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CHAPTER 5

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ACCOUNTING FOR MERCHANDISING OPERATIONS

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT	Item	LO	BT
True-False Statements
1.	1	C	10.	3	C	19.	5	K	28.	5	K	^sg37.	2	K
2.	1	C	11.	3	C	20.	5	K	29.	5	K	^sg38.	3	K
3.	1	K	12.	3	K	21.	5	C	^a30.	6	K	^sg39.	3	K
4.	1	K	13.	4	C	22.	5	C	^a31.	7	K	^sg40.	4	C
5.	1	K	14.	4	K	23.	5	C	^a32.	7	K	^sg41.	5	K
6.	2	K	15.	4	K	24.	5	K	^a33.	7	K	^sg42.	5	K
7.	2	K	16.	5	K	25.	5	K	^a34.	7	K
8.	3	C	17.	5	K	26.	5	AP	^sg35.	1	K
9.	3	C	18.	5	K	27.	5	K	^sg36.	1	K
Multiple Choice Questions
43.	1	K	73.	2	AP	103.	3	K	133.	5	AP	^a163.	7	AP
44.	1	K	74.	3	AP	104.	3	C	134.	5	AP	^a164.	7	AP
45.	1	C	75.	3	AP	105.	3	C	135.	5	AP	^sg165.	1	AP
46.	1	K	76.	3	AP	106.	3	K	136.	5	AP	^sg166.	2	K
47.	1	K	77.	3	C	107.	3	K	137.	5	AP	^sg167.	2	K
48.	1	C	78.	3	C	108.	4	C	138.	5	AP	^st168.	2	K
49.	1	K	79.	3	AP	109.	4	C	139.	5	AP	^sg169.	3	K
50.	1	K	80.	3	AP	110.	4	K	140.	5	AP	^st170.	4	K
51.	1	C	81.	3	C	111.	1	C	141.	5	AP	^sg171.	6	AP
52.	1	K	82.	3	C	112.	4	C	142.	5	AP	^st172.	5	K
53.	1	C	83.	3	C	113.	5	AP	143.	5	AP	^sg173.	6	K
54.	1	C	84.	3	K	114.	5	K	144.	5	AP	^a,st174.	7	K
55.	1	C	85.	3	K	115.	5	C	145.	5	AP	175.	8	K
56.	1	K	86.	3	C	116.	5	C	^a146.	6	K	176.	8	K
57.	1	C	87.	3	C	117.	5	C	^a147.	6	K	177.	8	K
58.	2	K	88.	3	K	118.	5	AP	^a148.	7	AP	178.	8	K
59.	2	K	89.	3	K	119.	5	K	149.	7	AP	179.	8	K
60.	2	C	90.	3	C	120.	5	C	150.	7	AP	180.	8	K
61.	2	K	91.	3	K	121.	5	K	151.	7	C	181	8	K
62.	2	C	92.	3	AP	122.	5	K	^a152.	7	K	182	8	K
63.	2	C	93.	3	C	123.	5	K	^a153.	7	K	183.	8	K
64.	2	C	94.	3	C	124.	5	AP	^a154.	7	K	184.	8	K
65.	2	AP	95.	3	C	125.	5	AP	^a155.	7	AP	185.	8	K
66.	2	AP	96.	3	C	126.	5	K	^a156.	7	AP	186.	8	K
67.	2	C	97.	3	C	127.	5	C	^a157.	7	K	187.	8	K
68.	2	K	98.	3	C	128.	5	K	^a158.	7	C	188.	8	K
69.	2	AP	99.	3	AP	129.	5	K	^a159.	7	C	189.	8	K
70.	2	AP	100.	3	AP	130.	5	AP	^a160.	7	K
71.	2	K	101.	3	AP	131.	5	AP	^a161.	7	K
72.	2	AP	102.	3	K	132.	5	AP	^a162.	7	C

^sg This question also appears in the Study Guide.

^stThis question also appears in a self-test at the student companion website.

^a This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Brief Exercises
190.	1	AP	193.	3	AP	196.	5	AP	199.	7	AP
191.	2	AP	194.	3	AP	197.	5	AP	200.	7	AP
192.	2,3	AP	195.	4	AP	198.	7	AP	^a201.	7	AP
Exercises
202.	1	C	207.	2,3	AN	212.	4	AP	217.	5	AP	^a222.	7	AP
203.	2,3	AP	208.	2	AP	213.	4	AP	218.	5	C	^a223.	7	AP
204.	2,3	AP	209.	3	AP	214.	5	AN	219.	5	AP	^a224.	7	AP
205.	2	E	210.	3	AP	215.	5	AP	220.	5	AP	^a221.	7	AP
206.	2,3	AP	211.	4	AP	216.	5	AP	^a221.	6	AP	^a226.	7	AP
Completion Statements
227.	1	K	229.	1	K	231.	2	K	233.	3	K	235.	5	K
228.	1	K	230.	2	K	232.	3	K	234.	3	K	236.	5	K
Matching Statements
237.	1	K
Short-Answer Essay
238.	3	K	240.	3	K	242.	1	K	244.	1	K
239.	1	K	241.	5	K	243.	5	K	245.	1	K

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Learning Objective 1
1.	TF	35.	TF	46.	MC	51.	MC	56.	MC	202.	Ex	239.	SA
2.	TF	36.	TF	47.	MC	52.	MC	57.	MC	227.	C	242.	SA
3.	TF	43.	MC	48.	MC	53.	MC	111.	MC	228.	C	244.	SA
4.	TF	44.	MC	49.	MC	54.	MC	165.	MC	229.	C	245.	SA
5.	F	45.	MC	50.	MC	55.	MC	190.	BE	237.	MA
Learning Objective 2
6.	TF	60.	MC	65.	MC	70.	MC	157.	MC	204.	Ex	230.	C
7.	TF	61.	MC	66.	MC	71.	MC	158.	MC	205.	Ex	231.	C
37.	TF	62.	MC	67.	MC	72.	MC	203.	Ex	206.	Ex
58.	MC	63.	MC	68.	MC	73.	MC	166.	BE	207.	Ex
59.	MC	64.	MC	69.	MC	156.	MC	167.	BE	208.	Ex
Learning Objective 3
8.	TF	75.	MC	83.	MC	91.	MC	99.	MC	107.	MC	209.	Ex
9.	TF	76.	MC	84.	MC	92.	MC	100.	MC	169.	MC	210.	Ex
10.	TF	77.	MC	85.	MC	93.	MC	101.	MC	192.	BE	232.	C
11.	TF	78.	MC	86.	MC	94.	MC	102.	MC	193.	BE	233.	C
12.	TF	79.	MC	87.	MC	95.	MC	103.	MC	194.	BE	234.	C
38.	TF	80.	MC	88.	MC	96.	MC	104.	MC	203.	Ex	240.	SA
39.	TF	81.	MC	89.	MC	97.	MC	105.	MC	204.	Ex
74.	MC	82.	MC	90.	MC	98.	MC	106.	MC	206.	Ex

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

Learning Objective 4

13.

15.

108.

110.

170.

211.

213.

14.

40.

109.

112.

195.

212.

Learning Objective 5

16.

26.

117.

127.

137.

172.

235.

17.

27.

118.

128.

138.

173.

236.

18.

28.

119.

129.

139.

196.

241.

19.

29.

120.

130.

140.

197.

243.

20.

41.

121.

131.

141.

215.

21.

42.

122.

132.

142.

216.

22.

113.

123.

133.

143.

217.

23.

114.

124.

134.

144.

218.

24.

115.

125.

135.

145.

219.

25.

116.

126.

136.

171.

220.

Learning Objective ^a6

^a34.

175.

178.

181.

184.

187.

^a225.

^a146.

176.

179.

182.

185.

188.

^a147.

177.

180.

183.

186.

189.

Learning Objective ^a7

^a30.

^a149.

^a154.

^a159.

^a164.

^a201.

^a225.

^a31.

^a150.

^a155.

^a160.

^a174.

^a221.

^a226.

^a32.

^a151.

^a156.

^a161.

^a198.

^a222.

^a33.

^a152.

^a157.

^a162.

^a199.

^a223.

^a148.

^a153.

^a158.

^a163.

^a200.

^a224.

Learning Objective 8

^175.

^177.

^179.

^181.

^183.

^185.

^176.

^178.

^180.

^182.

^184.

Note: TF = True-False BE = Brief Exercise C = Completion

MC = Multiple Choice Ex = Exercise SA = Short-Answer

MA = Matching

CHAPTER LEARNING OBJECTIVES

Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.
Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.
Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.
Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.
Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.

^a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

^a7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

TRUE-FALSE STATEMENTS

Retailers and wholesalers are both considered merchandisers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The steps in the accounting cycle are different for a merchandising company than for a service company.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A periodic inventory system requires a detailed inventory record of inventory items.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Freight terms of FOB Destination means that the seller pays the freight costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Sales revenues are earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A company’s unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandising company has different types of adjusting entries than a service company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Operating expenses are different for merchandising and service enterprises.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Net sales appears on both the multiple-step and single-step forms of an income statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A multiple-step income statement provides users with more information about a company’s income performance.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The multiple-step form of income statement is easier to read than the single-step form.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Inventory is classified as a current asset in a classified balance sheet.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Gross profit represents the merchandising profit of a company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit is a measure of the overall profitability of a company.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

^a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Inventory is reported as a long-term asset on the balance sheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Sales revenue should be recorded in accordance with the matching principle.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The major difference between the balance sheets of a service company and a merchandising company is inventory.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

13.

19.

25.

^a31.

37.

14.

