merchandise sold will be returned with a cost
of $2,480.
2. Prepare Tuttle Electronics’s adjusted trial balance as of October 31, 2018.
3. Prepare Tuttle Electronics’s multi-step income statement for year ended October 31, 2018.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 31
Interest Receivable
550
Interest Revenue
550
P5-44B, cont.
Requirement 2
TUTTLE ELECTRONICS COMPANY
Adjusted Trial Balance
October 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 4,200
Accounts Receivable
33,800
Interest Receivable
550
Merchandise Inventory
45,300
5-69
P5-44B, cont.
Requirement 3
TUTTLE ELECTRONICS COMPANY
Income Statement
Year Ended October 31, 2018
Net Sales Revenue
$ 294,100
Cost of Goods Sold
169,520
Gross Profit
124,580
5-70
P5-45B Preparing a single-step income statement, preparing a multi-step income statement,
and computing the gross profit percentage
Learning Objectives 5, 6
2. Operating Income $80,890
The records of Grade A Beef Company list the following selected accounts for the quarter ended
September 30, 2018:
Interest Revenue
$ 900
Accounts Payable
$ 17,000
Merchandise Inventory
46,300
Accounts Receivable
33,500
Notes Payable, long-term
47,000
Accumulated Depreciation—
Equipment
36,500
Salaries Payable
2,600
Common Stock
38,000
Net Sales Revenue
294,000
Retained Earnings
3,610
Rent Expense (Selling)
16,700
Dividends
15,000
Salaries Expense (Administrative)
2,500
Cash
7,300
Office Supplies
5,800
Cost of Goods Sold
161,700
Unearned Revenue
13,800
Equipment
131,000
Interest Expense
2,300
Interest Payable
900
Depreciation Expense—Equipment
(Administrative)
1,310
Rent Expense (Administrative)
7,400
Utilities Expense (Administrative)
4,500
Salaries Expense (Selling)
5,000
Delivery Expense (Selling)
3,100
Utilities Expense (Selling)
10,900
Requirements
1. Prepare a single-step income statement.
2. Prepare a multi-step income statement.
3. J. Douglas, manager of the company, strives to earn a gross profit percentage of at least 50%.
Did Grade A Beef achieve this goal? Show your calculations.
SOLUTION
Requirement 1
GRADE A BEEF COMPANY
Income Statement
Quarter Ended September 30, 2018
Revenues:
Net Sales Revenue
$ 294,000
5-72
P5-45B, cont.
Requirement 2
GRADE A BEEF COMPANY
Income Statement
Quarter Ended September 30, 2018
Administrative Expenses:
Depreciation Expense—Equipment
1,310
Utilities Expense
4,500
Net Income
$ 79,490
Requirement 3
Grade A Beef Company did not achieve the goal of a gross profit percentage of 50%; it was only
45%.
P5B-46B Journalizing purchase and sale transactions—periodic inventory system
Learning Objective 8 Appendix 5B
Journalize the following transactions that occurred in June 2018 for Daley Company. Assume Daley
uses the periodic inventory system. No explanations are needed. Identify each accounts payable and
accounts receivable with the vendor or customer name. Daley estimates sales returns at the end of
each month.
Jun. 3
Purchased merchandise inventory on account from Sherry Wholesalers, $5,500. Terms 3/15,
n/EOM, FOB shipping point.
4
Paid freight bill of $42 on June 3 purchase.
4
Purchased merchandise inventory for cash of $1,100.
6
Returned $200 of inventory from June 3 purchase.
8
Sold merchandise inventory to Henrich Company, $4,400, on account. Terms 2/15, n/35.
9
Purchased merchandise inventory on account from Tex Wholesalers, $4,600. Terms 1/10, n/30,
FOB destination.
10
Made payment to Sherry Wholesalers for goods purchased on June 3, less return and discount.
12
Received payment from Henrich Company, less discount.
13
After negotiations, received a $300 allowance from Tex Wholesalers.
15
Sold merchandise inventory to Jarvis Company, $1,500, on account. Terms n/EOM.
22
Made payment, less allowance, to Tex Wholesalers for goods purchased on June 9.
