Chapter Review
6-9fExercises
Determining Gross Profit
OBJ. 1
Determining Cost of Merchandise Sold
OBJ. 1
-
For a recent year, Best Buy reported sales of $42,879 million. Its gross profit was $9,961 million. What was the amount of Best Buy’s cost of merchandise sold?
Chart of Accounts
OBJ. 2
-
Monet Paints Co. is a newly organized business with a list of accounts arranged in alphabetical order, as follows:
Accounts Payable Merchandise Inventory Accounts Receivable Miscellaneous Administrative Expense Accumulated Depreciation—Office Equipment Miscellaneous Selling Expense Accumulated Depreciation—Store Equipment Notes Payable Advertising Expense Office Equipment Cash Office Salaries Expense Cost of Merchandise Sold Office Supplies Customer Refunds Payable Office Supplies Expense Delivery Expense Prepaid Insurance Depreciation Expense—Office Equipment Rent Expense Depreciation Expense—Store Equipment Salaries Payable Insurance Expense Sales Interest Expense Sales Salaries Expense Kailey Garner, Capital Store Equipment Kailey Garner, Drawing Store Supplies Land Store Supplies Expense Construct a chart of accounts, assigning account numbers and arranging the accounts in balance sheet and income statement order, as illustrated in Exhibit 2. Each account number is three digits: the first digit is to indicate the major classification (1 for assets, for example); the second digit is to indicate the subclassification (11 for current assets, for example); and the third digit is to identify the specific account (110 for Cash, 112 for Accounts Receivable, 114 for Merchandise Inventory, etc.).
Purchase-Related Transactions
OBJ. 2
-
Oppenheimer Company purchased merchandise on account from a supplier for $84,000, terms 1/10, n/30. Oppenheimer Company returned $16,000 of the merchandise and received full credit.
-
What is the amount of cash required for the payment within the discount period?
-
Under a perpetual inventory system, what account is credited by Oppenheimer Company to record the return?
-
Purchase-Related Transactions
OBJ. 2
-
A retailer is considering the purchase of 500 units of a specific item from either of two suppliers. Their offers are as follows:
-
Supplier One: $40 a unit, total of $20,000, 1/10, n/30, no charge for freight.
-
Supplier Two: $39 a unit, total of $19,500, 2/10, n/30, plus freight of $500.
Which of the two offers, Supplier One or Supplier Two, yields the lower price?
-
Purchase-Related Transactions
OBJ. 2
-
The debits and credits for four related entries for a purchase of $40,000, terms 2/10, n/30, are presented in the following T accounts. Describe each transaction.
Cash Accounts Payable (2) 450 (3) 4,900 (1) 39,200 (4) 34,300 (4) 34,300 Merchandise Inventory (1) 39,200 (3) 4,900 (2) 450
Purchase-Related Transactions
OBJ. 2
-
Poff’s Co., a women’s clothing store, purchased $53,000 of merchandise from a supplier on account, terms FOB destination, 2/10, n/30. Poff’s returned $7,000 of the merchandise, receiving a credit memo, and then paid the amount due within the discount period. Journalize Poff’s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.
AnswerCheck Figure: c. Cash, cr. $45,080
Purchase-Related Transactions
OBJ. 2
-
Journalize entries for the following related transactions of Greenville Heating & Air Company:
-
Purchased $57,000 of merchandise from Foster Co. on account, terms 2/10, n/30.
-
Paid the amount owed on the invoice within the discount period.
-
Discovered that $11,000 of the merchandise purchased in (a) was defective and returned items, receiving credit for $10,780 [$11,000 – ($11,000 × 2%)].
-
Purchased $6,300 of merchandise from Foster Co. on account, terms n/30.
-
Received a refund from Foster Co. for return in (c) less the purchase in (d).