20.

26.

^a32.

38.

15.

21.

27.

^a33.

39.

10.

16.

22.

28.

^a34.

40.

11.

17.

23.

29.

35.

41.

12.

18.

24.

30.

36.

42.

MULTIPLE CHOICE QUESTIONS

Net income is gross profit less
financing expenses.
operating expenses.
other expenses and losses.
other expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

An enterprise which sells goods to customers is known as a
proprietorship.
corporation.
retailer.
service firm.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Which of the following would not be considered a merchandising company?
Retailer
Wholesaler
Service firm
Dot Com firm

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

A merchandising company that sells directly to consumers is a
retailer.
wholesaler.
broker.
service company.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Two categories of expenses for merchandising companies are
cost of goods sold and financing expenses.
operating expenses and financing expenses.
cost of goods sold and operating expenses.
sales and cost of goods sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The primary source of revenue for a wholesaler is
investment income.
service fees.
the sale of merchandise.
the sale of fixed assets the company owns.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Sales revenue less cost of goods sold is called
gross profit.
net profit.
net income.
marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

After gross profit is calculated, operating expenses are deducted to determine
gross margin.
net income.
gross profit on sales.
net margin.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Cost of goods sold is determined only at the end of the accounting period in
a perpetual inventory system.
a periodic inventory system.
both a perpetual and a periodic inventory system.
neither a perpetual nor a periodic inventory system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Which of the following expressions is incorrect?
Gross profit – operating expenses = net income
Sales revenue – cost of goods sold – operating expenses = net income
Net income + operating expenses = gross profit
Operating expenses – cost of goods sold = gross profit

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Detailed records of goods held for resale are not maintained under a
perpetual inventory system.
periodic inventory system.
double entry accounting system.
single entry accounting system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A perpetual inventory system would likely be used by a(n)
automobile dealership.
hardware store.
drugstore.
convenience store.

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Which of the following is a true statement about inventory systems?
Periodic inventory systems require more detailed inventory records.
Perpetual inventory systems require more detailed inventory records.
A periodic system requires cost of goods sold be determined after each sale.
A perpetual system determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

In a perpetual inventory system, cost of goods sold is recorded
on a daily basis.
on a monthly basis.
on an annual basis.
with each sale.

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a company determines cost of goods sold each time a sale occurs, it
must have a computer accounting system.
uses a combination of the perpetual and periodic inventory systems.
uses a periodic inventory system.
uses a perpetual inventory system.

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
Inventory account.
Purchases account.
Supplies account.
Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
Accounts Payable.
Purchase Returns and Allowances.
Sales Revenue.
Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Inventory account is used in each of the following except the entry to record
goods purchased on account.
the return of goods purchased.
payment of freight on goods sold.
payment within the discount period.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A buyer would record a payment within the discount period under a perpetual inventory system by crediting
Accounts Payable.
Inventory.
Purchase Discounts.
Sales Discounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
Inventory account will be increased.
Inventory account will not be affected.
seller will bear the freight cost.
carrier will bear the freight cost.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Freight costs paid by a seller on merchandise sold to customers will cause an increase
in the selling expense of the buyer.
in operating expenses for the seller.
to the cost of goods sold of the seller.
to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the
seller.
buyer.
transportation company.
buyer and the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?
$8,100
$8,280
$8,820
$9,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ´ (1 – .02) = $8,820

Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
20%
24%
18%
36%

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [360 ¸ (30 – 10)] ´ 1% = 18%

If a company is given credit terms of 2/10, n/30, it should
hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
pay within the discount period and recognize a savings.
pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
Inventory.
Purchase Discounts.
Purchase Allowance.
Sales Discounts.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $60,000, terms 2/10, n/30.

Returned $1,200 of the shipment for credit.

Paid $300 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory increased by

$57,624.
$57,918.
$57,924.
$59,100.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [($60,000 – $1,200´ .98)] + 300 = $57,924

Costner’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $40,000, terms 2/10, n/30.

Returned $800 of the shipment for credit.

Paid $200 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

increased by $38,416.
increased by $38,612.
increased by $38,616.
increased by $39,400.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: [($40,000 – $800) ´ .98] + $200 = $38,616

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in
Freight Expense.
Freight – In.
Inventory.

d Freight – Out.

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:
Accounts Payable………………………………………………………… 5,000

Inventory…………………………………………………………….. 5,000

Accounts Payable………………………………………………………… 5,000

Inventory…………………………………………………………………….. 150

Cash…………………………………………………………………… 5,150

Accounts Payable………………………………………………………… 5,000

Purchase Discounts……………………………………………… 120

Inventory…………………………………………………………….. 4,850

Accounts Payable………………………………………………………… 5,000

Inventory…………………………………………………………….. 120

Cash…………………………………………………………………… 4,850

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:
Accounts Payable………………………………………………………… 9,000

Cash…………………………………………………………………… 9,000

Accounts Payable………………………………………………………… 8,730

Cash…………………………………………………………………… 8,730

Accounts Payable………………………………………………………… 9,000

Purchase Returns and Allowances………………………… 270

73 (Cont.)

Cash…………………………………………………………………… 8,730

Accounts Payable………………………………………………………… 9,000

Inventory…………………………………………………………….. 270

Cash…………………………………………………………………… 8,730

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ´ .97 = $8,730

On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
Cash…………………………………………………………………………… 5,000

Accounts Receivable……………………………………………. 5,000

Cash…………………………………………………………………………… 5,000

Sales Discounts…………………………………………………… 50

Accounts Receivable……………………………………………. 4,950

Cash…………………………………………………………………………… 4,950

Sales Discounts…………………………………………………………… 50

Accounts Receivable……………………………………………. 5,000

Cash…………………………………………………………………………… 5,050

Sales Discounts…………………………………………………… 50

Accounts Receivable……………………………………………. 5,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $5,000 ´ .99 = $4,950

On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day’s cash sales will include:
a $3,600 credit to Cost of Goods Sold.
a $6,000 credit to Cash.
a $3,600 credit to Inventory.

d a $6,000 debit to Accounts Receivable.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?
$3,675
$3,750
$3,920

d $4,000

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($4,000 – $250) ´ .98 = $3,675

The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to
Sales Discounts for $40.
Cash for $1,960.
Accounts Receivable for $2,000.
Sales Revenue for $2,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The collection of a $6,000 account within the 2 percent discount period will result in a
debit to Sales Discounts for $120.
debit to Accounts Receivable for $5,880.
credit to Cash for $5,880.
credit to Accounts Receivable for $5,880.

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $6,000 ´ .02 = $120

Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y’s check?
$630
$720
$810
$882

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $900 ´ .98 = $882

Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
$3,920
$4,000
$4,900
$4,920

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($5,000 – $1,000) ´ .98 = $3,920

The collection of a $1,500 account after the 2 percent discount period will result in a
debit to Cash for $1,470.
debit to Accounts Receivable for $1,500.
debit to Cash for $1,500.
debit to Sales Discounts for $30.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

The collection of a $1,000 account after the 2 percent discount period will result in a
debit to Cash for $980.
credit to Accounts Receivable for $1,000.
credit to Cash for $1,000.
debit to Sales Discounts for $20.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

In a perpetual inventory system, the Cost of Goods Sold account is used
only when a cash sale of merchandise occurs.
only when a credit sale of merchandise occurs.
only when a sale of merchandise occurs.
whenever there is a sale of merchandise or a return of merchandise sold.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Sales revenues are usually considered earned when
cash is received from credit sales.
an order is received.
goods have been transferred from the seller to the buyer.
adjusting entries are made.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

A sales invoice is a source document that
provides support for goods purchased for resale.
provides evidence of incurred operating expenses.
provides evidence of credit sales.
serves only as a customer receipt.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Sales revenue
may be recorded before cash is collected.
will always equal cash collections in a month.
only results from credit sales.
is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The journal entry to record a credit sale is
Cash

Sales Revenue

Cash

Service Revenue

Accounts Receivable

Service Revenue

Accounts Receivable

Sales Revenue

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Sales Returns and Allowances is increased when
an employee does a good job.
goods are sold on credit.
goods that were sold on credit are returned.
customers refuse to pay their accounts.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Sales Returns and Allowances account is classified as a(n)
asset account.
contra asset account.
expense account.
contra revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A credit granted to a customer for returned goods requires a debit to
Sales Revenue and a credit to Cash.
Sales Returns and Allowances and a credit to Accounts Receivable.
Accounts Receivable and a credit to a contra-revenue account.
Cash and a credit to Sales Returns and Allowances.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
discount.
return.
contra asset.
allowance.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24?
$3,332
$3,440
$3,528

d $3,600

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: ($3,600 – $200) ´ .98 = $3,332

When goods are returned that relate to a prior cash sale,
the Sales Returns and Allowances account should not be used.
the cash account will be credited.
Sales Returns and Allowances will be credited.
Accounts Receivable will be credited.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The Sales Returns and Allowances account does not provide information to management about
possible inferior merchandise.
the percentage of credit sales versus cash sales.
inefficiencies in filling orders.
errors in overbilling customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A Sales Returns and Allowances account is not debited if a customer
returns defective merchandise.
receives a credit for merchandise of inferior quality.
utilizes a prompt payment incentive.
returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

As an incentive for customers to pay their accounts promptly, a business may offer its customers
a sales discount.
free delivery.
a sales allowance.
a sales return.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
the customer must pay the bill within 10 days.
the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A sales discount does not
provide the purchaser with a cash saving.
reduce the amount of cash received from a credit sale.
increase a contra-revenue account.
increase an operating expense account.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?
$1,750
$2,000
$2,250
$2,450

