financial accounting tools for business decision making solutions 7e chapter 05

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CHAPTER MERCHANDISING OPERATIONS LEARNING OBJECTIVES Identify the differences between service and merchandising companies Prepare entries for purchases under a perpetual inventory system Prepare entries for sales under a perpetual inventory system Prepare a single-step and a multiple-step income statement Calculate the gross profit margin and profit margin Account and report inventory in a periodic inventory system (Appendix 5A) SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY Item LO 1 1 BT Item LO BT C C C C C 10 2 2,3 2,3 2,3 C AP C C C Item LO BT Questions 11 12 13 14 15 2,3 3 C C C C C Item LO BT Item LO BT 16 17 18 19 20 4 4 K C C C C 21 22 23 24 25 5 6 C C C C C Brief Exercises 1 C AN AP AP 10 4,5 C AN 13 14 6 AP AP 2,3 AP AP 4 AP C 11 12 AN AP 15 16 6 AP AP 2,3 2,3 C AN AP AP 2 2,3,5 AP AN AP C 10 11 12 13 14 15 16 2,3,6 AN AP AP AN 17 AN 1,2,3 2,3 AN AN AP 2,3 2,3,4 AP AP AN 1,6 AN AN AP 13 14 15 5,6 AP AP AP Exercises 4,5 4,5 4,6 AP AN AN AN Problems: Set A and B 4,5 AP AN AN 10 11 12 Accounting Cycle Review 2,3,4 AP 1,4,5 AN AN Cases 4,5 2,3,5 E E 4,5 C AN Solutions Manual 5-1 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legend: The following abbreviations will appear throughout the solutions manual file LO Learning objective BT Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to prepare in minutes Difficulty: Time: AACSB Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech Diversity Diversity Reflec Thinking Reflective Thinking CPA CM cpa-e001 cpa-e002 cpa-e003 cpa-e004 cpa-e005 cpa-t001 cpa-t002 cpa-t003 cpa-t004 cpa-t005 cpa-t006 CPA Canada Competency Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm Communication Self-Mgt Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat & Gov Strategy and Governance Mgt Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation Solutions Manual 5-2 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition ANSWERS TO QUESTIONS (a) The operating cycle is the time it takes to go from cash to cash in producing revenues (b) The normal operating cycle for a merchandising company is likely to be longer than that of a service company because, in a merchandising company, inventory must first be purchased and sold, and then the receivables must be collected whereas, in a service company, the services only need to be provided (not purchased first and then stored until sold) and then the receivables must be collected LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) The income measurement process of a merchandising company is the same as the service company in that net income is arrived at by deducting expenses from revenues (b) The income measurement process of a merchandising company differs from that of a service company in that its revenue is derived from sales revenue, not service revenue In addition, cost of goods sold is deducted from sales revenue to determine gross profit, before operating and other expenses, similar to both types of companies, are deducted (or other revenues are added) LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting The company needs to compare the cost of the detailed record keeping required in a perpetual inventory system to the benefits of having the additional information about the inventory One of the benefits of a perpetual inventory system is the ability to answer questions from customers about merchandise availability In a used clothing business, this may not be of much benefit unless each inventory item is unique Another benefit is the monitoring of inventory quantities in order to avoid running out of stock Again, this may not be of benefit since the company does not order recurring or similar merchandise, and may not have a supplier to order from But if the company is selling used clothing on consignment, it will need to track each item in order to determine which consignor to pay when an item is sold Solutions Manual 5-3 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition (continued) The company should carefully determine the cost of the detailed record keeping required, in particular for a new company A perpetual inventory system requires more record keeping and therefore is more expensive to use For example, a perpetual inventory system usually requires an investment in a point-of-sale system that is integrated with the inventory system LO BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting A physical count is an important control feature By using a perpetual inventory system, a company knows what should be on hand Performing a physical count and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting The key distinction between a periodic inventory system and a perpetual inventory system is whether or not information on inventory and cost of goods sold (units and dollars) are always (perpetually) available or only known when inventory counts are conducted (periodically) Because information on the cost of goods sold is only known after an