CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
Account No. 523
Post.
Item Ref. Debit Credit Debit Credit
20Y7
May 31 Adjusting 22 9,800 9,800
31 Closing 23 9,800 — —
Account No. 529
Account No. 530
Post.
Item Ref. Debit Credit Debit Credit
20Y7
May 1 Balance 382,100
28 21 29,000 411,100
31 Adjusting 22 6,600 417,700
31 Closing 23 417,700 — —
Account No. 531
Account No. 532
Post.
Item Ref. Debit Credit Debit Credit
20Y7
May 31 Adjusting 22 12,000 12,000
31 Closing 23 12,000 — —
Balance
Date
Account: Rent Expense
Account: Insurance Expense
Account: Store Supplies Expense
Balance
Date
Account: Miscellaneous Selling Expense
Account: Office Salaries Expense
Balance
Date
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
Account No. 539
Account: Miscellaneous Administrative Expense
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
1. and 2. Page 20
Post.
Ref. Debit Credit
20Y7
May 1 Rent Expense 531 5,000
Cash 110 5,000
6 Cost of Merchandise Sold 510 41,000
Merchandise Inventory 115 41,000
7 Cash 110 22,300
Accounts Receivable—Halstad Co. 112 22,300
15 Advertising Expense 521 11,000
Cash 110 11,000
16 Cash 110 67,130
Accounts Receivable—Korman Co. 112 67,130
19 Merchandise Inventory 115 18,700
Cash 110 18,700
Date
JOURNAL
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
Page 21
Post.
Ref. Debit Credit
20Y7
May 20 Accounts Receivable—Crescent Co. 112 108,900
Sales 410 108,900
[$110,000 – ($110,000 × 1%)]
21 Merchandise Inventory 115 87,120
Accounts Payable—Osterman Co. 210 87,120
[$88,000 – ($88,000 × 1%)]
24 Accounts Payable—Osterman Co. 210 4,950
Merchandise Inventory 115 4,950
26 Customer Refunds Payable 211 800
Cash 110 800
28 Sales Salaries Expense 520 56,000
Office Salaries Expense 530 29,000
Cash 110 85,000
29 Store Supplies 118 2,400
Cash 110 2,400
3.
Account Debit Credit
No. Balances Balances
Cash 110 99,430
Accounts Receivable 112 245,875
Merchandise Inventory 115 599,150
Accounts Payable 210 63,150
Customer Refunds Payable 211 44,200
Salaries Payable 212 —
Lynn Tolley, Capital 310 685,300
Lynn Tolley, Drawing 311 135,000
Sales 410 5,376,205
Cost of Merchandise Sold 510 3,013,000
Sales Salaries Expense 520 720,800
May 31, 20Y7
Palisade Creek Co.
Unadjusted Trial Balance
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
4. and 6. Page 22
Post.
Ref. Debit Credit
20Y7
May 31 Cost of Merchandise Sold 510 13,950
Merchandise Inventory 115 13,950
Inventory shrinkage
($599,150 – $585,200).
31 Depreciation Expense 522 14,000
Accum. Depr.—Store Equipment 124 14,000
Store equipment depreciation.
31 Sales Salaries Expense 520 7,000
Office Salaries Expense 530 6,600
Salaries Payable 212 13,600
Accrued salaries.
Date
JOURNAL
Adjusting Entries
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
7.
Account Debit Credit
No. Balances Balances
Cash 110 99,430
Accounts Receivable 112 245,875
Merchandise Inventory 115 585,200
Accounts Payable 210 63,150
Customer Refunds Payable 211 104,200
Salaries Payable 212 13,600
Lynn Tolley, Capital 310 685,300
Lynn Tolley, Drawing 311 135,000
Sales 410 5,316,205
Cost of Merchandise Sold 510 3,026,950
Sales Salaries Expense 520 727,800
Advertising Expense 521 292,000
Depreciation Expense 522 14,000
May 31, 20Y7
Palisade Creek Co.
Adjusted Trial Balance
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
8.
Sales $5,316,205
Cost of merchandise sold 3,026,950
Gross profit $2,289,255
Expenses:
Total selling expenses $1,056,200
Administrative expenses:
Office salaries expense $417,700
Rent expense 88,700
Lynn Tolley, capital, June 1, 20Y6 $ 685,300
Net income for the year $ 706,855
Palisade Creek Co.
Statement of Owner’s Equity
For the Year Ended May 31, 20Y7
Palisade Creek Co.
Income Statement
For the Year Ended May 31, 20Y7
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
Current assets:
Cash $ 99,430
Accounts receivable 245,875
Merchandise inventory 585,200
Store equipment $569,500
Less accumulated depreciation 70,700
Total property, plant, and equipment 498,800
Total assets $1,438,105
Current liabilities:
Accounts payable $ 63,150
Customer refunds payable 104,200
Salaries payable 13,600
Liabilities
Assets
Palisade Creek Co.
Balance Sheet
May 31, 20Y7
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
9.
Page
23
Post.
Ref. Debit Credit
20Y7
May 31 Sales 410 5,316,205
Cost of Merchandise Sold 510 3,026,950
Sales Salaries Expense 520 727,800
Advertising Expense 521 292,000
Depreciation Expense 522 14,000
Store Supplies Expense 523 9,800
Date
JOURNAL
Closing Entries
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Continued)
10.
Account Debit Credit
No. Balances Balances
Cash 110 99,430
Accounts Receivable 112 245,875
Merchandise Inventory 115 585,200
Prepaid Insurance 117 4,800
Store Supplies 118 4,000
May 31, 20Y7
Palisade Creek Co.
