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CHAPTER - ANSWER: ACCOUNTING FOR MERCHANDISING OPERATIONS TRUE - FALSE STATEMENT No True/ False Statements Retailers and wholesalers are both considered merchandising enterprises TRUE FALSE FALSE TRUE FALSE TRUE The operating cycle involves the purchase and sale of merchandise inventory as well as the subsequent collection of cash from credit sales TRUE An advantage of using the periodic inventory system is that it requires less record keeping than the perpetual inventory system 10 11 12 13 TRUE 14 TRUE Cost of Goods Sold is considered an expense of a merchandising firm Operating expenses are subtracted from revenue for a service enterprise and from gross profit for a merchandising enterprise 15 TRUE 16 TRUE 17 TRUE 18 TRUE 19 FALSE 20 FALSE 21 TRUE 22 TRUE 23 24 FALSE FALSE Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs Net sales minus cost of goods sold is called gross profit Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Inventory account Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller The terms 2/10, net/30 mean that a % discount is allowed on payments made within the 10 days discount period A buyer who acquires merchandise under credit terms of 1/10, n/30 has 10 days after the invoice date to take advantage of the cash discount Discounts taken by the buyer for early payment of an invoice are called purchases discounts by the buyer If merchandise costing $5,000, with terms 2/10, n/30, is paid within 10 days, the amount of the purchase discount is $100 When an invoice is paid within the discount period, the amount of the discount decreases Inventory 25 FALSE 26 TRUE 27 28 29 FALSE FALSE FALSE 30 TRUE 31 TRUE 32 TRUE 33 FALSE 34 TRUE 35 36 37 38 39 40 TRUE TRUE FALSE FALSE FALSE FALSE 41 TRUE 42 TRUE 43 44 45 FALSE FALSE TRUE 46 TRUE 47 TRUE 48 TRUE 49 50 51 FALSE FALSE FALSE Sales Returns and Allowances is a contra-revenue account Sales Discounts is a contra asset account The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned Sales Discounts is a contra revenue account to Sales Revenue The normal balance of Sales Returns and Allowances is a debit When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period Sales Discounts and Sales Returns and Allowances both have normal debit balances Merchandise is sold for $5,000 with terms 1/10, n/30 If $1,000 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $40 The terms 2/10, net/30 mean that a % discount is allowed on payments made within the 10 days discount period The multiple-step income statement is considered more useful than the single-step income statement because it highlights the components of net income General and administrative expenses are a category of operating expense Advertising expense appears as a selling expense in the income statement A merchandising company’s net income is determined by subtracting operating expenses from gross profit Sales revenues, cost of goods sold, and gross profit are amounts on a merchandising company's income statement not commonly found on the income statement of a service company Gross profit represents the merchandising profit of a company If net sales are $750,000 and cost of goods sold is $600,000, the gross profit rate is 20% With the periodic inventory system, goods available for sale must be calculated before cost of goods sold Under the periodic system, the purchases account is used to accumulate all purchases of merchandise for resale Gross profit is computed by subtracting cost of goods sold from net sales 52 TRUE Under the periodic inventory system, acquisitions of merchandise are not recorded in the Inventory account MULTIPLE CHOICE QUESTIONS 53 Merchandising companies that sell to retailers are known as a brokers b corporations c wholesalers d service firms 54 Which of the following would not be considered a merchandising operation? a Retailer b Wholesaler c Service firm d Merchandising company 55 Which of the following activities is not a component of the operating cycle? a Sale of merchandise b Payment of employees’ salaries c Collection of cash from merchandise sales d Purchase of merchandise 56 Which of the following companies would be most likely to use a perpetual inventory system? a Grain company b Beauty salon c Clothing store d Fur dealer 57 Gross profit equals the difference between a net income and operating expenses b net sales revenues and cost of goods sold c net sales revenues and operating expenses d net sales revenues and cost of goods sold plus operating expenses 58 Each of the following companies is a merchandising company