CHAPTER 5 Accounting for Merchandising Operations ...mathiabat4m.weebly.com/uploads/2/3/0/5/23057532/ch05sm.pdf5-1 CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION

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CHAPTER 5 Accounting for Merchandising Operations

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Describe the differences between a

service company and a merchandising company.

1, 2, 3, 4, 5 1

2. Explain and complete the entries for purchases under a perpetual inventory system.

6, 7 2, 4, 5 1, 3, 4, 5, 6

1, 2, 3, *9. *10

1, 2, 3, *9, *10

3. Explain and complete the entries for sales revenue under a perpetual inventory system.

7, 8, 9 3, 4, 5 2, 3, 4, 5 1, 2, 3, *9, *10

1, 2, 3, *9, *10

4. Explain and perform the steps in the accounting cycle for a merchandising company.

10, 11, 12 6, 7 6, 7 4, 5, *11 4, 5, *11

5. Distinguish between and be able to prepare both a multiple-step and a single-step income statement.

13, 14, 15, 16

8, 9, 10 7, 8, 9, 10 3, 4, 5, 6, 7, *10, *11

3, 4, 5, 6, 7, *10, *11

6. Explain the importance of and be able to calculate gross profit.

17 10, 11 10, 11 8 8

7. Calculate the inventory turnover and days sales in inventory ratios.

18, 19, 20 11 10, 11 8 8

*8. Describe and perform the accounting for sales taxes (Appendix 5A).

*21, *22 *12 *12 *9, *10 *9, *10

*9. Prepare a work sheet for a merchandising company (Appendix 5B).

*23 *13 *13 *11 *11

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendices to each chapter.

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ASSIGNMENT CHARACTERISTIC TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A

Journalize and post inventory transactions. Moderate 30-40

2A

Journalize inventory transactions. Moderate 20-30

3A Journalize, post, and prepare partial income statement and balance sheet.

Moderate 60-70

4A Prepare financial statements and closing entries.

Moderate 30-40

5A Prepare financial statements, adjusting and closing entries.

Moderate 40-50

6A Classify the accounts of a merchandising company.

Simple 10-15

7A Prepare correct multiple-step and single-step income statements.

Complex 50-60

8A Calculate inventory ratios and comment.

Moderate 20-25

*9A Journalize inventory transactions with sales tax.

Moderate 40-50

*10A Journalize, post, and prepare trial balance and partial income statement, with sales taxes.

Moderate 70-80

*11A Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance.

Moderate 50-60

1B Journalize and post inventory transactions.

Moderate 30-40

2B Journalize inventory transactions.

Moderate 20-30

3B Journalize, post, and prepare partial income statement and balance sheet.

Moderate 60-70

4B Prepare financial statements, adjusting entries, and closing entries.

Moderate 30-40

5B Prepare financial statements, adjusting entries and closing entries.

Moderate 40-50

6B Classify the accounts of a merchandising company.

Simple 10-15

7B Prepare correct multiple-step and single-step income statements.

Complex 50-60

8B Calculate inventory ratios and comment.

Moderate 20-25

*9B Journalize inventory transactions, with sales tax.

Moderate 40-50

*10B Journalize, post, and prepare trial balance and partial income statement, with sales taxes.

Moderate 70-80

*11B Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance.

Moderate 50-60

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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe the differences

between a service company and a merchandising company.

Q5-1 Q5-2 Q5-3

Q5-4 Q5-5

BE5-1

2. Explain and complete the entries for purchases under a perpetual inventory system.

Q5-6 Q5-7

BE5-2 BE5-4 BE5-5 E5-1 E5-3 E5-4 E5-6 P5-1A P5-2A

P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B

E5-5

3. Explain and complete the entries for sales revenue under a perpetual inventory system.

Q5-8 Q5-7 Q5-9

BE5-3 BE5-4 BE5-5 E5-2 E5-3 E5-4 P5-1A P5-2A

P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B

E5-5

4. Explain and perform the steps in the accounting cycle for a merchandising company.

Q5-12 Q5-10 Q5-11

BE5-6 BE5-7 E5-6 E5-7 P5-4A

P5-5A *P5-11A P5-4B P5-5B *P5-11B

5. Distinguish between and be able to prepare both a multiple-step and a single-step income statement.

Q5-14 P5-6A P5-6B

Q5-15 Q5-16

Q5-13 BE5-8 BE5-9 BE5-10 E5-7 E5-9 E-10 P5-3A P5-4A P5-5A

P5-7A *P5-10A *P5-11A P5-3B P5-4B P5-5B P5-7B *P5-10B *P5-11B

E5-8

6. Explain the importance of and be able to calculate gross profit.

Q5-17 BE5-10

BE5-11 E5-10

E5-11 P5-8A P5-8B

7. Calculate the inventory turnover and days sales in inventory ratios.

Q5-18 Q5-19 Q5-20

BE5-11 E5-10

E5-11 P5-8A P5-8B

*8. Describe and perform the accounting for sales taxes (Appendix 5A).

*Q5-21 *Q5-22 *BE5-12 *E5-12

*P5-9A *P5-10A *P5-9B *P5-10B

*9. Prepare a work sheet for a merchandising company (Appendix 5B).

*Q5-23 *BE5-13

*E5-13 *P5-11A *P5-10B *P5-11B

Broadening Your Perspective

BYP5-1 BYP 5-2 BYP5-3 BYP5-4 BYP5-5

BYP5-6 BYP5-7

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ANSWERS TO QUESTIONS

1. The components of revenues and expenses differ as follows:

Merchandising

Service

Revenue

Sales

Service Revenue, Fees Earned, Rent Revenue, Interest Revenue, Investment Income, Gains

Other Revenue

Rent Revenue, Interest Revenue, Investment Income, Gains

Expenses Cost of Goods Sold, Operating Expenses

All expenses

Other Expense

Interest Expense, Losses

2. The income measurement process in a merchandising company can

be summarized as follows:

Sales

Revenues

Less

Cost of Goods Sold

Equals

Gross Profit

Less

Operating Expenses

Equals

Net

Income

3. The normal operating cycle for a merchandising company is likely to

be longer than for a service company because inventory must first be purchased and sold, and then the receivables must be collected.

4. Under a perpetual inventory system, inventory quantities and

amounts are updated continually. At any point in time, the Cost of Goods Sold and Inventory accounts represent what has been sold to date, and what remains.

Under a periodic inventory system, temporary accounts are used to accumulate purchases of inventory throughout the period. The cost of goods sold and inventory are determined only at the end of the period (annually for example).

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Questions Chapter 5 (Continued)

5. Computer technology enables perpetual inventory systems to be

used by any company that requires timely information about the quantities of inventory on hand. It is more complex and costly to maintain a perpetual inventory record of costs, so companies with point of sale systems integrated with their inventory systems tend to be larger.

6. The reason for recording the purchase of merchandise for resale in a

separate account is to enable a company to determine its gross profit. This information is useful in setting prices.

7. The letters FOB mean free on board. FOB shipping point means that

the goods are placed free on board the carrier by the seller, and the buyer pays the freight costs. FOB shipping point will result in a debit to the Inventory account by the buyer.

FOB destination means that the goods are placed free on board to the buyer’s place of business, and the seller pays the freight. FOB destination will result in a debit to the Freight Out account by the seller.

8. (a) The primary source documents are:

(1) Cash sales—cash register tapes, (2) Credit sales—sales invoices, and (3) Sales returns and allowances—credit memoranda.

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Questions Chapter 5 (Continued) 8. (b)

Seller Debit Credit Cash sales— Cash............................................... XXX

Sales........................................ XXX

Cost of Goods Sold ...................... XXX Merchandise Inventory.......... XXX

Credit sales— Accounts Receivable.................... XXX

Sales........................................ XXX Cost of Goods Sold ...................... XXX

Merchandise Inventory.......... XXX

Sales returns Sales Returns and Allowances.... XXX & allowances – Accounts Receivable or Cash XXX

Merchandise Inventory................. XXX Cost of Goods Sold................ XXX

Purchaser

Cash purchase— Merchandise Inventory............... XXX Cash........................................ XXX

Credit purchase— Merchandise Inventory............... XXX

Accounts Payable ................. XXX

Purchase returns Cash or Accounts Payable .......... XXX & allowances – Merchandise Inventory ......... XXX 9. Sales returns are not debited directly to the Sales account because

this would not provide information on the cost of the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods.

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10. Disagree. The steps in the accounting cycle are the same for both a

merchandising company and a service enterprise.

11. A physical count is an important control feature. Using a perpetual inventory system a company knows what should be on hand. Performing a physical counts and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.

12. Of the merchandising accounts, only Merchandise Inventory (ending)

will appear in the post-closing trial balance.

13. Gross profit ....................................................................... $580,000 Less: Net income ............................................................. 0300,000 Operating expenses.......................................................... $280,000 14. (a) The operating activities part of the income statement has three

sections: sales revenues, cost of goods sold, and operating expenses.

(b) The non-operating activities part consists of two sections: other revenues and gains, and other expenses and losses.

15. The functional groupings are selling and administrative. The problem

with functional groupings is that some expenses may relate to both, and have to be allocated between the functions.

16. The single-step income statement differs from the multiple-step

income statement in that (1) all data are classified into two categories: Revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss).

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17. Sales revenues.......................................................... $100,000 Cost of goods sold ................................................... 70,000 Gross profit ............................................................... 30,000 Operating expenses ................................................. 20,000 Net income ................................................................ $ 10,000 Gross profit margin = $30,000 ÷ $100,000 = 30% Profit margin = $10,000 ÷ $100,000 = 10%

18. Two ratios that help management determine whether or not there is sufficient inventory on hand are Inventory turnover and days sales in inventory

19. Managing inventory is critical to a company’s success. It is often the

largest current asset (inventory) and the largest expense (cost of goods sold) on the income statement. Companies must manage the quantity of inventory on hand to avoid excessive cost and to ensure they can meet demand.

20. An increase in days sales in inventory would be viewed as a

deterioration because it means there is more inventory on hand in relation to sales.

*21. Accounts Receivable.................................................... 1,053

Sales ..................................................................... 900 GST Payable......................................................... 63 PST Payable ......................................................... 90 Cost of Goods Sold ...................................................... 600 Merchandise Inventory ....................................... 600

*22. Office Furniture [$2,000 + (8% x $2,000)] .................... 2,160 GST Recoverable ($2,000 x 7%)................................... 140 Accounts Payable ............................................... 2,300

*23. (a) Merchandise inventory – Trial balance debit column; Adjusted

trial balance debit column; and Balance sheet debit column (b) Cost of goods sold – Trial balance debit column; Adjusted trial

balance debit column; and Income statement debit column

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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) Cost of goods sold = $43,500 ($75,000 – $31,500)

Operating expenses = $20,700 ($31,500 – $10,800) (b) Gross profit = $38,000 ($108,000 – $70,000)

Operating expenses = $8,500 ($38,000 – $29,500) (c) Sales = $181,500 ($71,900 + $109,600)

Net income = $70,100 ($109,600 – $39,500) BRIEF EXERCISE 5-2 Rowen Company (a) March 2 Merchandise Inventory ................................. 900,000

Accounts Payable ................................... 900,000 (b) March 6 Accounts Payable ......................................... 130,000

Merchandise Inventory ........................... 130,000 (c) March 31 Accounts Payable ($900,000 – $130,000).... 770,000

Cash ......................................................... 770,000

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BRIEF EXERCISE 5-3 Hunt Company (a) March 2 Accounts Receivable ................................... 900,000

Sales ...................................................... 900,000 Cost of Goods Sold...................................... 600,000

Merchandise Inventory......................... 600,000 (b) March 6 Sales Returns and Allowances ................... 130,000

Accounts Receivable............................ 130,000 Merchandise Inventory ................................ 90,000 Cost of Goods Sold .............................. 90,000 (c) March 31 Cash ($900,000 – $130,000) ......................... 770,000

Accounts Receivable............................ 770,000

BRIEF EXERCISE 5-4 Keo Company

Nov. 12 Merchandise Inventory ............................... 900 Cash ...................................................... 900

Mayo Company

Nov. 12 Cash.............................................................. 900 Sales...................................................... 900

Cost of Goods Sold..................................... 700 Merchandise Inventory........................ 700

5-11

BRIEF EXERCISE 5-5 March 3 Merchandise Inventory (20 X $25) ................. 500 Accounts Payable ................................ 500 March 6 Accounts Payable ........................................... 75 Merchandise Inventory (3 X $25) ........ 75 March 21 Accounts Receivable (15 X $45) .................... 675 Sales ...................................................... 675 Cost of Goods Sold (15 x $25) ....................... 375 Merchandise Inventory ........................ 375 Quantity: 20 – 3 – 15 = 2 units remaining Cost: $500 - $75 - $375 = $50 Proof: 2 units x $25 = $50 BRIEF EXERCISE 5-6 Aug. 31 Cost of Goods Sold (Inventory shrinkage) .. 900

Merchandise Inventory ($98,000 – $97,100) .............................. 900

BRIEF EXERCISE 5-7 July 31 Sales ................................................................. 180,000 Prasad, Capital ..................................... 180,000 Prasad, Capital................................................. 102,000 Sales Returns and Allowances ........... 2,000 Cost of Goods Sold.............................. 100,000 Ending capital balance (not required): $150,000 + $180,000 - $102,000 = $228,000 Merchandise Inventory is a balance sheet (permanent) account and is not closed.