23
Jarvis Company returned $100 of the merchandise sold on June 15.
25
Sold merchandise inventory to Smith for $700 on account. Terms of 3/10, n/30 was offered,
FOB shipping point.
29
Received payment from Smith, less discount.
30
Received payment from Jarvis Company, less return.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jun. 3
Purchases
5,500
Accounts Payable—Sherry Wholesalers
5,500
5-74
P5B-46B, cont.
9
Purchases
4,600
Accounts Payable—Tex Wholesalers
4,600
15
Accounts Receivable—Jarvis Company
1,500
Sales Revenue
1,500
22
Accounts Payable—Tex Wholesalers ($4,600 – $300)
4,300
Cash
4,300
5-75
P5B-47B Preparing a multi-step income statement and journalizing closing entries
Learning Objective 8 Appendix 5B
1. Gross Profit $212,800
Taylor Department Store uses a periodic inventory system. The adjusted trial balance of Taylor
Department Store at December 31, 2018, follows:
Requirements
1. Prepare Taylor Department Store’s multi-step income statement for the year ended December 31,
2018. Assume ending Merchandise Inventory is $36,700.
2. Journalize Taylor Department Store’s closing entries.
5-76
SOLUTION
Requirement 1
TAYLOR DEPARTMENT STORE
Income Statement
Year Ended December 31, 2018
5-77
P5B-47B, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Sales Revenue
380,800
Purchase Returns and Allowances
110,000
Purchase Discounts
7,000
Merchandise Inventory (ending)
36,700
Income Summary
534,500
Using Excel
P5-48 Using Excel to prepare a multi-step income statement
Cougar Mountain Sports has prepared an adjusted trial balance for the fiscal year ended June 30, 2018.
Notes to the adjusted trial balance are located below the totals.
Use the blue shaded areas on the income statement worksheet for inputs.
Requirements:
1. Use Excel to prepare a multi-step income statement based on the adjusted trial balance.
a. Use formulas to link the balances on the adjusted trial balance to the amounts on the income
statement. Note that some balances are split between two different areas of the Income
Statement. For example, the Rent Expense is divided into two categories—Selling and
Administrative.
b. Use a formula to add and subtract account amounts as indicated.
c. Format the numbers in the dollar columns with a comma and no decimal places (e.g. 5,460).
Use a dollar sign at the top of each column and at the total (e.g. $26,201). Make sure the
decimal places align.
d. Double-underline the total.
2. Compute the gross profit margin percentage. Format percentages to two decimal places (e.g.
22.74%).
5-79
Continuing Problem – Part 1
P5-49 Journalizing and posting purchase and sale transactions
This problem continues the Canyon Canoe Company situation from Chapter 4. At the beginning of
the new year, Canyon Canoe Company decided to carry and sell T-shirts with its logo printed on
them. Canyon Canoe Company uses the perpetual inventory system to account for the inventory.
During January 2019, Canyon Canoe Company completed the following merchandising transactions:
Jan. 1
Purchased 10 T-shirts at $4 each and paid cash.
2
Sold 6 T-shirts for $10 each, total cost of $24. Received cash.
3
Purchased 50 T-shirts on account at $5 each. Terms 2/10, n/30.
7
Paid the supplier for the T-shirts purchased on January 3, less discount.
8
Realized 4 T-shirts from the January 1 order were printed wrong and returned them for a
cash refund.
10
Sold 40 T-shirts on account for $10 each, total cost of $200. Terms 3/15, n/45.
12
Received payment for the T-shirts sold on account on January 10, less discount.
14
Purchased 100 T-shirts on account at $4 each. Terms 4/15, n/30.
18
Canyon Company called the supplier from the January 14 purchase and told them that
some of the T-shirts were the wrong color. The supplier offered a $50 purchase allowance.
20
Paid the supplier for the T-shirts purchased on January 14, less the allowance and discount.
21
Sold 60 T-shirts on account for $10 each, total cost of $220. Terms 2/20, n/30.
23
Received a payment on account for the T-shirts sold on January 21, less discount.
25
Purchased 320 T-shirts on account at $5 each. Terms 2/10, n/30, FOB shipping point.