except a a wholesale parts company b candy store c moving company d furniture store 59 Net income will result if gross profit exceeds a cost of goods sold b operating expenses c purchases d cost of goods sold plus operating expenses 60 A merchandiser will earn an operating income of exactly $0 when a net sales equals cost of goods sold b cost of goods sold equals gross margin c operating expenses equal net sales d gross profit equals operating expenses 61 A merchandiser that sells directly to consumers is a a retailer b wholesaler c broker d service enterprise 62 Two categories of expenses in merchandising companies are a cost of goods sold and financing expenses b operating expenses and financing expenses c cost of goods sold and operating expenses d sales and cost of goods sold 63 The primary source of revenue for a wholesaler is a investment income b service revenue c the sale of merchandise d the sale of plant assets the company owns 64 Generally, the revenue account for a merchandising enterprise is called a Sales Revenue or Sales b Investment Income c Gross Profit d Net Sales 65 Under a perpetual inventory system a accounting records continuously disclose the amount of inventory b increases in inventory resulting from purchases are debited to purchases c there is no need for a year-end physical count d the account purchase returns and allowances is credited when goods are returned to vendors 66 The operating cycle of a merchandising company is a always one year in length b ordinarily longer than that of a service company c about the same as that of a service company d ordinarily shorter than that of a service company 67 Sales revenue less cost of goods sold is called a gross profit b net profit c net income d marginal income 68 After gross profit is calculated, operating expenses are deducted to determine a gross margin b net income c gross profit on sales d net margin 69 Which of the following expressions is incorrect? a Gross profit - operating expenses = net income b Sales - cost of goods sold - operating expenses = net income c Net income + operating expenses = gross profit d Operating expenses - cost of goods sold = gross profit 70 Detailed records of goods held for resale are not maintained under a a perpetual inventory system b periodic inventory system c double entry accounting system d single entry accounting system 71 A perpetual inventory system would most likely be used by a(n) a automobile dealership b hardware store c drugstore d convenience store 72 Which of the following is a true statement about inventory systems? a Periodic inventory systems require more detailed inventory records b Perpetual inventory systems require more detailed inventory records c A periodic system requires cost of goods sold be determined after each sale d A perpetual system determines cost of goods sold only at the end of the accounting period 73 The figure for which of the following items is determined at a different time under the perpetual inventory method than under the periodic method? a Sales Revenue b Cost of Goods Sold c Purchases d Accounts Receivable 74 In a perpetual inventory system, cost of goods sold is recorded a on a daily basis b on a monthly basis c on an annual basis d each time a sale occurs 75 The primary difference between a periodic and perpetual inventory system is that a periodic system a keeps a record showing the inventory on hand at all time b provides better control over inventories c records the cost of the sale on the date the sale is made d determines the inventory on hand only at the end of the accounting period 76 When using the periodic system the physical inventory count is used to determine a only the sales value of goods in the ending inventory b both the cost of the goods in ending inventory and the sales value of goods sold during the period c both the cost of the goods sold and the cost of ending inventory d only the cost of merchandise sold during the period 77 Inventory becomes part of cost of goods sold when a company a pays for the inventory b purchases the inventory c sells the inventory d receives payment from the customer 78 Under the perpetual inventory system, which of the following accounts would not be used? a Sales Revenue b Purchases c Cost of Goods Sold d Inventory 79 If a company determines cost of goods sold each time a sale occurs, it a must have a computer accounting system b uses a combination of the perpetual and periodic inventory systems c uses a periodic inventory system d uses a perpetual inventory system 80 The periodic inventory system is used most commonly by companies