AnswerCheck Figure: e. Cash, dr. $4,480
-
Sales-Related Transactions, Including the Use of Credit Cards
OBJ. 2
-
Journalize the entries for the following transactions:
-
Sold merchandise for cash, $116,300. The cost of the merchandise sold was $72,000.
-
Sold merchandise on account, $755,000. The cost of the merchandise sold was $400,000.
-
Sold merchandise to customers who used MasterCard and VISA, $1,950,000. The cost of the merchandise sold was $1,250,000.
-
Sold merchandise to customers who used American Express, $330,000. The cost of the merchandise sold was $230,000.
-
Paid $81,500 to National Clearing House Credit Co. for service fees for processing MasterCard, VISA, and American Express sales.
-
Sales-Related Transactions
OBJ. 2
Sales-Related Transactions
OBJ. 2
-
The debits and credits for four related entries for a sale of $15,000, terms 1/10, n/30, are presented in the following T accounts. Describe each transaction.
Cash Customer Refunds Payable (4) 14,400 (3) 450 Accounts Receivable Sales (1) 14,850 (3) 450 (1) 14,850 (4) 14,400 Cost of Merchandise Sold Merchandise Inventory (2) 8,800 (2) 8,800
Sales-Related Transactions
OBJ. 2
-
Merchandise is sold on account to a customer for $56,500, terms FOB shipping point, 2/10, n/30. The seller paid the freight of $2,100. Determine the following: (a) amount of the sale, (b) amount debited to Accounts Receivable, and (c) amount received within the discount period.
AnswerCheck Figure: c. $57,470
Determining Amounts to Be Paid on Invoices
OBJ. 2
-
Determine the amount to be paid in full settlement of each of the following invoices, assuming that credit for returns and allowances was received prior to payment and that all invoices were paid within the discount period:
Merchandise Freight Paid by Seller Customer Refunds and Allowances a. $20,500 — FOB destination, n/30 $4,800 b. 31,100 $560 FOB shipping point, 2/10, n/30 5,900 c. 24,000 — FOB shipping point, 1/10, n/30 1,300 d. 11,000 370 FOB shipping point, 2/10, n/30 1,800 e. 42,200 — FOB destination, 1/10, n/30 — AnswerCheck Figure: a. $15,700
Sales-Related Transactions
OBJ. 2
-
Showcase Co., a furniture wholesaler, sells merchandise to Balboa Co. on account, $254,500, terms n/30. The cost of the merchandise sold is $152,700. Showcase Co. issues a credit memo for $30,000 as a price adjustment prior to Balboa Co. paying the original invoice. Journalize Showcase Co.’s entries for (a) the sale, including the cost of the merchandise sold; (b) the credit memo; and (c) the receipt of the check for the amount due from Balboa Co.
Purchase-Related Transactions
OBJ. 2
-
Based on the data presented in Exercise 6-14, journalize Balboa Co.’s entries for (a) the purchase, (b) the credit memo, and (c) the payment of the invoice.
Sales Tax
OBJ. 2
-
-
A sale of merchandise on account for $36,000 is subject to an 8% sales tax. (a) Should the sales tax be recorded at the time of sale or when payment is received? (b) What is the amount recorded as sales? (c) What is the amount debited to Accounts Receivable? (d) What is the title of the account to which the $2,880 ($36,000 × 8%) is credited?
AnswerCheck Figure: c. $38,880
-
Sales Tax Transactions
OBJ. 2
-
Journalize the entries to record the following selected transactions:
-
Sold $62,800 of merchandise on account, subject to a sales tax of 5%. The cost of the merchandise sold was $37,500.
-
Paid $39,650 to the state sales tax department for taxes collected.
-
Normal Balances of Merchandise Accounts
OBJ. 2
-
What is the normal balance of the following accounts: (a) Cost of Merchandise Sold, (b) Customer Refunds Payable, (c) Delivery Expense, (d) Merchandise Inventory, (e) Sales, (f) Sales Tax Payable.
