Chapter 4 Solutions

Chapter 4: Accounting for a Merchandising Business Discussion Questions: Key Points
1. Inventory, Cost of Goods Sold, Sales, Sales Discounts, Sales Returns and Allowances. Students might identify gross profit, but this is not an account, it is a subtotal. 2. A perpetual system allows the company to know more about the inventory items that are selling well and not selling well. It allows companies to monitor inventory more closely to avoid stock-outs or excessive holding costs. It can also help companies to more effectively prevent and detect theft of inventory through closer monitoring. 3. Subsidiary ledgers are used to keep track of detailed information that would be too cumbersome for a general ledger. For example, individual accounts receivable and payable would be noted in a subsidiary ledger. 4. The terms 2/10, n/30 mean that the purchasing company gets a two percent discount if it pays within 10 days, otherwise the full amount is due within 30 days. You should advise them to take advantage of all early payment discounts because by delaying payment by 20 days it is costing two percent. Given that there are approximately 18 twenty-day periods in a year, that translates into a 36 percent interest rate. 5. Four accounts are involved. A/R is debited and Sales is credited while Cost of Goods Sold is debited while Inventory is credited. 6. Sales returns and allowances is a contra-revenue account. It would appear on the income statement along with sales (subtracting from it) in order to arrive at a net sales subtotal. 7. Debit memos are most commonly used to decrease accounts payable. Credit memos are most commonly used to decrease accounts receivable. Both documents would be used with the return of defective merchandise. The purchaser would use a debit memorandum to reduce accounts payable (with a debit) on items that were returned so that they would not pay for the returned items. The seller of merchandise would use a credit memorandum to reduce receivables (with a credit) so that they would not bill the customer for items that were returned. 8. Free on board or f.o.b. terms describe where the goods change hands and who is responsible for the shipping charges. It is important to understand f.o.b. terms because shipping charges can significantly affect the total price paid to acquire items. If a merchandiser does not take shipping charges on merchandise received into account when setting prices, suitable profit might not be earned. Also, if goods are damaged in transit, it is important to know which party is responsible for making the situation right. 9. A single step income statement arrives at net income in a single-step of subtracting expenses from revenues. A multi-step income statement arrives at several subtotals along the way to calculating net income. A multi-step income statement is appropriate for a merchandising or a manufacturing company. 10. Several factors could account for the shrinking difference between what a company sells its goods for and what it costs to acquire.. It could be that competitors have entered the market, lowering the prices that could be charged. It could be that recessionary forces have made consumers of the product more price-conscious. Later periods of a products life cycle are generally associated with lower prices. All of the above assumed a single product being sold. If a company sells multiple products, moving from high mark-up items to lower mark-up items would have a similar effect.
WaybrightKempFinancialAccounting1e 231
Short Exercises
(5-10 min.) S 4-1
a. A physical count of goods on hand at year end is required. b. Inventory records are continuously updated. c. Purchases of inventory are recorded in an asset account at the time of purchase. d. Bar code scanners are often utilized when using this inventory system. e. It is necessary to calculate the cost of goods sold at the end of the year with this inventory system. c. Both periodic and perpetual inventory b. Perpetual inventory b. Perpetual inventory b. Perpetual inventory a. Periodic inventory
(5-10 min.) S 4-2

Journal POST DATE Dec ACCOUNTS REF. Dr. 1,700 1,700 Cr.
31 Cost of Goods Sold Inventory Adjust inventory to physical count
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SolutionsManual
(5-10 min.) S 4-3

Req 1 Journal POST DATE Mar 1 Inventory Accounts Payable Pacific Trail Purchase inventory on account ACCOUNTS REF. Dr. 40,000 40,000 Cr.
Mar
Accounts Payable Pacific Trail Cash ($40,000 .98) Inventory ($40,000 .02) Record payment of inventory purchases within the discount period.
40,000 39,200 800
Req 2 Final cost of Inventory = Inventory $40,000 discount taken $800 = $39,200. (5-10 min.) S 4-4 Req 1 a. $8,000 - $1,100 = $6,900 ($8,000 - $1,100) x .98 = $6,762
(5-10 min.) S 4-5

Journal POST DATE a. Inventory Accounts Payable Pool Warehouse ACCOUNTS REF. Dr. 8,000 8,000 Cr.
b.
Accounts Payable Pool Warehouse Inventory
1,100 1,100
c.
Accounts Payable Pool Warehouse Cash ($6,900 .98) Inventory ($6,900 .02)
6,900 6,762 800
234
SolutionsManual
(5-10 min.) S 4-6
Journal POST DATE a. Inventory Accounts Payable Purchase inventory on account ACCOUNTS REF. Dr. 8,700 8,700 Cr.
b.
Inventory Cash Paid freight charges to have inventory delivered
175 175
c.
Accounts Payable Cash ($8,700 .98) Inventory ($8,700 .02) Record payment of inventory purchases less returns within the discount period.
8,700 8,526 174
WaybrightKempFinancialAccounting1e
235
(5-10 min.) S 4-7

Journal POST DATE a. ACCOUNTS Accounts Receivable Sonnys Spas Sales Revenue Cost of Goods Sold Inventory 30,250 30,250 REF. Dr. 55,000 55,000 Cr.
b.
Cash ($55,000 .98) Sales Discount ($55,000 .02) Accounts Receivable Sonnys Spas
53,900 1,100 55,000
236
SolutionsManual
(5-10 min.) S 4-8

Journal POST DATE May ACCOUNTS 17 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Record sale of inventory on account. 460.00 460.00 REF. Dr. 750.00 750.00 Cr.
21 Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold Record receipt of returned goods.
225.00 225.00 140.00 140.00
26 Cash [($750 225) .98] Sales Discount [($750 225) .02] Accounts Receivable ($750 - $225) Record payment received within the discount period.
514.50 10.50 525.00
237
(5-10 min.) S 4-9

Req 1 Net Sales Revenue: Sales Revenue... Less: Sales Returns and Allowances . Sales Discounts [($750 $225) .02]... Net Sales Revenue. Req 2 Net Sales Revenue: Less: Cost of Goods Sold Gross profit. $ 750.00 (225.00) (10.50) $ 514.50 $ 514.50 (320.00) $ 194.50
(5-10 min.) S 4-10

Req 1 a. Cash Accounts Receivable Inventory Supplies Prepaid Rent Total Current Assets $ 5,200 6,000 37,000 3,400 6,200 $ 57,800
b.
Accounts Payable Wages Payable Unearned Revenue Total Current Liabilities
$ 19,500 1,500 2,000 $ 23,000 $ 33,000 (4,500) $28,500
c.
Equipment Less: Accumulated Depreciation, Equipment
Building Less: Accumulated Depreciation, Building

238 SolutionsManual
$ 87,000 (24,000) 63,000
Book Value of Plant Assets
$ 91,500
d.
Total Long-Term Liabilities (Note Payable, Long Term)
$28,000
239
(10-15 min.) S 4-11

Req. 1 ADR, Inc. Income Statement Year Ended August 31, 2010 Net sales revenue Less: Cost of goods sold Gross profit Less: Operating expense Net income $28,000 19,500 8,500 3,700 $ 4,800
240
SolutionsManual
(10-15 min.) S 4-12

ADR, Inc. Balance Sheet August 31, 2010 Assets Current assets: Cash Accounts Receivable Inventory Prepaid Rent Total current assets Fixed assets: Equipment, net Total assets Liabilities Current liabilities: Accounts Payable Wages Payable Accrued Liabilities Total current liabilities Long-term liabilities: Long-Term Notes Payable Total liabilities Stockholders equity Total stockholders equity Total liabilities and stockholders equity
$ 3,500 2,900 1,700 800 8,900 6,100 $15,000
$ 4,500 1,100 1,900 7,500 2,300 9,800
5,200 $15,000
241
(10-15 min.) S 4-13