that sell a low-priced, high-volume merchandise b high-priced, high-volume merchandise c high-priced, low-volume merchandise d high-priced, low and high-volume merchandise 81 What is a difference between merchandising companies and service enterprises? a Merchandising companies must prepare multiple-step income statements and service enterprises must prepare single-step income statements b Merchandising companies generally have a longer operating cycle than service enterprises c Cost of goods sold is an expense for service enterprises but not for merchandising companies d All are differences 82 Which statement is incorrect? a Periodic inventory systems provide better control over inventories than perpetual inventory systems b Computers and electronic scanners allow more companies to use a perpetual inventory system c Freight-in is debited to merchandise inventory when a perpetual inventory system is used d Regardless of the inventory system that is used, companies should take a physical inventory count 83 Under a perpetual inventory system, acquisition of merchandise for resale is debited to a the Inventory account b the Purchases account c the Supplies account d the Cost of Goods Sold account 84 The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit a Accounts Payable b Purchase Returns and Allowances c Sales Revenue d Inventory 85 Which of the following items does not result in an adjustment in the merchandise inventory account under a perpetual system? a A purchase of merchandise b A return of merchandise inventory to the supplier c Payment of freight costs for goods shipped to a customer d Payment of freight costs for goods received from a supplier 86 A company using a perpetual inventory system that returns goods previously purchased on credit would a debit Accounts Payable and credit Inventory b debit Sales and credit Accounts Payable c debit Cash and credit Accounts Payable d debit Accounts Payable and credit Purchases 87 If a purchaser using a perpetual inventory system pays the transportation costs, then the a Inventory account is increased b Inventory account is not affected c Freight-out account is increased d Delivery Expense account is increased 88 Freight costs incurred by a seller on merchandise sold to customers will cause an increase a in the selling expenses of the buyer b in operating expenses for the seller c to the cost of goods sold of the seller d to a contra-revenue account of the seller 89 Conway Company purchased merchandise inventory with an invoice price of $8,000 and credit terms of 2/10, n/30 What is the net cost of the goods if Conway Company pays within the discount period? a $8,000 b $7,840 c $7,200 d $7,360 90 A buyer borrows money at 12% interest to pay a $6,000 invoice with terms 1/10, n/30 on the 10th day of the discount period The loan is repaid on the 30th day of the invoice What is the buyer’s net savings for this total event? a $0 b $20.00 c $20.40 d $40.00 91 In the credit terms of 1/10, n/30, the “1” represents the a number of days in the discount period b full amount of the invoice c number of days when the entire amount is due d percent of the cash discount 92 Farwell Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30 Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a 4% b 24% c 36% d 72% 93 Davies Company purchased merchandise inventory with an invoice price of $7,500 and credit terms of 2/10, n/30 What is the net cost of the goods if Davies Company pays within the discount period? a $7,500 b $7,380 c $7,350 d $6,000 94 A credit sale of $1,600 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28 What amount is received as payment in full on May 4? a $1,470 b $1,568 c $1,600 d $1,500 95 Grayson Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30 Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? a 1% b 6% c 12% d 18% 96 A credit sale of $900 is made on July 15, terms 2/10, net/30, on which a return of $50 is granted on July 18 What amount is received as payment in full on July 24? a $900 b $833 c $850 d $882 97 If a company is given credit terms of 2/10, n/30, it should a hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time b pay within the discount period and recognize a savings c pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill d recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price 98 A purchase invoice is a document that a provides support for goods purchased for cash b provides evidence of incurred operating expenses c provides evidence of credit purchases d serves only as a customer receipt 99 Adams Company is a retailer and uses a