27
Paid freight associated with the January 25 purchase, $48.
29
Paid for the January 25 purchase, less discount.
30
Sold 275 T-shirts on account for $10 each, total cost of $1,300. Terms 2/10, n/30.
31
Received payment for the T-shirts sold on January 30, less discount.
Requirements
1. Open the following T-accounts in the ledger, using the post-closing balances from Chapter 4:
Cash, Accounts Receivable, Merchandise Inventory, Estimated Returns Inventory, Office
Supplies, Prepaid Rent, Land, Building, Accumulated Depreciation––Building, Canoes,
Accumulated Depreciation––Canoes, Accounts Payable, Utilities Payable, Telephone Payable,
Wages Payable, Refunds Payable, Interest Payable, Unearned Revenue, Notes Payable, Common
Stock, Retained Earnings, Income Summary, Sales Revenue, Canoe Rental Revenue, Cost of
Goods Sold, Rent Expense, Wages Expense, Utilities Expense, Telephone Expense, Supplies
Expense, Depreciation Expense––Building, Depreciation Expense––Canoes, Interest Expense.
2. Journalize and post the transactions. Compute each account balance, and denote the balance as
Balance. Omit explanations.
SOLUTION
Requirement 2
Date
Accounts
Debit
Credit
Jan. 1
Merchandise Inventory (10 × $4)
40
Cash
40
5-81
P5-49, cont.
Requirement 2, cont.
Date
Accounts
Debit
Credit
18
Accounts Payable
50
Merchandise Inventory
50
23
Cash
588
Accounts Receivable
588
25
Merchandise Inventory (320 × $5)
1,600
Accounts Payable
1,600
27
Merchandise Inventory
48
Cash
48
P5-49, cont.
Requirements 1 and 2
Cash
Balance
12,125
Jan. 2
60
40
Jan. 1
Merchandise Inventory
Balance
0
Jan. 1
40
24
Jan. 2
3
250
5
7
14
400
16
8
25
1,600
200
10
27
48
50
18
Prepaid Rent
Balance
2,000
Land
Balance
85,000
5-83
P5-49, cont.
Requirements 1 and 2, cont.
Canoes
Balance
12,000
Accumulated Depreciation—Canoes
350
Balance
Telephone Payable
325
Balance
Wages Payable
1,250
Balance
Refunds Payable
P5-49, cont.
Requirements 1 and 2, cont.
Cost of Goods Sold
Balance
0
Jan. 2
24
10
200
21
220
30
1,300
Balance
1,744
Rent Expense
Balance
0
5-85
Continuing Problem – Part 2
P5-50 Making adjusting and closing entries, preparing financial statements, and computing
the gross profit percentage
This problem continues the Canyon Canoe Company situation and focuses on nonmerchandising
transactions, adjusting and closing entries, and preparing financial statements. Canyon Canoe
Company does not typically prepare adjusting and closing entries each month, but the company is
surprised at how popular the shirts are and wishes to know the net income for January and would
also like to understand how to prepare the closing entries for a merchandising company.
During January 2019, Canyon Canoe Company completed the following non-merchandising
transactions:
Jan. 2
Collected $4,500 on account.
15
Paid the utilities and telephone bills from December.
15
Paid the wages accrued in December.
18
Rented canoes and received cash, $1,825
20
Received bills for utilities ($360) and telephone ($275) which will be paid later.
23
Paid various accounts payable, $1,800.
30
Paid employee, $750.
Requirements
1. Journalize and post the January transactions. Omit explanations. Use the ledger from the
previous problem for posting.
2. Journalize and post the adjusting entries for the month of January. Omit explanations. Denote
each adjustment as Adj. Compute each account balance, and denote the balance as Balance. In
addition to the adjusting entries from the data from previous chapters, Canyon Canoe Company
provides this data:
a. A physical count of the inventory at the end of the month revealed the cost was $470.
b. The company estimated sales returns will be $30 with a cost of $15.
c. Office supplies used, $55.
d. The Unearned Revenue has now been earned.
e. Interest expense accrued on the notes payable, $50.
3. Prepare the month ended January 31, 2019, single step income statement of Canyon Canoe
Company.