5-12

BRIEF EXERCISE 5-8 HULDA COMPANY Income Statement (Partial) For the Month Ended October 31, 2003 Sales revenues

Sales ($300,000 + $100,000) .............................................. $400,000 Less: Sales returns and allowances ............................... 30,000 Net sales ............................................................................. $370,000

BRIEF EXERCISE 5-9 (1) Multiple-Step Income Statement

Item

Section

a.

Gain on sale of equipment

Other revenues and gains

b. Interest expense Other expenses and losses c.

d. Cost of goods sold Rent revenue

Cost of goods sold Other revenues and gains

(2) Single-Step Income Statement

Item

Section

a.

Gain on sale of equipment

Revenues

b. Interest expense Expenses c.

d. Cost of goods sold Rent revenue

Expenses Revenues

5-13

BRIEF EXERCISE 5-10 (a) Net sales = $485,000 ($500,000 – $15,000) (b) Gross profit = $145,000 ($485,000 – $340,000) (c) Net income = $35,000 ($145,000 - $70,000- $40,000) BRIEF EXERCISE 5-11 (a) Gross profit margin = 45% [($550,000 – $300,000) ÷ $550,000] (b) Inventory turnover = 12 times ($300,000 ÷ $25,000) (c) Days sales in inventory = 30 days (365 ÷ 12) *BRIEF EXERCISE 5-12 Merchandise Inventory................................................... 8,000 Supplies [$1,000 + ($1,000 X 10%)] ............................... 1,100 GST Recoverable [($8,000 + $1,000) X 7%]................... 630 Accounts Payable ................................................... 9,730 *BRIEF EXERCISE 5-13 (a) Cash: Trial balance debit column; Adjusted trial balance debit column;

Balance sheet debit column. (b) Merchandise Inventory: Trial balance debit column; Adjusted trial

balance debit column; Balance sheet debit column. (c) Sales: Trial balance credit column; Adjusted trial balance credit column;

Income statement credit column. (d) Cost of Goods Sold: Trial balance debit column; Adjusted trial balance

debit column; Income statement debit column.

5-14

SOLUTIONS TO EXERCISES EXERCISE 5-1 1. April 5 Merchandise Inventory.................................. 18,000

Accounts Payable ................................... 18,000 2. April 6 Merchandise Inventory.................................. 900

Cash.......................................................... 900 3. April 7 Equipment ...................................................... 26,000

Accounts Payable ................................... 26,000 4. April 8 Accounts Payable .......................................... 3,000

Merchandise Inventory ..................... ..... 3,000 5. May 2 Accounts Payable ($18,000 – $3,000)........... 15,000

Cash.......................................................... 15,000

5-15

EXERCISE 5-2 (a) Pippen Company 1. Dec. 3 Accounts Receivable................................ 400,000

Sales .................................................... 400,000 Cost of Goods Sold .................................. 320,000 Merchandise Inventory. .................... 320,000 2. Dec. 8 Sales Returns and Allowances................ 20,000

Accounts Receivable ......................... 20,000 3. Dec. 13 Cash ($400,000 – $20,000)........................ 380,000

Accounts Receivable ......................... 380,000 (b) Thomas Co. 1. Dec. 3 Merchandise Inventory............................. 400,000

Accounts Payable .............................. 400,000 2. Dec. 8 Accounts Payable ..................................... 20,000

Merchandise Inventory ...................... 20,000 3. Dec. 13 Accounts Payable ..................................... 380,000 Cash..................................................... 380,000

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EXERCISE 5-3 Sept. 6 Merchandise Inventory (60 X $20) ......................... 1,200

Accounts Payable............................................ 1,200

10 Accounts Payable (2 X $20).................................... 40 Merchandise Inventory ................................... 40

12 Accounts Receivable (26 X $30) ............................ 780 Sales ................................................................. 780 Cost of Goods Sold (26 X $20) ............................... 520 Merchandise Inventory ................................... 520

14 Sales Returns and Allowances .............................. 30 Accounts Receivable ...................................... 30 Merchandise Inventory ........................................... 20 Cost of Goods Sold ......................................... 20

20 Accounts Receivable (30 X $30) ............................ 900 Sales ................................................................. 900 Cost of Goods Sold (30 X $20) ............................... 600 Merchandise Inventory ................................... 600

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EXERCISE 5-4 Sept. 2 Merchandise Inventory (90 X $15) ......................... 1,350

Accounts Payable............................................ 1,350

5 Accounts Payable ................................................... 60 Merchandise Inventory ................................... 60

8 Accounts Receivable .............................................. 1,250 Sales (50 x $25)................................................ 1,250

Cost of Goods Sold................................................. 750 Merchandise Inventory (50 x $15) .................. 750

12 Accounts Receivable .............................................. 750 Sales (30 x $25)................................................ 750 Cost of Goods Sold................................................. 450 Merchandise Inventory (30 x $15) .................. 450 20 Merchandise Inventory (15 x $16).......................... 240 Accounts Payable............................................ 240

30 Cost of Goods Sold (Inventory Loss).................... 15* Merchandise Inventory ................................... 15 10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase.

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EXERCISE 5-5 1. Sales Returns and Allowances......................................... 150

Sales............................................................................ 150 2. Supplies .............................................................................. 250

Cash .................................................................................... 250 Accounts Payable ...................................................... 250 Merchandise Inventory .............................................. 250

3. Sales.................................................................................... 50

Merchandise Inventory .............................................. 50 4. Cash .................................................................................... 270

Merchandise Inventory .............................................. 270

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EXERCISE 5-6 (a) Jun. 10 Merchandise Inventory..................................... 5,000

Accounts Payable ..................................... 5,000

11 Merchandise Inventory..................................... 300 Cash............................................................ 300

12 Accounts Payable ............................................. 500 Merchandise Inventory ............................. 500

July 7 Accounts Payable ($5,000 – $500).................. 4,500

Cash............................................................ 4,500

15 Cash .................................................................. 8,500 Sales ........................................................... 8,500

15 Cost of Goods Sold ($5,000 + $300 - $500) .... 4,800 Merchandise Inventory ............................. 4,800

(b) July 31 Sales.................................................................. 8,500 Capital ........................................................ 8,500 31 Capital ............................................................... 4,800 Cost of Goods Sold................................... 4,800

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EXERCISE 5-7 (a)

CECILIE COMPANY Income Statement (Partial) For the Year Ended October 31, 2003

Sales revenues Sales..................................................................................... $900,000 Less: Sales returns and allowances................................. 24,000 Net sales............................................................................... $876,000

Note: Freight Out is a selling expense.

(b) Closing entries: Oct. 31 Sales ........................................................... 900,000

Capital ................................................. 900,000

31 Capital......................................................... 36,000 Sales Returns and Allowances ......... 24,000 Freight Out .......................................... 12,000

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EXERCISE 5-8 Natural

Cosmetics Mattar

Grocery Allied

Wholesalers Sales $90,000 (c) $100,000 $144,000 Less: Sales returns (a) 16,000 6,000 12,000 Net sales 74,000 94,000 (f) 132,000 Less: Cost of goods sold 64,000 (d) 72,000 (g) 108,000 Gross profit 10,000 22,000 24,000 Less: Operating expenses 6,000 (e) 12,000 18,000 Net income (b) $ 4,000 $ 10,000 (h) $ 6,000 (a) Sales.......................................................................... $90,000

*Sales returns ............................................................ (16,000) Net sales ................................................................... $74,000

(b) Gross profit .............................................................. $10,000

Operating expenses................................................. (6,000) *Net income .............................................................. $ 4,000

(c) *Sales ........................................................................ $100,000

Sales returns ............................................................ (6,000) Net sales ................................................................... $ 94,000

(d) Net sales ................................................................... $94,000

*Cost of goods sold ................................................. (72,000) Gross profit .............................................................. $22,000

(e) Gross profit .............................................................. $22,000

*Operating expenses ............................................... (12,000) Net income................................................................ $10,000

(f) Sales.......................................................................... $144,000

Sales returns ............................................................ (12,000) *Net sales.................................................................. $132,000

(g) Net sales ................................................................... $132,000

*Cost of goods sold ................................................. (108,000) Gross profit .............................................................. $ 24,000

(h) Gross profit .............................................................. $24,000 Operating expenses................................................. (18,000) *Net income .............................................................. $ 6,000

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EXERCISE 5-9 (a)

CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002

Net sales...................................................................... $2,359,000 Cost of goods sold ..................................................... 00,989,000 Gross profit ................................................................. 1,370,000 Operating expenses

Selling expenses................................................. $690,000 Administrative expenses.................................... 0435,000

Total operating expenses ........................... 1,125,000 Income from operations............................................. 245,000 Other revenues and gains

Interest revenue .................................................. $45,000 Other expenses and losses

Interest expense..................................... $70,000 Loss on sale of equipment..................... 10,000 80,000 35,000

Net income .................................................................. $ 210,000 (b) CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002

Revenues Net sales.............................................................. $2,359,000 Interest revenue.................................................. 0 45,000 Total revenues.............................................. 2,404,000

Expenses Cost of goods sold ............................................. $989,000 Selling expenses ................................................ 690,000 Administrative expenses ................................... 435,000 Interest expense ................................................. 70,000 Loss on sale of equipment ................................ 0010,000 Total expenses ............................................ 2,194,000

Net income .................................................................. $ 210,000

5-23

EXERCISE 5-10 (a) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands)

Revenues Revenue from products and services................. $94,317 Interest revenue .................................................... 2,868 Gain on sale of assets .......................................... 1,813 Other income......................................................... 295 Total revenues................................................. $ 99,293

Expenses Cost of products and services ............................. $24,426 Sales and marketing expenses ............................ 45,097 General and administrative expenses ................. 26,485 Amortization expense ........................................... 10,300 Income tax expense .............................................. 1,086

Total expenses ................................................ 107,394 Net loss........................................................................... ($ 8,101)

5-24

EXERCISE 5-10 (Continued) (b) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands) Revenue from products and services....................... $ 94,317 Cost of products and services .................................. 00, 24,426 Gross profit ................................................................. 69,891 Operating expenses

Sales and marketing expenses.......................... $45,097 General and administrative expenses (including amortization expense) .............. 0 36,785

Total operating expenses ........................... 81,882 Loss from operations ................................................. (11,991) Other revenues and gains

Interest revenue.................................................. $2,868 Gain on sale of assets........................................ 1,813 Other income ...................................................... 295

4,976 Other expenses and losses

Income tax expense* ........................................... 1,086 3,890 Net loss......................................................................... ($ 8,101) *Note to Instructor: You may wish to explain that income tax expense is usually presented differently (following an income (or loss) before income taxes caption) in corporate income statements.

5-25

EXERCISE 5-10 (Continued)

(c) Gross profit margin = 74% ($69,891 ÷ $94,317)

Profit margin = (8.6%) ($8,101 ÷ $94,317) Inventory turnover = 22 times ($24,426 ÷ $1,111) Days sales in inventory = 17 days (365 ÷ 22)

These results are misleading and likely overly high. The revenue includes revenue from services, in addition to products. Revenue from services does not have the same level of cost as does revenue from products. In other words, the revenue and costs from services does not have any “cost of goods sold” nor “inventory.” No further breakdown is available on Jetform’s financial statements. These ratios are still useful in determining trends, when compared against similar calculations for prior years.