perpetual inventory system Which statement is correct? a Returns of merchandise inventory by Adams Company to a manufacturer are credited to Inventory b Freight paid to get merchandise inventory to Adams Company’s store is debited to Freight Expense c A return of merchandise inventory by one of Adams Company’s customers is credited to Inventory d Discounts taken by Adams Company’s customers are credited to Inventory 100 As the president of Harter Company, you notice that no discounts have been taken when settling accounts payables What would be an acceptable explanation? a All invoices have credit terms of n/30 b There is not sufficient cash to pay within the discount period c Discounts are missed because no one knows how to enter them in the new accounting software d The full amount of the invoice is being paid within the discount period and the treasurer is pocketing the discount amount 101 When using a perpetual inventory system, why are discounts credited to Inventory? a The discounts are debited to discount expense and thus the credit has to be made to merchandise inventory b The discounts reduce the cost of the inventory c The discounts are a reduction of business expenses d None of the answers is correct 102 Tony’s Market recorded the following events involving a recent purchase of inventory: Received goods for $30,000, terms 2/10, n/30 Returned $600 of the shipment for credit Paid $150 freight on the shipment Paid the invoice within the discount period As a result of these events, the company’s inventory a increased by $28,812 b increased by $29,550 c increased by $28,959 d increased by $28,962 103 Stan’s Market recorded the following events involving a recent purchase of inventory: Received goods for $60,000, terms 2/10, n/30 Returned $1,200 of the shipment for credit Paid $300 freight on the shipment Paid the invoice within the discount period As a result of these events, the company’s inventory a increased by $57,624 b increased by $59,100 c increased by $57,918 d increased by $57,924 104 Assets purchased for resale are recorded in which of the following accounts? a Supplies b Inventory c Equipment d More than one of the above is correct 105 Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a Freight Expense b Freight-in c Inventory d Freight-out 106 Which of the following accounts is classified as a contra revenue account? a Sales Revenue b Cost of Goods Sold c Sales Returns and Allowances d Purchase Discounts Less: Sales Returns and Allowances $ 8,000 Sales Discounts 2,000 10,000 Net Sales 190,000 Be 212 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $550,000; Purchase Returns and Allowances $14,000; Purchases Discounts $9,000; and Freight-in $15,000 Determine net purchases and cost of goods purchased Be 213 Assume that Mitchell Company uses a periodic inventory system and has these account balances: Purchases $650,000; Purchase Returns and Allowances $25,000; Purchases Discounts $11,000; and Freight-in $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000 Determine the amounts to be reported for cost of goods sold and gross profit Be 214 Horner Corporation reported net sales of $150,000, cost of goods sold of $90,000, operating expenses of $35,000, other expenses of $10,000, net income of $15,000 Calculate the following values Profit margin ratio Gross profit rate EXERCISES Ex 215 Sue Cole is a new accountant with Simon Company Simon purchased merchandise on account for $5,000 The credit terms are 1/10, n/30 Sue has talked with the company's banker and knows that she could earn 6% on any money invested in the company's savings account Instructions (a) Should Sue pay the invoice within the discount period or should she keep the $5,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best Yes, Sue should take the discount Discount of 1% on $5,000 $50.00 Interest received on $5,000 (for 20 days at 6%) 16.67 ($5,000 × 6% × 20 ÷ 360) Savings by taking the discount $33.33 (b) If Sue forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of $5,000 for 20 days Calculate the annual rate of interest that this is equivalent to The equivalent annual interest rate is: 1% ì 360 ữ 20 = 18% Ex 216 This information relates to Sherper Co On April purchased merchandise from Newport Company for $20,000, terms 2/10, n/10 On April paid freight costs of $900 on merchandise purchased from Newport On April purchased equipment on account for $26,000 On April returned some of April merchandise to Newport Company which cost $2,000 On April 15 paid the amount due to Newport Company in full Instructions (a) Prepare the journal entries