4. Journalize and post the closing entries. Omit explanations. Denote each closing amount as Clo.
and each balance as Balance. After posting all closing entries, prove the equality of debits and
credits in the ledger by preparing a post-closing trial balance.
5. Compute the gross profit percentage for January for Canyon Canoe Company.
SOLUTION
Requirements 1 and 2
Date
Accounts
Debit
Credit
Jan. 2
Cash
4,500
Accounts Receivable
4,500
20
Utilities Expense
360
Utilities Payable
360
Telephone Expense
275
Telephone Payable
275
5-87
P5-50, cont.
Requirements 1 and 2
Date
Accounts
Debit
Credit
Adjusting Entries
Jan. 31
(a)
Cost of Goods Sold ($487 – $480)
7
Merchandise Inventory
7
(d)
Unearned Revenue
350
Canoe Rental Revenue
350
(e)
Interest Expense
50
Interest Payable
50
(f)
Rent Expense
1,000
Prepaid Rent
1,000
P5-50, cont.
Requirement 4, cont.
Date
Accounts
Debit
Credit
Closing Entries
Jan. 31
Sales Revenue
3,701
Canoe Rental Revenue
2,175
Income Summary
5,876
5-89
P5-50, cont., Requirements 1, 2, and 4
Cash
Balance
12,125
Jan. 2
60
40
Jan. 1
Accounts Receivable
Balance
7,600
Jan. 10
388
388
Jan. 12
21
588
588
23
30
2,695
2,695
31
Balance
7,600
4,500
Jan. 2
Balance
3,100
Office Supplies
Balance
165
55
Adj.
Balance
110
Prepaid Rent
Balance
2,000
1,000
Adj.
Balance
1,000
P5-50, cont., Requirements 1, 2, and 4, cont.
Land
Balance
85,000
Building
Balance
35,000
Accounts Payable
3,050
Balance
Jan. 7
250
250
Jan. 3
18
50
400
14
20
350
1,600
25
Jan. 15
325
275
Jan. 20
275
Balance
Wages Payable
1,250
Balance
Jan. 15
1,250
5-91
P5-50, cont., Requirements 1, 2, and 4, cont.
Interest Payable
50
Balance
50
Adj.
100
Balance
900
Clo.
5,420
Balance
Income Summary
Clo.
4,976
5,876
Clo.
900
Balance
3,701
Balance
Clo.
3,701
0
Balance
Canoe Rental Revenue
0
Balance
1,825
Jan. 18
1,825
Balance
350
Adj.
2,175
Balance
Clo.
2,175
0
Balance
P5-50, cont., Requirements 1, 2, and 4, cont.
Cost of Goods Sold
Balance
0
Jan. 2
24
10
200
Balance
1,000
1,000
Clo.
Balance
0
Wages Expense
Balance
0
Telephone Expense
Balance
0
Jan. 20
275
Balance
275
275
Clo.
Balance
0
5-93
P5-50, cont., Requirements 1, 2, and 4, cont.
Depreciation Expense—Building
Balance
0
Adj.
500
Balance
500
500
Clo.
Balance
0
P5-50, cont.
Requirement 3
CANYON CANOE COMPANY
Income Statement
Month Ended January 31, 2019
Revenues:
Net Sales Revenue
$ 3,701
5-95
P5-50, cont.
Requirement 4
CANYON CANOE COMPANY
Post-Closing Trial Balance
January 31, 2019
Account Title
Balance
Debit
Credit
Cash
$ 15,540
Requirement 5
Net Sales Revenue
$ 3,701
5-96
Practice Set
P5-51 Journalizing purchase and sale transactions, making closing entries, preparing financial
statements, and computing the gross profit percentage
This problem continues the Crystal Clear Cleaning practice set begun in Chapter 2 and continued
through Chapters 3 and 4.
Crystal Clear Cleaning has decided that, in addition to providing cleaning services, it will sell
cleaning products. Crystal Clear uses the perpetual inventory system. During December 2018,
Crystal Clear completed the following transactions:
Dec. 2
Purchased 1,000 units of inventory for $4,000 on account from Sparkle Company on terms,
5/10, n/20.