5-26

EXERCISE 5-11 Inventory turnover 2000 = 7.3 times [$1,298,606 ÷ ($193,831 + $160,092) ÷ 2] 1999 = 7.5 times [$1,546,723 ÷ ($160,092 + $254,690) ÷ 2] Days sales in inventory 2000 = 50 days (365 ÷ 7.3) 1999 = 49 days (365 ÷ 7.5) Gross profit margin 2000 = 23% [($1,683,142 - $1,298,606) ÷ $1,683,142] 1999 = 21% [($1,960,274 - $1,546,723) ÷ $1,960,274] The gross profit margin has improved, increasing from 21% in 1999 to 23% in 2000. The inventory turnover and days sales in inventory are basically unchanged from one year to the next.

5-27

*EXERCISE 5-12 Sept. 2 Merchandise Inventory (90 X $15) ............... 1,350.00 GST Recoverable ($1,350 x 7%) ................... 94.50

Accounts Payable.................................. 1,444.50

5 Accounts Payable ......................................... 64.20 Merchandise Inventory ......................... 60.00 GST Recoverable................................... 4.20

8 Accounts Receivable .................................... 1,337.50 Sales (50 x $25)...................................... 1250.00 GST Payable ($1,250 x 7%) ................... 87.50

Cost of Goods Sold....................................... 750.00 Merchandise Inventory (50 x $15) ........ 750.00

12 Accounts Receivable .................................... 802.50 Sales (30 x $25)...................................... 750.00 GST Payable ($750 x 7%) ...................... 52.50 Cost of Goods Sold....................................... 450.00 Merchandise Inventory (30 x $15) ........ 450.00 20 Merchandise Inventory (15 x $16)................ 240.00 GST Recoverable ($240 x 7%) ...................... 16.80 Accounts Payable.................................. 256.80 30 Cost of Goods Sold (Inventory Loss).......... 15.00* Merchandise Inventory ......................... 15.00 10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase. There is no GST effect of this loss.

5-28

*EXERCISE 5-13

(a)

Accounts

Adjusted

Trial Balance

Income

Statement

Balance

Sheet

Debit

Credit

Debit

Credit

Debit

Credit

Cash Merchandise Inven. Sales Sales Returns Cost of Goods Sold Rent Expense

9,000

80,000

10,000 250,000 42,000

450,000

10,000 250,000 42,000

450,000

9,000

80,000

(b) The accounts appearing in the post-closing trial balance are the balance

sheet accounts of Cash ($9,000) and Merchandise Inventory ($80,000).

5-29

SOLUTIONS TO PROBLEMS

PROBLEM 5-1A

(a) April 5 Merchandise Inventory–Custom Sedans (3 x $24,000)....................................................... 72,000

Accounts Payable ..................................... 72,000 13 Merchandise Inventory–Recreation Vehicles (2 x $28,000)....................................................... 56,000

Accounts Payable ..................................... 56,000

17 Accounts Receivable ........................................ 114,000 Sales (4 x $28,500)..................................... 114,000

Cost of Goods Sold (4 x $24,000) .................... 96,000 Merchandise Inventory–Custom Sedans 96,000 20 Merchandise Inventory–Convertibles (2 x $26,000)....................................................... 52,000

Accounts Payable ..................................... 52,000 22 Accounts Payable ............................................. 26,000

Merchandise Inventory–Convertibles ..... 26,000 24 Accounts Receivable ........................................ 102,000

Sales (3 x $34,000)..................................... 102,000 Cost of Goods Sold (3 x $28,000) .................... 84,000 Merchandise Inventory–Recreation Vehicles 84,000 28 Accounts Receivable ........................................ 31,000

Sales ........................................................... 31,000

Cost of Goods Sold........................................... 26,000 Merchandise Inventory–Convertibles ..... 26,000

5-30

PROBLEM 5-1A (Continued) (b)

Merchandise Inventory –Custom Sedans

Merchandise Inventory –Convertibles

Bal. 96,000 96,000 Bal. 78,000 26,000 72,000 52,000 26,000 72,000 78,000

Merchandise Inventory –Recreation Vehicles

Cost of Goods Sold Bal. 56,000 84,000 96,000

56,000 84,000 28,000 26,000

206,000

5-31

PROBLEM 5-2A

GENERAL JOURNAL Date Account Titles Ref. Debit Credit July 1

Merchandise Inventory (50 x $30) ........... Accounts Payable .............................

120 201

1,500

1,500 3 Accounts Receivable (40 x $50) ..............

Sales................................................... Cost of Goods Sold (40 x $30) ................. Merchandise Inventory .....................

112 401 505 120

2,000

1,200

2,000

1,200 9 Accounts Payable .....................................

Cash ................................................... 201 101

1,500 1,500

12 Cash ...........................................................

Accounts Receivable ........................ 101 112

2,000 2,000

17 Accounts Receivable (30 x $50) ..............

Sales................................................... Cost of Goods Sold (30 x $30) ................. Merchandise Inventory .....................

112 401 505 120

1,500

900

1,500

900 18 Merchandise Inventory ($1,700 + $100) ..

Accounts Payable ............................. Cash ...................................................

120 201 101

1,800 1,700 100

20 Accounts Payable ..................................... Merchandise Inventory .....................

201 120

300 300

21 Cash ...........................................................

Accounts Receivable ........................ 101 112

1,500 1,500

5-32

PROBLEM 5-2A (Continued) Date Account Titles Ref. Debit Credit July 22

Accounts Receivable (40 x $50) .............. Sales................................................... Cost of Goods Sold (40 x $30) ................. Merchandise Inventory .....................

112 401 505 120

2,000

1,200

2,000

1,200

30 Accounts Payable ($1,700 - $300) ........... Cash ...................................................

210 101

1,400 1,400

31 Sales Returns and Allowances................

Accounts Receivable ........................ Merchandise Inventory............................. Cost of Goods Sold ..........................

412 112 120 505

250

150

250

150

5-33

PROBLEM 5-3A

(a)

GENERAL JOURNAL J1 Date Account Titles Ref. Debit Credit Apr. 2 Merchandise Inventory.............................

Accounts Payable ............................. 120 201

4,900 4,900

4 Accounts Receivable................................

Sales................................................... Cost of Goods Sold .................................. Merchandise Inventory .....................

112 401 505 120

5,000

4,000

5,000

4,000 5 Freight Out.................................................

Cash ................................................... 644 101

200 200

6 Accounts Payable .....................................

Merchandise Inventory ..................... 201 120

300 300

14 Merchandise Inventory.............................

Cash ................................................... 120 101

4,400 4,400

16 Cash ...........................................................

Merchandise Inventory ..................... 101 120

500 500


Accounts Payable ............................. 120 201

4,200 4,200


Cash ................................................... 120 101

100 100

23 Cash ...........................................................


101 401 505 120

6,400

5,200

6,400

5,200

5-34

PROBLEM 5-3A (Continued) (a) (Continued)

J2

Date Account Titles Ref. Debit Credit Apr. 26 Merchandise Inventory .............................

Cash .................................................... 120 101

2,300 2,300

27 Accounts Payable ($4,900 - $300) ............

Cash .................................................... 201 101

4,600 4,600

28 Cash............................................................

Accounts Receivable......................... 101 112

5,000 5,000

29 Sales Returns and Allowances.................

Cash .................................................... Merchandise Inventory ............................. Cost of Goods Sold ...........................

412 101 120 505

90

60

90

60 30 Accounts Receivable ................................

Sales.................................................... Cost of Goods Sold ................................... Merchandise Inventory......................

112 401 505 120

3,700

3,000

3,700

3,000 (b)

Cash No. 101 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 1 5 14 16 20 23 26 27 28 29

Balance

J1 J1 J1 J1 J1 J2 J2 J2 J2

500

6,400

5,000

200 4,400

100

2,300 4,600

90

9,000 8,800 4,400 4,900 4,800

11,200 8,900 4,300 9,300 9,210

5-35

PROBLEM 5-3A (Continued) (b) (Continued)

Accounts Receivable No. 112 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 4 28 30

J1 J2 J2

5,000

3,700

5,000

5,000

0 3,700

Merchandise Inventory No. 120 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 2 4 6 14 16 18 20 23 26 29 30

J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2

4,900

4,400

4,200 100

2,300

60

4,000 300

500

5,200

3,000

4,900

900 600

5,000 4,500 8,700 8,800 3,600 5,900 5,960 2,960

Accounts Payable No. 201 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 2 6 18 27

J1 J1 J1 J2

300

4,600

4,900

4,200

4,900 4,600 8,800 4,200

5-36

PROBLEM 5-3A (Continued) (b) (Continued)

M. Nisson, Capital No. 301 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 1

Balance

9,000

Sales No. 401 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 4 23 30

J1 J1 J2

5,000 6,400

3,700

5,000

11,400 15,100

Sales Returns and Allowances No. 412 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 29

J2

90

90

Cost of Goods Sold No. 505 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 4 23 29 30

J1 J1 J2 J2

4,000 5,200

3,000

60

4,000 9,200 9,140

12,140 Freight Out No. 644 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 5

J1

200

200

5-37

PROBLEM 5-3A (Continued) (c) NISSON DISTRIBUTING COMPANY Income Statement (Partial) For the Month Ended April 30, 2003 Sales revenues Sales................................................................................ $15,100 Less: Sales returns and allowances............................ 90 Net sales.......................................................................... 15,010 Cost of goods sold ................................................................ 12,140 Gross profit ............................................................................ $ 2,870 (d) NISSON DISTRIBUTING COMPANY Balance Sheet (Partial) April 30, 2003 Assets Current assets Cash................................................................................. $ 9,210 Accounts receivable....................................................... 3,700 Merchandise inventory .................................................. 2,960 Total current assets ............................................... 15,870

5-38

PROBLEM 5-4A

Adjusting entries—not required: Dec. 31 Insurance Expense .................................................. 800

Prepaid Insurance............................................. 800 Amortization Expense ............................................. 3,000 Accumulated Amortization—Store Equipment 3,000 Rent Expense ........................................................... 500 Rent Payable .................................................... 500 (a) WORLD ENTERPRISES Income Statement For the Year Ended December 31, 2002

Sales revenues Sales ......................................................................... $238,500 Less: Sales returns and allowances ..................... 4 4,600 Net sales ................................................................... 233,900

Cost of goods sold .......................................................... 177,000 Gross profit .................................................................... 56,900 Operating expenses

Salaries expense ..................................... $31,600 Amortization expense ............................. 3,000 Rent expense ($6,100 + $500)................. 6,600 Insurance expense ................................. 000800 Total operating expenses.................................. .. 42,000

Net income ....................................................................... $14,900 WORLD ENTERPRISES Statement of Owner’s Equity For the Year Ended December 31, 2002

R. Roger, Capital, January 1 ........................................... $50,300 Add: Net income .............................................................. 14,900 R. Roger, Capital, December 31 ..................................... $65,200

5-39

PROBLEM 5-4A (Continued) (a) (Continued) WORLD ENTERPRISES Balance Sheet December 31, 2002 Assets Current assets

Cash .................................................................................. $ 14,000 Accounts receivable ....................................................... 30,600 Merchandise inventory.................................................... 27,500 Prepaid insurance ($1,800 – $800).................................. 1,000

Total current assets ................................................. 73,100 Capital assets

Equipment .......................................................... $42,000 Less: Accumulated amortization – Equipment 12,000 30,000

Total assets.............................................................. $103,100

Liabilities and Owner's Equity Current liabilities

Accounts payable ($34,400 + $500)................................ $ 34,900 Sales taxes payable ......................................................... 3,000 Total current liabilities..................................................... 37,900

Owner's equity

R. Roger, Capital .............................................................. 65,200

Total liabilities and owner's equity ......................... $103,100

5-40

PROBLEM 5-4A (Continued) (b) Dec. 31 Sales............................................................ 238,500

R. Roger, Capital ................................ 238,500

31 R. Roger, Capital ........................................ 223,600 Sales Returns and Allowances ......... 4,600 Cost of Goods Sold............................ 177,000 Salaries Expense................................ 31,600 Rent Expense...................................... 6,600 Insurance Expense............................. 800 Amortization Expense........................ 3,000

5-41

PROBLEM 5-5A

(a) DAIGLE DEPARTMENT STORE Income Statement For the Year Ended November 30, 2003

Sales revenues Sales........................................................................................ $850,000 Less: Sales returns and allowances ................................... 10,000 Net sales ................................................................................. 840,000

Cost of goods sold ........................................................................ 633,220 Gross profit .................................................................................. 206,780 Operating expenses

Selling expenses Salaries expense ($139,000 X 70%) $97,300 Sales commissions expense............ 12,750 Amortization expense—building 9,500 Delivery expense.............................. 8,200 Insurance expense ($9,000 x 50%) 4,500 Amortization expense— delivery equipment........................ 00 4,000