Adjusting Entry for Merchandise Inventory Shrinkage
OBJ. 3
-
Paragon Tire Co.’s perpetual inventory records indicate that $2,780,000 of merchandise should be on hand on March 31, 20Y9. The physical inventory indicates that $2,734,800 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Paragon Tire Co. for the year ended March 31, 20Y9.
Adjusting Entries for Customer Refunds and Allowances
OBJ. 3
-
Assume the following data for Oshkosh Company before its year-end adjustments:
Sales $51,600,000 Estimated percent of refunds and allowances for current year sales 1.2% Journalize the adjusting entry for customer refunds and allowances.
Customer Refunds and Allowances
OBJ. 2, 3
-
Zell Company had sales of $1,800,000 and related cost of merchandise sold of $1,150,000 for its first year of operations ending December 31, 20Y3. Zell Company provides customers refunds and allowances for any damaged merchandise. At the end of the year, Zell Company estimates that customers will request refunds and allowances for 1.5% of sales. Assume that on February 3, 20Y4, Zell Company paid a customer a $5,000 cash refund for damaged merchandise. (a) Journalize the adjusting entry on December 31, 20Y3, to record the expected customer refunds and allowances. (b) Journalize the entry to record the cash refund.
Income Statement and Accounts for Merchandiser
OBJ. 4
-
For the fiscal year, sales were $191,350,000 and the cost of merchandise sold was $114,800,000.
-
What was the amount of gross profit?
-
If total operating expenses were $18,250,000, could you determine net income?
-
Is Customer Refunds Payable an asset, liability, or owner’s equity account, and what is its normal balance?
-
Income Statement for Merchandiser
OBJ. 4
-
The following expenses were incurred by a merchandising business during the year. In which expense section of the income statement should each be reported: (a) selling, (b) administrative, or (c) other?
-
-
Advertising expense
-
Depreciation expense on store equipment
-
-
Insurance expense on office equipment
-
Interest expense on notes payable
-
Rent expense on office building
-
Salaries of office personnel
-
Salary of sales manager
-
Sales supplies used
-
Determining Amounts for Items Omitted from Income Statement
OBJ. 4
-
One item is omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them by letter.
Sales $463,400 (b) $1,295,000 (d) Cost of merchandise sold (a) $410,000 (c) $900,000 Gross profit 83,500 277,500 275,000 600,000
Multiple-Step Income Statement
OBJ. 4
-
On March 31, 20Y4, the balances of the accounts appearing in the ledger of Danns Furnishings Company, a furniture wholesaler, are as follows:
Accumulated Depreciation—Building $ 419,000 Merchandise Inventory $ 547,000 Administrative Expenses 302,000 Notes Payable 140,000 Building 1,397,000 Office Supplies 11,000 Cash 98,000 Salaries Payable 4,000 Cost of Merchandise Sold 2,123,000 Sales 3,582,000 Interest Expense 6,000 Selling Expenses 400,000 Kathy Melman, Capital 887,000 Store Supplies 50,000 Kathy Melman, Drawing 98,000 -
Prepare a multiple-step income statement for the year ended March 31, 20Y4.
-
Compare the major advantages and disadvantages of the multiple-step and single-step forms of income statements.
AnswerCheck Figure: a. Net income: $751,000
-
Multiple-Step Income Statement
OBJ. 4
-
-
Identify the errors in the following income statement:
-
Single-Step Income Statement
OBJ. 4
-
Summary operating data for Custom Wire & Tubing Company during the year ended April 30, 20Y6, are as follows: cost of merchandise sold, $6,100,000; administrative expenses, $740,000; interest expense, $25,000; rent revenue, $60,000; sales, $9,332,500; and selling expenses, $1,250,000. Prepare a single-step income statement.