Gross Profit Percentage Gross Profit Net Sales Revenue ($28,000 - $19,500) $28,000
0.304 or 30.4%
Current Ratio
Current Assets Current Liabilities
($3,500 + $2,900 + $1,700 + $800) = $4,500 + $1,100 + $1,900) = 1.19
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SolutionsManual
Exercises
(5-10 min.) E 4-14A
Req 1 Journal POST DATE Dec 31 Cost of Goods Sold Inventory Adjust inventory to physical count Req 2 The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged. ACCOUNTS REF. Dr. 1,800 1,800 Cr.
243
(10-15 min.) E 4-15A

Journal POST DATE Jun 15 Inventory Accounts Payable ACCOUNTS REF. Dr. 4,300 4,300 Cr.
18
Inventory Cash
350 350
20
Accounts payable Inventory
900 900
28
Accounts Payable ($4,300 - $900) Cash ($3,400 .97) Inventory ($3,400 .03)
3,400 3,298 102
244
SolutionsManual
(10-15 min.) E 4-16A

Journal POST DATE Mar 3 Inventory Accounts Payable Purchased Inventory on account. ACCOUNTS REF. Dr. 4,850 4,850 Cr.
Accounts payable Inventory Returned damaged inventory to supplier.
600 600
12
Accounts Payable ($4,850 - $600) Cash ($4,250 - $80) Inventory [($4,600-600) x .02] Paid invoice in full.
4,250 4,170 80
245
(10-15 min.) E 4-17A

Req 1 Journal POST DATE Sep ACCOUNTS 14 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 1,350 1,350 REF. Dr. 2,300 2,300 Cr.
16 Delivery Expense Cash
75 75
20 Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold
900 900 540 540
23 Cash ($1,400 .99) Sales Discount ($1,400 .01) Accounts Receivable ($2,300 - $900)
1,386 14 1,400
246
SolutionsManual
(10-15 min.) E 4-18A
Journal POST DATE Nov 3 ACCOUNTS Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Record sale of inventory on account. 1,040.00 1,040.00 REF. Dr. 1,600.00 1,600.00 Cr.
Accounts Receivable Cash Record prepayment of shipping charges.
85.00 85.00
Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold Record return of goods from customer.
250.00 250.00 162.50 162.50
16 Cash ($1,600 +$85 - $250 - $27) Sales Discounts [($1,600 $250) .02] Accounts Receivable ($1,600 + $85 - $250) Record receipt of payment from customer.
1,408.00 27.00 1,435.00
247
(15-20 min.) E 4-19A
Journal POST DATE ACCOUNTS REF. Dr. 3,500 3,500 400 400 110 110 4,300 4,300 2,100 2,100 3,100 3,038 62 300 300 3,880 120 4,000 Cr.
Apr 3 Inventory Accounts Payable 6 Accounts Payable Inventory 8 Inventory Cash Accounts Receivable 11 Sales Revenue Cost of Goods Sold Inventory 12 Accounts Payable ($3,500 - $400) Cash ($3,100 .98) Inventory ($3,100 .02) 18 Sales Returns and Allowances Accounts Receivable 25 Cash ($4,000 .97) Sales Discounts ($4,000 .03) Accounts Receivable ($4,300 - $300)
248
SolutionsManual
(10-15 min.) E 4-20A
a. Sales *
= Net Sales + Sales Discounts
= $100,400 + $2,500 = $102,900
b .
Net Sales
= Gross Profit + Cost of Goods Sold = $32,100 + $68,300 = $100,400
c. Net Sales
= Sales Sales Discounts
= $64,000 $1,700 = $62,300
d .
Gross Profit
= Net Sales Cost of Goods Sold
= $62,300 $44,600 = $17,700
e. Sales Discounts
= Sales Net Sales
= $102,000 - 93,500 = $8,500
f.
Cost of Goods Sold = Net Sales Gross Profit
= $93,500 28,600 = $64,900
Sales
= Net Sales + Sales Discounts
= $86,300 + 2,100 = $88,400
h .
Gross Profit
= Net Sales Cost of Goods Sold
= $86,300 - $57,700 = $28,600
* You must find (b) before you find (a).
249
(10-15 min.) E 4-21A

Req 1 Atlantis Aquatics, Inc. Income Statement Year Ended December 31, 2010 Revenues: Net Sales Revenue Expenses: Cost of Goods Sold Selling Expenses General and Administrative Expenses Total Expenses Net Income $136,400 26,800 18,200 181,400 $ 55,100 $ 236,500
Computations: Net Sales Revenue: $243,500 - $4,800 - $2,200 = $236,500 Req 2 The single-step income statement is not recommended for Atlantis Aquatics because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.
250
SolutionsManual
(15-20 min.) E 4-22A

Req 1 Atlantis Aquatics, Inc. Income Statement Year Ended December 31, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses General and Administrative Expenses Net Income $243,500 $4,800 2,200 7,000 $ 236,500 136,400 100,100 26,800 18,200 45,000 $ 55,100
Note: There are no Other Revenue or Expense items so Operating Income is Net Income
Req 2 Gross Profit Percentage Req 3 Atlantis Aquatics Gross Profit rate of 42.3% in 2010 is an improvement over the gross profit rate of 38.7% in 2009. Atlantis Aquatics has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009. = Gross Profit Net Sales Revenue = $100,100 $236,500 = .423 or 42.3%
251
(15-20 min.) E 4-23A

Req 1 Atlantis Aquatics, Inc. Balance Sheet December 31, 2010 Liabilities Current Liabilities: Accounts Payable Wages Payable Unearned Revenues Total Current Liabilities Long-term liabilities: $ 10,300 Long-Term Notes Payable Mortgage Payable Total liabilities 7,600 Stockholders Equity Common Stock Retained Earnings* Total Stockholders Equity
Assets Current assets: Cash Accounts Receivable Inventory Prepaid Rent Supplies Total current assets Fixed assets: Equipment Less Accumulated Depreciation, Equip Building Less Accumulated Depreciation, Bldg Total assets
$ 3,700 3,200 1,700 800 900
$ 4,500 1,100 1,900 $ 7,500 10,000 37,000
13,700 6,100 125,000 18,500
47,000 54,500
35,000 34,900 69,900
106,500 Total Liabilities and $ 124,400 Stockholders Equity $ 124,400
*Retained Earnings = ($13,800 Beginning Balance + $55,100 Net Income - $34,000 Dividends) = $34,900 Req 2 Current Assets Current Liabilities
Current Ratio
$10,300 = $7,500 = 1.37
Req 3 Atlantis Aquatics Current Ratio of 1.37 in 2010 is an improvement over the Current Ratio of 1.25 in 2009. Atlantis Aquatics has a higher percentage of current assets compared to current liabilities than it did in 2009.
252
SolutionsManual
(10-15 min.) E 4-24A

Gross Profit Percentage = Gross Profit ** Net Sales Revenue * = $20,500,000 $44,500,000 = .461 or 46.1%
* Net Sales Revenue = (Sales Revenue Sales Returns and Allowances Sales Discounts) = ($47,000,000 - $2,000,000 - $500,000) = ($44,500,000) ** Gross Profit = (Net Sales Revenue Cost of Goods Sold) = ($44,500,000 - $24,000,000) = $20,500,000 Current Assets Current Liabilities $15,000,000 = $9,000,000 = 1.67
Current Ratio
(5-10 min.) E 4-25B

Req 1 Journal POST DATE Dec 31 Cost of Goods Sold Inventory Adjust inventory to physical count Req 2 The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged. ACCOUNTS REF. Dr. 1,500 1,500 Cr.
253
(10-15 min.) E 4-26B