to record the transactions listed above on the books of Sherper Co Sherper Co uses a perpetual inventory system Apr Apr.6 Apr.7 Apr.8 Feb 16 (b) Inventory Accounts Payable Inventory Cash 20,000 20,000 900 900 Equipment Accounts Payable 26,000 Accounts Payable Inventory 2,000 Accounts Payable Inventory Cash 18,000 26,000 2,000 360 17,640 Assume that Sherper Co paid the balance due to Newport Company on May instead of April 15 Prepare the journal entry to record this payment May Accounts Payable Cash 18,000 18,000 Ex 217 (a) Bazil Company purchased merchandise on account from Office Suppliers for $56,000, with terms of 2/10, n/30 During the discount period, Bazil returned some merchandise and paid $53,900 as payment in full Bazil uses a perpetual inventory system Prepare the journal entries that Bazil Company made to record the: (1) purchase of merchandise (2) return of merchandise (3) payment on account (b) Weaver Company sold merchandise to Moore Company on account for $84,000 with credit terms of ?/10, n/30 The cost of the merchandise sold was $63,000 During the discount period, Moore Company returned $4,000 of merchandise and paid its account in full (minus the discount) by remitting $79,200 in cash Both companies use a perpetual inventory system Prepare the journal entries that Weaver Company made to record the: (1) sale of merchandise (2) return of merchandise (3) collection on account Ex 218 June Black Company purchased $7,000 worth of merchandise, terms n/30 from Hayes Company The cost of the merchandise was $4,900 12 Black returned $500 worth of goods to Hayes for full credit The goods had a cost of $350 to Hayes 12 Black paid the account in full Instructions Prepare the journal entries to record these transactions in (a) Black’s records and (b) Hayes’ records Assume use of the perpetual inventory system for both companies Ex 219 On October 1, the Kile Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $150 each During the month of October the following transactions occurred Assume Kile uses a perpetual inventory system Oct Purchased 200 bicycles at a cost of $145 each from the Nixon Bicycle Company, terms 2/10, n/30 Paid freight of $1,000 on the October purchase Sold bicycles from the October inventory to Team America for $250 each, terms 2/10, n/30 Received credit from the Nixon Bicycle Company for the return of defective bicycles 13 Issued a credit memo to Team America for the return of a defective bicycle 14 Paid Nixon Bicycle Company in full, less discount Instructions Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system Ex 220 On September 1, Pennington Supply had an inventory of 20 backpacks at a cost of $25 each The company uses a perpetual inventory system During September, the following transactions and events occurred Sept Purchased 40 backpacks at $25 each from Sievert, terms 2/10, n/30 Received credit of $100 for the return of backpacks purchased on Sept that were defective Sold 20 backpacks for $40 each to Lilly Books, terms 2/10, n/30 13 Sold 15 backpacks for $40 each to Stoner Office Supply, terms n/30 14 Paid Sievert in full, less discount Instructions Journalize the September transactions for Pennington Supply Ex 221 Petersen Book Store entered into the transactions listed below In the journal provided, prepare Petersen’s necessary entries, assuming use of the perpetual inventory system July Purchased $1,800 of merchandise on credit, terms n/30 Returned $100 of the items purchased on July Paid freight charges of $90 on the items purchased July 19 Sold merchandise on credit for $5,400, terms 1/10, n/30 The merchandise had an inventory cost of $2,700 22 Of the merchandise sold on July 19, $300 of it was returned The items had cost the store $150 28 Received payment in full from the customer of July 19 31 Paid for the merchandise purchased on July 6.Ex 222 Presented here are selected transactions for the Leiss Company during April Leiss uses the perpetual inventory system April Sold merchandise to Mann Company for $5,000, terms 2/10, n/30 The merchandise sold had a cost of $2,500 Purchased merchandise from Wild Corporation for $6,000, terms 1/10, n/30 Purchased merchandise from Ryan Company for $1,000, n/30 10 Received payment from Mann Company for purchase of April less appropriate discount 11 Paid Wild Corporation for April purchase Instructions Journalize the April transactions for Leiss Company Ex 223 Norman Company completed the following transactions in October: Norman uses a perpetual inventory system Credit Sales Sales Returns Date of Date Collection Oct Oct Oct 11 Oct 16 Oct 17 Oct 29 Oct 