Post-Closing Trial Balance
CHAPTER 6 Accounting for Merchandising Businesses
Comp. Prob. 2 (Concluded)
5. (Optional)*
Account Title Debit Credit Debit Credit Debit Credit Debit Credit
Cash 99,430 99,430 99,430
Accounts Receivable 245,875 245,875 245,875
Merchandise Inventory 599,150 (a) 13,950 585,200 585,200
Salaries Payable (e) 13,600 13,600 13,600
Lynn Tolley, Capital 685,300 685,300 685,300
Lynn Tolley, Drawing 135,000 135,000 135,000
Sales 5,376,205 (f) 60,000 5,316,205 5,316,205
Cost of Merchandise Sold 3,013,000 (a) 13,950 3,026,950 3,026,950
Sales Salaries Expense 720,800 (e) 7,000 727,800 727,800
Advertising Expense 292,000 292,000 292,000
Depreciation Expense (d) 14,000 14,000 14,000
Store Supplies Expense (c) 9,800 9,800 9,800
* This solution is applicable only if the end-of-period spreadsheet (work sheet) is used.
Palisade Creek Co.
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended May 31, 20Y7
BalanceUnadjusted Adjusted Income
SheetTrial Balance
Debit Credit
Trial Balance StatementAdjustments
CHAPTER 6 Accounting for Merchandising Businesses
CP 6-1
Margie has been placed in a very difficult position. Someone she trusts and respects
has asked her to do something that is clearly unethical. If Margie makes the
adjusting entry, her boss could very well be terminated. Yet, Margie’s primary
responsibility has to be on preparing relevant and representationally faithful financial
information that is useful for decision making. Margie should, therefore, make the
appropriate adjusting entry. Being right, however, doesn’t always make a decision
easy. Margie’s actions could result in the termination of her boss and mentor.
CP 6-2
Standards of Ethical Conduct for Management Accountants requires management
accountants to perform in a competent manner and to comply with relevant laws,
regulations, and technical standards. If Shelby Davey intentionally subtracted
CP 6-3
A sample solution based on The Home Depot Inc.’s Form 10-K for the fiscal year ended
February 3, 2019, follows:
1. a. $37,160 million in 2018; $34,356 million in 2017; $32,313 million in 2016
b. 34.3% ($37,160 million/$108,203 million) in 2018; 34.0% ($34,356 million/$100,904
million) in 2017; 34.2% ($32,313 million/$94,595 million) in 2016
2. The company’s financial performance has improved between 2016 and 2017 and
again between 2017 and 2018. A majority of the above measures have improved
during this period.
CASES & PROJECTS
CP 6-4
To: Suzi Nomro
President, Watercraft Supply Company
From: A+ student
Re: Proposal to Increase Net Income
If the proposed changes in credit terms increase sales by 10% as expected, and if th
e
ratio of cost of merchandise sold to sales remails at 60%, this proposal has the potential
to increase net income by $64,200, from $321,000 to $385,200. This increase will be drive
n
There are several potential risks associated with this type of proposal. First, the
accuracy of the estimates used to project the effects of the proposed changes are not
certain. If the increase in sales does not materialize, Watercraft Supply Company could
incur significant costs of carrying excess inventory stocked in anticipation of increasing
sales. At the same time it is incurring these additional inventory costs, cash collections
from customers will be reduced by the amount of the discounts. This could create a
liquidity problem for Watercraft Supply.
CHAPTER 6 Accounting for Merchandising Businesses
CP 6-4 (Concluded)
Revenues:
Sales $1,485,000
Interest revenue 15,000
Total revenues $1,500,000
Notes:
a. Projected sales
[$1,350,000 + (10% × $1,350,000)]………………………
…
$1,485,000
b. Projected cost of merchandise sold
($1,485,000 × 60%)…………………………………………
…
$ 891,000
Watercraft Supply Company
Projected Income Statement
For the Year Ended October 31, 20Y3
CHAPTER 6 Accounting for Merchandising Businesses
CP 6-5
Cam Pfeifer is correct. The accounts payable due to suppliers could be included on
the balance sheet at an amount of $314,500 ($269,500 + $45,000). This is the amount
that will be expected to be paid to satisfy the obligation (liability) to suppliers.
However, this is proper only if Rustic Furniture Co. has a history of taking all
CP 6-6
1. If Mark doesn’t need the stereo immediately (by the next day), Wholesale Stereo
offers the best buy, as shown below.
Wholesale Stereo:
List price……………………………………………………………………
…
$1,200.00
Shipping and handling (not including next-day air)………………… 49.99
Total…………………………………………………………………………
…
$1,249.99
…
…
List price……………………………………………………………………
…
$1,175.00
Less 2% cash discount.…………………………………………………
…
23.50
Subtotal……………………………………………………………………… $1,151.50
Sales tax (9%).……………………………………………………………… 103.64
Total…………………………………………………………………………
…
$1,255.14
…
CHAPTER 6 Accounting for Merchandising Businesses
CP 6-6 (Concluded)
Because both Wholesale Stereo and Tru-Sound Systems will accept Mark’s VISA,
the ability to use a credit card would not affect the buying decision. Tru-Sound
Systems will, however, allow Mark to pay his bill in three installments (the first
due immediately). This would allow Mark to save some interest charges on his
VISA for two months. If we assume that Mark would have otherwise used his VISA
and that Mark’s VISA carries an interest of 1.5% per month on the unpaid balance,
The total interest savings would be $19.41 ($12.81 + $6.60). This interest
savings still would not be enough to offset the price advantage of Wholesale
Stereo, as shown below.
Tru-Sound Systems price (see above)……………………………………
…
$1,280.75
Less interest savings…………………………………………………………
…
19.41
Total………………………………………………………………………………
…
$1,261.34