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $2,500 ´ .98 = $2,450

Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
$6,272
$6,400
$7,840
$7,872

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: ($8,000 – $1,600) ´ .98 = $6,272

Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?
Cash…………………………………………………………………………… 3,400

Accounts Receivable……………………………………………. 3,400

Cash…………………………………………………………………………… 3,332

Sales Returns and Allowances……………………………………… 668

Accounts Receivable……………………………………………. 4,000

Cash…………………………………………………………………………… 3,332

Sales Returns and Allowances……………………………………… 600

Sales Discounts…………………………………………………………… 68

Accounts Receivable……………………………………………. 4,000

Cash…………………………………………………………………………… 3,920

Sales Discounts…………………………………………………………… 80

Sales Returns and Allowances……………………………… 600

Accounts Receivable……………………………………………. 3,400

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Which of the following would not be classified as a contra account?
Sales Revenue
Sales Returns and Allowances
Accumulated Depreciation
Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following accounts has a normal credit balance?
Sales Returns and Allowances
Sales Discounts
Sales Revenue
Selling Expense

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

With respect to the income statement,
contra-revenue accounts do not appear on the income statement.
sales discounts increase the amount of sales.
contra-revenue accounts increase the amount of operating expenses.
sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When a seller grants credit for returned goods, the account that is credited is
Sales Revenue.
Sales Returns and Allowances.
Inventory.
Accounts Receivable.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are
credit, credit, credit.
debit, credit, debit.
credit, debit, debit.
credit, debit, credit.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

All of the following are contra revenue accounts except
sales revenue.
sales allowances.
sales discounts.
sales returns.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

A merchandising company using a perpetual system will make
the same number of adjusting entries as a service company does.
one more adjusting entry than a service company does.
one less adjusting entry than a service company does.
different types of adjusting entries compared to a service company.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of
sales revenue.
inventory.
sales discounts.
freight-out.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

A merchandising company using a perpetual system may record an adjusting entry by
debiting Income Summary.
crediting Income Summary.
debiting Cost of Goods Sold.
debiting Sales Revenue.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The operating cycle of a merchandiser is
always one year in length.
generally longer than it is for a service company.
about the same as for a service company.
generally shorter than it is for a service company.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

When the physical count of Rosanna Company inventory had a cost of $4,350 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:
Cost of Goods Sold……………………………………………………… 150

Inventory…………………………………………………………….. 150

Inventory…………………………………………………………………….. 150

Cost of Goods Sold……………………………………………… 150

Income Summary………………………………………………………… 150

Inventory…………………………………………………………….. 150

Cost of Goods Sold……………………………………………………… 4,500

Inventory…………………………………………………………….. 4,500

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $4,500 – $4,350 = $150

Arquette Company’s financial information is presented below.

Sales Revenue $ ???? Cost of Goods Sold 540,000

Sales Returns and Allowances 40,000 Gross Profit ????

Net Sales 900,000

The missing amounts above are:

Sales Revenue Gross Profit

$940,000 $360,000
$860,000 $360,000
$940,000 $420,000
$860,000 $420,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution: $900,000 + $40,000 = $940,000; $900,000 – $540,000 = $360,000

The sales revenue section of an income statement for a retailer would not include
Sales discounts.
Sales revenue.
Net sales.
Cost of goods sold.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The operating expense section of an income statement for a wholesaler would not include
freight-out.
utilities expense.
cost of goods sold.
insurance expense.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Income from operations will always result if
the cost of goods sold exceeds operating expenses.
revenues exceed cost of goods sold.
revenues exceed operating expenses.
gross profit exceeds operating expenses.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
Gross profit
Operating expenses
Sales revenues
Cost of goods sold

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Conrad Company reported the following balances at June 30, 2014:

Sales Revenue $16,200

Sales Returns and Allowances 600

Sales Discounts 300

Cost of Goods Sold 7,500

Net sales for the month is

$7,800
$15,300.
$15,600.
$16,200.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $16,200 – $600 – $300 = $15,300

Income from operations appears on
both a multiple-step and a single-step income statement.
neither a multiple-step nor a single-step income statement.
a single-step income statement.
a multiple-step income statement.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit does not appear
on a multiple-step income statement.
on a single-step income statement.
to be relevant in analyzing the operation of a merchandiser.
on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which of the following is not a true statement about a multiple-step income statement?
Operating expenses are similar for merchandising and service enterprises.
There may be a section for nonoperating activities.
There may be a section for operating assets.
There is a section for cost of goods sold.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Which one of the following is shown on a multiple-step but not on a single-step income statement?
Net sales
Net income
Gross profit
Cost of goods sold

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

All of the following items would be reported as other expenses and losses except
freight-out.
casualty losses.
interest expense.
loss from employees’ strikes.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross profit percentage is
25%.
35%.
65%.
100%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($700,000 – $455,000) ¸ $700,000 = 35%

A company shows the following balances:

Sales Revenue $2,500,000

Sales Returns and Allowances 450,000

Sales Discounts 50,000

Cost of Goods Sold 1,400,000

What is the gross profit percentage?

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $2,500,000 – $450,000 – $50,000 = $2,000,000; ($2,000,000 – $1,400,000) ¸ $2,000,000 = 30%

The gross profit rate is computed by dividing gross profit by
cost of goods sold.
net income.
net sales.
sales revenue.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In terms of liquidity, inventory is
more liquid than cash.
more liquid than accounts receivable.
more liquid than prepaid expenses.
less liquid than store equipment.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

On a classified balance sheet, inventory is classified as
an intangible asset.
property, plant, and equipment.
a current asset.
a long-term investment.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Gross profit for a merchandiser is net sales minus
operating expenses.
cost of goods sold.
sales discounts.
cost of goods available for sale.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Parker’s gross profit is

$24,000.
$27,000.
$45,000.
$90,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Yoder’s income from operations is

$18,000.
$27,000.
$45,000.
$90,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

Yoder’s net income is

$24,000.
$27,000.
$45,000.
$90,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Financial information is presented below:

Operating Expenses $ 60,000

Sales Revenue 225,000

Cost of Goods Sold 135,000

Gross profit would be

$30,000.
$90,000.

133 (Cont.)
$165,000.
$225,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $225,000 – $135,000 = $90,000

Financial information is presented below:

Operating Expenses $ 60,000

Sales Revenue 225,000

Cost of Goods Sold 135,000

The gross profit rate would be

.133.
.400.
.600.
.733.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($225,000 – $135,000) ¸ $225,000 = .40

Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 26,000

Sales Discounts 12,000

Sales 300,000

Cost of Goods Sold 158,000

Gross profit would be

$104,000.
$116,000.
$130,000.
$142,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $300,000 – $26,000 – $12,000 = $262,000; $262,000 – $158,000 = $104,000

Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 26,000

Sales Discounts 12,000

Sales Revenue 300,000

Cost of Goods Sold 158,000

The gross profit rate would be

.347.
.397.
.473.
.542.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $300,000 – $26,000 – $12,000 = $262,000; ($262,000 – $158,000) ¸ $262,000 = .397

Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

The amount of net sales on the income statement would be

$290,000.
$302,000.
$308,000.
$320,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 – $18,000 – $12,000 = $290,000

Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

Gross profit would be

$26,000.
$116,000.
$128,000.
$134,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 – $18,000 – $12,000 = $290,000; $290,000 – $174,000 = $116,000

Financial information is presented below:

Operating Expenses $ 90,000

Sales Returns and Allowances 18,000

Sales Discounts 12,000

Sales Revenue 320,000

Cost of Goods Sold 174,000

The gross profit rate would be

.363.
.400.
.456.
.503.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $320,000 – $18,000 – $12,000 = $290,000;($290,000 – $174,000) ¸ $290,000 = .40

If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $390,000, the gross profit rate is
35%.
38%
62%.
65%.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($600,000 – $390,000) ¸ $600,000 = 35%

Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of
$39,000 and $23,400.
$39,000 and $24,000.
$40,000 and $23,400.
$40,000 and $24,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s gross profit for August, 2014 is

$20,000.
$21,000.
$23,000.
$24,000.

Ans: D, LO:5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 – $36,000 = $24,000

During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s nonoperating income (loss) for the month of August, 2014 is

$0.
$1,000.
$2,000.
$3,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $1,000 + $2,000 = $3,000

During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s operating income for the month of August, 2014 is

$20,000.
$21,000.
$23,000.
$24,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 – $36,000 – $4,000 = $20,000

During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

Baxter’s net income for August, 2014 is

$20,000.
$21,000.
$23,000.
$24,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $60,000 – $36,000 – 4,000 + $1,000 + $2,000 = $23,000

^a146. In a worksheet for a merchandising company, Inventory would appear in the

trial balance and adjusted trial balance columns only.
trial balance and balance sheet columns only.
trial balance, adjusted trial balance, and balance sheet columns.
trial balance, adjusted trial balance, and income statement columns.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a147. The Inventory account balance appearing in a perpetual inventory worksheet represents the

ending inventory.
beginning inventory.
cost of merchandise purchased.
cost of merchandise sold.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a148. The following information is available for Dennehy Company:

Sales Revenue $390,000 Freight-In $30,000

Ending Inventory 37,500 Purchase Returns and Allowances 15,000

Purchases 270,000 Beginning Inventory 45,000

Dennehy’s cost of goods sold is

$262,500.
$285,000.

148 (Cont.)
$292,500.
$345,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $45,000 + $270,000 – $15,000 + $30,000 – $37,500 = $292,500

^a149. At the beginning of September, 2014, Stella Company reported Inventory of $8,000. During the month, the company made purchases of $35,600. At September 30, 2014, a physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is

$35,200.
$35,600.
$36,000.
$43,600.