21 Oct 27 Oct 23 Oct 28 Amount Terms Date Amount $ 800 2/10, n/30 1,200 3/10, n/30 Oct 14 $ 300 5,000 1/10, n/30 Oct 20 1,200 1,700 2/10, n/60 Oct 23 400 4,000 2/10, n/30 Oct 27 500 Instructions (a) Indicate the cash received for each collection Show your calculations (b) Prepare the journal entry for the (1) Oct 17 sale The merchandise sold had a cost of $3,000 (2) Oct 23 sales return The merchandise returned had a cost of $200 (3) Oct 28 collection Ex 224 The following transactions are for Kale Company (1) (2) (3) On December Kale Company sold $400,000 of merchandise to Thomson Co., terms 1/10, n/10 The cost of the merchandise sold was $320,000 On December Thomson Co was granted an allowance of $20,000 for merchandise purchased on December On December 13 Kale Company received the balance due from Thomson Co Instructions (a) (b) Prepare the journal entries to record these transactions on the books of Kale Company Kale uses a perpetual inventory system Assume that Kale Company received the balance due from Thomson Co on January of the following year instead of December 13 Prepare the journal entry to record the receipt of payment on January Ex 225 Instructions State the missing items identified by ? Gross profit - Operating expenses = ? ? + ? = Operating expenses Sales - (? + ?) = Net sales Income from operations + ? - ? = Net income Net sales - Cost of goods sold = ? Cost of goods sold + Gross profit on sales = ? Ex 226 Financial information is presented here for two companies King Company Queen Company Sales Revenue Sales Returns Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income $60,000 ? 55,000 33,000 ? 11,000 ? ? 5,000 80,000 ? 38,000 ? 18,000 Instructions (a) Compute the missing amounts (b) Calculate the profit margin ratio and the gross profit rate for each company Ex 227 The following information is available for Quayle Company: Sales Revenue Sales Returns and Allowances Cost of Goods Sold Selling Expense Administrative Expense Interest Expense Interest Revenue $628,000 20,000 398,000 69,000 35,000 19,000 20,000 Instructions Use the above information to prepare a multiple-step income statement for the year ended December 31, 2012 Compute the profit margin ratio Ex 228 The adjusted trial balance of McCoy Company included the following selected accounts: Debit Credit Sales Revenue $625,000 Sales Returns and Allowances $ 50,000 Sales Discounts 9,500 Cost of Goods Sold 396,000 Freight-out 2,000 Advertising Expense 15,000 Interest Expense 19,000 Store Salaries Expense 74,000 Utilities Expense 23,000 Depreciation Expense 3,500 Interest Revenue 25,000 Instructions Use the above information to prepare a multiple-step income statement for the year ended December 31, 2012 Calculate the profit margin ratio and gross profit rate Ex 229 Presented below is information for Zales Company for the month of January 2012 Cost of goods sold $260,000 Freight-out 7,000 Insurance expense 12,000 Salaries and wages expense 58,000 Rent expense Sales discounts Sales returns and allowances Sales revenue $35,000 8,000 13,000 421,000 Instructions (a) Prepare a multiple-step income statement (b) Calculate the profit margin ratio and the gross profit rate Ex 230 The trial balance of Rachel Company at the end of its fiscal year, August 31, 2012, includes these accounts: Inventory $19,200; Purchases $144,000; Sales $190,000; Freight-in $8,000; Sales Returns and Allowances $3,000; Freight-out $1,000; and Purchases Returns and Allowances $5,000 The ending inventory is $25,000 Instructions Prepare a cost of goods sold section for the year ending August 31 Ex 231 Below is a series of cost of goods sold sections for Mikey Inc., Nancie Co., and Oscar Inc Mikey Oscar Beginning inventory Purchases Purchase returns and allowances Net purchases Freight-in Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold $ 250 1,900 40 (a) 130 (b) 2,240 310 (c) Nancie $ 120 1,080 (d) 1,050 (e) 1,230 1,350 (f) 1,130 $ (g) 43,590 (h) 41,090 2,740 (i) 49,530 6,230 43,300 Instructions Fill in the lettered blanks to complete the cost of goods sold sections Ex 232 The following information is available from the annual reports of Flynn Company and Tolan Inc Sales Cost of goods sold Operating expenses Income before taxes Net income (Amounts in millions) Flynn Tolan $35,622 $42,457 20,739 24,431 10,428 11,188 4,455 6,838 2,594 4,072 Instructions Calculate the profit margin ratio and gross profit rate for each company What conclusion concerning the relative profitability of the two companies can be drawn from these data? *Ex 233 June Deere Company purchased $3,750 worth of