Total selling expenses ............. $136,250 Administrative expenses

Salaries expense ($139,000 X 30%) . $41,700 Utilities expense................................ 10,600 Insurance expense ($9,000 x 50%) .. 4,500 Property tax expense ........................ 3,500

Total administrative expenses . 0 60,300 Total operating expenses.. 196,550

Income from operations..................................................... 10,230 Other revenues and gains

Interest revenue .......................................................... $5,000 Other expenses and losses

Interest expense.......................................................... 8,000 000 3,000 Net income .......................................................................... $ 7,230

5-42

PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Statement of Owner's Equity For the Year Ended November 30, 2003

B. Daigle, Capital, December 1, 2002 ................................................ $84,200 Add: Net income ............................................................................... 7,230 91,430 Less: Drawings .................................................................................. 012,000 B. Daigle, Capital, November 30, 2003.............................................. $79,430

5-43

PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Balance Sheet November 30, 2003 Assets Current assets

Cash ............................................................................. $008,000 Accounts receivable ................................................... 11,770 Merchandise inventory............................................... 36,200 Prepaid insurance....................................................... 4,500

Total current assets ............................................ 60,470 Capital assets

Land ................................................... $50,000 Building.............................................. $125,000 Less: Accumulated amortization—

building ............................ 00 41,800 83,200 Delivery equipment........................... $57,000 Less: Accumulated amortization—

delivery equipment ............. 19,680 037,320 Total capital assets ................... 0170,520

Total assets................................................................... $230,990 Liabilities and Owner's Equity Current liabilities

Accounts payable ........................................................ $ 47,310 Property taxes payable................................................ 3,500 Sales commissions payable ....................................... 4,750 Current portion of mortgage....................................... 6,000

Total current liabilities ......................................... 61,560 Long-term liabilities

Mortgage payable ........................................................ 0 90,000 Total liabilities ...................................................... 151,560

Owner's equity B. Daigle, Capital.......................................................... 0 79,430 Total liabilities and owner's equity............................. $230,990

5-44

PROBLEM 5-5A (Continued) (b) Nov. 30 Amortization Expense–Delivery Equip ....... 4,000

Amortization Expense–Building .................. 9,500 Accum. Amortiz.–Delivery .................... 4,000 Accum. Amortiz.–Building.................... 9,500

30 Insurance Expense ....................................... 9,000 Prepaid Expense ................................... 9,000 30 Property Tax Expense .................................. 3,500 Property Tax Payable............................ 3,500 30 Sales Commissions Expense ...................... 4,750 Sales Commissions Payable................ 4,750

(c) Nov. 30 Sales............................................................... 850,000

Interest Revenue ........................................... 5,000 B. Daigle, Capital ................................... 855,000

Nov. 30 B. Daigle, Capital........................................... 847,770

Sales Returns and Allowances ............ 10,000 Cost of Goods Sold............................... 633,220 Salaries Expense................................... 139,000 Amortization Expense—Delivery Equipment........................................... 4,000 Delivery Expense................................... 8,200 Sales Commission Expense................. 12,750 Amortization Expense—Store Equipment........................................... 9,500 Insurance Expense................................ 9,000 Property Tax Expense........................... 3,500 Utilities Expense.................................... 10,600 Interest Expense.................................... 8,000

30 B. Daigle, Capital............................................ 12,000 B. Daigle, Drawings................................ 12,000

5-45

PROBLEM 5-6A Account Statement Classification Accounts Payable

Balance Sheet Current Liabilities

Accounts Receivable

Balance Sheet Current Assets

Accumulated Amortization –Office Building

Balance Sheet Capital Assets (Contra Account)

Accumulated Amortization –Store Equipment


Advertising Expense

Income Statement Selling Expenses

Amortization Expense –Office Building

Income Statement Administrative Expenses

Amortization Expense –Store Equipment


Cash


Swirsky, Capital Balance Sheet Owner’s Equity Freight Out


Swirsky, Drawings

Statement of Owner’s Equity

Drawings

Income Tax Expense

Income Statement Other Expenses

Income Tax Payable Insurance Expense

Balance Sheet Income Statement

Current Liabilities Administrative Expenses

Interest Expense


Interest Payable Balance Sheet Current Liabilities

5-46

Account Statement Classification

Land

Balance Sheet Capital Assets

Merchandise Inventory


Mortgage Payable

Balance Sheet Long-Term Liability

Office Building


Prepaid Insurance


Salaries Expense –Office Staff


Salaries Expense –Store Staff


Salaries Payable


Sales Returns and Allowances

Income Statement Contra Revenue

Store Equipment


Utilities Expense–Office


Utilities Expense–Store


Wages Payable Balance Sheet Current Liabilities

5-47

PROBLEM 5-7A

(a)

MCGRATH COMPANY Income Statement

For the Year Ended December 31, 2002 Sales revenues Sales......................................................................... $800,000 Less: Sales returns and allowances .................... 30,000 Net sales .................................................................. 770,000 Cost of goods sold ......................................................... 555,000 Gross profit ..................................................................... 215,000 Operating expenses Selling expenses Sales salaries expense ($80,000 + $16,000) ........................... $96,000 Delivery expense............................... 30,000 Advertising expense ......................... 10,000 Sales commissions expense............ 6,000 $142,000 Administrative expenses Office salaries expense .................... $27,000 Rent expense..................................... 24,000 Utilities expense................................ 12,000 Amortization expense—office equip. 8,000 71,000 Total operating expenses....................................... 213,000 Income from operations................................................. 2,000 Other revenues and gains Rent revenue ........................................................... $40,000 Other expenses and losses Interest expense...................................................... 2,000 38,000 Net income ...................................................................... $ 40,000

5-48

PROBLEM 5-7A (Continued) (b)

MCGRATH COMPANY

Income Statement For the Year Ended December 31, 2002

Revenues Net sales .................................................................. $770,000 Rent revenue ........................................................... 40,000 $810,000 Expenses Cost of sales............................................................ $555,000 Selling expenses ($80,000 + $16,000 + $30,000 + $10,000 + $6,000) 142,000 Administrative ($27,000 + $24,000 + $12,000 + $8,000) ................ 71,000 Interest expense...................................................... 2,000 770,000 Net income ...................................................................... $ 40,000

5-49

PROBLEM 5-8A

(a) 2000 1999 Gross profit margin

19.5% ($949,263 - $764,198) ÷ $949,263

23.8% ($808,251 – $615,827) ÷ $808,251

Inventory turnover

3.5 times $764,198 ÷ [($225,958 + $212,382) ÷ 2]

3.3 times $615,827 ÷ [($212,382 + $164,557) ÷ 2]

Days sales in inventory

104.3 days 365 days ÷ 3.5 times

110.6 days 365 days ÷ 3.3 times

(b) IPSCO’s gross profit margin declined in 2000. However, its management

of its inventories improved. It’s inventory turned over (sold) faster in 2000 and the number of days sales in inventory declined from 110.6 days to 104.3 days. This means that IPSCO is not holding its inventory for as long in 2000, as it did in 1999. The faster you sell your inventory, the faster the company will collect cash/receivables, the lower its carrying costs, and the reduced risk of inventory obsolescence.

5-50

*PROBLEM 5-9A

GENERAL JOURNAL Date

Account Titles and Explanation

Ref.

Debit

Credit

Sept. 2

GST Recoverable.....................................Merchandise Inventory ...........................

Accounts Payable............................

4,200 60,000

64,200

4 Merchandise Inventory ...........................Cash..................................................

02,000 02,000

5 Accounts Payable ...................................Merchandise Inventory ...................GST Recoverable.............................

07,490 07,000 490

6 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................

Cost of Goods Sold.................................Merchandise Inventory ...................

23,520

15,000

21,000 1,470 1,050

15,000

15 GST Recoverable.....................................Supplies [$4,000 + (5% x $4,000)] ..........

Cash..................................................

280 4,200

04,480

18 GST Recoverable.....................................Merchandise Inventory ...........................

Cash..................................................

420 6,000

06,420

22 Accounts Receivable ..............................Sales .................................................GST Payable (7% x $28,000) ...........PST Payable (5% x $28,000)............


31,360

20,000

28,000 1,960 1,400

20,000

5-51

*PROBLEM 5-9A (Continued)

Date


Ref.

Debit

Credit

Sept. 27

Delivery Equipment [$30,000 + (5% x $30,000)] ......................GST Recoverable (7% x $30,000) ...........


31,500 2,100

33,600

28 Accounts Payable ($64,200 – $7,490) ....

Cash..................................................

56,710

0

56,710

30 Cash..........................................................Accounts Receivable ......................

23,520 00,

23,520

5-52

*PROBLEM 5-10A

(a) GENERAL JOURNAL J1 Date


Ref.

Debit

Credit

April 4 GST Recoverable.................................... Merchandise Inventory ..........................

Accounts Payable...........................

114 120 201

42.00 600.00

642.00

6 Merchandise Inventory .......................... Cash.................................................

120 101

060.00 060.00

8 Accounts Receivable ............................. Sales ................................................ GST Payable.................................... PST Payable ....................................

Cost of Goods Sold ................................ Merchandise Inventory ..................

112 401 214 215

505 120

1,053.00

630.00

900.00 63.00 90.00

630.00

10 Accounts Payable .................................. Merchandise Inventory ..................

GST Recoverable ($40 X 7%)........

201 120 114

042.80 040.00 2.80

11 GST Recoverable.................................... Merchandise Inventory ..........................

Cash.................................................

114 120 101

21.00 300.00

321.00

14 GST Recoverable.................................... Merchandise Inventory ..........................

Accounts Payable...........................

114 120 201

49.00 700.00

749.00

15 Cash......................................................... Merchandise Inventory .................. GST Recoverable............................

101 120 114

053.50 050.00 3.50

17 Merchandise Inventory .......................... Cash.................................................

120 101

070.00 070.00

5-53

*PROBLEM 5-10A (Continued) (a) (Continued)

J2 Date


Ref.

Debit

Credit

April 18

Accounts Receivable ..............................

Sales .................................................GST Payable.....................................PST Payable .....................................

Cost of Goods Sold................................. Merchandise Inventory ...................

112 401 214 215

505 120

936.00

560.00

800.00 56.00 80.00

560.00


101 112

500.00 500.00

27 GST Payable ............................................PST Payable.............................................Sales Returns and Allowances ..............

Accounts Receivable ......................

Merchandise Inventory .......................... Cost of Goods Sold .........................

214 215 412 112

120 505

2.10 3.00 30.00

25.00

035.10

25.00

29 Accounts Payable ...................................Cash..................................................

201 101

599.20 599.20



112 401 214 215

505 120

1,170.00

730.00

1,000.00

70.00 100.00

730.00


101 112

1,200.00 1,200.00

5-54

*PROBLEM 5-10A (Continued) (b) Cash No. 101 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 1 6 11 15 17 20 29 30

Balance

J1 J1 J1 J1 J2 J2 J2

053.50

500.00

1,200.00

060.00 321.00

070.00

599.20

2,500.00 2,440.00 2,119.00 2,172.50 2,102.50 2,602.50 2,003.30 3,203.30

Accounts Receivable No. 112

Explanation

Ref.

Debit

Credit Balance

Apr. 8 18 20 27 30 30

J1 J2 J2 J2 J2 J2

1,053.00 936.00

1,170.00

500.00 035.10

1,200.00

1,053.00 1,989.00 1,489.00 1,453.90 2,623.90 1,423.90

GST Recoverable No. 114 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 4 10 11 14 15

J1

J1 J1 J1 J1

42.00

21.00 49.00

2.80

3.50

42.00 39.20 60.20 109.20 105.70

5-55

*PROBLEM 5-10A (Continued) (b) (Continued) Merchandise Inventory No. 120 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 1 4 6 8 10 11 14 15 17 18 27 30

Balance

J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2

600.00 60.00

300.00 700.00

70.00

25.00

630.00 40.00

50.00

560.00

730.00

3,500.00 4,100.00 4,160.00 3,530.00 3,490.00 3,790.00 4,490.00 4,440.00 4,510.00 3,950.00 3,975.00 3,245.00


Explanation

Ref.

Debit

Credit

Balance

Apr. 4 10 14 29

J1 J1 J1 J2

42.80

599.20

642.00

749.00

642.00 599.20 1,348.20 749.00

GST Payable No. 214 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 8 18 27 30

J1 J2 J2 J2

2.10

63.00 56.00

70.00

63.00 119.00 116.90 186.90

5-56

*PROBLEM 5-10A (Continued) (b) (Continued) PST Payable No. 215 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 8 18 27 30

J1 J2 J2 J2

3.00

90.00 80.00

100.00

90.00 170.00 167.00 267.00

B. J. Evert, Capital No. 301 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 1

Balance

6,000.00

Sales No. 401 Date

Explanation

Ref.

