Solution manual accounting 25th editon warren chapter 06

CHAPTER ACCOUNTING FOR MERCHANDISING BUSINESSES DISCUSSION QUESTIONS Merchandising businesses acquire merchandise for resale to customers It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business Yes Gross profit is the excess of (net) sales over cost of merchandise sold A net loss arises when operating expenses exceed gross profit Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss The date of sale as shown by the date of the invoice or bill a 1% discount allowed if paid within 15 days of date of invoice; entire amount of invoice due within 60 days of date of invoice b Payment due within 30 days of date of invoice c Payment due by the end of the month in which the sale was made Sales to customers who use MasterCard or VISA cards are recorded as cash sales a A credit memo issued by the seller of merchandise indicates the amount for which the buyer’s account is to be credited (credit to Accounts Receivable) and the reason for the sales return or allowance b A debit memo issued by the buyer of merchandise indicates the amount for which the seller’s account is to be debited (debit to Accounts Payable) and the reason for the purchases return or allowance a The buyer b The seller Examples of such accounts include the following: Sales, Sales Discounts, Sales Returns and Allowances, Cost of Merchandise Sold, Merchandise Inventory Cost of Merchandise Sold would be debited; Merchandise Inventory would be credited 10 Loss from Merchandise Inventory Shrinkage would be debited 6-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Accounting for Merchandising Businesses PRACTICE EXERCISES PE 6–1A a $700,000 ($450,000 + $1,350,000 – $1,100,000) PE 6–1B a $126,000 ($18,300 + $295,700 – $188,000) PE 6–2A a $8,526 Purchase of $12,650 less the return of $3,950 less the discount of $174 [($12,650 – $3,950) × 2%)] b Merchandise Inventory PE 6–2B a $56,925 Purchase of $65,000 less the return of $7,500 less the discount of $575 [($65,000 – $7,500) × 1%] b Accounts Payable PE 6–3A a b Accounts Receivable Sales 41,100 Cost of Merchandise Sold Merchandise Inventory 26,750 Cash Sales Discounts Accounts Receivable 40,278 822 41,100 26,750 41,100 PE 6–3B a b Accounts Receivable Sales 92,500 Cost of Merchandise Sold Merchandise Inventory 55,500 Cash Sales Discounts Accounts Receivable 91,575 925 92,500 55,500 92,500 PE 6–4A a $161,400 Purchase of $180,000 less return of $20,000 less the discount of $1,600 [($180,000 – $20,000) × 1%] plus $3,000 of shipping b $77,420 Purchase of $88,000 less return of $9,000 less the discount of $1,580 [($88,000 – $9,000) × 2%] PE 6–4B a $31,680 Purchase of $36,000 less return of $4,000 less the discount of $320 [($36,000 – $4,000) × 1%] b $42,025 Purchase of $44,900 less return of $2,400 less the discount of $850 [($44,900 – $2,400) × 2%] plus $375 of shipping PE 6–5A Sundance Co journal entries: Cash ($16,800 – $3,800 – $260) Sales Discounts [($16,800 – $3,800) × 2%] Accounts Receivable—Butterfield Co ($16,800 – $3,800) 12,740 260 13,000 Butterfield Co journal entries: Accounts Payable—Sundance Co ($16,800 – $3,800) Merchandise Inventory [($16,800 – $3,800) × 2%] Cash ($16,800 – $3,800 – $260) 13,000 260 12,740 PE 6–5B Shore Co journal entries: Cash ($112,000 – $2,240 + $1,800) Sales Discounts ($112,000 × 2%) Accounts Receivable—Blue Star Co ($112,000 + $1,800) 111,560 2,240 113,800 Blue Star Co journal entries: Accounts Payable—Shore Co ($112,000 + $1,800) Merchandise Inventory ($112,000 × 2%) Cash ($112,000 – $2,240 + $1,800) 113,800 2,240 111,560 PE 6–6A Apr 30 Cost of Merchandise Sold Merchandise Inventory Inventory shrinkage ($890,000 – $876,250) 13,750 31 Cost of Merchandise Sold Merchandise Inventory Inventory shrinkage ($1,333,150 – $1,309,900) 23,250 13,750 PE 6–6B Dec 23,250 PE 6–7A a Ratio of net sales to assets 2014 3.4* 2013 3.5** * $1,734,000 ÷ [($480,000 + $540,000) ÷ 2] ** $1,645,000 ÷ [($460,000 + $480,000) ÷ 2] b The change from 3.5 to 3.4 indicates an unfavorable trend in using assets to generate sales PE 6–7B a Ratio of net sales to assets 2014 2.4* * $1,884,000 ÷ [($770,000 + $800,000) ÷ 2] ** $1,562,000 ÷ [($650,000 + $770,000) ÷ 2] b The change from 2.2 to 2.4 indicates a favorable trend in using assets to generate sales 2013 2.2** EXERCISES Ex 6–1 a $931,000 ($2,450,000 – $1,519,000) b 38% ($931,000 ÷ $2,450,000) c No If operating expenses are less than gross profit, there will be a net income On the other hand, if operating expenses exceed gross profit, there will be a net loss Ex 6–2 $37,635 million ($50,272 million – $12,637 million) Ex 6–3 a $28,215 {Purchase of $34,900, less return of $6,400, less discount of $285 [($34,900 – $6,400) × 1%]} b Merchandise Inventory Ex 6–4 The offer of Supplier Two is lower than the offer of Supplier One Details are as follows: Supplier One List price Less discount Supplier Two $100,000 1,000 $99,750 1,995 $ 99,000 $97,755 975 $98,730 Freight $ 99,000 Ex 6–5 (1) Purchased merchandise on account at a cost of $21,000 (2) Paid freight, $300 (3) An allowance or return of merchandise was granted by the creditor, $4,000 (4) Paid the balance due within the discount period: debited Accounts Payable, $17,000, and credited Merchandise Inventory for the amount of the discount, $170, and Cash, $16,830 CHAPTER Accounting for Merchandising Businesses Ex 6–6 a b c Merchandise Inventory Accounts Payable 60,000 Accounts Payable Merchandise Inventory 12,000 Accounts Payable Cash Merchandise Inventory 48,000 60,000 12,000 47,040 960 Ex 6–7 a b c d e Merchandise Inventory Accounts Payable—Sitwell Co 71,500 Accounts Payable—Sitwell Co Cash Merchandise Inventory 71,500 Accounts Payable*—SitwellCo Merchandise Inventory 13,365 71,500 70,785 715 13,365 Merchandise Inventory Accounts Payable—SitwellCo 9,000 Cash Accounts Payable—Sitwell Co 4,365 9,000 4,365 * Note: The debit of $13,500 to Accounts Payable in entry (c) is the amount of cash refund due from Sitwell Co It is computed as the amount that was paid for the returned merchandise, $13,500, less the purchase discount of $135 ($13,500 × 1%) The credit to Accounts Payable of $9,000 in entry (d) reduces the debit balance in the account to $4,365, which is the amount of the cash refund in entry (e) The alternative entries below yield the same final results c d e Accounts Receivable—Sitwell Co Merchandise Inventory 13,365 Merchandise Inventory Accounts Payable—Sitwell Co 9,000 Cash Accounts Payable—Sitwell Co Accounts Receivable—Sitwell Co 4,365 9,000 13,365 9,000 13,365 CHAPTER Accounting for Merchandising Businesses Ex 6–8 a b Cash Sales 45,000 Cost of Merchandise Sold Merchandise Inventory 27,000 Accounts Receivable Sales Cost of Merchandise Sold Merchandise Inventory c Cash Sales Cost of Merchandise Sold Merchandise Inventory d Cash Sales Cost of Merchandise Sold Merchandise Inventory e Credit Card Expense Cash 45,000 27,000 115,000 115,000 69,000 69,000 130,000 130,000 78,000 78,000 100,000 100,000 60,000 60,000 9,200 9,200 Ex 6–9 It was acceptable to debit Sales for the $55,000 However, using Sales Returns and Allowances assists management in monitoring the amount of returns so that quick action can be taken if returns become excessive Accounts Receivable should also have been credited for $55,000 In addition, Cost of Merchandise Sold should only have been credited for the cost of the merchandise sold, not the selling price Merchandise Inventory should also have been debited for the cost of the merchandise returned The entries to correctly record the returns would have been as follows: Sales (or Sales Returns and Allowances) Accounts Receivable 55,000 Merchandise Inventory Cost of Merchandise Sold 33,000 55,000 33,000 Ex 6–10 a b b $27,440 [$28,000 – ($28,000 × 2%)] Sales Returns and Allowances Sales Discounts Cash 28,000 Merchandise Inventory Cost of Merchandise Sold 16,800 560 27,440 Ex 6–11 (1) Sold