merchandise, terms n/30 from Gilbert Company The cost of the merchandise was $2,500 13 Deere returned $600 worth of goods to Gilbert for full credit The goods had a cost of $400 to Johnson 13 Deere paid the account in full Instructions Prepare the journal entries to record these transactions in (a) Deere’s records and (b) Gilbert’s records Assume use of the periodic inventory system for both companies *Ex 234 On September 1, Hendricks Supply had an inventory of 18 backpacks at a cost of $20 each The company uses a periodic inventory system During September, the following transactions and events occurred Sept Purchased 45 backpacks at $20 each from Neufeld, terms 2/10, n/30 Received credit of $100 for the return of backpacks purchased on Sept that were defective Sold 25 backpacks for $30 each to Brewer Books, terms 2/10, n/30 13 Sold 10 backpacks for $30 each to Stoner Office Supply, terms n/30 14 Paid Neufeld in full, less discount Instructions Journalize the September transactions for Hendricks Supply *Ex 235 Presented here are selected transactions for the Foyle Company during April Foyle uses the periodic inventory system April Sold merchandise to Land Company for $3,000, terms 2/10, n/30 The merchandise sold had a cost of $2,000 Purchased merchandise from Webb Corporation for $5,000, terms 1/10, n/30 Purchased merchandise from Ryan Company for $2,000, n/30 10 Received payment from Land Company for purchase of April less appropriate discount 11 Paid Webb Corporation for April purchase Instructions Journalize the April transactions for Foyle Company *Ex 236 This information relates to Tandi Co On April purchased merchandise from Buehler Company for $30,000, terms 2/10, net/30 On April paid freight costs of $900 on merchandise purchased from Buehler Company On April purchased equipment on account for $26,000 On April returned some of the April merchandise to Buehler Company which cost $3,000 On April 15 paid the amount due to Buehler Company in full Instructions (a) Prepare the journal entries to record these transactions on the books of Tandi Co using a periodic inventory system (b) Assume that Tandi Co paid the balance due to Buehler Company on May instead of April 15 Prepare the journal entry to record this payment COMPLETION STATEMENTS 237 A Merchandising Company buys and sells inventory rather than performing services as their primary source of revenue 238 Cost of goods sold is deducted from net sales revenue for the period in order to arrive at gross profit 239 Inventory on hand can be obtained from detailed inventory records when a perpetual inventory system is maintained 240 The acquisition of inventory is debited to the Inventory account when a perpetual inventory system is used 241 The freight costs incurred by a seller on outgoing inventory are an operating expense to the seller 242 When a customer returns inventory previously purchased on credit, the entry to record the credit granted to the customer requires a debit to the Sales returns & Allowances account and a credit to the Accounts Receivable account 243 Every credit sales transaction should be supported by a business document that provides written evidence of the sale 244 Sales Returns and Allowances and Sales Discounts are both Contra Revenue accounts and have normal debt balances 245 Gross profit is obtained by subtracting the cost of goods sold from revenue 246 A useful measure of profitability is the ratio of net income to _ MATCHING 247 Match the items below by entering the appropriate code letter in the space provided A B C D E Net sales Sales discount Credit terms Periodic inventory system Gross profit rate F G H I J Contra revenue Freight-out Gross profit Sales invoice Purchase discount _ A reduction given by the seller for prompt payment of a credit sale _ Provides support for a credit sale _ Gross profit divided by net sales _ Sales less sales returns and allowances and sales discounts _ Specifies the amount of cash discount and time period during which it is offered _ Net sales less cost of goods sold _ Freight cost to deliver goods to customers reported as an operating expense _ Requires a physical count of goods on hand to compute cost of goods sold _ A cash discount claimed by a buyer for prompt payment of a balance due _ 10 An account that is offset against a revenue account on the income statement SHORT-ANSWER ESSAY QUESTIONS S-A-E 248 You are at a company picnic and the company president starts a conversation with you The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks? S-A E 249 A merchandising company frequently has a need to use contra accounts