Journal POST DATE Nov 15 Inventory Accounts Payable ACCOUNTS REF. Dr. 5,100 5,100 Cr.
18
Inventory Cash
175 175
20
Accounts payable Inventory
600 600
28
Accounts Payable ($5,100 - $600) Cash ($4,500 .97) Inventory ($4,500 .03)
4,500 4,365 135
254
SolutionsManual
(10-15 min.) E 4-27B

Journal POST DATE Jan 3 Inventory Accounts Payable Purchased inventory on account. ACCOUNTS REF. Dr. 5,925 5,925 Cr.
Accounts payable Inventory Returned damaged inventory to supplier.
500 500
12
Accounts Payable ($5,925 - $500) Cash ($5,425 - $52) Inventory [($5,700-500) x .01] Paid invoice in full.
5,425 5,373 52
255
(10-15 min.) E4-28B

Req 1 Journal POST DATE Nov ACCOUNTS 14 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 1,330 1,330 REF. Dr. 3,100 3,100 Cr.
16 Delivery Expense Cash
65 65
20 Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold
800 800 420 420
23 Cash ($2,300 .97) Sales Discount ($2,300 .03) Accounts Receivable ($3,100 - $800)
2,231 69 2,300
256
SolutionsManual
(10-15 min.) E 4-29B
Journal POST DATE Apr 3 ACCOUNTS Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Record sale of inventory on account. 1,470.00 1,470.00 REF. Dr. 2,100.00 2,100.00 Cr.
Accounts Receivable Cash Record prepayment of shipping charges.
50.00 50.00
Sales Returns and Allowances Accounts Receivable Inventory Cost of Goods Sold Record return of goods from customer.
225.00 225.00 157.50 157.50
16 Cash ($2,100.00 + $50.00 - $225.00 - $18.75) Sales Discounts [($2,100.00 $225.00) .01] Accounts Receivable ($2,100 + $50 - $225) Record receipt of payment from customer.
1,906.25 18.75 1,925.00
257
(15-20 min.) E 4-30B

Journal DATE ACCOUNTS Apr 3 Inventory Accounts Payable 6 Accounts Payable Inventory 8 Inventory Cash 11 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 12 Accounts Payable ($3,400 - $500) Cash ($2,900 .99) Inventory ($2,900 .01) 18 Sales Returns and Allowances Accounts Receivable 25 Cash ($2,575 .97) Sales Discounts ($2,575 .03) Accounts Receivable ($2,800 - $225) POST REF. Dr. 3,400 500 500 130 130 2,800 2,800 1,600 1,600 2,900 2,2,871 29 225 225 2,497.75 77.25 2,575.00 Cr. 3,400
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SolutionsManual
(10-15 min.) E 4-31B
a.
Sales *
Net Sales + Sales Discounts
= $105,200 + $1,700 = $106,900
b.
Net Sales
Gross Profit + Cost of Goods Sold
= $37,700 + $67,500 = $105,200
c.
Net Sales
Sales Sales Discounts
= $89,600 $2,900 = $86,700
d.
Gross Profit
Net Sales Cost of Goods Sold
= $86,700 $55,700 = $31,000
e.
Sales Discounts
Sales Net Sales
= $103,000 94,300 = $8,700
f.
Cost of Goods Sold
Net Sales Gross Profit
= $94,300 31,500 = $62,800
Sales
Net Sales + Sales Discounts
= $88,000 + 1,400 = $89,400
h.
Gross Profit
Net Sales Cost of Goods Sold
= $88,000 - $51,900 = $36,100
* You must find (b) before you find (a).
259
(10-15 min.) E 4-32B

Req 1 Great Gadget, Inc. Income Statement Year Ended December 31, 2010 Revenues: Net Sales Revenue Expenses: Cost of Goods Sold Selling Expenses General and Administrative Expenses Total Expenses Net Income $135,000 43,500 18,200 196,700 $ 55,900 $ 252,600
Computations: Net Sales Revenue: $257,000 - $2,900 - $1,500 = $252,600 Req 2 The single-step income statement is not recommended for Great Gadget because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.
260
SolutionsManual
(15-20 min.) E 4-33B

Req 1 Great Gadget, Inc. Income Statement Year Ended December 31, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses General and Administrative Expenses Net Income $257,000 $2,900 1,500 4,400 $ 252,600 135,000 117,600 43,500 18,200 61,700 $ 55,900
Req 2 Gross Profit Percentage Req 3 Great Gadgets Gross Profit rate of 46.6% in 2010 has deteriorated from the gross profit rate of 52.3%% in 2009. Great Gadget has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009. = Gross Profit Net Sales Revenue = $117,600 $252,600 = .466 or 46.6%
261
(15-20 min.) E 4-34B Req 1 Great Gadget, Inc. Balance Sheet December 31, 2010 Assets Current assets: Cash Accounts Receivable Inventory Prepaid Rent Supplies Total current assets Fixed assets: Equipment Less Accumulated Depreciation, Equip Building Less Accumulated Depreciation, Bldg Total assets Liabilities Current Liabilities: Accounts Payable Wages Payable Unearned Revenues Total Current Liabilities Long-term liabilities: $ 23,400 Long-Term Notes Payable Mortgage Payable Total liabilities 26,100 Stockholders Equity Common Stock Retained Earnings* Total Stockholders Equity
$ 9,300 4,500 3,700 2,600 3,300
$ 6,300 1,300 1,900 $ 9,500 35,000 43,500
39,800 13,700 130,000 25,900
78,500 88,000
25,000 40,600 65,600
104,100 Total Liabilities and $ 153,600 Stockholders Equity $ 153,600
*Retained Earnings = ($25,700 Beginning Balance + $55,900 Net Income - $41,000 Dividends) = $40,600. Req 2
Current Ratio
$23,400 = $9,500 = 2.46
Req 3 Great Gadgets Current Ratio of 2.46 in 2010 has deteriorated from the Current Ratio of 3.62 in 2009. Great Gadget has a lower percentage of current assets compared to current liabilities than it did in 2009.
262
SolutionsManual
(10-15 min.) E 4-35B

Gross Profit Percentage = Gross Profit ** Net Sales Revenue * = $27,700,000 $50,700,000 = .546 or 54.6%
* Net Sales Revenue = (Sales Revenue Sales Returns and Allowances Sales Discounts) = ($53,000,000 - $2,000,000 - $300,000) = ($50,700,000) ** Gross Profit = (Net Sales Revenue Cost of Goods Sold) = ($50,700,000 - $23,000,000) = $27,700,000
Current Ratio
$13,000,000 = $7,000,000 = 1.86
263
Problems
(15-20 min.) P 4-36A
Req. 1 Journal POS T REF.
DATE Feb 3 Inventory Cash
ACCOUNTS
Dr. 5,400 650
Cr. 5,400 650
9 Supplies Accounts Payable Supplies Unlimited 16 Inventory Accounts Payable A to Z, Inc. 22 Accounts Payable A to Z, Inc. Inventory 28 Accounts Payable Supplies Unlimited Cash 28 Accounts Payable A to Z, Inc. ($6,800 - $1,200) Cash ($5,600 x .98) Inventory ($5,600 x .02)
6,800 6,800 1,200 1,200 650 650 5,600 5,488 112
264
SolutionsManual
(10-15 min.) P4-37A

Req 1 Journal DATE ACCOUNTS Jun 3 Accounts Receivable J. Henderson Sales Revenue Cost of Goods Sold Inventory 4 Delivery Expense Cash 10 Cash Sales Revenue Cost of Goods Sold Inventory 17 Cash ($3,200 x .98) Sales Discount ($3,200 x .02) Accounts Receivable J. Henderson 22 Accounts Receivable M. Perez Sales Revenue Cost of Goods Sold Inventory 26 Sales Returns and Allowances Accounts Receivable M. Perez 30 Cash ($4,100 .97) Sales Discount ($4,100 .03) Accounts Receivable ($4,700 - $600) POST REF. Dr. 3,200 2,100 2,100 250 250 1,800 1,800 1,200 1,200 3,136 64 3,200 4,700 4,700 3,100 3,100 600 600 3,977 123 4,100 Cr. 3,200
265
(20-25 min.) P 4-38A