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $8,000 + $35,600 – $8,400 = $35,200

^a150. At the beginning of the year, Hunt Company had an inventory of $750,000. During the year, the company purchased goods costing $2,400,000. If Hunt Company reported ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold and gross profit rate must be

$1,500,000 and 66.7%.
$2,250,000 and 40%.
$1,500,000 and 40%.
$2,250,000 and 60%.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $$750,000 +$2,400,000 – $900,000 = $2,250,000; ($3,750,000 – $2,250,000) ¸ $3,750,000 = 40%

^a151. During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost of goods sold for the year was $500,000, purchases must have been

$475,000.
$500,000.
$525,000.
Unable to determine.

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $500,000 – $25,000 = $475,000

^a152. Cost of goods available for sale is computed by adding

beginning inventory to net purchases.
beginning inventory to the cost of goods purchased.
net purchases and freight-in.
purchases to beginning inventory.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

^a 153. The Freight-In account

increases the cost of merchandise purchased.
is contra to the Purchases account.
is a permanent account.
has a normal credit balance.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 154. Net purchases plus freight-in determines

cost of goods sold.
cost of goods available for sale.
cost of goods purchased.
total goods available for sale.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a155. Goldblum Company has the following account balances:

Purchases $96,000

Sales Returns and Allowances 12,800

Purchase Discounts 8,000

Freight-In 6,000

Delivery Expense 10,000

The cost of goods purchased for the period is

$80,800.
$88,000.
$94,000.
$104,000.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $96,000 – $8,000 + $6,000 = $94,000

^a156. McKendrick Shoe Store has a beginning inventory of $45,000. During the period, purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical count of inventory at the end of the period revealed that $30,000 was still on hand. The cost of goods available for sale was

$189,000.
$204,000.
$219,000.
$249,000.

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $45,000 + $195,000 – $6,000 + $15,000 = $249,000

^a157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting

Accounts Payable.
Inventory.
Purchases.
Purchase Returns and Allowances.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a158. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?

Cash received on account with a discount
Payment of freight costs on a purchase
Return of merchandise sold
Sale of merchandise on credit

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a159. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be

Accounts Payable

Purchase Returns and Allowances

Purchase Returns and Allowances

Accounts Payable

Accounts Payable

Inventory

Inventory

Accounts Payable

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a160. Under a periodic inventory system, acquisition of merchandise is debited to the

Inventory account.
Cost of Goods Sold account.
Purchases account.
Accounts Payable account.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a161. Which of the following accounts has a normal credit balance?

Purchases
Sales Returns and Allowances
Freight-In
Purchase Discounts

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a162. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are

credit, credit, debit.
debit, credit, credit.
debit, credit, debit.
debit, debit, debit.

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a163. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

Purchase Discounts $ 11,200

Freight – In 15,600

Purchases 402,000

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns 12,800

Using the periodic system, the cost of goods purchased is

$378,000.
$383,000.
$393,600.
$404,200.

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $402,000 – $11,200 – $12,800 + $15,600 = $393,600

^a164. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

Purchase Discounts $ 11,200

Freight – In 15,600

Purchases 402,000

Beginning Inventory 47,000

Ending Inventory 57,600

Purchase Returns 12,800

Using the periodic system, the cost of goods sold is

$378,000.
$383,000.
$393,600.
$404,200.

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: $47,000 + $402,000 – $11,200 – $12,800 + $15,600 – $57,600 = $383,000

Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is
$0.
$10,000.
$24,000.
$46,000.

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution: $60,000 – $36,000 = $24,000

Rae Company uses a perpetual inventory system made a purchase of merchandise on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is
Accounts Payable………………………………………………………… 9,000

Cash……………………………………………………………………. 9,000

Accounts Payable………………………………………………………… 8,820

Cash……………………………………………………………………. 8,820

Accounts Payable………………………………………………………… 9,000

Purchase Returns and Allowances………………………….. 180

Cash……………………………………………………………………. 8,820

Accounts Payable………………………………………………………… 9,000

Inventory………………………………………………………………. 180

Cash……………………………………………………………………. 8,820

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution: $9,000 ´ .98 = $8,820

Kate Company uses a perpetual inventory system purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:
There is no entry on Kate’s books for this transaction.
Freight Expense………………………………………………………….. 500

Cash…………………………………………………………………… 500

Freight-Out………………………………………………………………….. 500

Cash…………………………………………………………………… 500

Inventory…………………………………………………………………….. 500

Cash…………………………………………………………………… 500

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
Purchases.
Purchase Returns.
Purchase Allowance.
Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

On October 4, 2014, JT Corporation had credit sales transactions of $4,000 from merchandise having cost $2,400. The entries to record the day’s credit transactions include a
debit of $4,000 to Inventory.
credit of $4,000 to Sales Revenue.
debit of $2,400 to Inventory.
credit of $2,400 to Cost of Goods Sold.

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Which of the following accounts is not closed to Income Summary?
Cost of Goods Sold
Inventory
Sales Revenue
Sales Discounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In the Augie Company, sales were $750,000, sales returns and allowances were $30,000, and cost of goods sold was $450,000. The gross profit rate was
36%.
37.5%.
40%.
41.7%.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution: ($750,000 – $30,000) – $450,000 = $270,000; $270,000 ¸ $720,000 = 37.5%

Net sales is sales revenue less
sales discounts.
sales returns.
sales returns and allowances.
sales discounts and sales returns and allowances.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

In the balance sheet, ending inventory is reported
in current assets immediately following accounts receivable.
in current assets immediately following prepaid expenses.
in current assets immediately following cash.
under property, plant, and equipment.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a174. Cost of goods available for sale is computed by adding

freight-in to net purchases.
beginning inventory to net purchases.
beginning inventory to purchases and freight-in.
beginning inventory to cost of goods purchased.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The Income statement is
required under GAAP but not under IFRS.
required under IFRS in the same format as under GAAP.
required under IFRS but not under GAAP.
required under IFRS with some differences as compared to GAAP.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The basic accounting entries for merchandising are
the same under GAAP and under IFRS.
required under GAAP but not under IFRS.
required under IFRS but not under GAAP.
required under IFRS with some differences as compared to GAAP.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under GAAP, companies can choose which inventory system?

Perpetual Periodic

Yes No
Yes Yes
No Yes
Yes No

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS, companies can choose which inventory system?

Perpetual Periodic

Yes No
Yes Yes
No Yes
Yes No

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Companies cannot use the
periodic inventory system under GAAP.
periodic inventory system under IFRS.
perpetual system under IFRS.
both periodic and perpetual can be used under GAAP and IFRS.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Inventories are defined by IFRS as
held-for-sale in the ordinary course of business.
in the process of production for sale in the ordinary course of business.
in the form of materials or supplies to be consumed in the production process or in the providing of services.
All of these answer choices are correct.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under GAAP, companies generally classify income statement items by
function.
nature.
nature or function
date incurred.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS, companies must classify income statement items by
function.
nature.
nature or function
date incurred.

IFRS. Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under GAPP, income statement items are generally described as
administration, distribution, manufacturing, etc.
salaries, depreciation, utilities, etc.
administration, depreciation, manufacturing, etc.
salaries, distribution, utilities, etc.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS, income statement items are generally described as
administration, distribution, manufacturing, etc.
salaries, depreciation, utilities, etc.
administration, depreciation, manufacturing, etc.
salaries, distribution, utilities, etc.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For the income statement, IFRS requires
single-step approach.
multiple-step approach.
single-step approach or multiple-step approach.
no specific income statement approach.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Under IFRS, companies can apply revaluation to
land, buildings, and intangible assets.
land, buildings, but not intangible assets.
intangible assets, but not land or beer.
no assets.

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The use of IFRS results in more transactions affecting
net income but not other comprehensive income.
other comprehensive income, but not net income.
but net income and other comprehensive income.
neither net income nor other comprehensive income.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Comprehensive income under IFRS
includes unrealized gains and losses included in net income, in contrast to GAAP.
includes unrealized gains and losses included in net income, similar to GAAP.
excludes unrealized gains and losses included in net income, in contrast to GAAP.
excludes unrealized gains and losses included in net income, similar to GAAP.

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

The number of years of income statement information to be presented is
2 years under both GAAP and IFRS.
3 years under both GAAP and IFRS.
2 years under GAAP and 3 years under IFRS.
3 years under GAAP and 2 years under IFRS.

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Multiple Choice Questions

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
43.	b	64.	b	85.	c	106.	c	127.	c	^a148.	c	169.	b
44.	c	65.	c	86.	a	107.	a	128.	c	^a149.	a	170.	b
45.	c	66.	c	87.	d	108.	b	129.	b	^a150.	b	171.	b
46.	a	67.	b	88.	c	109.	a	130.	c	^a151.	a	172.	d
47.	c	68.	a	89.	d	110.	c	131.	b	^a152.	b	173.	a
48.	c	69.	c	90.	b	111.	b	132.	a	^a153.	a	^a174.	d
49.	a	70.	c	91.	d	112.	a	133.	b	^a154.	c	175.	d
50.	b	71.	c	92.	a	113.	a	134.	b	^a155.	c	176.	a
51.	b	72.	a	93.	b	114.	d	135.	a	^a156.	d	177.	b
52.	d	73.	d	94.	b	115.	c	136.	b	^a157.	d	178.	b
53.	b	74.	c	95.	c	116.	d	137.	a	^a158.	a	179.	d
54.	a	75.	c	96.	a	117.	b	138.	b	^a159.	a	180.	d
55.	b	76.	a	97.	c	118.	b	139.	b	^a160.	c	181.	a
56.	d	77.	c	98.	d	119.	d	140.	a	^a161.	d	182.	c
57.	d	78.	a	99.	d	120.	b	141.	a	^a162.	c	183.	a
58.	a	79.	d	100.	a	121.	c	142.	d	^a163.	c	184.	b
59.	d	80.	a	101.	c	122.	c	143.	d	^a164.	b	185.	d
60.	c	81.	c	102.	a	123.	a	144.	a	165.	c	186.	a
61.	b	82.	b	103.	c	124.	b	145.	c	166.	d	187.	b
62.	a	83.	d	104.	d	125.	a	^a146.	c	167.	d	188.	b
63.	b	84.	c	105.	d	126.	c	^a147.	a	168.	d	189.	d

BRIEF Exercises

BE 190

Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.