inventory count has been carried out under the periodic system, no entry is made for the cost of goods sold at the time of each sale Instead, cost of goods sold is a residual number, determined by subtracting ending inventory (as determined by the inventory account) from cost of goods available for sale This means that any goods not included in ending inventory are assumed to have been sold In order to arrive at the cost of goods available for sale, separate accounts are set up in the general ledger to keep track of the purchases, freight-in, purchase returns and allowances, and purchase discounts Under the periodic inventory system, management is not able to look up in the general ledger accounts for the balance of inventory at a particular point in time In order to arrive at the inventory value, a physical count of the inventory must be performed LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-4 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition The reason for recording the purchase of merchandise for resale in a separate account is to enable a company to determine its cost of goods sold and gross profit This information is useful in managing costs and setting prices LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting (a) The value of the purchase discount to Butler’s Roofing is $480 ($48,000 × 1%) (b) Failing to take advantage of the discount terms is like paying the supplier an extra $480 in order to settle a $47,520 invoice 20 days later This works out to 1.01% [$480 ÷ $47,520] every 20 days On an annual basis this amounts to 18.4% [($480 ữ $47,520 ì (365 ÷ 20)] Butler’s should take advantage of the cash discount offered LO BT: AP Difficulty: M Time: AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance (a) Lebel Ltée should record the sale as revenue in June, when it is sold to a customer When the merchandise was purchased in April, it should be recorded as an asset, inventory It should be recorded as cost of goods sold (an expense) in June when the inventory is sold and the revenue is recognized This is necessary in order to match the cost with the related revenue (b) Lebel’s customer should recognize the purchase in June, when the inventory is received LO 2,3 BT: C Difficulty: C Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-5 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition (a) FOB shipping point means that the goods are placed free on board by the seller at the point of shipping The buyer pays the freight costs from the point of shipping to the buyer’s destination because title passes at shipping point FOB destination means the goods are delivered by the seller to their destination, where the title passes The seller pays for shipping to the buyer’s destination (b) FOB shipping point will result in a debit to the Inventory account by the buyer because title has transferred at shipping point and the inventory is now owned by the buyer FOB destination will result in a debit to Freight Out by the seller because they are paying for the freight LO 2,3 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 10 In a perpetual inventory system, purchase returns are credited to Inventory because the items purchased have been returned to the vendor and are no longer available to be sold to customers Sales returns are not debited directly to the Sales account because this would not provide information about 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 LO 2,3 BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 11 (a) A quantity discount gives a reduction in the price according to the volume of the purchase A purchase discount is offered by a seller to a buyer for early payment of an invoice When the buyer pays the invoice within the discount period, the amount of the discount decreases the Inventory account A sales discount is the same as a purchase discount but from the seller’s point of view (b) Quantity discounts are not recorded or accounted for separately but become part of the recorded sales price Buyers record purchase discounts taken as a credit to Inventory under the perpetual system or to Purchase Discounts when using the periodic system The seller records a sales discount as a debit to the Sales Discounts account, which is a contra revenue account to Sales, when the invoice is paid within the discount period LO 2,3 BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-6 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 12 Financial Accounting, Seventh Canadian Edition Contra accounts are used to reduce the account they are contra to, such as accumulated depreciation reducing equipment A debit (decrease) recorded directly to Sales would make it more difficult for management to determine the percentage of total sales that ends up being lost through sales returns and allowances, so a contra revenue account (sales returns and allowances) is used Another example of a contra revenue account is sales discounts This account keeps track of the costs incurred for discounts taken by customers for paying early, in accordance with the discount terms offered