Req 1 M&L Furniture Warehouse Journal POST DATE May ACCOUNTS REF. Dr. 5,800 5,800 Cr.
4 Inventory Accounts Payable - M & L Furniture Warehouse Record purchase of inventory on account. 7 Inventory Cash Record payment of freight charges. 10 Accounts Payable M & L Furniture Warehouse Inventory Record inventory returned to supplier. 18 Accounts Payable M & L Furniture Warehouse Cash ($2,000 x .98) Inventory ($2,000 .02) Record partial payment of invoice. 31 Accounts Payable M & L Furniture Warehouse ($5,800 $1,400 - $2,000) Cash Record payment of remainder of invoice in full.
125 125 1,400 1,400 2,000 1,960 40
2,400 2,400
266
SolutionsManual
Req 2 May
Kinzer Warehouse 4 Accounts Receivable - Kinzer Furniture Sales Revenue Cost of Goods Sold Inventory Record sale of inventory on account. 10 Sales Returns and Allowances Accounts Receivable - Kinzer Furniture Inventory Cost of Goods Sold Record receipt of returned goods. 18 Cash ($2,000 x .98) Sales Discount ($2,000 x .02) Accounts Receivable - Kinzer Furniture Record partial payment received. 31 Cash Accounts Receivable - Kinzer Furniture ($5,800 - $1,400 - $2,000) Record payment on remainder of invoice received. 5,800 5,800 3,300 3,300
1,400 1,400 800 800 1,960 40 2,000 2,400 2,400
267
(20-25 min.) P 4-39A

Journal DATE Oct 4 ACCOUNTS Inventory ($5,900 + $300) Accounts Payable Firerock Tire Record purchase of inventory on account Supplies Accounts Payable OfficeMaxx Record purchase of supplies on account Accounts Receivable L. Simpson Sales Revenue Cost of Goods Sold Inventory Record sale on account Delivery Expense Cash Record payment of freight charges Accounts Payable Firerock Tire Inventory Record return of merchandise to supplier 15 Cash Sales Revenue Cost of Goods Sold Inventory Record cash sales. 16 Accounts Payable - OfficeMaxx Cash ($350 X .98) Supplies ($350 X .02) Record payment for supplies Accounts Payable Firerock Tire ($5,900 + $300 $1,400) Cash ($4,800 $90) Inventory [($5,900 - $1,400) .02] Sales Returns and Allowances Accounts Receivable L. Simpson 650 650 350 350 350 343 7 POST REF. Dr. 6,200 Cr. 6,200 350 350 950 950 500 500 75 75 1,400 1,400
11
13
18
4,800 4,710 90 175 175
20
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Inventory Cost of Goods Sold Record receipt of returned goods. 22 Inventory Cash Record purchase of inventory for cash. 23 Cash ($775 .97) Sales Discounts ($775 .03) Accounts Receivable L. Simpson ($950 - $175) Record payment received on account
100 100 2,100 2,100
751.75 23.25 775.00
Req. 2 Sales Revenue ($950 + $650) Less: Sales Returns and Allowance Sales Discounts Net Sales Revenue Cost of Goods Sold ($500+ $350 -$100) Gross Profit $1,600.00 $ 175.00 23.25 198.25 1,401.75 750.00 $ 651.75
269
(20-25 min.) P 4-40A

Req. 1 Sparkys Electrical, Inc. Income Statement Month Ended November 30, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses General and Administrative Expenses Net Income $193,200 $8,700 2,600 11,300 $ 181,900 103,400 78,500 25,200 16,100 41,300 $ 37,200
Req 2 Gross Profit Percentage Req 3 Sparkys Electrical Inc.s 43.2% gross profit percentage means that each dollar of net sales generates 43.2 cents of gross profit that is used to cover operating expenses and generate net income. = Gross Profit Net Sales Revenue = $78,500 $181,900 = .432 or 43.2%
270
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(25-30 min.) P 4-41A

Req. 1 Williams Industries, Inc. Income Statement Year Ended December 31, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses: Commission Expense Advertising Expense Delivery Expense General and Administrative Expenses Office Salaries Expense Utilities Expense Rent Expense Insurance Expense Operating Income Other Revenues (Expenses) Interest Expense Net Income $322,800 $6,700 2,200 8,900 $ 313,900 158,400 155,500 22,300 12,600 1,300 52,000 10,300 5,800 5,700
36,200
73,800
110,000 45,500 (1,700) $43,800
Req 2 Williams Industries, Inc. Statement of Retained Earnings Year Ended December 31, 2010 Retained earnings, January 1, 2010 Plus: Net Income Subtotal Less: Dividends Retained earnings, December 31, 2010 $ 87,600 43,800 131,400 14,000 $ 117,400
271
Req 3 Williams Industries, Inc. Balance Sheet December 31, 2010 Assets Current Assets: Cash Accounts Receivable Inventory Supplies Prepaid Rent Total Current Assets Fixed Assets: Equipment Less: Accumulated Depreciation, Equipment Building Less: Accumulated Depreciation, Building Total assets Liabilities Current Liabilities: Accounts Payable Wages Payable Unearned Sales Revenue Total Current Liabilities Long-Term Liabilities: Mortgage Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $ 16,500 1,600 2,500 20,600 37,000 57,600 35,000 117,400 152,400 $210,000 $ 7,800 6,900 16,400 600 1,200 32,900 $104,000 26,400 140,000 40,500 77,600
99,500 $210,000
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(20-25 min.) P 4-42A

Req 1 Gross Profit Percentage = Gross Profit Net Sales Revenue = $155,500* $313,900* = .495 or 49.5%
* Numbers are taken from the solution to P4-41A above Req 2 Williams Industries, Inc.s Gross Profit rate of 49.5% in 2010 has deteriorated from the gross profit rate of 51.3%% in 2009. Williams Industries, Inc. has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009. Req 3 Current Ratio Current Assets Current Liabilities $32,900 = $20,600 = 1.60
Req 4 Williams Industries, Inc.s Current Ratio of 1.60 in 2010 has improved from the Current Ratio of 1.47 in 2009. Williams Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.
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(15-20 min.) P 4-43B

Req. 1 Journal DATE Sep 3 Inventory Cash ACCOUNTS POST REF. Dr. 5,100 800 800 4,300 4,300 1,100 1,100 800 800 3,200 3,104 96 Cr. 5,100
9 Supplies Accounts Payable Chandler Unlimited 16 Inventory Accounts Payable Garden Supplies, Inc. 22 Accounts Payable Garden Supplies, Inc. Inventory 28 Accounts Payable Chandler Unlimited Cash 28 Accounts Payable Garden Supplies, Inc. ($4,300- $1,100) Cash ($3,200 x .97) Inventory ($3,200 x .03)
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(10-15 min.) P4-44B

Req 1 Journal POST DATE Apr ACCOUNTS 3 Accounts Receivable A. Klecans Sales Revenue Cost of Goods Sold Inventory 4 Delivery Expense Cash 10 Cash Sales Revenue Cost of Goods Sold Inventory 17 Cash ($3,600 x .97) Sales Discount ($3,600 x .03) Accounts Receivable A. Klecans 22 Accounts Receivable M. Perez Sales Revenue Cost of Goods Sold Inventory 26 Sales Returns and Allowances Accounts Receivable M. Perez 30 Cash ($4,900 .98) Sales Discount ($4,900 .02) Accounts Receivable ($5,100 - $200) REF. Dr. 3,600 3,600 1,700 1,700 75 75 2,700 2,700 1,200 1,200 3,492 108 3,600 5,100 5,100 2,500 2,500 200 200 4,802 98 4,900 Cr.
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(20-25 min.) P 4-45B