AnswerCheck Figure: Net income: $1,277,500
Closing the Accounts of a Merchandiser
OBJ. 4
-
From the following list, identify the accounts that should be closed to Tim Button, Capital at the end of the fiscal year under a perpetual inventory system: (a) Accounts Receivable, (b) Cost of Merchandise Sold, (c) Customer Refunds Payable, (d) Delivery Expense, (e) Merchandise Inventory, (f) Sales, (g) Supplies, (h) Supplies Expense, (i) Tim Button, Drawing, (j) Wages Expense.
Closing Entries; Net Income
OBJ. 4
-
Based on the data presented in Exercise 6-25, journalize the closing entries.
Closing Entries
OBJ. 4
-
On July 31, 20Y7, the balances of the accounts appearing in the ledger of Yang Interiors Company, a furniture wholesaler, are as follows:
Accumulated Depr.—Building $443,000 Peter Bronsky, Capital $ 644,000 Administrative Expenses 534,000 Peter Bronsky, Drawing 18,000 Building 984,000 Sales 1,745,000 Cash 95,000 Sales Tax Payable 4,500 Cost of Merchandise Sold 941,000 Selling Expenses 194,000 Interest Expense 7,000 Store Supplies 19,000 Merchandise Inventory 140,000 Store Supplies Expense 25,500 Notes Payable 121,000 Prepare the July 31, 20Y7, closing entries for Yang Interiors Company.
Asset Turnover
OBJ. 5
-
The Home Depot reported the following data (in millions) in its recent financial statements:
Year 2 Year 1 Sales $108,203 $100,904 Total assets at the end of the year 44,003 44,529 Total assets at the beginning of the year 44,529 42,966 -
Determine the asset turnover for The Home Depot for Year 2 and Year 1. Round to two decimal places.
-
What conclusions can be drawn concerning the trend in the ability of The Home Depot to effectively use its assets to generate sales?
-
Asset Turnover
OBJ. 5
-
Kroger Co., a national supermarket chain, reported the following data (in millions) in its financial statements for a recent year:
Total revenue $121,162 Total assets at end of year 38,118 Total assets at beginning of year 37,197 -
Compute the asset turnover. Round to two decimal places.
-
Tiffany & Co. is a large North American retailer of jewelry with an asset turnover of 0.82. Why would Tiffany’s asset turnover be lower than that of Kroger?
-
Gross Method for Sales Discounts
-
Schofield Co. sold merchandise on account to Bernard Retail Inc. for $15,000, terms 2/10, n/30. The cost of the merchandise sold was $8,000. Assuming Schofield Co. uses the gross method of recording sales discounts, journalize the entries to record (a) the sale, (b) the receipt of payment assuming it is made within the discount period, and (c) the receipt of payment assuming it is made beyond the discount period.
Gross Method for Sales Discounts
-
The following were selected from among the transactions completed by Essex Company during March of the current year:
Mar. 2. Sold merchandise on account to Parsley Co., $32,000, terms 1/10, n/30. The cost of the merchandise sold was $18,500. 8. Sold merchandise on account to Tabor Co., $24,000, terms 2/10, n/30. The cost of the merchandise sold was $14,400. 11. Received payment on account for the sale of March 2 less the discount. 20. Received payment on account for the sale of March 8. Journalize the March transactions using the gross method of recording sales discounts.
Adjusting Entry for Gross Method
-
The following data were extracted from the accounting records of Sacajawea Mercantile Co. for the year ended June 30, 20Y4:
June 30, 20Y4 Balances Debit Credit Sales $10,000,000 Accounts Receivable $850,000 Allowance for Sales Discounts 400 Estimated sales discounts that will be taken in fiscal year ending June 30, 20Y5 $ 7,000 a. Journalize the June 30, 20Y4, adjusting entry for estimated sales discounts.
b. How would sales and accounts receivable be reported on the financial statements for the year ending June 30, 20Y4?