merchandise on account, $42,000 (2) Recorded the cost of the merchandise sold and reduced the merchandise inventory account, $25,200 (3) Accepted a return of merchandise and granted an allowance, $2,000 (4) Updated the merchandise inventory account for the cost of the merchandise returned, $1,200 (5) Received the balance due within the discount period, $39,200 [Sale of $42,000, less return of $2,000, less discount of $800 (2% × $40,000).] Ex 6–12 a b c d $24,000 $24,425 $480 ($24,000 × 2%) $23,945 ($24,425 – $480) Ex 6–13 a b c d e $49,600 ($52,300 – $2,700) $13,136 [($14,800 – $1,600) – ($13,200 × 2%) + $200] $17,622 [($19,100 – $1,300) – ($17,800 × 1%)] $6,352 [($6,700 – $300) – ($6,400 × 2%) + $80] $22,374 [$22,600 – ($22,600 × 1%)] 16,800 Ex 6–14 a b Accounts Receivable—Belarus Co Sales 64,300 Cost of Merchandise Sold Merchandise Inventory 38,000 Sales Returns and Allowances Accounts Receivable—Belarus Co 13,300 Merchandise Inventory Cost of Merchandise Sold c Cash Sales Discounts Accounts Receivable—Belarus Co 64,300 38,000 13,300 8,000 8,000 49,980 1,020 51,000 Ex 6–15 a b c Merchandise Inventory Accounts Payable—Sombrero Co 64,300 Accounts Payable—Sombrero Co Merchandise Inventory 13,300 Accounts Payable—Sombrero Co Cash Merchandise Inventory 51,000 64,300 13,300 49,980 1,020 Ex 6–16 Balance Sheet Accounts 100 Assets 110 Cash 112 Accounts Receivable 114 Merchandise Inventory 115 Store Supplies 116 Office Supplies 117 Prepaid Insurance 120 Land 123 Store Equipment 124 Accumulated Depreciation— Store Equipment 125 Office Equipment 126 Accumulated Depreciation— Office Equipment 200 Liabilities 210 Accounts Payable 211 Salaries Payable 212 Notes Payable 300 Owner’s Equity 310 Kailey Garner, Capital 311 Kailey Garner, Drawing 312 Income Summary Income Statement Accounts 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 500 Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Store Supplies Expense 524 Delivery Expense 529 Miscellaneous Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Miscellaneous Administrative Expense 600 Other Expense 610 Interest Expense Note: The order and number of some of the accounts within subclassifications is somewhat arbitrary, as in accounts 115–117, accounts 520–524, and accounts 530–534 For example, in a new business, the order of magnitude expense account balances often cannot be determined in advance The magnitude may also vary from period to period CHAPTER Accounting for Merchandising Businesses Comp Problem (Continued) JOURNAL and Post Ref Date 2014 May Page Debit Rent Expense Cash 531 110 5,000 Merchandise Inventory 115 36,000 Accounts Payable—Martin Co 210 36,000 115 110 600 Accounts Receivable—Korman Co Sales 112 410 68,500 Cost of Merchandise Sold Merchandise Inventory 510 115 41,000 Cash Accounts Receivable—Halstad Co 110 112 22,300 10 Cash Sales 110 410 54,000 10 Cost of Merchandise Sold Merchandise Inventory 510 115 32,000 13 Accounts Payable—Martin Co Cash 210 110 36,000 600 68,500 41,000 22,300 54,000 32,000 35,280 115 720 14 Sales Returns and Allowances Accounts Receivable—Korman Co 411 112 13,500 14 Merchandise Inventory 115 8,000 Cost of Merchandise Sold 15 Advertising Expense Cash 13,500 510 521 8,000 11,000 110 11,000 16 Cash Sales Discounts Accounts Receivable—Korman Co 110 412 112 53,900 1,100 19 Merchandise Inventory Cash 115 110 18,700 19 Accounts Payable—Buttons Co 210 33,450 Cash 110 Credit 5,000 Merchandise Inventory Cash Merchandise Inventory 20 55,000 18,700 33,450 CHAPTER Accounting for Merchandising Businesses Comp Problem (Continued) JOURNAL Post Ref Date 2014 May Page Debit 20 Accounts Receivable—Crescent Co Sales 112 410 110,000 20 Cost of Merchandise Sold 510 70,000 Merchandise Inventory 115 70,000 112 110 2,300 21 Cash Accounts Receivable—Gee Co 110 112 42,900 21 Merchandise Inventory Accounts Payable—Osterman Co 115 210 88,000 24 Accounts Payable—Osterman Co Merchandise Inventory 210 115 5,000 26 Sales Returns and