Req 1 Retro Furniture Journal DATE ACCOUNTS Oct 4 Inventory Accounts Payable - E & S Furniture Warehouse Record purchase of inventory on account. 7 Inventory Cash Record payment of freight charges. 10 Accounts Payable E & S Furniture Warehouse Inventory Record inventory returned to supplier. 18 Accounts Payable E & S Furniture Warehouse Cash ($2,000 x .99) Inventory ($2,000 .01) Record partial payment of invoice. 31 Accounts Payable E & S Furniture Warehouse ($8,000 $1,000 - $2,000) Cash Record payment of remainder of invoice in full. POST REF. Dr. 8,000 Cr. 5,800
200 200 1,000 1,000 2,000 1,980 20
5,000 5,000
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Req 2 Oct
E & S Furniture Warehouse 4 Accounts Receivable - Retro Furniture Sales Revenue Cost of Goods Sold Inventory Record sale of inventory on account. 2,900 2,900 8,000 8,000
10 Sales Returns and Allowances Accounts Receivable - Retro Furniture Inventory Cost of Goods Sold Record receipt of returned goods.
1,000 1,000 450 450
18 Cash ($2,000 x .99) Sales Discount ($2,000 x .01) Accounts Receivable - Retro Furniture Record partial payment received.
1,980 20 2,000
31 Cash Accounts Receivable - Retro Furniture ($8,000 - $1,000 - $2,000) Record payment on remainder of invoice received.
5,000 5,000
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(20-25 min.) P 4-46B

Journal DATE May 4 ACCOUNTS Inventory ($5,400 + $125) Accounts Payable Bargain Tire Record purchase of inventory on account Supplies Accounts Payable Office Maxx Record purchase of supplies on account Accounts Receivable W. Furmick Sales Revenue Cost of Goods Sold Inventory Record sale on account Delivery Expense Cash Record payment of freight charges Accounts Payable Bargain Tire Inventory Record return of merchandise to supplier 15 Cash Sales Revenue Cost of Goods Sold Inventory Record cash sales. 16 Accounts Payable Office Maxx Cash ($375 x .97) Supplies (375 x .03) Record payment for supplies Accounts Payable Bargain Tire ($5,400 + $125 $600) Cash ($4,925 $144) Inventory [($5,400 - $600) .03] Sales Returns and Allowances Accounts Receivable W. Furmick 900 900 350 350 375 363.75 11.25 POST REF. Dr. 5,525 Cr. 5,525 375 375 950 950 250 250 25 25 600 600
11
13
18
4,925 4,781 144 175 175
20
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Inventory Cost of Goods Sold Record receipt of returned goods. 22 Inventory Cash Record purchase of inventory for cash. 23 Cash ($775 .97) Sales Discounts ($775 .03) Accounts Receivable W. Furmick ($950 - $175) Record payment received on account
100 100 3,900 3,900
751.75 23.25 775.00
Req. 2 Sales Revenue ($950 + $900) Less: Sales Returns and Allowance Sales Discounts Net Sales Revenue Cost of Goods Sold ($250+ $350 -$100) Gross Profit $1,850.00 $ 175.00 23.25 198.25 1,651.75 500.00 $ 1,151.75
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(20-25 min.) P 4-47B

Req. 1 CED Electric, Inc. Income Statement Month Ended June 30, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses General and Administrative Expenses Net Income $197,500 $4,800 3,100 7,900 $ 189,600 101,400 88,200 37,000 20,600 57,600 $ 30,600
Req 2 Gross Profit Percentage Req 3 CED Electric Inc.s 46.5% gross margin percentage means that each dollar of net sales generates 46.5 cents of gross profit that is used to cover operating expenses and generate net income. = Gross Profit Net Sales Revenue = $88,200 $189,600 = .465 or 46.5%
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(25-30 min.) P 4-48B

Req. 1 Clark Industries, Inc. Income Statement Year Ended March 31, 2010 Sales Revenue Less: Sales Returns and Allowances Sales Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses: Commission Expense Advertising Expense Delivery Expense General and Administrative Expenses Office Salaries Expense Utilities Expense Insurance Expense Rent Expense Operating Income Other Revenues (Expenses) Interest Expense Net Income $275,100 $4,900 2,500 7,400 $ 267,700 119,000 148,700 31,700 11,500 1,200 54,000 14,000 10,200 5,200
44,400
83,400
127,800 20,900 (700) $20,200
Req 2 Clark Industries, Inc. Statement of Retained Earnings Year Ended March 31, 2010 Retained earnings, April 1, 2009 Plus: Net Income Subtotal Less: Dividends Retained earnings, March 31, 2010
$ 112,800 20,200 133,000 12,000 $ 121,000
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Req 3 Clark Industries, Inc. Balance Sheet March 31, 2010 Assets Current Assets: Cash Accounts Receivable Inventory Supplies Prepaid Rent Total Current Assets Fixed Assets: Equipment Less: Accumulated Depreciation, Equipment Building Less: Accumulated Depreciation, Building Total assets Liabilities Current Liabilities: Accounts Payable Wages Payable Unearned Sales Revenue Total Current Liabilities Long-Term Liabilities: Mortgage Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $ 16,500 1,000 2,500 20,000 42,000 62,000 35,000 121,000 156,000 $218,000
$ 22,500 8,800 29,000 1,200 5,000 66,500 $27,000 13,000 190,000 52,500 14,000
137,500 $218,000
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(20-25 min.) P 4-49B