Sales Cost of Gross Operating Net

Revenue Goods Sold _Profit Expenses Income

$75,000 (a) $35,000 (b) $17,000

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 190 (5 min.)

$40,000
$18,000
$145,000
$11,000

BE 191

Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):

(a) Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $3,000 of damaged merchandise for credit.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 191 (5 min.)

(a) Inventory…………………………………………………………………………….. 45,000

Accounts Payable……………………………………………………… 45,000

(b) Accounts Payable………………………………………………………………… 3,000

Inventory………………………………………………………………….. 3,000

Inventory ($42,000 × .02)…………………………………………… 840

Cash ($42,000 – $840)………………………………………………. 41,160

BE 192

Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 192 (3 min.)

Journal entry on Garth’s books:

Accounts Receivable…………………………………………………………….. 1,100

Sales……………………………………………………………………………. 1,100

Cost of Goods Sold….. ………………………………………………………….. 600

Inventory…………………………………………………………………… 600

Journal entry on Kyle’s books:

Inventory……………… ………………………………………………………….. 1,100

Accounts Payable…………………………………………………………. 1,100

BE 193

Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 193 (3 min.)

Sales Returns and Allowances……………………………………………….. 200

Sales Discounts ($2,300 × .03)……………………………………………… 69

Cash ($2,500 – $200 – $69)……………………………………………………. 2,231

Accounts Receivable ……………………………………………………. 2,500

BE 194

Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.

May 13 Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.

May 16 One defective motor was returned to Charlie.

May 23 Received payment in full from Scruffy Brothers. Round to nearest dollar.

Instructions

Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations. Round amounts to nearest dollar.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 194 (8 min.)

May 13 Accounts Receivable…………………………………………………. 360

Sales Revenue…………………………………………………. 360

Cost of Goods Sold…………………………………………………… 208

Inventory………………………………………………………….. 208

May 16 Sales Returns and Allowances…………………………………… 45

Accounts Receivable…………………………………………. 45

Inventory………………………………………………………………….. 26

Cost of Goods Sold…………………………………………… 26

May 23 Cash………………………………………………………………………… 302

Sales Discounts ($315 × .04)……………………………………… 13

Accounts Receivable ($360 – $45)……………………… 315

BE 195

The income statement for Pepe Serna Company for the year ended December 31, 2014 is as follows:

PEPE SERNA COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Sales revenue…………………………………………………………………… $58,000

Interest revenue………………………………………………………………… 3,000

Total revenues…………………………………………………………….. 61,000

Expenses

Cost of goods sold…………………………………………………………….. $33,000

Salaries and wages expense……………………………………………… 13,000

Interest expense……………………………………………………………….. 1,000

Total expenses……………………………………………………………. 47,000

Net income…………………………………………………………………………………. $ 14,000

Prepare the entries to close the revenue and expense accounts at December 31, 2014. You may omit explanations for the transactions.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (5 min.)

Dec. 31 Sales Revenue……………………………………………………………. 58,000

Interest Revenue…………………………………………………………. 3,000

Income Summary………………………………………………… 61,000

31 Income Summary………………………………………………………… 47,000

Cost of Goods Sold……………………………………………… 33,000

Salaries and Wages Expense……………………………….. 13,000

Interest Expense………………………………………………….. 1,000

BE 196

Hoyt Company provides this information for the month of November, 2014: sales on credit $170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 196 (3 min.)

HOYT COMPANY

Income Statement (Partial)

For the Month Ended November 30, 2014

Sales Revenue……………………………………………………………. $240,000

Less: Sales Returns and Allowances…………………………… $9,000

Sales Discounts………………………………………………… 2,000 11,000

Net Sales……………………………………………………………………. $229,000

BE 197

During October, 2014, Red’s Catering Company generated revenues of $14,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (4 min.)

(1) Gross profit: $6,100 ($14,000 – $200 – $7,700)

(2) Income from operations: $4,100 ($6,100 – $2,000)

^aBE 198

For each of the following, determine the missing amounts.

Beginning Goods Available Cost of Ending

Inventory Purchases for Sale Goods Sold Inventory

$10,000 ________ $ 45,000 $25,000 _______
______ $220,000 $265,000 _______ $40,000

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^aSolution 198 (4 min.)

Purchases $35,000 ($45,000 – $10,000), Ending inventory $20,000 ($45,000 – $25,000)

Beginning inventory $45,000 ($265,000 – $220,000), Cost of Goods Sold $225,000 ($265,000 – $40,000)

^aBE 199

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^aSolution 199 (4 min.)

Calculation of Net purchases and Cost of goods purchased

Purchases…………………………………………………………………… $525,000

Less: Purchase returns and Allowances……………………….. $14,000

Purchase discounts ………………………………………….. 9,000 23,000

Net purchases……………………………………………………………… 502,000

Add: Freight-in…………………………………………………………….. 15,000

Cost of goods purchased………………………………………………. $517,000

^aBE 200

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 200 (6 min.)

Inventory, beginning……………………………………………………… $ 45,000

Purchases…………………………………………………………………… $630,000

Less: Purchase returns and allowances……………………….. $25,000

Purchase discounts…………………………………………… 11,000 36,000

Net purchases……………………………………………………………… 594,000

Add: Freight-in…………………………………………………………….. 19,000

Cost of goods purchased………………………………………………. 613,000

Cost of goods available for sale…………………………………….. 658,000

Inventory, ending…………………………………………………………. 55,000

Cost of goods sold……………………………………………………….. $603,000

^aBE 201

Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

May 13 Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.

May 16 Returned 1 defective motor to Charlie.

May 23 Paid Charlie Company in full. Round to nearest dollar.

Instructions

Journalize the May transactions for Scruffy Brothers. You may omit explanations.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^aSolution 201 (6 min.)

May 13 Purchases………………………………………………………………… 360

Accounts Payable……………………………………………… 360

May 16 Accounts Payable……………………………………………………… 45

Purchase Returns and Allowances……………………… 45

May 23 Accounts Payable ($360 – $45)………………………………….. 315

Purchase Discounts ($315 × .04)………………………… 13

Cash………………………………………………………………… 302

Exercises

Ex. 202

For each of the following, determine the missing amounts.

Sales Cost of Gross Operating Net

Revenue Goods Sold _Profit Expenses Income

$100,000 ________ _______ $30,000 $12,000
________ $135,000 $125,000 _______ $80,000

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 202 (5 min.)

Gross Profit = $42,000 ($30,000 + $12,000)

Cost of Goods Sold = $58,000 ($100,000 – $42,000)

Sales = $260,000 ($135,000 + $125,000)

Operating Expenses = $45,000 ($125,000 – $80,000)

Ex. 203

On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 40 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.

6 Sold 25 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.

7 Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.

13 Issued a credit memo to Team Wisconsin for the return of a defective bicycle.

14 Paid Monroe Bicycle Company in full, less discount.

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 203 (20 min.)

Oct. 4 Inventory…………………………………………………………………….. 8,000

Accounts Payable………………………………………………… 8,000

6 Accounts Receivable……………………………………………………. 8,250

Sales Revenue……………………………………………………. 8,250

Cost of Goods Sold……………………………………………………… 5,000

Inventory…………………………………………………………….. 5,000

7 Accounts Payable………………………………………………………… 400

Inventory…………………………………………………………….. 400

Solution 203 (Cont.)

13 Sales Returns and Allowances……………………………………… 330

Accounts Receivable……………………………………………. 330

Inventory…………………………………………………………………….. 200

Cost of Goods Sold……………………………………………… 200

14 Accounts Payable ($8,000 – $400)………………………………… 7,600

Cash ($7,600 × .99)……………………………………………… 7,524

Inventory ($7,600 × .01)……………………………………….. 76

Ex. 204

On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 70 backpacks at $20 each from Hunter, terms 2/10, n/30.

Sept. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.

Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.

Sept. 14 Paid Hunter in full, less discount.

Instructions

Journalize the September transactions for Reid Supply.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 204 (20 min.)

Sept. 4 Inventory………………………………………………………………….. 1,400

Accounts Payable……………………………………………… 1,400

Sept. 6 Accounts Payable……………………………………………………… 100

Inventory………………………………………………………….. 100

Sept. 9 Accounts Receivable…………………………………………………. 1,400

Sales Revenue…………………………………………………. 1,400

Cost of Goods Sold…………………………………………………… 800

Inventory………………………………………………………….. 800

Sept. 13 Accounts Receivable…………………………………………………. 525

Sales Revenue…………………………………………………. 525

Cost of Goods Sold…………………………………………………… 300

Inventory………………………………………………………….. 300

Solution 204 (Cont.)