The contra revenue accounts reduce sales to net sales, reported on the income statement LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 13 If the merchandise is not resaleable, it cannot be included in inventory since it cannot be resold and it has no value The cost remains in cost of goods sold since it is a cost of doing business If the merchandise is resaleable, it still has value to the company In this case, the cost of the merchandise is debited to inventory again and cost of goods sold is credited LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 14 The sales taxes are collected on behalf of the federal and provincial governments, and must be periodically remitted to these authorities Sales taxes that are collected from selling a product or service are not recorded as revenue, instead they are recorded as a liability until they are paid to the government LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-7 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 15 Financial Accounting, Seventh Canadian Edition In a single-step income statement, all data are classified into two categories: (1) revenues and (2) expenses It is referred to as a single-step income statement because only a single step—subtracting expenses from revenues— is needed to determine income before income tax A multiple-step income statement requires several steps to determine income before income tax First, cost of goods sold is deducted from net sales to determine gross profit Operating expenses are then deducted to calculate income from operations Finally, other revenues and expenses are added or deducted to determine income before income tax The deduction of income tax to calculate net income (loss) is the same under both formats In addition, both formats produce the same profit amount for the period LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 16 North West Company uses a multiple-step income statement LO BT: K Difficulty: S Time: AACSB: None CPA: cpa-t001 CM: Reporting 17 (a) When classifying expenses by their nature, they are reported in accordance with their natural classification (for example, salaries, deprecation, and so on) When classifying expenses by their function, they are reported according to the activity (business function) for which they were incurred (for example, cost of goods sold, administrative, selling) (b) It does not matter whether a single-step or multiple-step income statement is prepared, expenses must be classified either by nature or by function LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 18 Because the Overwaitea is a private enterprise, it can follow Accounting Standards for Private Enterprises (ASPE) Companies following ASPE can classify their expenses in whatever manner is useful to them Loblaws, which follows IFRS, must classify its expenses by their nature or their function LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-8 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley 19 Financial Accounting, Seventh Canadian Edition Interest expense is a non-operating expense because it relates to how a company’s operations are financed, not to the company’s main operations LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 20 The difference between gross profit margin and profit margin is that the gross profit margin measures the amount by which the selling price exceeds the cost of goods sold while the profit margin measures the extent to which sales cover all expenses (including the cost of goods sold) LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting 21 Factors affecting a company’s gross profit margin include the selling price and the cost of the merchandise Recall that gross profit = net sales  cost of goods sold Selling products with a higher price or “mark-up” or selling products with a lower cost would result in an increased gross profit margin Selling products with a lower price (perhaps due to increased competition that results in lower selling prices) or selling products with a higher cost (perhaps due to price increases from suppliers and shippers) would result in a lower gross profit margin LO BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting 22 High gross profit Computer services and such as software companies Pharmaceutical manufacturers Luxury goods retailers Low gross profit Low-price retail companies Walmart Grocery stores Forestry and wood products LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-9 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition *23 Accounts Purchase Returns and Allowances Purchase Discounts Freight In (a) Added/Deducted Deducted Deducted Added (b) Normal Balance Credit Credit Debit LO BT: C Difficulty: M Time: AACSB: None CPA: cpa-t001 CM: Reporting *24 Periodic System Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases – Purchase Discounts – Purchase Returns and Allowances + Freight In) – Ending Inventory Ending inventory and cost of goods sold for the period are calculated at the end of the period Perpetual System Cost of Goods Sold = the cost of the item(s) sold Cost of