Req 1 Gross Profit Percentage = Gross Profit Net Sales Revenue = $148,700* $267,700* = .555 or 55.5%
* Numbers are taken from the solution to P4-48B above Req 2 Clark Industries, Inc.s Gross Profit rate of 55.5% in 2010 has improved from the gross profit rate of 39.1% in 2009. Clark Industries, Inc. has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009. Req 3 Current Ratio Current Assets Current Liabilities $66,500 = $20,000 = 3.33
Req 4 Clark Industries, Inc.s Current Ratio of 3.33 in 2010 has improved from the Current Ratio of 2.33 in 2009. Clark Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.
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Continuing Exercise
Req. 1 Journal DATE Sept. 2 5 15 Cash Service Revenue Plant Inventory ($250 +$10) Accounts Payable Accounts Receivable Sales Revenue Cost of Goods Sold Plant Inventory Accounts Receivable Service Revenue Plant Inventory Accounts Payable Accounts Payable Cash Cash Sales Revenue Cost of Goods Sold Plant Inventory 31 31 31 Salaries Expense Salaries Payable Depreciation Expense - Equipment Accumulated Depreciation Equip. Cost of Goods Sold Plant Inventory 260 260 400 400 104 104 150 150 300 300 100 100 700 700 276 276 225 225 30 30 30 30 ACCOUNTS AND EXPLANATIONS DEBIT 500 500 CREDIT
17 20 21 25
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Bal. July 2 25 Bal. Bal. Bal. Bal.
Cash 1,480 July 21 500 700 2,580 Lawn Supplies 20 20 Equipment 1,400
100
Bal. July 15 Bal.
Accounts Receivable 150 400 17 150 700 Plant Inventory 0 July 15 260 25 300 31 150 Acc. Depreciation Equip. Bal. July 31 Bal.
Bal. July 5 20 Bal.
104 276 30
30 30 60 225 225
July 21
Accounts Payable 100 Bal. July 5 20 Bal. Common Stock Bal.
1,400 260 300 1,860 1,000
Salaries Payable July 31 Bal.
Retained Earnings Bal.
620
Service Revenue July 2 17 Bal. July 15 25 31 Bal. Cost of Goods Sold 104 276 30 410
500 150 650 Bal.
Sales Revenue July 15 25 Bal. Fuel Expense
400 700 1,100
285
Supplies expense Bal. Bal. July 31 Bal. Bal. Salaries Expense 225 225
Depreciation Exp. Equip 0 30 30
July 31 Bal.
Req. 2 Grahams Yard Care, Inc. Income Statement Month Ended July 31, 2010 Revenues: Service Revenue Sales Revenue Total Revenues Expenses: Cost of Goods Sold Salaries Expense Depreciation Expense - Equipment Total expenses Net income $ 650 1,100 $ 1,750 410 225 30 665 $ 1,085
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Continuing Problem
Req 1 8/2 8/3 8/5 8/6 8/8 Salary Payable Cash Inventory Accounts Payable Spa Superstore Supplies Cash Inventory Cash Accounts Receivable R. Tanaka Sales Cost of Goods Sold Inventory Office Furniture Cash Advertising Expense Cash Accounts Payable Spa Superstore Inventory Cash Sales Cost of Goods Sold Inventory Sales Returns and Allowances Accounts Receivable R. Tanaka Salary Expense Cash Accounts Payable Spa Superstore 675 675 20,600 20,600 750 750 475 475 5,800 5,800 3,600 3,600 1,200 1,200 625 625 3,400 3,400 6,750 6,750 3,360 3,360 300 300 675 675 17,200
8/10 8/11 8/12 8/13
8/15 8/16 8/17
Cash Inventory 8/19 8/21 Inventory Accounts Payable Pool Universe Accounts Receivable B. Wagoner Sales Cost of Goods Sold Inventory Cash Sales Discounts Accounts Receivable R. Tanaka Delivery Expense Cash Equipment Accounts Payable Betterbuy, Inc. Cash Sales Discounts Accounts Receivable B. Wagoner Accounts Payable Pool Universe Cash Inventory Utilities Expense Cash Commission Expense Cash 12,100
16,684 516 12,100 13,700 13,700 8,500 8,500 5,390 110 5,500 560 560 2,600 2,600 13,426 274 13,700 12,100 11,858 242 850 850 1,300 1,300
8/22
8/24 8/25 8/27
8/28
8/30 8/31
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Req 2 Cash DATE ITEM Aug. 1 Bal. 2 5 6 10 11 13 16 17 22 24 27 28 30 31 POST. REF. DEBIT CREDIT 675 750 475 1,200 625 6,750 675 16,684 5,390 560 13,426 11,858 850 1,300 BALANCE DEBIT CREDIT 17,380 16,705 15,955 15,480 14,280 13,655 20,405 19,730 3,046 8,436 7,876 21,302 9,444 8,594 7,294
Accounts Receivable DATE ITEM Aug. 1 Bal. 8 15 21 22 27 POST. REF. DEBIT 5,800 300 13,700 5,500 13,700 CREDIT BALANCE DEBIT CREDIT 5,400 11,200 10,900 24,600 19,100 5,400
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Inventory DATE ITEM Aug. 1 Bal. 3 6 8 12 13 17 19 21 28 POST. REF. DEBIT 20,600 475 3,600 3,400 3,360 516 12,100 8,500 242 CREDIT BALANCE DEBIT CREDIT 0 20,600 21,075 17,475 14,075 10,715 10,199 22,299 13,799 13,557
Supplies DATE Aug. 1 5 ITEM Bal. POST. REF. DEBIT 750 CREDIT BALANCE DEBIT CREDIT 350 1,100
Prepaid Rent DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 3,600
Land POST. DATE ITEM Aug. 1 Bal. REF. DEBIT CREDIT BALANCE DEBIT 15,000 CREDIT
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Furniture DATE ITEM Aug. 1 Bal. 10 POST. REF. DEBIT 1,200 CREDIT BALANCE DEBIT CREDIT 3,300 4,500
Accumulated Depreciation, Furniture POST. DATE ITEM Aug. 1 Bal. REF. DEBIT CREDIT
BALANCE DEBIT CREDIT 210
Equipment POST. DATE ITEM Aug. 1 Bal. 25 REF. DEBIT 2,600 CREDIT BALANCE DEBIT 4,700 7,300 CREDIT
Accumulated Depreciation, Equipment POST. DATE ITEM REF. DEBIT Aug. 1 Bal.
CREDIT
BALANCE DEBIT CREDIT 400
Vehicles DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 31,000
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Accumulated Depreciation, Vehicles DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 650
Accounts Payable DATE ITEM Aug. 1 Bal. 3 12 17 19 25 28 POST. REF. DEBIT CREDIT 20,600 3,400 17,200 12,100 2,600 12,100 BALANCE DEBIT CREDIT 1,840 22,440 19,040 1,840 13,940 16,540 4,440
Salary Payable DATE ITEM Aug. 1 Bal. 2 POST. REF. DEBIT 675 CREDIT BALANCE DEBIT CREDIT 675 0
Unearned Service Revenue DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 2,800
Notes Payable POST. BALANCE
293
DATE ITEM Aug. 1 Bal.
REF.
DEBIT
CREDIT
DEBIT
CREDIT 31,000
Common Stock DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 38,500
Retained Earnings DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 4,655
Sales DATE ITEM Aug. 1 Bal. 8 13 21 POST. REF. DEBIT CREDIT 5,800 6,750 13,700 BALANCE DEBIT CREDIT 0 5,800 12,550 26,250
Sales Discounts DATE ITEM Aug. 1 Bal. 22 27 POST. REF. DEBIT 110 274 CREDIT BALANCE DEBIT CREDIT 0 110 384
Sales Returns and Allowances POST.
BALANCE
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DATE ITEM Aug. 1 Bal. 15
REF.
DEBIT 300
CREDIT
DEBIT 0 300
CREDIT
Cost of Goods Sold DATE ITEM Aug. 1 Bal. 8 13 21 POST. REF. DEBIT 3,600 3,360 8,500 CREDIT BALANCE DEBIT CREDIT 0 3,600 6,960 15,460
Advertising Expense DATE ITEM Aug. 1 Bal. 11 POST. REF. DEBIT 625 CREDIT BALANCE DEBIT CREDIT 0 625
Salary Expense DATE ITEM Aug. 1 Bal. 16 POST. REF. DEBIT 675 CREDIT BALANCE DEBIT CREDIT 0 675
Delivery Expense DATE ITEM Aug. 1 Bal. POST. REF. DEBIT CREDIT BALANCE DEBIT CREDIT 0
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560
560
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Utilities Expense DATE ITEM Aug. 1 Bal. 30 POST. REF. DEBIT 850 CREDIT BALANCE DEBIT CREDIT 0 850
Commissions Expense DATE ITEM Aug. 1 Bal. 31 POST. REF. DEBIT 1,300 CREDIT BALANCE DEBIT CREDIT 0 1,300
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Req 3 Aqua Elite, Inc. Unadjusted Trial Balance August 31, 2010 ACCOUNT DEBIT Cash $7,294 Accounts Receivable 5,400 Inventory 13,557 Supplies 1,100 Prepaid Rent 3,600 Land 15,000 Furniture 4,500 Accumulated Depreciation, Furniture Equipment 7,300 Accumulated Depreciation, Equipment Vehicles 31,000 Accumulated Depreciation, Vehicles Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Sales Sales Discounts 384 Sales Returns and Allowances 300 Cost of Goods Sold 15,460 Commision Expense 1,300 Utilities Expense 850 Salary Expense 675 Advertising Expense 625 Delivery Expense ___560 Total $108,90 5
CREDIT
$210 400 650 4,440 2,800 31,000 38,500 4,655 26,250
_ $108,905
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Req. 4 8/31 8/31 8/31 Rent Expense Prepaid Rent Supplies Expense Supplies Depreciation Expense Accumulated Depreciation, Equipment Accumulated Depreciation, Furniture Accumulated Depreciation, Vehicles Cost of Goods Sold Inventory 1,800 1,800 655 655 1,605 575 380 650 170 170
8/31
Rent Expense DATE ITEM Aug. 1 Bal. 31 POST. REF. DEBIT 1,800 CREDIT BALANCE DEBIT CREDIT 0 1,800
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Prepaid Rent DATE ITEM Aug. 1 Bal. 31 POST. REF. DEBIT CREDIT 1,800 BALANCE DEBIT CREDIT 3,600 1,800
Supplies Expense DATE ITEM Aug. 1 Bal. 31 POST. REF. DEBIT 655 CREDIT BALANCE DEBIT CREDIT 0 655
Supplies DATE ITEM Aug. 1 Bal. 5 31 POST. REF. DEBIT 750 655 CREDIT BALANCE DEBIT CREDIT 350 1,100 445
Depreciation Expense DATE ITEM Aug. 1 Bal. 31 POST. REF. DEBIT 1,605 CREDIT BALANCE DEBIT CREDIT 0 1,605
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Accumulated Depreciation, Equipment POST. DATE ITEM REF. DEBIT Aug. 1 Bal. 31
CREDIT 575
BALANCE DEBIT CREDIT 400 975
Accumulated Depreciation, Furniture POST. DATE ITEM REF. Aug. 1 Bal. 31
DEBIT
CREDIT 380
BALANCE DEBIT CREDIT 210 590