5
Purchased 1,200 units of inventory from Borax on account with terms 4/10, n/30. The total
invoice was for $6,000, which included a $300 freight charge.
7
Returned 300 units of inventory to Sparkle from the December 2 purchase (cost $1,200).
9
Paid Borax.
11
Sold 500 units of goods to Happy Maids for $5,500 on account with terms n/30. Crystal
Clear’s cost of the goods was $2,000.
12
Paid Sparkle.
15
Received 100 units with a retail price of $1,100 back from customer Happy Maids. The
goods cost Crystal Clear $400.
21
Received payment from Happy Maids, settling the amount due in full.
28
Sold 500 units of goods to Bridget, Inc. on account for $6,500 (cost $2,022). Terms 1/15,
n/30.
29
Paid cash for utilities of $550.
30
Paid cash for Sales Commission Expense of $214.
31
Received payment from Bridget, Inc., less discount.
31
Recorded the following adjusting entries:
a. Physical count of inventory on December 31 showed 800 units of goods on hand, with
a cost of $3,848.
b. Depreciation, $150.
c. Accrued salaries expense of $2,100.
d. Estimated sales returns of $1,500, with cost of $540.
e. Prepared all other adjustments necessary for December (Hint: You will need to review
the adjustment information in Chapter 3 to determine the remaining adjustments).
Assume the cleaning supplies left at December 31 are $50.
Requirements
1. Open the following T-accounts in the ledger: Cash, $51,650; Accounts Receivable, $4,000;
Merchandise Inventory, $0; Estimated Returns Inventory, $0; Cleaning Supplies, $50; Prepaid
Rent, $3,000; Prepaid Insurance, $4,400; Equipment, $5,400; Truck, $3,000; Accumulated
Depreciation, $150; Accounts Payable, $1,245; Salaries Payable, $0; Interest Payable, $59;
Refunds Payable, $0; Unearned Revenue, $14,375; Notes Payable, $36,000; Common Stock,
$18,000; Retained Earnings, $1,671; Income Summary, $0; Dividends, $0; Service Revenue, $0;
Sales Revenue, $0; Cost of Goods Sold, $0; Salaries Expense, $0; Sales Commission Expense,
$0; Utilities Expense, $0; Depreciation Expense, $0; Rent Expense, $0; Insurance Expense, $0;
Interest Expense, $0.
2. Journalize and post the December transactions. Omit explanations. Compute each account
balance, and denote the balance as Balance. Identify each accounts payable and accounts
receivable with the vendor or customer name.
3. Journalize and post the adjusting entries. Omit explanations. Denote each adjusting amount as
Adj. Compute each account balance, and denote the balance as Balance. After posting all
adjusting entries, prove the equality of debits and credits in the ledger by preparing an adjusted
trial balance.
4. Prepare the single step income statement and statement of retained earnings for the month ended
December 31, 2018. Also prepare a classified balance sheet at December 31, 2018. Assume the
note payable is long-term.
5. Compute the gross profit percentage for December for the company.
SOLUTION
Requirements 2 and 3
Date
Accounts and Explanation
Debit
Credit
Dec. 2
Merchandise Inventory
4,000
Accounts Payable—Sparkle Company
4,000
Requirements 2 and 3, cont.
21
Cash
4,400
Accounts Receivable—Happy Maids ($5,500 – $1,100)
4,400
Adjusting Entries
Dec. 31
Cost of Goods Sold
962
Merchandise Inventory ($4,810 − $3,848)
962
31
Depreciation Expense
150
Accumulated Depreciation
150
31
Salaries Expense
2,100
Salaries Payable
2,100
5-99
P5-51, cont.
Requirements 1, 2 and 3, cont.
Cash
Accounts Payable
Balance
51,650
1,245
Balance
Dec. 21
4,400
5,772
Dec. 9
Dec. 7
1,200
4,000
Dec. 2
Dec. 31
6,435
2,660
Dec. 12
Dec. 9
6,000
6,000
Dec. 5
550
Dec. 29
Dec. 12
2,800
214
Dec. 30
1,245
Balance
Balance
53,289
962
Adj.
Unearned Revenue
Balance
3,848
14,375
Balance
Adj.
