20 Minutes, Medium
Year 2-Year 3 Year 1-Year 2
a. 1. 3.8% (1) 7.5% (2)
b.
While Pete’s has increased its overall revenue from sales, several of the statistics indicate problems.
Both sales per square foot of selling space and comparable store sales have declined. This indicates
PETE’S AUTO PARTS
PROBLEM 6.3B
Change in net sales…………………………
Cost of Goods Sold
Accounts Payable (Whosa Industries)
Made payment after discount period had expired.
To record cost of TVs sold.
Accounts Payable (Whosa Industries)
Accounts Payable (Whosa Industries)
Purchase Discounts Lost
Made payment after discount period had expired.
Paid account payable, less 2%.
PROBLEM 6.4B
a.
General Journal
MARY’S TV
Inventory
Date
Inventory
Cash
Sold 2 Whosa TVs for cash.
Paid account within discount period.
To record purchase of 8 TVs at gross invoice price
price ($350 per unit).
11 1,200
Sales 1,200
16 2,744
per unit ($350, less 2%).
To record purchase of 8 TVs at net cost of $343
Cash
Sold 2 Whosa TVs for cash.
Cost of Goods Sold
To record cost of TVs sold.
Accounts Payable (Whosa Industries)
c.
PROBLEM 6.4B
MARY’S TV (concluded)
The net cost method provides more useful information for evaluating the company’s
Cash
($17,760 x 1% = $177.60).
Collected amount due, less return and less 1%
Sales Discount
cash discount on remaining $17,760 balance
Net cost, $59.40 per pair ($60, less 1%).
Accounts Payable (Hip Pants)
Paid transportation charge on inbound shipment.
Transportation-in
Returned 4 pairs of pants to supplier. (Net cost,
Purchased 300 pairs of pants; terms, 1/10, n/30.
Inventory
PROBLEM 6.5B
Journal entries by Hip Pants:
General Journal
HIP PANTS AND SLEEK
Accounts Receivable (Sleek)
Sold merchandise on account; terms, 1/10, n/30.
Reduce cost of goods sold for cost of merchandise
returned (4 pr. X $20/pr.).
Inventory
Journal entries by Sleek:
Accounts Receivable (Sleek) 240
Sales Returns & Allowances
Customer returned merchandise (4 pr. X $60/pr.).
Cost of Goods Sold
Delivery Expense
Paid delivery charges on outbound shipment.
Oct 22 17,582.40
Cash 17,582.40
c.
Yes. Sleek should take advantage of 1/10, n/30 purchase discounts, even if it must borrow
PROBLEM 6.5B
Accounts Payable (Hip Pants)
General Journal
HIP PANTS AND SLEEK (concluded)
Paid within discount period balance owed to Hip
Pants ($17,820 – $237.60 = $17,582.40).
60 Minutes, Strong
a.
Jan. 7 4,900
Payment for furniture received on December 20th
Purchase of $10,000 of furniture net of the purchase
Entries that Should Have Been Recorded by the Accounting Clerk
Jan. 7 Accounts Payable………………………………….. 4,900
Cash………………………………………. 4,900
a.1.
PROBLEM 6.6B
QUEEN ENTERPRISES
The easiest way for a student to solve this problem is to record the journal entries that the
accounting clerk made and to compare them with the journal entries that should have
been made.
Entries Record by the Accounting Clerk
Based on a comparison of the above entries, accounts receivable is understated by
$15,000.
Inventory……………………………………………
Payment for furniture received on December 20th
15,000
d.
e.
PROBLEM 6.6B
QUEEN ENTERPRISES (concluded)
The journal entry to correct the accounting clerk’s errors is (assuming that Queen’s books
have yet to be closed for the year).
The journal entry to correct the accounting clerk’s errors assuming that the ending
inventory balance has been adjusted based on a physical inventory (and assuming that
Queen’s books have been closed for the year) is:
Accounts receivable………………………………..
c.
The journal entry to correct the accounting clerk’s errors is (assuming that Queen’s books
have been closed for the year).
12,250
Cost of goods sold………………………………….
30 Minutes, Strong
a.
$ 100,000
c.
d.
Inventory…………………………………………………………
125,000
Revaluation of Inventory to Market Value.. 125,000
PROBLEM 6.7B
COMPUTER RESOURCES
The difference between the $50,000 of gross profit under accrual accounting and the
breakeven gross profit under a cash-basis system reflects the balances in the accounts
Sales
(50,000)
$ 50,000
Gross profit
Cost of goods sold
a.
c.
g.
h.
40 Minutes, Strong
PROBLEM 6.8B
HEARTHSTONE
Computation of profit margin on January 10 sales transaction:
Hearthstone probably would use a perpetual inventory system. The items in its inventory
Parts a, c, g, and h follow; parts b, d, e, and f are on the next page.
The operating cycle of a merchandising company consists of purchasing merchandise,
In the January 5 entry, the $69,840 debit to the Inventory control account should
be allocated among and posted to the appropriate product accounts in the inventory
Jan 5 69,840
d.
Inventory at Dec. 31, Year 1 900,000$
Add: Merchandise purchased on Jan. 5 69,840
Less: Cost of goods sold on Jan. 10 (18,000)
Inventory at close of business on Jan. 10 951,840$
e.