Accumulated Depreciation, Vehicles POST. DATE ITEM REF. Aug. 1 Bal. 31
DEBIT
CREDIT 650
BALANCE DEBIT CREDIT 650 1,300
Cost of Goods Sold DATE ITEM Aug. 1 Bal. 8 13 21 31 POST. REF. DEBIT 3,600 3,360 8,500 170 CREDIT BALANCE DEBIT CREDIT 0 3,600 6,960 15,460 15,630
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Inventory DATE ITEM Aug. 1 Bal. 3 6 8 12 13 17 19 21 28 31 POST. REF. DEBIT 20,600 475 3,600 3,400 3,360 516 12,100 8,500 242 170 CREDIT BALANCE DEBIT CREDIT 0 20,600 21,075 17,475 14,075 10,715 10,199 22,299 13,799 13,557 13,387
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Req. 5 Aqua Elite, Inc. Adjusted Trial Balance August 31, 2010 ACCOUNT DEBIT Cash $7,294 Accounts Receivable 5,400 Inventory 13,387 Supplies 445 Prepaid Rent 1,800 Land 15,000 Furniture 4,500 Accumulated Depreciation, Furniture Equipment 7,300 Accumulated Depreciation, Equipment Vehicles 31,000 Accumulated Depreciation, Vehicles Accounts Payable Unearned Service Revenue Notes Payable Common Stock Retained Earnings Sales Sales Discounts 384 Sales Returns and Allowances 300 Cost of Goods Sold 15,630 Rent Expense 1,800 Depreciation Expense 1,605 Commision Expense 1,300 Utilities Expense 850 Salary Expense 675 Supplies Expense 655 Advertising Expense 625 Delivery Expense ___560 Total $110,51 0
CREDIT
$590 975 1,300 4,440 2,800 31,000 38,500 4,655 26,250
_ $110,510
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Req. 6 Aqua Elite, Inc. Income Statement Month ended August 31, 2010 Sales revenue Less: Sales Discounts Sales Returns and Allowances Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses: Selling Expenses: Commissions Expense Delivery Expense General and Administrative Expenses: Rent Expense Depreciation Expense Utilities Expense Salaries Expense Supplies Expense Advertising Expense Net income $26,250 $384 300 684 $25,566 15,630 9,936 1,300 560 1,800 1,605 850 675 655 625
1,860
6,210
8,070 $ 1,866
Aqua Elite, Inc. Statement of Retained Earnings Month Ended August 31, 2010 Retained Earnings, August 1, 2010 Add: Net Income Retained Earnings, August 31, 2010
$4,655 1,866 $6,521
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Aqua Elite, Inc. Balance Sheet August 31, 2010 Assets Current Assets: Cash Accounts Receivable Inventory Supplies Prepaid Rent Total Current Assets Fixed assets: Land Furniture Less: Accumulated Depreciation, Furniture Equipment Less: Accumulated Depreciation, Equipment Vehicles Less: Accumulated Depreciation, Vehicles Total Assets Liabilities Current Liabilities: Accounts Payable Unearned Service Revenue Total Current Liabilities Long-Term Liabilities: Notes Payable Total Liabilities Stockholders Equity Common Stock Retained Earnings Total Stockholders Equity Total Liabilities and Stockholders Equity $ 7,294 5,400 13,387 445 1,800 28,326 15,000 $ 4,500 590 7,300 975 31,000 1,300 3,910
6,325
29,700 $83,261
$ 4,440 2,800 7,240 31,000 38,240 38,500 6,521 45,021 $83,261
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Req. 7 8/31 8/31 Sales Retained Earnings Retained Earnings Sales Discounts Sales Returns and Allowances Cost of Goods Sold Rent Expense Depreciation Expense Commission Expense Utilities Expense Salary Expense Supplies Expense Advertising Expense Delivery Expense Note there were no dividends during August so no closing entry is required to close dividends 26,250 26,250 24,384 384 300 15,630 1,800 1,605 1,300 850 675 655 625 560
8/31
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Retained Earnings DATE ITEM Aug. 1 Bal. 31 31 POST. REF. DEBIT CREDIT 26,250 24,384 BALANCE DEBIT CREDIT 4,655 30,905 6,521
Sales DATE ITEM Aug. 1 Bal. 8 13 21 31 POST. REF. DEBIT CREDIT 5,800 6,750 13,700 26,250 BALANCE DEBIT CREDIT 0 5,800 12,550 26,250 0
Sales Discounts DATE ITEM Aug. 1 Bal. 22 27 31 POST. REF. DEBIT 110 274 384 CREDIT BALANCE DEBIT CREDIT 0 110 384 0
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Sales Returns and Allowances POST. DATE ITEM REF. Aug. 1 Bal. 15 31
DEBIT 300
CREDIT
300
BALANCE DEBIT CREDIT 0 300 0
Cost of Goods Sold DATE ITEM Aug. 1 Bal. 8 13 21 31 31 POST. REF. DEBIT 3,600 3,360 8,500 170 15,630 CREDIT BALANCE DEBIT CREDIT 0 3,600 6,960 15,460 15,630 0
Rent Expense DATE ITEM Aug. 1 Bal. 31 31 POST. REF. DEBIT 1,800 1,800 CREDIT BALANCE DEBIT CREDIT 0 1,800 0
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Depreciation Expense DATE ITEM Aug. 1 Bal. 31 31 POST. REF. DEBIT 1,605 1,605 CREDIT BALANCE DEBIT CREDIT 0 1,605 0
Commissions Expense DATE ITEM Aug. 1 Bal. 31 31 POST. REF. DEBIT 1,300 1,300 CREDIT BALANCE DEBIT CREDIT 0 1,300 0
Utilities Expense DATE ITEM Aug. 1 Bal. 30 31 POST. REF. DEBIT 850 850 CREDIT BALANCE DEBIT CREDIT 0 850 0
Salary Expense DATE ITEM Aug. 1 Bal. 16 31 POST. REF. DEBIT 675 675 CREDIT BALANCE DEBIT CREDIT 0 675 0
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Supplies Expense Advertising Expense DATE ITEM DATE ITEM Aug. 1 Bal. Aug. 1 Bal. 31 11 31 31
POST. POST. REF. REF.
DEBIT DEBIT 655 625
CREDIT CREDIT 655 625
BALANCE BALANCE DEBIT CREDIT DEBIT CREDIT 0 0 655 625 0 0
Delivery Expense DATE ITEM Aug. 1 Bal. 24 31 POST. REF. DEBIT 560 560 CREDIT BALANCE DEBIT CREDIT 0 560 0
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Req. 8 Aqua Elite, Inc. Post-closing Trial Balance August 31, 2010 ACCOUNT DEBIT Cash $7,294 Accounts receivable 5,400 Inventory 13,387 Supplies 445 Prepaid rent 1,800 Land 15,000 Furniture 4,500 Accumulated depreciation, furniture Equipment 7,300 Accumulated depreciation, equipment Vehicles 31,000 Accumulated depreciation, vehicles Accounts payable Unearned service revenue Notes payable Common stock Retained earnings Total $86,126
CREDIT
$590 975 1,300 4,440 2,800 31,000 38,500 6,521 $86,126
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Ethics in Action
Case 1 It is unethical for Tim to encourage the customer to make this purchase. While it is a salesmans job to convince customers to make purchases, intentionally soliciting a purchase with the full knowledge that the merchandise will likely be returned just to earn the sales commission is wrong. Conway can deter this behavior by basing sales commissions on net sales rather than on gross sales. Case 2 Normally there is nothing wrong with Tina asking her parents to loan Cottage Caf money. However, if Tinas request is soley for the pupose of making the Cottage Cafs current ratio look better in order to receive credit from UMT, then Tinas request could be viewed as unethical behavior. This is especially true if Tina intends on repaying the loan before the due date. Creditors like to see a current ration of 1.5 or higher because they know that some of a companys assets such as prepaid expenses and supplies will not be available to pay off liabilities as they come due. They also realize that inventory and accounts receivable can not be used to pay liabilities as they come due. They must first be converted to cash.
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Financial Analysis
Req 1 Columbia Sportswear uses a multi-step income statement format. You can tell because line items for gross profit, and operating expenses can be seen. Req 2 2006 $541,055 $1,287,672 = 42.0% $579,751 $1,356,039 2007 = 42.8% $567,811 $1,317,835 2008 =43.1 %
Columbia Sportswears gross profit rate has been improving each year. Req 3 Columbia Sportswear uses a classified balance sheet format. In addition to current assets and current liabilities, other categories such as property and equipment can be seen. Req 4 2007 $885,664 $166,531 5.32 $872,519 $173,189 2008 5.04
Columbia Sportswears current ratio has deteriorated slightly from 2007 to 2008. However, at 5.04 it is still a very high current ratio.
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Industry Analysis
Both the Consolidated Balance Sheets and the Consolidated Statements of Income (or Operations) give you clues to the fact that these companies are merchandising businesses. On the balance sheet, merchandising businesses will have an account called Inventories or Merchandise Inventory. This represents the merchandise the company has already bought but hasnt sold yet. On the income statement, there may be several clues. The first one may be the name of the revenue account. Most merchandising businesses call this account Sales or Net Sales, as Columbia Sportswear does. However, Under Armour uses the term Net Revenues. The next clue on the income statement is the account located right under the revenue account. That account is usually called Cost of Goods Sold. Columbia Sportswear uses the term Cost of Sales, but it means the same thing. This account represents the cost to the company for the items that they sold during that particular accounting period. When they sell merchandise, the cost of that merchandise is moved from the Inventory account on the balance sheet to the Cost of Goods Sold account on the income statement.
Small Business Analysis