related to the sale of goods Identify the contra accounts that have normal debit balances and explain why they are not considered expenses S-A E 250 Alice Gray believes revenues from credit sales may be earned before they are collected in cash Do you agree? Explain The above statement is correct When a company is following the accrual accounting method, it can record income when it was earned irrespective of when it was received in cash This is because when the good is manufactured the expenses related to the manufacturing of goods should be matched against the income So if the goods are sold on a credit basis, the income is recorded when the income was earned to match the cost of producing the goods sold on credit S-A E 251 To encourage bookstores to buy a broader range of book titles many publishers allow bookstores to return unsold books to the publisher This results in very significant returns each year To ensure proper recognition of revenues, how should publishing companies account for these returns? S-A E 252 In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented? S-A-E 253 Distinguish between cost of goods sold and operating expenses, describe the nature of these two items and their placement on the income statement S-A E 254 The income statement for a merchandising company presents five amounts not shown on a service company’s income statement Identify and briefly explain the five unique amounts S-A E 255 What factors affect a company's gross profit rate—that is, what can cause the gross profit rate to increase and what can cause it to decrease? S-A E 256 The following are the gross profit percentages for Naylor Company: Year Gross Profit Percentage 2009 33% 2010 34% 2011 36% 2012 13% List four possible explanations for the low gross profit percentage in 2012 S-A E 257 (Ethics) Hiller Corporation manufactures electronic components for use in many consumer products Their raw materials are purchased literally from all over the world Depending on the country involved, purchase terms vary widely Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods Because of this situation, Hiller never closes its books until at least ten days after month end In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not Donna Gordon, a new accountant, was asked to record about $50,000 in inventory as having been received before month end She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month Her boss, busy with month-end reports, curtly tells Donna to check the shipping terms She did so, and found the notation "FOB (free on board) shipper's dock" on the document She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Hiller should consider it received when it reached Hiller's dock She did not record the sale until after month end Required: Why are accountants concerned with the timing in the recording of purchases? Was there a violation of ethical standards here? Explain S-A E 258 (Communication) Sandy Lang and Mandy Starr, two salespersons in adjoining territories, regularly compete for bonuses During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal On May 30, 2012, each made a large sale Both orders were shipped on May 31, 2012, the last day of the month, and both were received by the customers on June 5, 2012 Sandy's sale was FOB shipping point (ownership passes to buyer at time of shipping), and Mandy's was FOB destination (ownership passes to buyer at time of receipt) The printed policy of the company states that sales "count" for purposes of calculating bonuses on the date that ownership passes to the purchaser Sandy's sale was therefore counted in her May monthly total of sales while Mandy's sale was not Mandy is quite upset She has asked you to just include it, or to take Sandy's off as well She also has told you that you are being unethical for allowing Sandy to get a bonus just for choosing a particular shipping method S-A E 258 (Cont.) As the accounting manager write a memo to Mandy on June 15, 2012, and explain your position ... Discounts for $18 b debit to Sales Revenue for $882 c credit to Accounts Receivable for $900 d credit to Sales Revenue for $900 113 A sales invoice is prepared when goods a are sold for cash b... Sales Discounts for $16 b debit to Accounts Receivable for $784 c credit to Cash for $784 d credit to Accounts Receivable for $784 119 A sales invoice is used as documentation for a journal entry... n/30 will include a a credit to Sales Discounts for $10 b debit to Cash for $490 c credit to Accounts Receivable for $500 d credit to Sales Revenue for $500 118 The collection of an $800 account