Debit

Credit

Balance

Apr. 8 18 30

J1 J2 J2

900.00 800.00

1,000.00

0,900.00 1,700.00 2,700.00


Explanation

Ref.

Debit

Credit

Balance

Apr. 27

J2

030.00

0,030.00


Explanation

Ref.

Debit

Credit

Balance

Apr. 8 18 27 30

J1 J2 J2 J2

630.00 560.00

730.00

25.00

0,630.00 1,190.00 1,165.00 1,895.00

5-57

*PROBLEM 5-10A (Continued) (c)

B. J.'S TENNIS SHOP Trial Balance April 30, 2003

Debit

Credit

Cash ................................................................Accounts Receivable.....................................GST Recoverable ...........................................Merchandise Inventory..................................Accounts Payable ..........................................GST Payable ...................................................PST Payable ...................................................B. J. Evert, Capital .........................................Sales................................................................Sales Returns and Allowances.....................Cost of Goods Sold .......................................

$3,203.30

1,423.90 105.70 3,245.00

30.00 1,895.00 $9,902.90

$ 749.00 186.90 267.00 6,000.00 02,700.00

00000000 $9,902.90

(d)

B. J.'S TENNIS SHOP Income Statement (Partial) For the Month Ended April 30, 2003

Sales revenues

Sales........................................................................................ $2,700 Less: Sales returns and allowances.................................... 30 Net sales.................................................................................. 2,670

Cost of goods sold ........................................................................ 1,895 Gross profit .................................................................................... 775

5-58

*PROBLEM 5-11A

(a) METIS WHOLESALE COMPANY

Work Sheet For the Year Ended December 31, 2002

Account Titles

Trial Balance

Adjustments

Adjusted Trial Balance

Income

Statement

Balance Sheet

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Cash Accounts Receivable Merchandise Inventory Land Buildings Accum. Amortization Equipment Accum. Amortization Notes Payable Accounts Payable G. Metis, Capital G. Metis, Drawings Sales Cost of Goods Sold Salaries Expense Utilities Expense Repair Expense Gas and Oil Expense Insurance Expense

Totals Amort. Expense—Bldings Amort. Expense— Equip. Interest Expense Interest Payable

Totals Net Income

Totals

33,400 37,600 92,400 92,000

197,000

83,500

10,000

712,100 69,800

9,400 5,900 7,200

0,00 3,500 1,353,800

54,000

42,400 50,000 37,500

267,800

902,100

00000000 1,353,800

(3) 2,400

(1) 10,000 (1) 9,000 (2) 4,000

000000 0025,400

(3) 2,400

(1) 10,000

(1) 9,000

(2) 04,000 25,400

33,400 37,600 90,000 92,000

197,000

83,500

10,000

714,500 69,800

9,400 5,900 7,200 3,500

10,000

9,000 4,000

00000000 1,376,800

64,000

51,400 50,000 37,500

267,800

902,100

0,004,000 1,376,800

714,500 69,800

9,400 5,900 7,200 3,500

10,000

9,000 4,000

0000000 0833,300

068,800 902,100

902,100

0000000 902,100

0000000 00902,100

33,400 37,600 90,000 92,000

197,000

83,500

10,000

0000000 543,500

0000000 543,500

64,000

51,400 50,000 37,500

267,800

004,000 474,700 068,800 543,500

Key: (1) Amortization expense—buildings, (1) Amortization expense—equipment, (2) Interest payable., (3) Inventory adjustment.

5-59

*PROBLEM 5-11A (Continued) (b)

METIS WHOLESALE COMPANY Income Statement

For the Year Ended December 31, 2002

Sales ..................................................................................................... $902,100 Cost of goods sold .............................................................................. 714,500 Gross profit ........................................................................................ 187,600 Operating expenses

Selling expenses Salaries expense ($69,800 X 80%) ..... $55,840 Gas and oil expense............................ 0007,200

Total selling expenses ................ $63,040 Administrative expenses

Salaries expense ($69,800 X 20%) ..... $13,960 Amortization expense—buildings ..... 10,000 Utilities expense.................................. 9,400 Amortization expense—equipment ... 9,000 Repair expense.................................... 5,900 Insurance expense .............................. 3,500

Total administrative expenses ... 00 51,760 Total operating expenses..................................... 0 114,800

Income from operations...................................................................... 72,800 Other expenses and losses

Interest expense .......................................................................... 00 4,000 Net income ........................................................................................... $ 68,800

METIS WHOLESALE COMPANY Statement of Owner’s Equity

For the Year Ended December 31, 2002

G. Metis, Capital January 1 ................................................................. $267,800 Add: Net income .................................................................................. 68,800 ............................................................................................................... 336,600 Less: Drawings .................................................................................... 10,000 G. Metis, Capital December 31 ........................................................... $326,600

5-60

*PROBLEM 5-11A (Continued) (b) (Continued)

METIS WHOLESALE COMPANY Balance Sheet

December 31, 2002

Assets Current assets Cash .............................................................................................. $ 33,400 Accounts receivable .................................................................... 37,600 Merchandise inventory ................................................................ 90,000 Total current assets.............................................................. 161,000 Capital assets Land............................................................ $ 92,000 Buildings.................................................... $197,000 Less: Accumulated amortization............. (64,000) 133,000 Equipment.................................................. 83,500 Less: Accumulated amortization............. (51,400) 32,100 257,100 Total assets .......................................................................... $418,100 Liabilities and Owner’s Equity Current liabilities Notes payable............................................................................... $ 50,000 Accounts payable ........................................................................ 37,500 Interest payable............................................................................ 4,000 Total liabilities ...................................................................... 91,500 Owner’s Equity G. Metis Capital ............................................................................ 326,600 Total liabilities and owner’s equity.................................... $418,100

5-61

*PROBLEM 5-11A (Continued) (c) Dec. 31 Amortization Expense–Building......... 10,000 Accum. Amortiz.–Building........... 10,000 Amortization Expense–Equipment..... 9,000 Accum. Amortiz.–Equipment....... 9,000 Interest Expense .................................. 4,000 Interest payable ............................ 4,000 Cost of Goods Sold ............................. 2,400 Merchandise Inventory ................ 2,400 (d) Dec. 31 Sales .................................................... 902,100 G. Methis, Capital ........................ 902,100 G. Metis, Capital .................................. 833,300 Cost of Goods Sold ..................... 714,500 Salaries Expense ......................... 69,800 Utilities Expense.......................... 9,400 Repair Expense............................ 5,900 Gas and Oil Expense................... 7,200 Insurance Expense...................... 3,500 Amortization Expense–Buildings 10,000 Amortization Expense–Equipment 9,000 Interest Expense.......................... 4,000 G. Metis, Capital .................................. 10,000 G. Metis, Drawings ...................... 10,000

5-62

*PROBLEM 5-11A (Continued) (e)

METIS WHOLESALE COMPANY Post-Closing Trial Balance

December 31, 2002

Debit Credit Cash .............................................................. $ 33,400 Accounts Receivable ................................... 37,600 Merchandise Inventory ................................ 90,000 Land............................................................... 92,000 Buildings....................................................... 197,000 Accumulated Amortization—Buildings...... $ 64,000 Equipment..................................................... 83,500 Accumulated Amortization—Equipment.... 51,400 Notes Payable............................................... 50,000 Accounts Payable ........................................ 37,500 Interest Payable............................................ 4,000 G. Metis, Capital ........................................... 00000 00 326,600

Totals $533,500 $533,500

5-63

PROBLEM 5-1B

(a) June 5 Merchandise Inventory–Jet Runners (2 x $22,000)................................................... 44,000

Accounts Payable ................................. 44,000 13 Merchandise Inventory–Skiffs (2 x $25,000)................................................... 50,000

Accounts Payable ................................. 50,000

17 Accounts Receivable (4 x $26,500).............. 106,000 Sales ....................................................... 106,000

Cost of Goods Sold (4 x $22,000) ................ 88,000 Merchandise Inventory–Jet Runners .. 88,000 18 Merchandise Inventory–Skiffs (2 x $26,000)................................................... 52,000

Accounts Payable ................................. 52,000 22 Accounts Payable ......................................... 26,000

Merchandise Inventory–Skiffs ............. 26,000 23 Accounts Receivable (2 x $33,000).............. 66,000

Sales ....................................................... 66,000 Cost of Goods Sold (2 x $27,000) ............... 54,000 Merchandise Inventory–Power ............ 54,000 24 Accounts Receivable (3 x $29,000).............. 87,000

Sales ....................................................... 87,000

Cost of Goods Sold (3 x $24,000) ................ 72,000 Merchandise Inventory–Skiffs ............. 72,000

5-64

PROBLEM 5-1B (Continued) (b)

Merchandise Inventory– Jet Runners

Merchandise Inventory– Skiffs

Bal. 88,000 88,000 Bal. 72,000 26,000 44,000 50,000 72,000 44,000 52,000

76,000

Merchandise Inventory–

Power

Cost of Goods Sold Bal. 54,000 54,000 88,000

0 54,000 72,000 214,000

5-65

PROBLEM 5-2B

GENERALJOURNAL

Date Account Titles Ref. Debit Credit June 1

Merchandise Inventory (130 x $5) ............ Accounts Payable .............................. Merchandise Inventory.............................. Cash ....................................................

120 201 120 101

650

50

650

50 3 Accounts Receivable (140 x $10) .............

Sales.................................................... Cost of Goods Sold (140 x $6) .................. Merchandise Inventory ......................

112 401 505 120

1,400

840

1,400

840 6 Accounts Payable ......................................

Merchandise Inventory ...................... 201 120

50 50

9 Accounts Payable ......................................

Cash .................................................... 201 101

600 600

15 Cash ............................................................

Accounts Receivable ......................... 101 112

1,400 1,400

17 Accounts Receivable (120 x $10) .............

Sales.................................................... Cost of Goods Sold ................................... Merchandise Inventory ......................

112 401 505 120

1,200

682

1,200

682 20 Merchandise Inventory (120 x $5) ............

Accounts Payable .............................. 120 201

600 600

24 Cash ............................................................

Accounts Receivable ......................... 101 112

1,200 1,200

5-66

PROBLEM 5-2B (Continued) Date Account Titles Ref. Debit Credit June 26

Accounts Payable ..................................... Cash ...................................................

201 101

600

600 28 Accounts Receivable (110 x $10) ............


112 401 505 120

1,100

609

1,100

609 30 Sales Returns and Allowances................

Accounts Receivable ........................ Merchandise Inventory............................. Cost of Goods Sold ..........................

412 112 120 505

150

75

150

75

5-67

PROBLEM 5-3B

(a)

GENERAL JOURNAL J1 Date


Ref.

Debit

Credit

May 1

Merchandise Inventory ...........................


120 201

5,000

5,000

2 Accounts Receivable ..............................Sales .................................................


112 401

505 120

4,000

3,000

4,000

3,000

5

7

Accounts Payable ...................................Merchandise Inventory ...................

Freight Out ............................................... Cash .................................................

201 120

644 101

0,200

200

0,200

200

11 Supplies ...................................................Cash..................................................

126 101

0,900 0,900


120 101

2,400 2,400

15 Cash .........................................................Merchandise Inventory ...................

101 120

0,230 0,230

17 Merchandise Inventory ...........................Accounts Payable............................

120 201

1,900 1,900

19

Merchandise Inventory ...........................

Cash..................................................

120 101

0,250

0,250

5-68

PROBLEM 5-3B (Continued) (a) (Continued)

J2 Date


Ref.

Debit

Credit

May 24

Cash ........................................................

Sales ................................................ Cost of Goods Sold................................ Merchandise Inventory ..................

101 401

505 120

6,200

4,340

6,200

4,340

25 Merchandise Inventory .......................... Accounts Payable...........................

120 201

1,000 1,000

27 Cash ....................................................... Accounts Receivable .....................

101 112

4,000 0,0

4,000

29 Sales Returns and Allowances ............. Cash.................................................

Merchandise Inventory .......................... Cost of Goods Sold ........................

412 101

120 505

0,100

70

0,100

70

30 Accounts Payable ($5,000 – $200) ........ Cash.................................................

201 101

4,800

4,800

31 Accounts Receivable ............................. Sales ................................................

Cost of Goods Sold................................ Merchandise Inventory ..................