Allowances Cash 411 110 7,500 26 Merchandise Inventory Cost of Merchandise Sold 115 510 4,800 28 Sales Salaries Expense Office Salaries Expense 520 530 56,000 29,000 2,300 42,900 88,000 5,000 7,500 4,800 Cash 110 29 Store Supplies Cash 117 110 2,400 30 Accounts Receivable—Turner Co 112 85,000 78,750 2,400 410 30 Cost of Merchandise Sold 510 Merchandise Inventory 115 78,750 47,000 47,000 30 Cash Sales Discounts Accounts Receivable—Crescent Co 110 412 112 111,200 1,100 31 Accounts Payable—Osterman Co Cash 210 110 83,000 Merchandise Inventory 115 Credit 110,000 21 Accounts Receivable—Crescent Co Cash Sales 21 112,300 82,170 830 Comp Problem (Continued) PALISADE CREEK CO Unadjusted Trial Balance May 31, 2014 Debit Balances Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Store Supplies Store Equipment Accumulated Depreciation—Store Equipment Accounts Payable Salaries Payable Lynn Tolley, Capital Lynn Tolley, Drawing Sales Sales Returns and Allowances Sales Discounts Cost of Merchandise Sold Sales Salaries Expense Advertising Expense Depreciation Expense Store Supplies Expense Miscellaneous Selling Expense Office Salaries Expense Rent Expense Insurance Expense Miscellaneous Administrative Expense Credit Balances 84,500 247,450 561,950 16,800 13,800 569,500 56,700 63,150 — 685,300 135,000 5,532,350 113,700 61,600 3,000,200 720,800 292,000 — — 12,600 411,100 88,700 — 7,800 6,337,500 6,337,500 Comp Problem (Continued) and JOURNAL Post Ref Date 2014 May Page Adjusting Entries 31 Cost of Merchandise Sold Merchandise Inventory Inventory shrinkage ($561,950 – $550,000) Debit 510 115 11,950 31 Insurance Expense Prepaid Insurance Insurance expired 532 116 12,000 31 Store Supplies Expense Store Supplies Supplies used ($13,800 – $4,000) 523 117 9,800 31 Depreciation Expense Accum Depr.—Store Equipment Store equipment depreciation 522 124 14,000 31 Sales Salaries Expense Office Salaries Expense Salaries Payable Accrued salaries 520 530 211 7,000 6,600 22 Credit 11,950 12,000 9,800 14,000 13,600 Comp Problem (Continued) PALISADE CREEK CO Adjusted Trial Balance May 31, 2014 Debit Balances Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Store Supplies Store Equipment Accumulated Depreciation—Store Equipment Accounts Payable Salaries Payable Lynn Tolley, Capital Lynn Tolley, Drawing Sales Sales Returns and Allowances Sales Discounts Cost of Merchandise Sold Sales Salaries Expense Advertising Expense Depreciation Expense Store Supplies Expense Miscellaneous Selling Expense Office Salaries Expense Rent Expense Insurance Expense Miscellaneous Administrative Expense Credit Balances 84,500 247,450 550,000 4,800 4,000 569,500 70,700 63,150 13,600 685,300 135,000 5,532,350 113,700 61,600 3,012,150 727,800 292,000 14,000 9,800 12,600 417,700 88,700 12,000 7,800 6,365,100 6,365,100 Comp Problem (Continued) PALISADE CREEK CO Income Statement For the Year Ended May 31, 2014 Revenue from sales: Sales Less: Sales returns and allowances Sales discounts $5,532,350 $113,700 61,600 175,300 Net sales Cost of merchandise sold $5,357,050 3,012,150 Gross profit Expenses: Selling expenses: Sales salaries expense Advertising expense Depreciation expense Store supplies expense Miscellaneous selling expense $2,344,900 Total selling expenses Administrative expenses: Office salaries expense Rent expense Insurance expense Miscellaneous administrative expense $727,800 292,000 14,000 9,800 12,600 $1,056,200 $417,700 88,700 12,000 7,800 Total administrative expenses Total expenses Net income 526,200 1,582,400 $ 762,500 PALISADE CREEK CO Statement of Owner’s Equity For the Year Ended May 31, 2014 Lynn Tolley, capital, June 1, 2013 Net income for the year Less withdrawals Increase in owner’s equity Lynn Tolley, capital, May 31, 2014 $ 685,300 $762,500 135,000 627,500 $1,312,800 Comp Problem (Continued) PALISADE CREEK CO Balance Sheet May 31, 2014 Assets Current assets: Cash Accounts receivable Merchandise inventory Prepaid insurance Store