goods sold is calculated at the time of each sale and recorded as an increase (debit) to the Cost of Goods Sold account and a decrease (credit) to the Inventory account LO BT: C Difficulty: M Time: 10 AACSB: None CPA: cpa-t001 CM: Reporting Solutions Manual 5-10 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT5-2 (a) Percentage change in sales Gross profit margin Financial Accounting, Seventh Canadian Edition FINANCIAL REPORTING CASE The North West Company (in millions) Sobeys (in millions) ($1,796.0 – $1,624.4) $1,624.4 ($24,618.8 – $23,928.8) $23,928.8 = 10.6% = 2.9% ($1,796.0 – $1,273.4) $1,796.0 (24,618.8 - $18,661.2) $24,618.8 = 29.1% = 24.2% (b) North West had the bigger increase in sales In fiscal 2015, North West’s gross profit was 28.6% ($464,218 ÷ $1,624,400) North West was able to increase its gross profit margin We can conclude that North West is doing well managing its purchasing and pricing policies (c) Sobeys experienced an increase in sales but had a decreased gross margin Gross margin was $5,962.5 (23,928.8 – 17,966.3) in 2015 and dropped slightly to $5,957.6 (24,618.8 – 18,661.2) in 2016 This could have been caused by mismanagement of inventory, lower selling prices, or purchasing price constraints LO BT: AN Difficulty: C Time: 30 AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance Solutions Manual 5-142 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT5-3 Financial Accounting, Seventh Canadian Edition FINANCIAL REPORTING CASE (a) The main difference between these two income statements is that Happy Coffee presents its expense items by function (such as general and administrative expenses) while Country Coffee presents its expenses by nature of the expense item Under IFRS, Happy Coffee is required to also disclose the total depreciation expense and salaries and benefits expense in the notes to the financial statements (b) Under IFRS both formats of expense presentation, by nature or by function, are acceptable ASPE does not have a requirement on how to report expenses Expenses under ASPE can be classified in any manner that would be useful to the key stakeholders The method that classifies expenses by function can require a higher degree of judgement since expenses have to be allocated to each of the functional categories (depending on how many functional categories are present) In the case of Happy Coffee, there are three categories—cost of goods sold, selling expenses, and administrative expenses This method provides better information to the reader despite the requirement for increased judgement (c) The difference in format could make it difficult to compare expense items For example, expense items as a percentage of sales would not be comparable However, Country Coffee can still easily compare the key profitability measures of gross profit margin and profit margin These profitability ratios are not dependent on the expense classifications (d) No, comparability of the gross profit margin and profit margin will not be impacted The definitions of gross profit and net income not change when preparing the income statements with a different format Solutions Manual 5-143 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-3 (CONTINUED) (e) Country Coffee can change the presentation of its income statement and begin classifying its expenses by function This would be an acceptable presentation under ASPE Under IFRS, if a company chooses to report its expenses by function it must still disclose total depreciation and salaries and benefit expense in the note disclosures Country Coffee could use this additional information from the notes of Happy Coffee for improved comparability LO 4,5 BT: E Difficulty: C Time: 35 AACSB: Analytic CPA: cpa-t001 CM: Reporting Solutions Manual 5-144 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT5-4 Financial Accounting, Seventh Canadian Edition ETHICS CASE Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS (a) The CEO asked for three inappropriate adjustments to be made to the financial statements By recording a purchase return as an increase in sales revenue, the sales revenue is now overstated and cost of goods sold is also overstated By recording freight-in relating to inventory that has now been sold as an operating expense, it overstates operating expense while understating cost of goods sold Finally by recording a sales return as an operating expense, it overstates sales and overstates operating expenses All of these adjustments were designed to boost gross profit in order to increase the bonus of the CEO If we reverse the adjustments made, we get: Net sales Cost of goods sold Gross profit Operating expenses Income from operations Income tax expense Net income Gross profit margin: $51,000 ÷ $113,000 Gross profit margin: $40,000 ÷ $100,000 2018 Draft Adjustments 2018 Revised $(7,000) $113,000 (6,000) $100,000 5,000 62,000 (7,000) 60,000 51,000 (11,000) 40,000 (6,000) 21,000 (5,000) 10,000 30,000 30,000 9,000 9,000 $ 21,000 $ $ 21,000 45.1% 40.0% When we calculate the gross profit margin using the revised amounts, we can see that it