112 401

505 120

1,600

1,000

1,600

1,000

5-69

PROBLEM 5-3B (Continued) (b) Cash No. 101 Date

Explanation

Ref.

Debit

Credit

Balance

May 1 7

11 12 15 19 24 27 29 30

Balance

J1 J1 J1 J1 J1 J2 J2 J2

J2

230

6,200 4,000

200 900 2,400

250

100 4,800

5,000 4,800 3,900 1,500 1,730 1,480 7,680 11,680 11,580 6,780


Explanation

Ref.

Debit

Credit

Balance

May 2 27 31

J1 J2 J2

4,000

1,600

4,000

04,000 00,000 01,600

Merchandise Inventory No. 120 Date

Explanation

Ref.

Debit

Credit

Balance

May 1 2 5 12 15 17 19 24 25 29 31

J1 J1 J1 J1 J1 J1 J1 J2 J2 J2 J2

5,000

2,400

1,900 250

1,000

70

3,000 200

230

4,340

1,000

5,000 2,000 1,800 4,200 3,970 5,870 6,120 1,780 2,780 2,850 1,850

5-70

PROBLEM 5-3B (Continued) (b) (Continued) Supplies No. 126 Date

Explanation

Ref.

Debit

Credit

Balance

May 11

J1

0,900

00,900


Explanation

Ref.

Debit

Credit

Balance

May 1 5 17 25 30

J1 J1 J1 J2 J2

0,200

4,800

5,000

1,900 1,000

05,000 04,800 6,700 7,700 2,900

S. Eagle, Capital No. 301 Date

Explanation

Ref.

Debit

Credit

Balance

May 1

Balance

05,000

Sales No. 401 Date

Explanation

Ref.

Debit

Credit

Balance

May 2 24 31

J1 J2 J2

4,000 6,200 1,600

04,000 10,200 11,800


Explanation

Ref.

Debit

Credit

Balance

May 29

J2

0,100

00,100

5-71

PROBLEM 5-3B (Continued) (b) (Continued) Cost of Goods Sold No. 505 Date

Explanation

Ref.

Debit

Credit

Balance

May 2 24 29 31

J1 J2 J2 J2

3,000 4,340

1,000

70

03,000 07,340 07,270 8,270

Freight Out No. 644 Date

Explanation

Ref.

Debit

Credit

Balance

May 7

J1

0,200

00,200

(c) EAGLE HARDWARE STORE

Income Statement (Partial) For the Month Ended May 31, 2003

Sales revenues Sales.............................................................................. $11,800

Less: Sales returns and allowances.......................... 100 Net sales........................................................................ 11,700 Cost of goods sold .............................................................. 8,270 Gross profit .......................................................................... 3,430

(d) EAGLE HARDWARE STORE

Balance Sheet (Partial) May 31, 2003

Assets

Current assets Cash............................................................................... $ 6,780 Accounts receivable .................................................... 1,600 Merchandise inventory ................................................ 1,850 Supplies ........................................................................ 900 Total current assets ............................................. $11,130

5-72

PROBLEM 5-4B

Adjusting entries—not required: Dec. 31 Cost of Goods Sold (Inventory Loss)..................... 100

Merchandise Inventory..................................... 100 Insurance Expense .................................................. 900

Prepaid Insurance............................................. 900 Amortization Expense ............................................. 4,000 Accumulated Amortization—Building ............ 4,000 Amortization Expense ............................................. 2,850 Accumulated Amortization—Store Equipment 2,850 Property Tax Expense ............................................. 6,000 Property Tax Payable ....................................... 6,000 (a) GLOBAL ENTERPRISES Income Statement For the Year Ended December 31, 2002

Sales revenues Sales ............................................................................ $243,700 Less: Sales returns and allowances ........................ 4 4,800 Net sales ...................................................................... 238,900

Cost of goods sold ($180,300 + $100)............................... 180,400 Gross profit ....................................................................... 58,500 Operating expenses

Salaries expense ...................................... $31,600 Utilities expense...................................... 5,100 Amortization expense ($4,000 + $2,850) 6,850 Property tax expense ............................. 6,000 Insurance expense ................................. 900

Total operating expenses.............................. 50,450 Net income .......................................................................... $ 8,050

5-73

PROBLEM 5-4B (Continued) (a) (Continued) GLOBAL ENTERPRISES Statement of Owner’s Equity For the Year Ended December 31, 2002 T. Brown, Capital, January 1.............................................. $50,000 Add: Net income ................................................................. 8,050 T. Brown, Capital, December 31 ........................................ $58,050

5-74

PROBLEM 5-4B (Continued) (a) (Continued)

GLOBAL ENTERPRISES Balance Sheet

December 31, 2002 Assets Current assets

Cash ............................................................................................ $ 13,000 Accounts receivable .................................................................. 31,700 Merchandise inventory............................................................... 28,000 Prepaid insurance ($1,900 – $900)............................................. 1,000

Total current assets ............................................................ 73,700 Capital assets

Land ......................................................... $ 30,000 Building.................................................... $150,000 Less: Accumulated amortization –Building ($18,750 + $4,000) .................. 22,750 127,250 Store equipment...................................... $45,000 Less: Accumulated amortization –Store Equipment ($9,100 + $2,850)...... 11,950 33,050 190,300

Total assets.......................................................................... $264,000

Liabilities and Owner's Equity Current liabilities

Accounts payable ....................................................................... $ 34,700 Sales taxes payable .................................................................... 4,000 Property tax payable................................................................... 6,000 Current portion of mortgage payable........................................ 5,000 Total current liabilities................................................................ 49,700

Long-term liabilities Mortgage payable........................................................................ 156,250 Total liabilities ..................................................................... 205,950 Owner's equity

T. Brown, Capital......................................................................... 58,050 Total liabilities and owner's equity .................................... $264,000

5-75

PROBLEM 5-4B (Continued) (b) Dec. 31 Sales............................................................ 243,700

T. Brown, Capital ................................ 243,700

31 T. Brown, Capital........................................ 235,650 Sales Returns and Allowances ......... 4,800 Cost of Goods Sold............................ 180,400 Salaries Expense................................ 31,600 Utilities Expense................................. 5,100 Insurance Expense............................. 900 Property Tax Expense........................ 6,000 Amortization Expense........................ 6,850

5-76

PROBLEM 5-5B

(a) VEITCH DEPARTMENT STORE Income Statement For the Year Ended December 31, 2002

Sales revenues Sales........................................................................................... $624,000 Less: Sales returns and allowances ...................................... 8,000 Net sales .................................................................................... 616,000

Cost of goods sold ........................................................................... 427,200 Gross profit ....................................................................................... 188,800 Operating expenses

Selling expenses Sales salaries expense ..................... $76,000 Sales commissions expense............ 15,500 Amortization expense — equipment 13,300 Utilities expense ($11,000 X 60%) .... 6,600 Insurance expense ($7,200 X 60%) .. 000 4,320

Total selling expenses .............. $115,720 Administrative expenses

Office salaries expense .................... $32,000 Amortization expense — building ... 10,400 Property taxes expense .................... 4,800 Utilities expense ($11,000 X 40%) .... 4,400 Insurance expense ($7,200 X 40%) .. 000 2,880

Total administrative expenses 0054,480 Total operating expenses 0 170,200

Income from operations..................................................... 18,600 Other revenues and gains

Interest revenue .......................................................... $ 4,000 Other expenses and losses

Interest expense.......................................................... 11,000 00 07,000 Net income .......................................................................... $ 11,600

5-77

PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Statement of Owner's Equity For the Year Ended December 31, 2002

S. Veitch, Capital, January 1.............................................................. $226,600 Add: Net income ............................................................................... 0 11,600 238,200 Less: Drawings .................................................................................. 0 28,000 S. Veitch, Capital, December 31 ........................................................ $210,200

5-78

PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Balance Sheet December 31, 2002 Assets Current assets

Cash ............................................................................................. $023,000 Accounts receivable ................................................................... 50,300 Merchandise inventory............................................................... 72,500 Prepaid insurance....................................................................... 0 2,400

Total current assets ............................................................ 148,200 Capital assets

Land ........................................................... $ 50,000 Building...................................................... $190,000 Less: Accum. amortization—building.... 52,500 137,500 Equipment ................................................. $110,000 Less: Accum. amortization—equipment 42,900 00 67,100 0254,600

Total assets........................................ $402,800 Liabilities and Owner's Equity Current liabilities

Accounts payable ...................................................................... $089,300 Mortgage payable due next year .............................................. 20,000 Property taxes payable.............................................................. 4,800 Sales commissions payable ..................................................... 4,500 Interest payable.......................................................................... 0008,000 Sales taxes payable ................................................................... 00 06,000

Total current liabilities ....................................................... 132,600 Long-term liabilities

Mortgage payable (less current portion) ................................. 00 60,000 Total liabilities .................................................................... 192,600

Owner's equity S. Veitch, Capital........................................................................ 0210,200

Total liabilities and owner's equity ................................... $402,800

5-79

PROBLEM 5-5B (Continued) (b) Dec. 31 Amortization Expense—Building .................... 10,400

Accumulated Amortization—Building..... 10,400

31 Amortization Expense—Equipment ................ 13,300 Accumulated Amortization—Equipment. 13,300

31 Insurance Expense ........................................... 7,200 Prepaid Insurance ..................................... 7,200

31 Interest Expense ................................................. 8,000 Interest Payable......................................... 8,000

31 Property Taxes Expense .................................... 4,800 Property Taxes Payable............................ 4,800

31 Sales Commissions Expense ............................ 4,500 Sales Commissions Payable.................... 4,500 31 Cost of Goods Sold (Inventory Loss).............. 2,500 Merchandise Inventory ............................. 2,500

5-80

PROBLEM 5-5B (Continued) (c) Dec. 31 Sales............................................................... 624,000

Interest Revenue ........................................... 4,000 S. Veitch, Capital ................................... 628,000

31 S. Veitch, Capital ........................................... 616,400 Cost of Goods Sold............................... 427,200 Sales Returns and Allowances ............ 8,000 Office Salaries Expense........................ 32,000 Sales Salaries Expense ........................ 76,000 Sales Commissions Expense............... 15,500 Property Taxes Expense....................... 4,800 Utilities Expense.................................... 11,000 Amortization Expense—Building......... 10,400 Amortization Expense—Equipment..... 13,300 Insurance Expense................................ 7,200 Interest Expense.................................... 11,000

31 S. Veitch, Capital ........................................... 28,000 S. Veitch, Drawings ............................... 28,000

5-81

PROBLEM 5-6B

Account Statement Classification Accumulated Depreciation


Cash and Time Deposits


Cost of Sales

Income Statement Cost of Goods Sold

Depreciation Expense

Income Statement Operating Expenses (Administrative Expenses)

Income Taxes Expense

Income Statement Other Expenses (or Income Tax Expense)

Interest Expense


Inventories–Aluminum


Inventories–Other Supplies


Inventories–Raw Materials


Operating Income

Income Statement Operating Income

Other Expenses


Payables


Property, Plant, and Equipment


Receivables


Sales

Income Statement Revenue

Selling, Administrative and General Expenses

Income Statement Operating Expenses

5-82

PROBLEM 5-7B

(a) TAO COMPANY


Sales revenues Sales ($702,000 - $10,000) ....................................................... $692,000 Less: Sales returns and allowances ..................................... 4,100 Net sales ................................................................................... 687,900 Cost of goods sold .......................................................................... 470,000 Gross profit ...................................................................................... 217,900 Operating expenses Selling expenses Sales salaries expense .................. $76,000 Freight out....................................... 17,200 Advertising expense ...................... 10,000 Amortization expense—store equip. 7,500 Sales commissions expense ($6,500 + $1,000)......................... 7,500 $118,200 Administrative expenses Office salaries expense ................. $19,000 Rent expense ($16,000 - $1,250) ... 14,750 Utilities expense............................. 8,000 Insurance expense ($7,000 - $1,200) 5,800 47,550 Total operating expenses.......... 165,750 Income from operations.................................................. 52,150 Other revenues and gains Interest revenue ....................................................... $5,300 Other expenses and losses Interest expense....................................................... 4,000 1,300 Net income ....................................................................... $ 53,450 Reconciliation Net Income as prepared by bookkeeper......................................... $50,000 Sales revenue unearned .................................................................. (10,000) Insurance expense applicable to 2003 ........................................... 1,200 Rent expense applicable to 2003 .................................................... 1,250 Sales commission expense applicable to 2002 ............................. (1,000) Drawings............................................................................................ 12,000 As adjusted ....................................................................................... $53,450