Sept. 14 Accounts Payable ($1,400– $100)………………………………. 1,300

Cash ($1,300 × .98)…………………………………………… 1,274

Inventory ($1,300 × .02)…………………………………….. 26

Ex. 205

Sam Wainwright is a new accountant with Ground floor Company. Ground floor purchased merchandise on account for $18,000. The credit terms are 1/10, n/30. Sam has talked with the company’s banker and knows that he could earn 4% on any money invested in the company’s savings account.

Instructions

(a) Should Sam pay the invoice within the discount period or should he keep the $18,000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Sam forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $18,000for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 205 (10 min.)

Dan should pay the invoice within the discount period to save $140:

(a) Discount of 1% on $18,000 $180

Interest received on $18,000 (for 20 days at 4%) 40 ($18,000 × 4% × 20 ÷ 360)

Savings by taking the discount $140

(b) The equivalent annual interest rate is:

1% × 360 ÷ 20 = 18%.

Ex. 206

(a) Karns Company purchased merchandise on account from Bailey Office Suppliers for $174,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $156,800 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record:

(1) the purchase of merchandise.

(2) the return of merchandise.

(3) the payment on account.

(b) Hinds Company sold merchandise to Peter Company on account for $146,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $86,140. During the discount period, Peter Company returned $6,000 of merchandise and paid its account in full (minus the discount) by remitting $137,200 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record:

(1) the sale of merchandise.

(2) the return of merchandise.

(3) the collection on account.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 206 (20 min.)

(a) To compute the amount due after returns but before the discount, divide $156.800 by .98 (100% – 2%).

$156,800 ÷ .98 = $60,000.

Subtract $60,000 from $174,000 to determine that $174,000 of merchandise was returned.

(1) Inventory…………………………………………………………………….. 174,000

Accounts Payable………………………………………………… 174,000

(2) Accounts Payable………………………………………………………… 14,000

Inventory…………………………………………………………….. 14,000

(3) Accounts Payable………………………………………………………… 160,000

Inventory…………………………………………………………….. 3,200

Cash…………………………………………………………………… 156,800

(b) Peter Company returns $6,000 of merchandise and owes $140,000 to Hinds Company.

$137,200 ÷ $140,000 = .98

100% – 98% = 2%

The missing discount percentage is 2%. $140,000 × 2% = $2,800 sales discount.

$140,000 – $2,800 = $137,200 cash received on account.

(1) Accounts Receivable……………………………………………………. 146,000

Sales Revenue……………………………………………………. 146,000

Cost of Goods Sold……………………………………………………… 86,140

Inventory…………………………………………………………….. 86,140

(2) Sales Returns and Allowances……………………………………… 6,000

Accounts Receivable……………………………………………. 6,000

Inventory [$6,000 × ($86,140 ÷ $146,000)]……………………… 3,540

Cost of Goods Sold……………………………………………… 3,540

(3) Cash…………………………………………………………………………… 137,200

Sales Discounts…………………………………………………………… 2,800

Accounts Receivable……………………………………………. 140,000

Ex. 207

An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions.

A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270.
A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.
A $190 sales return was debited to Sales Revenue.
A cash payment of $40 for freight on merchandise purchases was debited to Freight-Out $400 and credited to Cash $400.

Instructions

Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.)

Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 207 (6-8 min.)

Sales Returns and Allowances……………………………………………… 270

Sales Revenue……………………………………………………………. 270

Supplies …………………………………………………………………………….. 310

Cash ………………………………………………………………………………….. 310

Accounts Payable………………………………………………………… 310

Inventory…………………………………………………………………….. 310

Sales Returns and Allowances……………………………………………… 190

Sales Revenue……………………………………………………………. 190

Inventory ………………………………………………………………………….. 40

Cash ………………………………………………………………………………….. 360

Freight-Out………………………………………………………………….. 400

Ex. 208

Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system.

(a) Purchased $35,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $700 of damaged merchandise for credit.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 208 (6-8 min.)

(a) Inventory………………………………………………………. 35,000

Accounts Payable…………………………………….. 35,000

(b) Accounts Payable………………………………………….. 700

Inventory…………………………………………………. 700

Inventory ($34,300 × .02)………………………….. 686

Cash ($33,614 – $686)……………………………… 33,314

Ex. 209

Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system.

(a) Eustace sells $45,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.

(b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 209 (7-9 min.)

(a) Accounts Receivable……………………………………………………………. 45,000

Sales Revenue……………………………………………………………. 45,000

Cost of Goods Sold……………………………………………………………… 30,000

Inventory…………………………………………………………………….. 30,000

(b) Sales Returns and Allowances……………………………………………… 4,000

Accounts Receivable……………………………………………………. 4,000

Inventory…………………………………………………………………………….. 2,400

Cost of Goods Sold……………………………………………………… 2,400

Sales Discounts ($40,000 × .01)……………………………………………. 410

Accounts Receivable……………………………………………………. 41,000

Ex. 210

Newell Company completed the following transactions in October:

Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection

Oct. 3 $ 600 2/10, n/30 Oct. 8

Oct. 11 1,700 3/10, n/30 Oct. 14 $ 400 Oct. 16

Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29

Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27

Oct. 23 2,300 2/10, n/30 Oct. 27 400 Oct. 28

Instructions

(a) Indicate the cash received for each collection. Show your calculations.

(b) Prepare the journal entry for the

(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.

(2) Oct. 23 sales return. The merchandise returned had a cost of $140.

(3) Oct. 28 collection.

Newell uses a perpetual inventory system.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 210 (20 min.)

(a) Oct. 8 $588 [Sales $600 – Sales discount $12 ($600 × .02)]

Oct. 16 $1,261 [Sales $1,700 – Sales return $400 = $1,300

$1,300 – Sales discount $39 ($1,300 × .03)]

Oct. 29 $4,000 [Sales $5,000 – Sales return $1,000 = $4,000;

(Discount lapsed)]

Oct. 27 $1,176 [Sales $1,400 – Sales return $200 = $1,200;

$1,200 – Sales discount $24 ($1,200 × .02)]

Oct. 28 $1,862 [Sales $2,300 – Sales return $400 = $1,900;

$1,900 – Sales discount $38 ($1,900 × .02)]

Solution 210 (Cont.)

(b) (1) Oct. 17 Accounts Receivable……………………………………. 5,000

Sales Revenue……………………………………. 5,000

Cost of Goods Sold……………………………………… 3,500

Inventory…………………………………………….. 3,500

(2) Oct. 23 Sales Returns and Allowances……………………… 200

Accounts Receivable……………………………. 200

Inventory…………………………………………………….. 140

Cost of Goods Sold……………………………… 140

(3) Oct. 28 Cash…………………………………………………………… 1,862

Sales Discounts…………………………………………… 38

Accounts Receivable……………………………. 1,900

Ex. 211

The following information is available for Moiz Company:

Debit Credit

Owner’s Capital $ 50,000

Owner’s Drawings $ 30,000

Sales Revenue 510,000

Sales Returns and Allowances 20,000

Sales Discounts 7,000

Cost of Goods Sold 310,000

Freight-Out 2,000

Advertising Expense 15,000

Interest Expense 19,000

Salaries and Wages Expense 55,000

Utilities Expense 18,000

Depreciation Expense 7,000

Interest Revenue 23,000

Instructions

Using the above information, prepare the closing entries for Moiz Company.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 211 (10 min.)

Dec. 31 Interest Revenue…………………………………………………………. 23,000

Sales Revenue……………………………………………………………. 510,000

Income Summary………………………………………………… 533,000

31 Income Summary………………………………………………………… 453,000

Sales Returns and Allowances……………………………… 20,000

Sales Discounts…………………………………………………… 7,000

Cost of Goods Sold……………………………………………… 310,000

Freight-Out………………………………………………………….. 2,000

Advertising Expense…………………………………………….. 15,000

Solution 211 (Cont.)

Interest Expense………………………………………………….. 19,000

Salaries and Wages Expense……………………………….. 55,000

Utilities Expense………………………………………………….. 18,000

Depreciation Expense………………………………………….. 7,000

31 Income Summary………………………………………………………… 80,000

Owner’s Capital…………………………………………………… 80,000

31 Owner’s Capital ………………………………………………………….. 30,000

Owner’s Drawings ………………………………………………. 30,000

Ex. 212

The adjusted trial balance of J. W. Hatch Company appears below.

W. HATCH

Adjusted Trial Balance

December 31, 2014

Debit Credit

Cash 12,000

Accounts Receivable 25,000

Inventory 35,000

Buildings 140,000

Accumulated Depreciation—

Buildings 20,000

Accounts Payable 12,000

Owner’s Capital 144,000

Owner’s Drawings 30,000

Sales Revenue 310,000

Sales Discounts 6,000

Sales Returns & Allowances 8,000

Cost of Goods Sold 188,000

Operating Expenses 42,000

486,000 486,000

Instructions

Using the information given, prepare the year-end closing entries.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 212 (10 min.)

Dec. 31 Sales Revenue……………………………………………………………. 310,000

Income Summary………………………………………………… 310,000

(To close credit balance accounts)

31 Income Summary………………………………………………………… 244,000

Sales Discounts…………………………………………………… 6,000

Sales Returns and Allowances……………………………… 8,000

Cost of Goods Sold……………………………………………… 188,000

Operating Expense………………………………………………. 42,000

Solution 212 (Cont.)