has not risen by more than 3% compared to the prior year of 40% ($32,000 ÷ $80,000) and because of this, the CEO will not eligible for his bonus Solutions Manual 5-145 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-4 (CONTINUED) (b) The profit margin in 2018 is 21.0% ($21,000 ÷ $100,000) which is unchanged from the prior year ($16,800 ÷ $80,000) However, in the first draft of the income statement, the profit margin was 18.6% ($21,000 ÷ $113,000), which is lower than the 21.0% determined using the correct amounts This is because net sales were overstated even though overall profit was not (c) Harm was done to the users of the financial statements Assuming no corrections were made, the income statement would have been adjusted for the bonus given to the CEO Many of the elements except for income tax expense reported in the statement are false and misleading Users of the financial statements would not have obtained a true reflection of the performance trends of Peshawar Inc and may have made inappropriate decisions based on misleading financial statements Furthermore, the CEO would have been awarded a bonus that he did not deserve, thereby taking assets away from the company and its shareholders LO 2,3,5 BT: E Difficulty: C Time: 40 AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001, cpat005 CM: Reporting, Ethics, and Finance Solutions Manual 5-146 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT5-5 Financial Accounting, Seventh Canadian Edition ETHICS CASE (a) Rita Pelzer, as a new employee, is placed in a position of responsibility and is pressured by her supervisor to continue an unethical practice previously performed by him The unethical practice is taking unearned cash discounts Her dilemma is either to follow her boss’s unethical instructions or offend her boss and maybe lose the job she just assumed (b) The stakeholders (affected parties) are: Rita Pelzer, the assistant controller Jamie Caterino, the controller (he looks good to superiors because of increased income) Zaz Stores Ltd., the company benefited Creditors of Zaz Stores Ltd (suppliers harmed) Canada Post employees (those blamed harmed) (c) Ethically Rita should not continue the practice started by Jamie She has several choices in that she could: Tell the controller (her boss) that she will attempt to take every allowable cash discount by preparing and mailing cheques within the discount period—the ethical thing to This will offend her boss and may jeopardize her continued employment Comply with Jamie’s directions and continue the unethical practice of taking unearned cash discounts Solutions Manual 5-147 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-5 (CONTINUED) (c) (continued) 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 consequences To continue the practice 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 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 LO BT: C Difficulty: M Time: 30 AACSB: Ethics CPA: cpa-t001, cpa-e001 CM: Reporting and Ethics Solutions Manual 5-148 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley CT5-6 (a) June 30 Financial Accounting, Seventh Canadian Edition SERIAL CASE Inventory 1,750 Cost of Goods Sold ($18,000 physical count – $16,250 perpetual record = $1,750 overage) 1,750 Note to instructors: June balances were taken from the answer to CT4-6 Solutions Manual 5-149 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) June Bal Cash 34,534 (Ch 4) Accounts Receivable June Bal 12,090 (Ch 4) Inventory June Bal 16,250 (Ch 4) 30 AJE 1,750 June Bal 18,000 June Bal Supplies 3,775 (Ch 4) June Bal Prepaid Insurance 6,000 (Ch 4) June 100,000 June 165,000 Land Bal (Ch 4) Buildings Bal (Ch 4) (Ch 4) Unearned Revenue June Bal 1,000 (Ch 4) Salaries Payable June Bal 1,000 (Ch 4) Interest Payable June Bal 50 (Ch 4) Income Tax Payable June 30 AJE 5,000 (Ch 4) Bank Loan Payable June Bal (Ch 4) Mortgage Payable June Bal 53,200 (Ch 4) Common Shares June Bal 300 (Ch 4) 22,500 Retained Earnings June Bal 146,788 Accumulated Depreciation—Buildings (Ch 4) June Bal 143,000 June 44,520 Equipment Bal (Ch 4) Accumulated Depreciation—Equipment (Ch 4) Bal 21,070 June Bal Vehicles 52,500 (Ch 4) Accumulated Depreciation—Vehicles (Ch 4) June Bal 4,200 (Ch 4) Accounts Payable June Bal 7,265 Solutions Manual 5-150 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) (a) (continued) Dividends Declared June Bal 30,000 (Ch 4) (Ch 4) Rent Revenue June Bal (Ch 4) Sales June Bal 6,000 640,358 Cost of Goods Sold June Bal 102,386 (Ch 4) June 30 AJE 1,750 June Bal 100,636 June Bal Salaries Expense 391,782 (Ch 4) June Bal Depreciation Expense 16,770 (Ch 4) June Bal Office Expense 18,000 (Ch 4) June Bal Utilities Expense 13,225 (Ch 4) June Bal Advertising Expense 9,600 (Ch 4) Insurance Expense June Bal 6,000 (Ch 4) June Bal Property Tax Expense 5,950 (Ch 4) June Bal Interest Expense 5,349 (Ch 4) June Bal Income Tax Expense 18,000 Solutions Manual 5-151 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) (b) ANTHONY BUSINESS COMPANY LTD Adjusted Trial Balance June 30, 2017 Debit Cash Accounts receivable