Discount Taken in Next Fiscal Year
-
Using the data for Sacajawea Mercantile Co. in Exercise 6-35, assume that Mark Bishop pays his June 30, 20Y4, account receivable of $1,500 on July 6, 20Y4, and takes a 2% sales discount. Journalize the entry to record the payment on account from Mark Bishop.
Gross and Net Methods for Sales Discounts
-
The following were selected from among the transactions completed by Strong Retail Group during August of the current year:
Aug. 5. Sold merchandise on account to M. Quinn, $7,500, terms 2/10, n/30. The cost of the merchandise sold was $4,200. 9. Sold merchandise on account to R. Busch., $4,000, terms 1/10, n/30. The cost of the merchandise sold was $2,100. 15. Received payment on account for the sale of August 5 less the discount. 20. Sold merchandise on account to S. Mooney, $6,000, terms n/eom. The cost of the merchandise sold was $3,300. 25. Received payment on account for the sale of August 9. 31. Received payment on account for the sale of August 20. -
Journalize the August transactions using the gross method of recording sales discounts.
-
Journalize the August transactions using the net method of recording sales discounts.
-
What is the total sales for August under each method?
-
Which method of recording sales discounts requires an end-of-period adjusting entry?
-
Customer Refunds, Allowances, and Returns
-
On February 18, Silverman Enterprises sold $24,000 of merchandise to Brewster Co. with terms 2/10, n/30. The cost of the merchandise sold was $12,200. On February 23, Silverman Enterprises issued Brewster Co. a credit memo for returned merchandise. The invoice amount of the returned merchandise was $3,000, and the merchandise originally cost Silverman Enterprises $1,800.
-
Journalize the entries by Silverman Enterprises to record the February 18 sale.
-
Journalize the entries by Silverman Enterprises to record the merchandise returned by Brewster Co. on February 23.
-
Journalize the entry by Silverman Enterprises to record the payment of the amount due by Brewster on February 28.
-
Customer Refunds, Allowances, and Returns
-
On April 23, Stilwell Inc. sold $15,000 of merchandise to Bosch Inc. with terms 2/10, n/30. The cost of the merchandise sold was $9,000. On May 2, Bosch Inc. paid Stilwell for the April 23 purchase less the discount. On May 11, Bosch Inc. returned merchandise to Stilwell Inc. and received a cash refund. The invoice amount of the returned merchandise was $2,500, and the merchandise originally cost Stilwell Inc. $1,300.
-
Journalize the entries by Stilwell Inc. to record the April 23 sale.
-
Journalize the entry by Stilwell Inc. to record the payment by Bosch Inc. on May 2.
-
Journalize the entries by Stilwell Inc. on May 11 to record the cash refund to Bosch Inc. and the returned merchandise.
-
How are Estimated Returns Inventory and Customer Refunds Payable reported on the financial statements of Stilwell Inc.?
-
Adjusting Entries for Customer Refunds, Allowances, and Returns
-
-
Simons Company had sales of $24,000,000 and related cost of goods sold of $13,300,000 for its first year of operations ending December 31, 20Y6. Simons Company provides customers a refund for any returned or damaged merchandise. At the end of 20Y6, Simons Company estimates that customers will request refunds for 1.1% of sales and that merchandise costing $150,000 will be returned. Journalize the adjusting entries on December 31, 20Y6, to record the expected customer returns.
-
Adjusting Entries for Customer Refunds, Allowances, and Returns
-
Swartz Company had sales of $7,800,000 and related cost of goods sold of $4,500,000 for its first year of operations ending December 31, 20Y3. Swartz Company provides customers a refund for any returned or damaged merchandise. At the end of 20Y3, Swartz Company estimates that customers will request refunds for 1.8% of sales and that merchandise costing $90,000 will be returned. Journalize the adjusting entries on December 31, 20Y3, to record the expected customer returns.