(To close accounts with debit balances)

31 Income Summary………………………………………………………… 66,000

Owner’s Capital…………………………………………………… 66,000

(To transfer net income to capital)

31 Owner’s Capital…………………………………………………………… 30,000

Owner’s Drawings……………………………………………….. 30,000

(To close drawings account to capital)

Ex. 213

Kennedy Company had the following account balances at year-end: cost of goods sold $85,000; inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that inventory on hand is $14,400.

Instructions

(a) Prepare the adjusting entry necessary as a result of the physical count.

(b) Prepare closing entries.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 213 (10 min.)

(a) Cost of Goods Sold……………………………………………………………… 600

Inventory…………………………………………………………………….. 600

(b) Sales Revenue……………………………………………………………………. 144,000

Income Summary……………………………………………………….. 144,000

Income Summary………………………………………………………………… 128,500

Cost of Goods Sold……………………………………………………… 85,600

Operating Expenses…………………………………………………….. 39,000

Sales Returns and Allowances……………………………………… 2,300

Sales Discounts…………………………………………………………… 1,600

Income Summary ($144,000 – $128,500)……………………………….. 15,500

Owner’s, Capital…………………………………………………………… 15,500

Ex. 214

Financial information is presented below for two different companies.

Gower Martini

Drugs Food and Liquor

Sales revenue	$90,000	$ (e)
Sales returns and allowances	(a)	3,000
Net sales	86,000	95,000
Cost of goods sold	56,000	(f)
Gross profit	(b)	36,000
Operating expenses	22,000	(g)
Income from operations	(c)	(h)
Other expenses and losses	4,000	7,000
Net income	(d)	11,000

Ex. 214 (Cont)

Instructions

Determine the missing amounts.

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214 (15 min.)

(*Missing amount)

(a) Sales………………………………………………………………………………….. $ 90,000

Sales returns and allowances……………………………………………….. 4,000*

Net sales…………………………………………………………………………….. $ 86,000

(b) Net sales…………………………………………………………………………….. $ 86,000

Cost of goods sold……………………………………………………………….. 56,000

Gross profit…………………………………………………………………………. $ 30,000*

Gross profit…………………………………………………………………………. $ 30,000

Operating expenses……………………………………………………………… 22,000

Income from operations (c)…………………………………………………… $ 8,000*

Other expenses and losses…………………………………………………… 4,000

Net income (d)…………………………………………………………………….. $ 4,000*

(e) Sales………………………………………………………………………………….. $ 98,000*

Sales returns and allowances……………………………………………….. 3,000

Net sales…………………………………………………………………………….. $ 95,000

(f) Net sales…………………………………………………………………………….. $ 95,000

Cost of goods sold……………………………………………………………….. 59,000*

Gross profit…………………………………………………………………………. $ 36,000

(g) and (h)

Gross profit…………………………………………………………………………. $ 36,000

Operating expenses (g)………………………………………………………… 18,000*

Income from operations (h)…………………………………………………… $ 18,000*

Other expenses and losses…………………………………………………… 7,000

Net income …………………………………………………………………………. $ 11,000

Ex. 215

Presented below is information for Annie Company for the month of March 2015.

Cost of goods sold $245,000 Rent expense $ 36,000

Freight-out 7,000 Sales discounts 8,000

Insurance expense 5,000 Sales returns and allowances 11,000

Salaries and wages expense 63,000 Sales revenue 410,000

Instructions

(a) Prepare a multiple -step income statement.

(b) Compute the gross profit rate.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 215 (10 min.)

(a)

ANNIE COMPANY

Income Statement

For the Month Ended March 31, 2014

_______________________________________________________________________________________________________________

Sales Revenues

Sales………………………………………………………………………….. $410,000

Less: Sales returns and allowances…………………………….. $11,000

Sales discounts…………………………………………………. 8,000 19,000

Net sales…………………………………………………………………….. 391,000

Cost of goods sold……………………………………………………….. 245,000

Gross profit…………………………………………………………………. 146,000

Operating expenses

Salaries and wages expense………………………………. 63,000

Rent expense……………………………………………………. 36,000

Insurance expense…………………………………………….. 5,000

Freight-out……………………………………………………………… 7,000

Total operating expenses……………………………………. 111,000

Net income …………………………………………………………………. $ 35,000

(b) Gross profit rate = $146,000 ¸ $391,000 = 37.3%.

Ex. 216

In 2014, Rondelli Company had net sales of $650,000 and cost of goods sold of $455,000. Operating expenses were $150,000, and interest expense was $10,000. Rondelli prepares a multiple-step income statement.

Instructions

(a) Compute Rondelli gross profit.

(b) Compute the gross profit rate.

(d) If Rondelli prepared a single-step income statement, what amount would it report for net income?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 216 (10 min.)

(a) $650,000 – $455,000 = $195,000.

(b) $195,000/$650,000 = 30%.

(d) The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Therefore, net income in Rondelli single-step income statement is also $35,000.

Ex. 217

Argentina Company gathered the following condensed data for the year ended December 31, 2014:

Cost of goods sold $ 750,000

Net sales 1,200,000

Operating expenses 275,000

Interest expense 48,000

Dividend revenue 38,000

Casualty loss from vandalism 125,000

Instructions

Prepare a single-step income statement for the year ended December 31, 2014.
Prepare a multiple-step income statement for the year ended December 31, 2014.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 217 (25 min.)

ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Net sales………………………………………………………………………….. $1,200,000

Dividend revenue………………………………………………………………. 38,000

Total revenues…………………………………………………………….. 1,238,000

Expenses

Cost of goods sold…………………………………………………………….. $750,000

Operating expenses…………………………………………………………… 275,000

Casualty loss from vandalism…………………………………………….. 125,000

Interest expense……………………………………………………………….. 48,000

Total expenses……………………………………………………………. 1,198,000

Net income ……………………………………………………………………………. $ 40,000

ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2014

Net sales……………………………………………………………. $1,200,000

Cost of goods sold………………………………………………. 750,000

Gross profit………………………………………………………… 450,000

Operating expenses……………………………………………. 275,000

Income from operations………………………………………. 175,000

Other revenues and gains

Dividend revenue……………………………………….. 38,000

Other expenses and losses

Casualty loss from vandalism………………………. $125,000

Interest expense…………………………………………. 48,000 173,000 135,000

Net income………………………………………………………… $ 40,000

Ex. 218

Instructions

State the missing items identified by ?.

Gross profit – Operating expenses = ?
Cost of goods sold + Gross profit on sales = ?
Sales Revenue – (? + ?) = Net sales
Income from operations + ? – ? = Net income
Net sales – Cost of goods sold = ?

Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 218 (5 min.)

Income from operations (or Net income)
Net sales
Sales discounts, Sales returns and allowances
Other revenues and gains, Other expenses and losses
Gross profit

Ex. 219

The adjusted trial balance of Nick Company contained the following information:

Debit Credit

Sales Revenue $570,000

Sales Returns and Allowances $ 15,000

Sales Discounts 7,000

Cost of Goods Sold 323,000

Freight-Out 2,000

Advertising Expense 15,000

Interest Expense 18,000

Salaries and Wages Expense 85,000

Utilities Expense 28,000

Depreciation Expense 7,000

Interest Revenue 27,000

Instructions

Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.

Prepare a single-step income statement for the year ended December 31, 2014.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 219 (20 min.)

NICK COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Sales revenue…………………………………………………… $570,000

Less: Sales returns and allowances………………….. $ 15,000

Sales discounts………………………………………. 7,000 22,000

Net sales………………………………………………………….. 548,000

Cost of goods sold…………………………………………….. 323,000

Gross profit………………………………………………………. 225,000

Operating expenses

Salaries and wages expense…………………… $85,000

Utilities expense……………………………………… 28,000

Advertising expense……………………………….. 15,000

Depreciation expense……………………………… 7,000

Freight-out……………………………………………… 2,000

Total operating expenses……………… 137,000

Income from operations……………………………………… 88,000

Other revenues and gains

Interest revenue…………………………………………… 27,000

Other expenses and losses

Interest expense………………………………………….. 18,000 9,000

Net income $ 97,000

NICK COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Net sales………………………………………………………………………….. $548,000

Interest revenue………………………………………………………………… 27,000

Total revenues…………………………………………………………….. 575,000

Expenses

Cost of goods sold…………………………………………………………….. $323,000

Salaries and wages expense……………………………… …………… 85,000

Utilities expense………………………………………………… …………… 28,000

Advertising expense………………………………………….. …………… 15,000

Depreciation expense………………………………………… …………… 7,000

Freight-out………………………………………………………… …………… 2,000

Interest expense……………………………………………………………….. 18,000

Total expenses……………………………………………………………. 478,000

Net income…………………………………………………………………………………. $ 97,000

Ex. 220

The following information is available for Sheldon Leonard Company:

Operating expenses $ 85,000

Cost of goods sold 200,000

Sales 325,000

Sales returns and allowances 16,000

Instructions

Compute each of the following:

(a) Net sales

(b) Gross profit

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 220 (6 min.)

(a) Net sales = $309,000 ($325,000 – $16,000)

(b) Gross profit = $109,000 ($309,000 – $200,000)

^aEx. 221

The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method.

Instructions

Complete the worksheet below.

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2014

Adjusted

Trial Balance Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit

Cash 11,000

Inventory 19,000

Supplies 3,500

Equipment 80,000

Accum. Depreciation—

Equipment 15,000

Accounts Payable 20,000

Owner’s Capital 92,000

Owner’s Drawings 8,000

Sales Revenue 39,000

Sales Discounts 2,000

Cost of Goods Sold 23,000

Advertising Expense 7,000

Supplies Expense 6,000

Depreciation Expense 1,000

Ex. 221 (Cont.)