supplies $ 84,500 247,450 550,000 4,800 4,000 Total current assets Property, plant, and equipment: Store equipment Less accumulated depreciation $ 890,750 $569,500 70,700 Total property, plant, and equipment Total assets 498,800 $1,389,550 Liabilities Current liabilities: Accounts payable Salaries payable $ 63,150 13,600 Total liabilities $ 76,750 Owner’s Equity Lynn Tolley, capital Total liabilities and owner’s equity 1,312,800 $1,389,550 Comp Problem (Continued) JOURNAL Post Ref Date 2014 May Page Debit 23 Credit Closing Entries 31 Sales Income Summary 410 312 5,532,350 31 Income Summary Sales Returns and Allowances Sales Discounts Cost of Merchandise Sold Sales Salaries Expense Advertising Expense Depreciation Expense Store Supplies Expense Miscellaneous Selling Expense Office Salaries Expense Rent Expense Insurance Expense Miscellaneous Administrative Exp 312 411 412 510 520 521 522 523 529 530 531 532 539 4,769,850 31 Income Summary Lynn Tolley, Capital 312 310 762,500 31 Lynn Tolley, Capital Lynn Tolley, Drawing 310 311 135,000 5,532,350 113,700 61,600 3,012,150 727,800 292,000 14,000 9,800 12,600 417,700 88,700 12,000 7,800 762,500 135,000 Comp Problem (Continued) 10 PALISADE CREEK CO Post-Closing Trial Balance May 31, 2014 Debit Balances Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Store Supplies Store Equipment Accumulated Depreciation—Store Equipment Accounts Payable Salaries Payable Lynn Tolley, Capital Credit Balances 84,500 247,450 550,000 4,800 4,000 569,500 1,460,250 70,700 63,150 13,600 1,312,800 1,460,250 CHAPTER Accounting for Merchandising Businesses Comp Problem (Concluded) Optional PALISADE CREEK CO End-of-Period Spreadsheet (Work Sheet) For the Year Ended May 31, 2014 Unadjusted Trial Balance Account Title Cash Accounts Receivable Merchandise Inventory Prepaid Insurance Store Supplies Store Equipment Accum Depr.—Store Equip Accounts Payable Salaries Payable Lynn Tolley, Capital Lynn Tolley, Drawing Sales Sales Returns and Allowances Sales Discounts Cost of Merchandise Sold Sales Salaries Expense Advertising Expense Depreciation Expense Store Supplies Expense Miscellaneous Selling Expense Office Salaries Expense Rent Expense Insurance Expense Miscellaneous Admin Expense Debit 84,500 247,450 561,950 16,800 13,800 569,500 Adjustments Debit Credit Credit (a) 11,950 (b) 12,000 (c) 9,800 56,700 63,150 Adjusted Trial Balance Debit 84,500 247,450 550,000 4,800 4,000 569,500 (d) 14,000 (e) 13,600 Credit 113,700 61,600 3,000,200 720,800 292,000 (d) 14,000 (c) 9,800 12,600 411,100 88,700 (e) 6,600 (b) 12,000 6,337,500 61,350 61,350 Net income 113,700 61,600 3,012,150 727,800 292,000 14,000 9,800 12,600 417,700 88,700 12,000 7,800 6,365,100 Credit 135,000 5,532,350 (a) 11,950 (e) 7,000 Debit 84,500 247,450 550,000 4,800 4,000 569,500 70,700 63,150 13,600 685,300 135,000 5,532,350 7,800 6,337,500 Debit Balance Sheet 70,700 63,150 13,600 685,300 685,300 135,000 Credit Income Statement 6,365,100 5,532,350 113,700 61,600 3,012,150 727,800 292,000 14,000 9,800 12,600 417,700 88,700 12,000 7,800 4,769,850 762,500 5,532,350 5,532,350 1,595,250 832,750 5,532,350 1,595,250 762,500 1,595,250 *This solution is applicable only if the end-of-period spreadsheet (work sheet) is used 6-81 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Accounting for Merchandising Businesses CASES & PROJECTS CP 6–1 Standards of Ethical Conduct for Management Accountants requires management accountants to perform in a competent manner and to comply with relevant laws, regulations, and technical standards If Shelby Davey intentionally subtracted the discount with knowledge that the discount period had expired, he would have behaved in an unprofessional manner Such behavior could eventually jeopardize Bontanica Company’s buyer/supplier relationship with Whitetail Seed Co CP 6–2 Cam Pfeifer is correct The accounts payable due suppliers could be included on the balance sheet at an amount of $314,500 ($269,500 + $45,000) This is the amount that will be expected to be paid to satisfy the obligation (liability) to suppliers However, this is proper only if Rustic Furniture Co has a history of taking all purchases discounts, has a properly designed accounting system to identify available discounts, and has sufficient liquidity (cash) to pay the accounts payable within the discount period In this case, Rustic Furniture Co apparently meets these criteria, since it has a history of taking all available discounts, as indicated by Mitzi Wheeler Thus, Rustic Furniture Co could report total accounts payable of $314,500 on its balance sheet Merchandise Inventory would also need to be reduced by the discount of $5,500 in order to maintain consistency in approach 6-82 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER Accounting for Merchandising Businesses CP 6–3 If Mark doesn’t need the stereo immediately (by the next day), Wholesale Stereo offers the best buy, as shown below Wholesale Stereo: List price…………………………………………………………………………… Shipping and handling (not including next-day air)……………………… Total………………………………………………………………………………… $1,200.00 49.99 Tru-Sound Systems: List price………………………………………………………………………… Sales tax (9%).…………………………………………………………………… Total………………………………………………………………………………… $1,175.00 105.75 $1,249.99 $1,280.75 Even if the 2% cash discount offered by Tru-Sound Systems is considered, Wholesale Stereo still offers the best buy, as shown below List price………………………………………………………………………… Less 2% cash discount.………………………………………………………… Subtotal…………………………………………………………………………… Sales tax (9%).…………………………………………………………………… Total………………………………………………………………………………… $1,175.00 23.50 $1,151.50 103.64 $1,255.14 If Mark needs the stereo immediately (the next day), then Tru-Sound Systems has the best price This is because a shipping and handling charge of $89.99 would be added to the Wholesale Stereo, as shown below Wholesale Stereo list price…………………………………………………… Next-day freight charge………………………………………………………… Total………………………………………………………………………………… $1,200.00 89.99 $1,289.99 Since both Wholesale Stereo and Tru-Sound Systems will accept Mark’s VISA, the ability to use a credit card would not affect the buying decision Tru-Sound Systems will, however, allow Mark to pay his bill in three installments (the first due immediately) This would allow Mark to save some interest charges on his VISA for two months If we assume that Mark would have otherwise used his VISA and that Mark’s VISA carries an interest of 1.5% per month on the unpaid balance, the potential interest savings would be calculated as follows: CHAPTER Accounting for Merchandising Businesses CP 6–3 (Concluded) Tru-Sound Systems price (see previous page)…………………………………… $1,280.75 426.92 Less first installment (down payment)…………………………………………… $ 853.83 Remaining balance…………………………………………………………………… Interest for first month at 1.5% ($853.83 × 1.5%)………………………………… Remaining balance ($853.83 + $12.81)…………………………………………… Less second installment……………………………………………………………… Remaining balance…………………………………………………………………… $ 12.81 $ 866.64 426.92 Interest for second month at 1.5% ($439.72 × 1.5%)…………………………… $ $ 439.72 6.60 The total interest savings would be $19.41 ($12.81 + $6.60) This interest savings would still not be enough to just offset the price advantage of Wholesale Stereo, as shown below Tru-Sound Systems price (see above)………………………………………… $1,280.75 19.41 Less interest savings……………………………………………………………… Total…………………………………………………………………………………… $1,261.34 Other considerations in buying the stereo include the ability to have the stereo repaired locally In addition, Tru-Sound Systems’ employees would presumably be available to answer questions on the operation and installation of the stereo In addition, if Mark purchased the stereo from Tru-Sound Systems, he would have the stereo the same day rather than the next day, which is the earliest that Wholesale Stereo could deliver the stereo CHAPTER