5-83

PROBLEM 5-7B (Continued) (b) TAO COMPANY


Revenues Net sales .............................................................. $687,900 Interest revenue .................................................. 5,300 Total revenue............................................... $693,200 Expenses Cost of goods sold ............................................. $470,000 Selling expenses (1) ........................................... 118,200 Administrative expenses (2) .............................. 47,550 Interest expense.................................................. 4,000 Total expenses ............................................ 639,750 Net income .................................................................. $ 53,450 (1) Selling expenses Sales salaries expense ....................................... $ 76,000 Freight out............................................................ 17,200 Advertising expense ........................................... 10,000 Amortization expense—store equipment .......... 7,500 Sales commissions expense ($6,500 + $1,000) 7,500 Total ..................................................................... $118,200 (2) Administrative expenses Office salaries expense ....................................... $19,000 Rent expense ($16,000 - $1,250) ......................... 14,750 Utilities expense................................................... 8,000 Insurance expense ($7,000 - $1,200).................. 5,800 Total ...................................................................... $47,550 Reconciliation Net income as prepared by bookkeeper........................................... $50,000 Sales revenue unearned .................................................................... (10,000) Insurance expense applicable to 2003 ............................................. 1,200 Rent expense applicable to 2003 ...................................................... 1,250 Sales commission expense applicable to 2002 ............................... (1,000) Drawings.............................................................................................. 12,000 As adjusted ......................................................................................... $53,450

5-84

PROBLEM 5-8B (a) 8 Months Ended

December 31, 1999 Year Ended

April 30 1999 Gross profit margin

85.3% ($74,314 – $10,931) ÷ $74,314

57.1% ($1,472 – $631) ÷ $1,472

Inventory turnover

1.64 times $10,931 ÷ [($4,966 + $8,330) ÷ 2]

0.25 times $631 ÷ [($4,966 + $0) ÷ 2]

Days sales in inventory

148 days 365 days x 8/12 ÷ 1.64 times

1,460 days 365 days ÷ 0.25 times

Current ratio

1.42:1 $1,973,457 ÷ $1,390,850

1.15:1 $298,499 ÷ $259,851

(b) SAM’s current ratio of more than 1 to 1 indicates that SAM does not

have a liquidity problem. Its current assets are more than its current liabilities. It appears to managing inventory better in its second year of operations, with a substantial reduction of days sales in inventory. The inventory ratios for the year ended April 1999 are probably reflective of the start up phase of the company.

5-85

*PROBLEM 5-9B

GENERAL JOURNAL Date


Ref.

Debit

Credit

Oct. 1

GST Recoverable.....................................Merchandise Inventory ...........................


5,250 75,000

80,250


01,800 01,800

5 Accounts Payable ...................................Merchandise Inventory ...................GST Recoverable.............................

06,420 06,000 420



24,640

16,000

22,000 1,540 1,100

16,000

12 GST Recoverable.....................................Supplies ($5,000 + $250).........................

Cash..................................................

350 5,250

05,600


Cash..................................................

350 5,000

05,350

18 Accounts Receivable ..............................Sales .................................................GST Payable (7% x $ 30,000) ..........PST Payable (5% x $ 30,000) ..........


33,600

23,000

30,000 2,100 1,500

23,000

5-86

*PROBLEM 5-9B (Continued) Date


Ref.

Debit

Credit

Oct. 20

Delivery Equipment [$44,000 + (5% x $ 44,000)] .....................GST Recoverable (7% x $44,000) ...........


46,200 3,080

049,280

25 Accounts Payable ($80,250 – $6,420) ....

Cash..................................................

73,830

0

73,830

27 Cash .........................................................Accounts Receivable ......................

24,640 00,

24,640

5-87

*PROBLEM 5-10B

(a) GENERAL JOURNAL J1 Date


Ref.

Debit

Credit

May 4 GST Recoverable.....................................Merchandise Inventory ...........................


114 120 201

49.00 700.00

749.00


120 101

055.00 055.00


Cost of Goods Sold ................................. Merchandise Inventory ...................

112 401 214 215

505 120

936.00

600.00

800.00 56.00 80.00

600.00

9 Accounts Payable ...................................Merchandise Inventory ...................

GST Recoverable ($45 X 7%).........

201 120 114

048.15 045.00 3.15

14 GST Recoverable ($400 x 7%) ................Merchandise Inventory ...........................

Cash..................................................

114 120 101

28.00 400.00

428.00



114 120 201

42.00 600.00

642.00


120 101

075.00 075.00

21 Cash .........................................................Merchandise Inventory ...................GST Recoverable.............................

101 120 114

058.85 055.00 3.85

5-88

*PROBLEM 5-10B (Continued) (a) (Continued)

J2 Date


Ref.

Debit

Credit

May 23

Cash .........................................................

Sales .................................................GST Payable.....................................PST Payable .....................................


101 401 214 215

505 120

1,053.00

675.00

900.00 63.00 90.00

675.00

25 Cash .........................................................Accounts Receivable ......................

101 112

400.00 400.00

27 GST Payable ............................................PST Payable.............................................Sales Returns and Allowances ..............

Accounts Receivable ......................

Merchandise Inventory .......................... Cost of Goods Sold .........................

214 215 412 112

120 505

2.45 3.50 35.00

25.00

040.95

25.00

29 Accounts Payable ($749.00 - $ 48.15)....Cash..................................................

201 101

700.85 700.85



112 401 214 215

505 120

1,755.00

1,125.00

1,500.00 105.00 150.00

1,125.00 31 Cash .........................................................

Accounts Receivable ......................101 112

800.00 800.00

5-89

*PROBLEM 5-10B (Continued) (b) Cash No. 101 Date

Explanation

Ref.

Debit

Credit

Balance

May 1 6 14 18 21 23 25 29 31

Balance

J1 J1 J1 J1 J2 J2 J2 J2

058.85 1,053.00

400.00

800.00

055.00 428.00 075.00

700.85

3,000.00 2,945.00 2,517.00 2,442.00 2,500.85 3,553,85 3,953.85 3,253.00 4,053.00


Explanation

Ref.

Debit

Credit

Balance

May 8 25 27 30 31

J1 J2 J2 J2 J2

936.00

1,755.00

400.00 0440.95

800.00

936.00 536.00 495.05

2,250.05 1,450.05

GST Recoverable No. 114 Date

Explanation

Ref.

Debit

Credit

Balance

May 4 9 14 16 21

J1

J1 J1 J1 J1

49.00

28.00 42.00

3.15

3.85

49.00 45.85 73.85 115.85 112.00

5-90

*PROBLEM 5-10B (Continued) (b) (Continued) Merchandise Inventory No. 120 Date

Explanation

Ref.

Debit

Credit

Balance

May 1 4 6 8 9 14 16 18 21 23 27 30

Balance

J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2

700.00 55.00

400.00 600.00

75.00

25.00

600.00 45.00

55.00 675.00

1,125.00

1,850.002,550.00 2,605.00 2,005.00 1,960.00 2,360.00 2,960.00 3,035.00 2,980.00 2,305.00 2,330.00 1,205.00


Explanation

Ref.

Debit

Credit

Balance

May 4 9 16 29

J1 J1 J1 J2

48.15

700.85

749.00

642.00

749.00 700.85 1,342.85 642.00

GST Payable No. 214 Date

Explanation

Ref.

Debit

Credit

Balance

May 8 23 27 30

J1 J2 J2 J2

2.45

56.00 63.00

105.00

56.00 119.00 116.55 221.55

5-91

*PROBLEM 5-10B (Continued) (b) (Continued) PST Payable No. 215 Date

Explanation

Ref.

Debit

Credit

Balance

May 8 23 27 30

J1 J2 J2 J2

3.50

80.00 90.00

150.00

80.00 170.00 166.50 316.50

J. Nejedly, Capital No. 301 Date

Explanation

Ref.

Debit

Credit

Balance

May 1

Balance

4,850.00

Sales No. 401 Date

Explanation

Ref.

Debit

Credit

Balance

May 8 23 30

J1 J2 J2

800.00 900.00

1,500.00

800.00

1,700.00 3,200.00


Explanation

Ref.

Debit

Credit

Balance

May 27

J2

035.00

0,035.00


Explanation

Ref.

Debit

Credit

Balance

May 8 23 27 30

J1 J2 J2 J2

600.00 675.00

1,125.00

25.00

0,600.00 1,275.00 1,250.00 2,375.00

5-92

*PROBLEM 5-10B (Continued) (c)

JANA'S TENNIS SHOP Trial Balance May 31, 2003

Debit

Credit

Cash...........................................................Accounts Receivable................................GST Recoverable ......................................Merchandise Inventory.............................Accounts Payable.....................................GST Payable..............................................PST Payable ..............................................J. Nejedly, Capital .....................................Sales ..........................................................Sales Returns and Allowances................Cost of Goods Sold ..................................

$4,053.00

1,450.05 112.00 1,205.00

35.00 2,375.00 $9,230.05

$ 642.00 221.55 316.50 4,850.00 03,200.00

00000000 $9,230.05

(d)

JANA'S TENNIS SHOP Income Statement (Partial) For the Month Ended May 31, 2003

Sales revenues Sales....................................................................................... $3,200 Less: Sales returns and allowances................................... 35 Net sales................................................................................. 3,165

Cost of goods sold ....................................................................... 2,375 Gross profit ................................................................................... 790

5-93

*PROBLEM 5-11B

(a) BRENNAN FASHION CENTRE

Work Sheet For the Year Ended November 30, 2003

Account Titles

Trial Balance

Adjustments

Adj. Trial Balance

Income Statement

Balance Sheet

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Cash Accounts Receivable Merchandise Inventory Store Supplies Land Building Accumulated Amortization Delivery Equipment Accumulated Amortization Mortgage Payable Accounts Payable Sales Taxes Payable L. Brennan, Capital L. Brennan, Drawings Sales Sales Returns and Allow. Cost of Goods Sold Salaries Expense Advertising Expense Utilities Expense Repair Expense Delivery Expense Rent Expense

Totals Supplies Expense Amort. Expense—Bldg. Amort. Expense—Equip. Interest Expense Interest Payable Property Tax Expense Property Tax Payable

Totals Net Loss

Totals

16,700 40,700 48,000

5,500 60,000 85,000

48,000

12,000

4,200 497,500 140,000 26,400 14,000 12,100 16,700

24,000 1,050,800

17,000

16,000 51,000 48,500

7,000 161,000

750,300

00000000 0,01,050,800

(4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 5,000

000000 26,250

(4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 05,000 26,250

16,700 40,700 45,000

3,500 60,000 85,000

48,000

12,000

4,200 500,500 140,000 26,400 14,000 12,100 16,700 24,000

2,000 4,250 8,000 4,000

0, 5,000

00000000 1,072,050

21,250

24,000 51,000 48,500

7,000 161,000

750,300

4,000

0,005,000 1,072,050

4,200 500,500 140,000 26,400 14,000 12,100 16,700 24,000

2,000 4,250 8,000 4,000

5,000

00000 0 761,150 00 0000 761,150

750,300

0

0000000 750,300 010,850 761,150

16,700 40,700 45,000

3,500 60,000 85,000

48,000

12,000

0000000 310,900

00010,850 321,750

21,250

24,000 51,000 48,500

7,000 161,000

4,000

005,000 321,750

0000000 321,750

5-94

*PROBLEM 5-11B (Continued) Key: (1) Supplies expense; (2) Amortization expense—building & equipment; (3) Interest payable; (4) Inventory adjustment; (5) Property tax payable

5-95

*PROBLEM 5-11B (Continued) (b)

BRENNAN FASHION CENTRE Income Statement

For the Year Ended November 30, 2003

Sales revenues Sales.............................................................................................. $750,300 Less: Sales returns and allowances .......................................... 4,200

Net sales ....................................................................................... 746,100 Cost of goods sold .............................................................................. 500,500 Gross profit ........................................................................................ 245,600 Operating expenses

Selling expenses Salaries expense ($140,000 X 70%) $98,000 Advertising expense .......................... 26,400 Rent expense ($24,000 x 80%) .......... 19,200 Store supplies expense ..................... 2,000 Delivery expense................................ 0016,700 Utilities expense ($14,000 x 80%) ..... 11,200

Total selling expenses ............... $173,500 Administrative expenses

Salaries expense ($140,000 X 30%) .. $42,000 Repair expense................................... 12,100 Amortization expense—equipment .. 8,000 Property tax expense ......................... 5,000 Rent expense ($24,000 x 20%) .......... 000 4,800 Amortization expense—building ...... 4,250 Utilities expense ($14,000 x 20%) ..... 2,800