Inventory Supplies Prepaid insurance Land Buildings Accumulated depreciation—buildings Equipment Accumulated depreciation—equipment Vehicles Accumulated depreciation—vehicles Accounts payable Unearned revenue Salaries payable Interest payable Income tax payable Bank loan payable Mortgage payable Common shares Retained earnings Dividends declared Rent revenue Sales Cost of goods sold Salaries expense Depreciation expense Office expense Utilities expense Advertising expense Insurance expense Property tax expense Interest expense Income tax expense Totals $ Credit 34,534 12,090 18,000 3,775 6,000 100,000 165,000 $ 143,000 44,520 21,070 52,500 4,200 7,265 1,000 1,000 50 5,000 22,500 53,200 300 146,788 30,000 6,000 640,358 100,636 391,782 16,770 18,000 13,225 9,600 6,000 5,950 5,349 18,000 $1,051,731 000 0000 $1,051,731 (Total debit account balances = Total credit account balances) Solutions Manual 5-152 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) (c) ANTHONY BUSINESS COMPANY LTD Income Statement Year Ended June 30, 2017 Sales Cost of goods sold Gross profit $640,358 100,636 539,722 Operating expenses Salaries expense $391,782 Depreciation expense 16,770 Office expense 18,000 Utilities expense 13,225 Advertising expense 9,600 Insurance expense 6,000 Property tax expense 5,950 Total operating expenses Income from operations 461,327 78,395 Other revenues and expenses Rent revenue $6,000 Interest expense 5,349 Income before income tax Income tax expense Net income 651 79,046 18,000 $ 61,046 (Income from operations + Other revenues – Other expenses = Income before income taxes) ANTHONY BUSINESS COMPANY LTD Statement of Changes in Equity Year Ended June 30, 2017 Common Shares Balance, July 1, 2016 Net income Dividends declared Balance, June 30, 2017 $300 0000 $300 Retained Earnings $146,788 61,046 (30,000) $177,834 Total Equity $147,088 61,046 (30,000) $178,134 Note to instructors: Although ABC would most likely prepare a statement of retained earnings rather than a statement of changes in equity since it has been assumed that it is using ASPE, the statement of retained earnings is not explained in detail until Ch 11, which is why we chose to require a statement of changes in equity here instead Solutions Manual 5-153 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) (c) (continued) ANTHONY BUSINESS COMPANY LTD Statement of Financial Position June 30, 2017 Assets Current assets Cash Accounts receivable Inventory Supplies Prepaid insurance Total current assets $34,534 12,090 18,000 3,775 6,000 74,399 Property, plant, and equipment Land $100,000 Buildings $165,000 Less: Accumulated depreciation 143,000 22,000 Equipment $44,520 Less: Accumulated depreciation 21,070 23,450 Vehicles $52,500 Less: Accumulated depreciation 4,200 48,300 Total property, plant, and equipment Total assets 193,750 $268,149 Liabilities and Shareholders’ Equity Current liabilities Accounts payable Unearned revenue Salaries payable Interest payable Income tax payable Current portion of bank loan payable Current portion of mortgage payable Total current liabilities $ 7,265 1,000 1,000 50 5,000 7,500 5,000 26,815 Non-current liabilities Bank loan payable ($22,500 – $7,500) Mortgage payable ($53,200 – $5,000) Total liabilities 15,000 48,200 90,015 Common shares $ 300 Retained earnings 177,834 Total shareholders’ equity Total liabilities and shareholders’ equity 178,134 $268,149 Shareholders’ equity Solutions Manual 5-154 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition CT5-6 (CONTINUED) (d) ABC Competitor Current ratio $74,399 = 2.8:1 $26,815 2.5:1 Gross profit margin $539,722 = 84.3% $640,358 Profit margin $61,046 = 9.5% $640,358 75% 8% (1) Compared to its competitor, ABC’s ratios are better in every respect ABC has better liquidity and profitability than its competitor (2) We must recall that ABC is a small, family company while its competitor is a large, publicly-traded company They likely have different product lines, cost structures, and other differences affecting its financial results LO 4,5 BT: AN Difficulty: M Time: 50 AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance Solutions Manual 5-155 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition Legal Notice Copyright © 2017 by John Wiley & Sons Canada, Ltd or related companies All rights reserved The data contained in these files are protected by copyright This manual is furnished under licence and may be used only in accordance with the terms of such licence The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd (MMXVII vi F2) Solutions Manual 5-156 Chapter Copyright © 2017 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... Leadership Reporting Financial Reporting Stat & Gov Strategy and Governance Mgt Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Taxation Solutions Manual 5-2 Chapter Copyright... not provide information about 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... Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition The reason for recording the purchase of merchandise for resale in a separate account is to enable