Accounting for Merchandising Businesses CP 6–4 WATERCRAFT SUPPLY COMPANY Projected Income Statement For the Year Ended October 31, 2015 Revenues: Net sales (a) Interest revenue Total revenues Expenses: Cost of merchandise sold (b) Selling expenses (c) Administrative expenses (d) Interest expense $1,485,000 15,000 $1,500,000 $891,000 129,800 90,550 4,000 Total expenses Net income 1,115,350 $ 384,650 Notes: a Projected net sales [$1,350,000 + (10% × $1,350,000)]………………………… b c $1,485,000 Projected cost of merchandise sold ($1,485,000 × 60%)…………………………………………… $ 891,000 Total selling expenses for year ended October 31, 2014… $ 140,000 Add: Increase in store supplies expense ($12,000 × 10%)…………………………………… $1,200 Increase in miscellaneous selling expense ($6,000 × 10%)……………………………………… Less delivery expenses………………………………………… 600 $ 129,800 Projected total selling expenses……………………………… d 1,800 (12,000) Total administrative expenses for year ended October 31, 2014………………………………………………… Add: $90,000 Increase in office supplies expense ($3,000 × 10%)……………………………………… $ 300 Increase in miscellaneous administrative expense ($2,500 × 10%)…………………………… Projected total administrative expenses…………………… 250 550 $90,550 CHAPTER Accounting for Merchandising Businesses CP 6–4 (Concluded) a Yes The proposed change will increase net income from $321,000 to $384,650, a change of $63,650 b Possible concerns related to the proposed changes include the following: The primary concern is with the accuracy of the estimates used for projecting the effects of the proposed changes If the increase in sales does not materialize, Watercraft Supply Company could incur significant costs of carrying excess inventory stocked in anticipation of increasing sales At the same time it is incurring these additional inventory costs, cash collections from customers will be reduced by the amount of the discounts This could create a liquidity problem for Watercraft Supply Company Another concern arises from the proposed change in shipping terms so as to eliminate all shipments of merchandise FOB destination, thereby eliminating delivery expenses Watercraft Supply Company assumes that this change will have no effect on sales However, some (perhaps a significant number of) customers may object to this change and may seek other vendors with more favorable shipping terms Hence, an unanticipated decline in sales could occur because of this change As with any business decision, risks (concerns) such as those mentioned above must be thoroughly considered before final action is taken CP 6–5 Note to Instructors: The purpose of this activity is to familiarize students with the variety of possible purchase prices for a fairly common household item Students should report several alternative prices when they consider the source of the purchase and the other factors that affect the purchase, e.g., delivery, financing, warranties, etc Consider going to www.cnet.com and entering a search for “55 inch LED TV.” Pick one model of TV that offers a range of prices from different stores and compare shipping and payment differences among companies For example, the Sony Bravia KDL-55EX720 TV as of August 2011 has a range of prices of $1,598 to $2,158 from 17 different stores Some stores offer free shipping, while one store offers that no payment is required for six months You might consider offering the student group(s) that comes up with the lowest price extra credit points for homework .. .CHAPTER Accounting for Merchandising Businesses PRACTICE EXERCISES PE 6–1A a $700,000 ($450,000 + $1,350,000... and credited Merchandise Inventory for the amount of the discount, $170, and Cash, $16,830 CHAPTER Accounting for Merchandising Businesses Ex 6–6 a b c Merchandise Inventory Accounts Payable... Accounts Payable—Sitwell Co Accounts Receivable—Sitwell Co 4,365 9,000 13,365 9,000 13,365 CHAPTER Accounting for Merchandising Businesses Ex 6–8 a b Cash Sales 45,000 Cost of Merchandise Sold