Jan 5 69,840
Accounts Payable (Rock Creek Corporation) 69,840
Sales 50,400
Inventory (Dec. 31, Year 1) 900,000$
Cost of goods available for sale 969,840$
Less: Inventory (Jan. 10–per part d)951,840
Accounts Receivable (Harolds, Inc.)
Sale on account; terms, 5/10, n/90.
Computation of cost of goods sold:
Purchased merchandise on account; terms, 3/10,
PROBLEM 6.8B
b.
Year 2
Purchases
General Journal
Year 2
HEARTHSTONE (concluded)
Inventory
Computation of inventory at January 10.
Journal entries assuming use of a periodic system
Accounts Payable (Rock Creek Corporation) 69,840
Cost of Goods Sold
To record the cost of merchandise sold to Harolds, Inc.
Purchased merchandise on account; terms, 3/10,
Accounts Receivable (Harolds, Inc.)
Sale on account; terms, 5/10, n/90.
n/60, net cost, $72,000, less 3%.
35 Minutes, Medium
a.
b.
c.
d.
SOLUTIONS TO CRITICAL THINKING CASES
SELECTING AN INVENTORY SYSTEM
CASE 6.1
The Frontier Shop would probably use a periodic inventory system. Several factors
support this conclusion. First, this is a small business that does not have a computerized
Although Allister’s Corner is a small business with a manual accounting system, it probably
would maintain a perpetual inventory system. The primary reason for using a perpetual
The publicly owned publishing company probably would use a perpetual inventory system
for several reasons. First, in order to service its customers, the company needs to have
The facts suggest that Toys-4-You uses a perpetual inventory system. Point-of-sale
terminals can maintain a perpetual inventory system at little or no incremental cost. In
e.
f.
CASE 6.1
Several factors suggest that TransComm would use a perpetual inventory system. For one,
management needs to know precisely how many units are on hand at any time in order to
(concluded)
An ice cream truck would use a periodic inventory system. Several factors support this
conclusion. First, it would be impractical for an ice cream truck to utilize a perpetual system,
as this would involve separately recording the cost of each ice cream bar and popsicle sold.
SELECTING AN INVENTORY SYSTEM
a.
580,000$
58,000$
297,250
355,250$
c.
CASE 6.2
A COST-BENEFIT ANALYSIS
25 Minutes, Medium
VILLAGE HARDWARE
Cost of goods sold:
For the Year Ended December 31, Current Year
Net sales
Partial Income Statement
The loss sustained by Village Hardware as a result of inventory shrinkage is the cost of the
lost merchandise, not its resale value. Thus, hiring the security guard would not be a
Inventory, January 1
Purchases
Cost of goods available for sale
305,950
274,050$
(net sales, $580,000 x 50%)
Cost of goods sold
Loss from inventory “shrinkage” at cost:
Less: Cost of goods sold excluding any shrinkage losses
Inventory shrinkage losses for the year, at cost
Inventory shrinkage losses for the year, at retail
Cost of goods sold, per part a
Less: Inventory, December 31
Gross profit
Group assignment:
No time estimate
No specific solution is provided for this group assignment.
In this assignment, students are likely to encounter many variations in perpetual inventory
systems. For example, some businesses may maintain perpetual records only in units, others
CASE 6.3
GROUP ASSIGNMENT WITH
BUSINESS COMMUNITY
INVOLVEMENT
20 Minutes, Medium
a.
b.
There are several implications, other than integrity, which come into play in a situation
such as the one described in this case. For example, an intentional overstatement of ending
inventory for purposes of reducing cost of goods sold and increasing gross profit and net
income will flow into the next accounting period as an overstatement of beginning
inventory. An overstatement of beginning inventory in Year 2 has the opposite effect of
what your supervisor is trying to accomplish in Year 1. Specifically, the Year 2
overstatement of beginning inventory will result in a higher cost of goods sold, lower gross
profit, and lower net income in Year 2.
One thing you need to consider before going down this path with your supervisor is what he
is likely to ask you to do a year from now when the above situation is in place. Will he
CASE 6.4
MANIPULATING INCOME
Your first thought should probably be whether you want to work for someone who asks you
to do something that is wrong in order to benefit himself. You should probably start by
reasoning with your supervisor about why you think what he proposes is not a good thing,
or the right thing, to do. One factor that should be considered is the potential for a criminal
judgment against you and the potential that might have on your life, reputation, career,
family, etc. Another implication is what will happen in future years should you start down
the “slippery slope” proposed by your supervisor. (See answer to part b.) Once you start
doing things like your supervisor proposes, will you have to continue doing them, perhaps in
greater proportions over time?
ETHICS, FRAUD & CORPORATE GOVERNANCE
Ultimately, you are going to have to decide whether to take the high ground or the low
ground. Assuming you decide on the former, and you have reasoned with your supervisor
25 Minutes, Easy
a.
b.
Information pertaining to the company’s performance is found throughout its Form 10-K
CASE 6.5
INTERNET
Note: We cannot supply quantitative answers to this assignment as they are time sensitive. Our
answers provide only general information about the requirements.
Financial information available at the company’s web site include financial news and
SEC filings, and annual reports and proxy statements.
EXPLORING THE ANNUAL REPORT OF GAP, INC.