1,250
Estimated Returns Inventory
13,125
Balance
Adj.
540
400
Dec. 15
Balance
140
Notes Payable
36,000
Balance
Cleaning Supplies
Balance
50
Common Stock
18,000
Balance
Prepaid Rent
P5-51, cont.
Requirements 1, 2 and 3, cont.
Accumulated Depreciation
Sales Revenue
150
Balance
5,500
Dec. 11
150
Adj.
6,435
Dec. 28
300
Balance
11,935
Balance
Adj.
1,500
10,435
Balance
Sales Commission Expense
Dec. 30
214
Balance
214
Utilities Expense
Dec. 29
550
Balance
550
5-101
P5-51, cont.
Requirement 3
CRYSTAL CLEAR CLEANING
Adjusted Trial Balance
December 31, 2018
Account Title
Balance
Debit
Credit
Cash
$ 53,289
Accounts Receivable
4,000
Accumulated Depreciation
$ 300
Accounts Payable
1,245
Salaries Payable
2,100
Interest Payable
239
Sales Commission Expense
214
Utilities Expense
550
Depreciation Expense
150
Rent Expense
1,000
Insurance Expense
400
Interest Expense
180
Total
$ 84,765
$ 84,765
P5-51, cont.
Requirement 4
CRYSTAL CLEAR CLEANING
Income Statement
Month Ended December 31, 2018
Revenues:
Net Sales Revenue
$ 10,435
CRYSTAL CLEAR CLEANING
Statement of Retained Earnings
Month Ended December 31, 2018
Retained Earnings, November 30, 2018
$ 1,671
5-103
P5-51
Requirement 4, cont.
CRYSTAL CLEAR CLEANING
Balance Sheet
December 31, 2018
Assets
Current Assets:
Plant Assets:
Equipment
5,400
Truck
3,000
Accumulated Depreciation
(300)
Total Plant Assets
8,100
Notes Payable
36,000
Total Liabilities
53,109
Stockholders’ Equity
Common Stock
18,000
Retained Earnings
4,318
5-104
P5-51, cont.
Requirement 5
5-105
Critical Thinking
Tying It All Together Case 5-1
Macy’s, Inc. is a premier retailer in the United States, operating nearly 900 stores in 45 states.
Macy’s, Bloomingdale’s, and Bloomingdale’s Outlet are all brands that operate under Macy’s, Inc.
The company sells a wide range of merchandise including apparel and accessories, cosmetics, home
furnishings, and other goods. Macy’s, Inc. purchases it merchandise from many suppliers and also
develops its own private label brands.
Requirements
1. Under the new revenue recognition rules, how will Macy’s record and recognize sales revenue?
Which financial statement is sales revenue reported on?
2. Macy’s, Inc. reported cost of sales of $16,496 million for the year ending January 30, 2016.
Which financial statement is cost of sales (also known as cost of goods sold) reported on? What
does cost of sales represent? What type of account is cost of sales?
3. Assume Macy’s, Inc. purchases $100,000 of inventory from one of its vendors. The terms of the
purchase are FOB shipping point. Who pays the freight and how does the cost of the freight get
recorded? Assume Macy’s uses the perpetual inventory system.
4. On which financial statement will Macy’s report its merchandise inventory?
5. Assume Macy’s, Inc. prepares a multi-step income statement. What would the format of that
income statement look like? What is one benefit of preparing a multi-step income statement for
merchandising companies such as Macy’s, Inc.?
SOLUTION
Requirement 1
Under the new revenue recognition standard, Macy’s, Inc. would record the sale of inventory at the
Requirement 2
Requirement 3
Under the terms FOB shipping point, the buyer (Macy’s, Inc.) pays the shipping costs. The cost of
5-106
Requirement 4
Requirement 5
A multi-step income statement includes several important subtotals. It starts by calculating gross
Decision Case 5-1
Party-Time T-Shirts sells T-shirts for parties at the local college. The company completed the first
year of operations, and the shareholders are generally pleased with operating results as shown by the
following income statement:
Bill Hildebrand, the controller, is considering how to expand the business. He proposes two ways to
increase profits to $100,000 during 2018.