Total administrative expenses 78,950 Total operating expenses 0 252,450

Loss from operations .......................................................................... 6,850 Other expenses and losses

Interest expense .......................................................................... 00 04,000 Net loss................................................................................................. $ 10,850

5-96

*PROBLEM 5-11B (Continued) (b) (Continued)

BRENNAN FASHION CENTRE Statement of Owner’s Equity

For the Year Ended November 30, 2003

L. Brennan, Capital, December 1..................................... $161,000 Less: Net loss ................................................................. $10,850 Drawings................................................................ 12,000 22,850 L. Brennan, Capital, November 30 .................................. $138,150

5-97

*PROBLEM 5-11B (Continued) (b) (Continued)

BRENNAN FASHION CENTRE Balance Sheet

November 30, 2003 Assets Current assets Cash .............................................................................................. $ 16,700 Accounts receivable .................................................................... 40,700 Store supplies .............................................................................. 3,500 Merchandise inventory ................................................................ 45,000 Total current assets ............................................................. 105,900 Capital assets Land.......................................................... $60,000 Building.................................................... $85,000 Less: Accumulated amortization........... 21,250 63,750 Equipment................................................ $48,000 Less: Accumulated amortization........... 24,000 24,000 147,750 Total assets ........................................................................... $253,650 Liabilities and Owner’s Equity Current liabilities Accounts payable ........................................................................ $ 48,500 Sales taxes payable ..................................................................... 7,000 Property tax payable.................................................................... 5,000 Interest payable............................................................................ 4,000 Current portion of mortgage payable......................................... 30,000 Total current liabilities......................................................... 94,500 Long-term liabilities Mortgage payable......................................................................... 21,000 Total liabilities ...................................................................... 115,500 Owner’s Equity L. Brennan, Capital ...................................................................... 138,150 Total liabilities and owner’s equity..................................... $253,650

5-98

*PROBLEM 5-11B (Continued) (c) Nov. 30 Store Supplies Expense ................... 2,000 Store Supplies ............................ 2,000 Amortization Expense–Building ...... 4,250 Accum. Amortiz.–Building......... 4,250 Amortization Expense–Equipment.. 8,000 Accum. Amortiz.–Equipment..... 8,000 Cost of Goods Sold........................... 3,000 Inventory ..................................... 3,000 Interest Expense ............................... 4,000 Interest payable .......................... 4,000 Property Tax Expense ...................... 5,000 Property Tax Payable ................. 5,000 (d) Nov. 30 Sales.................................................. 750,300 L. Brennan, Capital.................... 750,300 L. Brennan, Capital .......................... 761,150 Cost of Goods Sold ................... 500,500 Salaries Expense ....................... 140,000 Advertising Expense ................. 26,400 Utilities Expense........................ 14,000 Repair Expense.......................... 12,100 Delivery Expense....................... 16,700 Rent Expense............................. 24,000 Amortization Expense–Building 4,250 Amortization Expense–Equipment 8,000 Interest Expense........................ 4,000 Property Tax Expense............... 5,000 Supplies Expense...................... 2,000 Sales Returns and Allowances 4,200 L. Brennan, Capital .......................... 12,000 L. Brennan, Drawings................ 12,000

5-99

*PROBLEM 5-11B (Continued) (e)

BRENNAN FASHION CENTRE Post-Closing Trial Balance

November 30, 2003

Debit

Credit

Cash .............................................................. $ 16,700 Accounts Receivable ................................... 40,700 Merchandise Inventory ................................ 45,000 Store Supplies .............................................. 3,500 Land............................................................... 60,000 Building ........................................................ 85,000 Accumulated Amortization—Building........ $ 21,250 Equipment..................................................... 48,000 Accumulated Amortization—Equipment.... 24,000 Mortgage Payable ........................................ 51,000 Accounts Payable ........................................ 48,500 Property Tax Payable................................... 5,000 Sales Taxes Payable .................................... 7,000 Interest Payable............................................ 4,000 L. Brennan, Capital ...................................... 00 00000 138,150

Totals $298,900 $298,900

5-100

BYP 5-1 FINANCIAL REPORTING PROBLEM

(a) The Second Cup is involved in merchandising―selling at the retail

level through its corporate-owned stores, and at the wholesale level to its franchise operators and third parties (other companies). It is also involved in the production (roasting and blending) of coffees, and is therefore to some extent a manufacturer.

(b) Systemwide sales include retail sales of all corporate-owned and

franchised stores (based on sales information reported by store operators) and product sales to third parties. Total revenues include revenues from sales in corporate stores, franchise revenues (fees and royalties) from store operators, and product sales to third parties (refer to Note 2).

(c) 100% of revenue in 2000 was generated by operations in Canada. (d) No information is provided on the cost of goods sold, gross profit, or

regular operating expenses. After reporting Total Revenue, the next item reported on the income statement is "Earnings before Interest, Taxes, Depreciation, Amortization, and Unusual Items". The missing information would contain the Cost of Goods Sold, Gross Profit, and Operating Expenses.

(e) For competitive reasons, The Second Cup does not want to disclose

detailed information regarding its operations―such as that referred to in part (d) above. Additionally, the company feels that this information is not very meaningful when presented on a consolidated (combined) basis with the results of other companies.

5-101

BYP 5-2 FINANCIAL REPORTING PROBLEM

(a) 1. Sales returns and allowances........................Sales 2. Freight out .......................................................Front-line expenses (b) Gross profit margin

2000 = 41% ($127,824 ÷ $314,547) 1999 = 40% ($114,238 ÷ $283,401) Inventory turnover 2000 = 2.4 times [$186,723 ÷ ($76,982 + $81,468) ÷ 2] 1999 = 2.5 times [$169,163 ÷ ($60,108 + $76,982) ÷ 2] Days sales in inventory 2000 = 152 days (365 days ÷ 2.4) 1999 = 146 days (365 days ÷ 2.5)

Mark’s Work Wearhouse’s gross margin is slightly below its forecast in both years 2000 (41% compared to a forecasted range of 41.1% - 41.2%) and in 1999 (40% compared to a forecasted range of 40.6% - 40.7%). This, however, is an insignificant difference. It’s inventory turnover is slightly better than that forecasted in 1999 and is on target as forecasted in 2000 (forecasted goal of 2.1 - 2.4 times over the two years). Even though it’s inventory turnover (and days sales in inventory) are within forecast, the company’s sales, gross margin, and net earnings are still slightly below that forecasted. The difference is not substantial, though, and not likely to be of significant concern.

5-102

BYP 5-3 GLOBAL FOCUS

(a)

Carrefour (in billions of euros)

Wal-Mart (in billions of US

dollars)

Gross profit margin (€51.9 - €40.8)

€51.9 = 21.4%

($165.0 - $129.7) $165.0 = 21.4%

Inventory turnover €40.8 ÷ €4.6

=8.9 times $129.7 ÷ $18.4

= 7.0 times Days sales in

inventory 365 days ÷ 8.9

= 41 days 365 days ÷ 7.0

= 52 days Based on these ratios, it would appear the companies achieve the

same markup from the gross profit margin. However, Carrefour appears to be more efficient in controlling its inventory. It is selling its inventory more often than Wal-Mart (its inventory turns over 8.9 times a year compared to Wal-Mart’s 7 times a year) and correspondingly has less stock on hand (41 days compared to Wal-Mart’s 52 days). In spite of less stock on hand, it is able to maintain the same gross profit margin of Wal-Mart, which means its operating costs are likely lower because of reduced carrying costs.

(b) Current ratio €12.3 ÷ €10.1

= 1.22:1 $24.4 ÷ $25.8

= 0.95:1 Both companies report low current ratios. This is not surprising since

in recent years most large companies have tried to reduce costs and limit the amount of current assets that they hold.

(c) Ratios improve our ability to compare these two companies that report

financial information using different currencies. However, other factors can still reduce our ability to compare them. The two companies might classify items quite differently. Also, different accounting standards in the two countries might result in dramatically different results under the same circumstances.

5-103

BYP 5-4 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page [www.wiley.com/canada/weygandt2].

5-104

BYP 5-5 COLLABORATIVE LEARNING ACTIVITY

(a) 1. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales [$700,000 + ($700,000 X 6%)] ........ $742,000 Cost of goods sold ($742,000 X 75%)* ......... 556,500 Gross profit ($742,000 X 25%)** .................... 185,500 Operating expenses Selling expenses .................................... $100,000 Administrative expenses ....................... 25,000 Total operating expenses............... 125,000 Net income...................................................... $ 60,500 **Alternatively: Net sales, $742,000 – Gross profit, $185,500 **25% = ($154,000 ÷ $700,000) + 3%

2. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales.......................................................... $700,000 Cost of goods sold......................................... 546,000 Gross profit..................................................... 154,000 Operating expenses Selling expenses .................................... $72,000* Administrative expenses ....................... 25,000* 97,000 Net income...................................................... $ 57,000

*$100,000 – $30,000 – ($30,000 X 40%) + ($700,000 X 2%) = $72,000

5-105

BYP 5-5 (Continued)

(b) Kathy’s proposed changes will increase net income by $31,500. John’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in net income. Thus, if the choice is between Kathy’s plan and John’s plan, Kathy’s plan should be adopted. While John’s plan will increase net income, it may also have an adverse effect on sales personnel. Under John’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].

(c) FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales .............................................................. $742,000 Cost of goods sold ............................................. 556,500 Gross profit ......................................................... 185,500 Operating expenses Selling expenses ......................................... $72,840* Administrative expenses ............................ 25,000* Total operating expenses ................... 97,840 Net income........................................................... $ 87,660 *$72,000 + 2% X ($742,000 – $700,000) = $72,840

If both plans are implemented, net income will be $58,660 ($87,660 – $29,000) higher than the 2001 results. This is an increase of over 200%. Given the size of the increase, John’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $7,740 [$60,000 – ($30,000 – ($742,000 X 3%))].

5-106

BYP 5-6 COMMUNICATION ACTIVITY

MEMORANDUM

TO: PRESIDENT, THE GREAT CANADIAN SNOWBOARD COMPANY FROM: SUBJECT: REVENUE RECOGNITION DATE:

As you know, the financial statements for The Great Canadian Snowboarding Company are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when they are earned. Typically, sales revenues are earned when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the snowboard ordered by Dexter is earned at event No. 7, when Dexter picks up the snowboard. The circumstances pertaining to this sale may seem to you to be atypical because Dexter has ordered a specific kind of snowboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this snowboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the snowboard for Dexter. Whether Dexter makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Dexter’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know.

5-107

BYP 5-7 ETHICS CASE

(a) Rita Pelzer, as a new employee, is placed in a position of responsibility

and is pressured by her supervisor to continue delaying payments to creditors. Delaying payment is not an unethical practice. Companies can pay their bills late, but they do risk incurring interest charges or impairing their credit ratings. What is unethical is lying and blaming the late payment on the mail room or post office in order to avoid interest charges or affecting the company’s credit rating.

Rita’s dilemma is to decide whether to (1) delay payments and place

inappropriate blame for these late payments on the mail room and / or post office, or (2) risk offending her boss and possibly lose the job she just assumed.

(b) The stakeholders (affected parties) are: Rita Pelzer, the assistant controller. Jamie Caterino, the controller. Yorkshire Stores, the company. Creditors of Yorkshire Stores (suppliers). Mail room / post office employees (those assigned the blame). (c) Rita’s alternatives: 1. Tell the controller (her boss) that she will prepare and mail

creditors’ cheques to take advantage of the full credit period but will not delay mailing the cheques beyond their due dates. This may offend her boss and may jeopardize her continued employment.

2. Tell the controller (her boss) that she will be happy to delay the

payment four days but will not blame others for this delay when asked. This is contrary to current practice and may also offend her boss and jeopardize her continued employment.

3. Join the team and continue the practice of delaying payments and

lay blame on others for the delay.

5-108

BYP 5-7 (Continued) (c) (Continued) 4. Go over her boss’s head and take the chance of receiving just and

reasonable treatment from an officer superior to Jamie. The company may not condone this practice. Rita definitely has a choice, but probably not without consequence. To continue the practice of lying is definitely unethical. If Rita submits to this request, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things—if she isn’t fired. Maybe nobody has ever challenged Jamie’s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.

Documents

CHAPTER 5 Accounting for Merchandising Operations ...mathiabat4m.weebly.com/uploads/2/3/0/5/23057532/ch05sm.pdf5-1 CHAPTER 5 Accounting for Merchandising Operations ASSIGNMENT CLASSIFICATION