Adjusting Entry for Customer Refunds, Allowances, and Returns; Customer Refund
-
Sinclair Company had sales of $12,000,000 and related cost of merchandise sold of $7,200,000 for its first year of operations ending December 31, 20Y1. Sinclair Company provides customers a refund for any returned or damaged merchandise. At the end of 20Y1, Sinclair Company estimates that customers will request refunds for 1.5% of sales and that merchandise costing $120,000 will be returned. Assume that on February 15, 20Y2, Brown Co. returned merchandise with an invoice amount of $8,000 for a cash refund. The returned merchandise originally cost Sinclair Company $5,500. (a) Journalize the adjusting entries on December 31, 20Y1, to record the expected customer returns. (b) Journalize the entries to record the returned merchandise and cash refund to Brown Co. on February 15, 20Y2.
Rules of Debit and Credit for Periodic Inventory Accounts
-
Complete the following table by indicating for (a) through (g) whether the proper answer is debit or credit:
Account Increase Decrease Normal Balance Purchases debit (a) (b) Purchases Discounts credit (c) credit Purchases Returns and Allowances (d) (e) (f) Freight In debit (g) debit
Journal Entries Using the Periodic Inventory System
-
The following selected transactions were completed by Air Systems Company during January of the current year. Air Systems Company uses the periodic inventory system.
Jan. 2. Purchased $18,200 of merchandise on account, FOB shipping point, terms 2/15, n/30. 5. Paid freight of $190 on the January 2 purchase. 6. Returned $2,750 of the merchandise purchased on January 2. 13. Sold merchandise on account, $37,300, FOB destination, 1/10, n/30. The cost of merchandise sold was $22,400. 15. Paid freight of $215 for the merchandise sold on January 13. 17. Paid for the purchase of January 2 less the return and discount. 23. Received payment on account for the sale of January 13 less the discount. Journalize the entries to record the transactions of Air Systems Company.
Identify Items Missing in Determining Cost of Merchandise Sold
Cost of Merchandise Sold and Related Items
-
The following data were extracted from the accounting records of Harkins Company for the year ended April 30, 20Y7:
Merchandise inventory, May 1, 20Y6 $ 380,000 Merchandise inventory, April 30, 20Y7 426,600 Purchases 3,800,000 Purchases returns and allowances 150,000 Purchases discounts 80,000 Sales 5,850,000 Freight in 16,600 -
Prepare the cost of merchandise sold section of the income statement for the year ended April 30, 20Y7, using the periodic inventory system.
-
Determine the gross profit to be reported on the income statement for the year ended April 30, 20Y7.
-
Would gross profit be different if the perpetual inventory system was used instead of the periodic inventory system?
AnswerCheck Figure: Cost of merchandise sold, $3,540,000
-
Cost of Merchandise Sold
-
Based on the following data, determine the cost of merchandise sold for November:
Merchandise inventory, November 1 $ 28,000 Merchandise inventory, November 30 46,000 Purchases 475,000 Purchases returns and allowances 15,000 Purchases discounts 9,000 Freight in 7,000
Cost of Merchandise Sold
-
Based on the following data, determine the cost of merchandise sold for July:
Merchandise inventory, July 1 $ 190,850 Merchandise inventory, July 31 195,350 Purchases 1,126,000 Purchases returns and allowances 46,000 Purchases discounts 23,000 Freight in 17,500
Cost of Merchandise Sold
Closing Entries Using Periodic Inventory System
-
United Rug Company is a small rug retailer owned and operated by Pat Kirwan. After the accounts have been adjusted on December 31, the following selected account balances were taken from the ledger:
Advertising Expense $ 36,000 Depreciation Expense 13,000 Freight In 17,000 Merchandise Inventory, January 1 375,000 Merchandise Inventory, December 31 480,000 Miscellaneous Expense 9,000 Purchases 1,760,000 Purchases Discounts 35,000 Purchases Returns and Allowances 45,000 Pat Kirwan, Drawing 65,000 Salaries Expense 375,000 Sales 2,220,000 Journalize the closing entries on December 31.