a. Hildebrand believes he should advertise more heavily. He believes additional advertising
costing $20,000 will increase net sales by 30% and leave administrative expense unchanged. Assume
that Cost of Goods Sold will remain at the same percentage of net sales as in 2017, so if net sales
increase in 2018, Cost of Goods Sold will increase proportionately.
b. Hildebrand proposes selling higher-margin merchandise, such as party dresses, in addition to
the existing product line. An importer can supply a minimum of 1,000 dresses for $40 each; Party-
Time can mark these dresses up 100% and sell them for $80. Hildebrand realizes he will have to
advertise the new merchandise, and this advertising will cost $5,000. Party-Time can expect to sell
only 80% of these dresses during the coming year.
Help Hildebrand determine which plan to pursue. Prepare a multi-step income statement for 2018 to
show the expected net income under each plan.
5-107
SOLUTION
Plan a:
PARTY-TIME T-SHIRTS
Expected Income Statement
Plan b:
PARTY-TIME T-SHIRTS
Expected Income Statement
Ethical Issue 5-1
Dobbs Wholesale Antiques makes all sales under terms of FOB shipping point. The company
usually ships inventory to customers approximately one week after receiving the order. For orders
received late in December, Kathy Dobbs, the owner, decides when to ship the goods. If profits are
already at an acceptable level, Dobbs delays shipment until January. If profits for the current year are
lagging behind expectations, Dobbs ships the goods during December.
Requirements
1. Under Dobbs’s FOB policy, when should the company record a sale?
2. Do you approve or disapprove of Dobbs’s manner of deciding when to ship goods to customers
and record the sales revenue? If you approve, give your reason. If you disapprove, identify a
better way to decide when to ship goods. (There is no accounting rule against Dobbs’s practice.)
SOLUTION
Requirement 1
Requirement 2
This is a difficult ethical issue because there is no single correct answer. There is no rule of
5-109
Fraud Case 5-1
Rae Philippe was a warehouse manager for Atkins Oilfield Supply, a business that operated across
eight Western states. She was an old pro and had known most of the other warehouse managers for
many years. Around December each year, auditors would come to do a physical count of the
inventory at each warehouse. Recently, Rae’s brother started his own drilling company and
persuaded Rae to “loan” him 80 joints of 5-inch drill pipe to use for his first well. He promised to
have it back to Rae by December, but the well encountered problems and the pipe was still in the
ground. Rae knew the auditors were on the way, so she called her friend Andy, who ran another
Atkins warehouse. “Send me over 80 joints of 5-inch pipe tomorrow, and I’ll get them back to you
ASAP,” said Rae. When the auditors came, all the pipe on the books was accounted for, and they
filed a “no-exception” report.
Requirements
1. Is there anything the company or the auditors could do in the future to detect this kind of
fraudulent practice?
2. How would this kind of action affect the financial performance of the company?
SOLUTION
Requirement 1
Auditors should arrive unannounced, so that the local manager cannot make an arrangement like this
Requirement 2
5-110
Financial Case 5-1
This case uses both the income statement (consolidated statements of operations) and the balance
Annual Report, for the fiscal year ending on January 30, 2016.
Requirements
1. What was the value of the company’s inventory at January 30, 2016, and January 31, 2015?
2. Review Note 12 (specifically Inventories) in the Notes to Consolidated Financial Statements.
What does Target include in the cost of inventory?
3. What was the amount of Target’s cost of goods sold (cost of sales) for the year ending January
30, 2016, and the year ending January 31, 2015?
4. What income statement format does Target use? Explain.
5. Compute Target’s gross profit percentage for the year ending January 30, 2016, and the year
ending January 31, 2015. Did the gross profit percentage improve, worsen, or hold steady?
Assuming the industry average for gross profit percentage is 35%, how does Target compare in
the industry?
SOLUTION
Requirement 1
Requirement 2
The cost of Target’s inventory includes the amount it pays to its suppliers to acquire inventory,
Requirement 3
Requirement 4
Target uses the multi-step income statement to some extent. It shows gross margin, earnings from
Requirement 5
January 30, 2016(in millions)
January 31, 2015(in millions)