Rent Expense 2,500

Utilities Expense 1,000

166,000 166,000

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^aSolution 221 (15 min.)

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2014

Adjusted

Trial Balance Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit

Cash 11,000 11,000

Inventory 19,000 19,000

Supplies 3,500 3,500

Equipment 80,000 80,000

Accum. Depreciation—

Equipment 15,000 15,000

Accounts Payable 20,000 20,000

Owner’s Capital 92,000 92,000

Owner’s Drawings 8,000 8,000

Sales Revenue 39,000 39,000

Sales Discounts 2,000 2,000

Cost of Goods Sold 25,000 25,000

Advertising Expense 7,000 7,000

Supplies Expense 6,000 6,000

Depreciation Expense 1,000 1,000

Rent Expense 2,500 2,500

Utilities Expense 1,000 1,000

166,000 166,000 44,500 39,000 121,500 127,000

Net Loss 5,500 5,500

44,500 44,500 127,000 127,000

^aEx. 222

Three items are missing in each of the following columns and are identified by letter.

Sales revenue $ (a) $840,000

Sales returns and allowances 15,000 22,000

Sales discounts 10,000 15,000

Net sales 440,000 (d)

Beginning inventory (b) 300,000

Cost of goods purchased 220,000 (e)

Ending inventory 170,000 303,000

Cost of goods sold 252,000 575,000

Gross profit (c) (f)

Ex. 222 (Cont.)

Instructions

Calculate the missing amounts and identify them by letter.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^aSolution 222 (15 min.)

(a) $465,000 (d) $803,000

(b) $202,000 (e) $578,000

^aEx. 223

Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 3 Purchased 90 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.

Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.

Sept. 9 Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.

Sept. 13 Paid Zuzu Company in full.

Instructions

Journalize the September transactions for Reineman Supply Company.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^aSolution 223 (12 min.)

Sept. 3 Purchases………………………………………………………………… 2,250

Accounts Payable……………………………………………… 2,250

Sept. 6 Accounts Payable……………………………………………………… 150

Purchase Returns and Allowances……………………… 150

Sept. 9 Accounts Receivable…………………………………………………. 630

Sales Revenue…………………………………………………. 630

Sept. 13 Accounts Payable ($2,250 – $150)……………………………… 2,100

Purchase Discounts ($2,100 × .02)……………………… 42

Cash………………………………………………………………… 2,058

^aEx. 224

The following information is available for Hopkins Company:

Beginning inventory $ 45,000

Ending inventory 70,000

Freight-in 10,000

Purchases 290,000

Purchase returns and allowances 8,000

Ex. 224 (Cont.)

Instructions

Compute each of the following:

(a) Net purchases

(b) Cost of goods purchased

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^aSolution 224 (6 min.)

(a) Net purchases = $282,000 ($290,000 – $8,000)

(b) Cost of goods purchased = $292,000 ($282,000 + $10,000)

Ex. 225

The income statement of Jue’s Luggage. includes the items listed below:

Net sales $900,000

Gross profit 315,000

Beginning inventory 80,000

Purchase discounts 15,000

Purchase returns and allowances 8,000

Freight-in 10,000

Operating expenses 300,000

Purchases 560,000

Instructions

Use the appropriate items listed above as a basis for determining:

(a) Cost of goods sold.

(b) Cost of goods available for sale.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 225 (15 min.)

(a) Net sales – Cost of goods sold = Gross profit

$900,000 – Cost of goods sold = $315,000

Cost of goods sold = $585,000

(b) Beginning inventory $ 80,000

Purchases $560,000

Less: Purchase discounts $15,000

Purchase returns and allowances 8,000 23,000

Net Purchases 537,000

Add: Freight-in 10,000

Cost of goods purchased 547,000

Cost of goods available for sale $627,000

$627,000 – Ending inventory = $585,000

Ending inventory = $42,000

^aEx. 226

Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:

(a) Purchased $450,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $30,000 of damaged merchandise for credit.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^aSolution 226 (6 min.)

(a) Purchases…………………………………………………………………………… 450,000

Accounts Payable……………………………………………………… 450,000

(b) Accounts Payable………………………………………………………………… 30,000

Purchase Returns and Allowances……………………………… 30,000

Purchase Discounts ($420,000 × .02)………………………….. 8,400

Cash ($420,000 – $8,400)………………………………………….. 411,600

COMPLETION STATEMENTS

A ________________ buys and sells goods rather than performing services to earn a profit.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

Every sales transaction should be supported by a ________________ that provides written evidence of the sale.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

Gross profit is obtained by subtracting ________________ from ________________.

Ans: N/A, LO:5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Income from operations is determined by subtracting total operating expenses from ________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements

merchandising company 233. contra revenue, debit
gross profit 234. business document
perpetual 235. cost of goods sold, net sales
Inventory 236. gross profit
freight-out
Sales Returns and Allowances,

Accounts Receivable

MATCHING

Match the items below by entering the appropriate code letter in the space provided.

Net sales F. FOB shipping point
Sales discounts G. Freight-out
Purchase invoice H. Gross profit
Periodic inventory system I. Operating expenses
FOB destination J. Income from operations

_____ 1. An incentive to encourage customers to pay their accounts early.

_____ 2. Expenses incurred in the process of earning sales revenue.

_____ 3. Freight terms that require the seller to pay the freight cost.

_____ 4. Sales revenue less sales returns and allowances and sales discounts.

_____ 5. A document that supports each credit purchase.

_____ 6. Net sales less cost of goods sold.

_____ 7. Freight cost to deliver goods to customers reported as a selling expense.

_____ 8. Requires a physical count of goods on hand to compute cost of goods sold.

_____ 9. Gross profit less total operating expenses.

_____ 10. Freight terms that require the buyer to pay the freight cost.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Answers to Matching

B 6. H
I 7. G
E 8. D
A 9. J
C 10. F

SHORT-ANSWER ESSAY QUESTIONS

S-A E 238

A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 238

The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue.

S-A E 239

Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 239

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus the seller pays the freight and debits Freight-out.

S-A E 240

Adrland Caselotti believes revenues from credit sales may be recognized before they are collected in cash. Do you agree? Explain.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 240

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The recognized of revenue is not dependent on the collection of credit sales.

S-A E 241

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 241

The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed operating expenses, income from operations, and other revenues and gains, and other expenses and losses.

S-A E 242

You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 242

You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated.

S-A E 243

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 243

The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold.

S-A E 244 (Ethics)

Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes’s dock. She did not record the purchase until after month end.

Required:

Why are accountants concerned with the timing in the recording of purchases?
Was there a violation of ethical standards here? Explain.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 244

Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.
The only ethical principle that may be involved is one of competence. Monya does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Buzz as soon as they left the shipper’s dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Monya compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents.

S-A E 245 (Communication)

Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen’s sale was FOB shipping point, and Bryn’s was FOB destination. The company “counts” sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Jill is quite upset. She has asked you to just include it, or to take Ellen’s off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method.

Write a memo to Bryn. Explain your position.

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 245

M E M O

TO: Bryn Davi’s

FROM: Helen Dictison, Accounting

RE: Sales Bonuses

DATE: June 15, 200x

As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $110,000. This total does not include the $19,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else’s sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing.

I do understand your disappointment, but this sale does count in June—and it just may make the difference in June’s bonus. Please call me if I can be of further help.

ACCOUNTING FOR MERCHANDISING OPERATIONS

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

True-False Statements

Multiple Choice Questions

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Brief Exercises

Exercises

Completion Statements

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

CHAPTER LEARNING OBJECTIVES

TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

BRIEF Exercises

BE 190

Solution 190 (5 min.)

BE 191

Solution 192 (3 min.)

BE 193

Solution 193 (3 min.)

BE 194

Solution 194 (8 min.)

BE 195

Solution 195 (5 min.)

BE 196

Solution 196 (3 min.)

BE 197

Solution 197 (4 min.)

aBE 198

aSolution 198 (4 min.)

aBE 199

aSolution 199 (4 min.)

Solution 200 (6 min.)

aSolution 201 (6 min.)

Exercises

Ex. 202

Solution 202 (5 min.)

Ex. 203

Solution 203 (20 min.)

Ex. 204

Solution 204 (20 min.)

Ex. 205

Solution 205 (10 min.)

Ex. 206

Solution 206 (20 min.)

Ex. 207

Solution 207 (6-8 min.)

Ex. 208

Solution 208 (6-8 min.)

Ex. 209

Solution 209 (7-9 min.)

Ex. 210

Solution 210 (20 min.)

Ex. 211

Solution 211 (10 min.)

Ex. 212

Solution 212 (10 min.)

Ex. 213

Solution 213 (10 min.)

Ex. 214

Ex. 214 (Cont)

Solution 214 (15 min.)

Ex. 215

Solution 215 (10 min.)

Ex. 216

Solution 216 (10 min.)

Ex. 217

Solution 217 (25 min.)

Ex. 218

Solution 218 (5 min.)

Ex. 219

Solution 219 (20 min.)

Ex. 220

Solution 220 (6 min.)

aEx. 221

aSolution 221 (15 min.)

aEx. 222

aSolution 222 (15 min.)

aEx. 223

aSolution 223 (12 min.)

^aBE 198

^aSolution 198 (4 min.)

^aBE 199

^aSolution 199 (4 min.)

^aSolution 201 (6 min.)

^aEx. 221

^aSolution 221 (15 min.)

^aEx. 222

^aSolution 222 (15 min.)

^aEx. 223

^aSolution 223 (12 min.)

^aEx. 224

^aSolution 224 (6 min.)

^aEx. 226

^aSolution 226 (6 min.)