The only thing thats certain is that this transaction will not save your client any tax dollars. The purchase of inventory is not an expense that appears on the income statement. Inventory is an asset until it is sold. Then it will be moved from the asset account on the balance sheet to the income statement as cost of merchandise sold. So, your clients main objective for making this large purchase will not be achieved. As far as paying cash for this transaction, that depends on a lot of different factors. If your client had ample cash prior to this purchase and the discount was sufficient to cover the cost of tying up his money until the inventory can be sold (one of the carrying costs of inventory), then it was probably not a bad idea. However, if this cash purchase created a cash shortage, even to the point of having to borrow money on the companys line of credit, then the transaction was probably not a good idea. Your clients last statement about making more profit when he sells this inventory is also contingent upon some of the other items mentioned above. It would seem like that would be the case, but if this vendor normally offers a discount for early payment anyway, then maybe the per-unit cost of this product isnt as good as he may think.
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SolutionsManual
Written Communication
Regardless of whether or not you choose to have the customer return the youth footballs or just give them an allowance (reduce the invoice amount) for the error, the accounting is the same. You will be debiting an account called Sales Returns and Allowances and crediting accounts receivable for the amount that you will be reducing the invoice. Sales Returns and Allowances is an account known as a contra-revenue account which only means that the normal balance of the account is contrary (opposite) to what a revenue account would normally be. So by debiting the Sales Returns and Allowance account, you are increasing it. The accounting form that you will issue to the customer for this transaction is called a credit memorandum, or a credit memo. The form gets its name from the fact that you will be crediting (decreasing) their accounts receivable account because the customer now owes you less. Concerning the freight costs, the customer is correct. If the terms for the sale were in fact FOB Destination, then the customer is not responsible for paying the freight, or shipping costs. Had the terms been FOB Shipping point, then the customer would be responsible for those costs. These terms derive their name from the point at which title passes for the merchandise. So whoever owns the goods while theyre in route ultimately is responsible for paying to get them there. So your letter might read like this: Dear Customer: Thank you for the letter concerning your recent purchase from us. I apologize for the mix-up in the product. As football season approaches, it tends to get a little hectic around here, but that is no reason for us to not get your order correct. So heres what we can do to correct it now. Ill give you the option to either send the footballs back to us (freight will be paid by us), or if you like, you can keep the youth footballs and we will reduce the price 50% from the normal cost of a youth football. Either way, we will reduce the amount of your invoice and issue you a credit memorandum for the amount of the reduction. Please let us know what you prefer to do. Concerning the shipping terms on the invoice, you are correct that you do not normally pay for shipping. So the shipping terms on your invoice were correct, but there should be no freight charged to you. FOB (Free on Board) Destination only means that you didnt officially own the product until it reached its destination, that being your store. So since we still officially owned the product, we were responsible for paying the freight. We will deduct the freight from your invoice and include it as part of the credit memo we will be issuing to you. Thank you for your business, and, again, we apologize for the mix-up. Hopefully, this will clear everything up.

Chapter 4 Solutions

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Chapter 4: Accounting for a Merchandising Business Discussion Questions: Key Points

(5-10 min.) S 4-2

31 Cost of Goods Sold Inventory Adjust inventory to physical count

(5-10 min.) S 4-3

40,000 39,200 800

(5-10 min.) S 4-5

Accounts Payable Pool Warehouse Inventory

6,900 6,762 800

(5-10 min.) S 4-6

Inventory Cash Paid freight charges to have inventory delivered

8,700 8,526 174

(5-10 min.) S 4-7

53,900 1,100 55,000

(5-10 min.) S 4-8

225.00 225.00 140.00 140.00

514.50 10.50 525.00

(5-10 min.) S 4-9

(5-10 min.) S 4-10

Accounts Payable Wages Payable Unearned Revenue Total Current Liabilities

$ 19,500 1,500 2,000 $ 23,000 $ 33,000 (4,500) $28,500

Equipment Less: Accumulated Depreciation, Equipment

Building Less: Accumulated Depreciation, Building

$ 87,000 (24,000) 63,000

Book Value of Plant Assets

Total Long-Term Liabilities (Note Payable, Long Term)

(10-15 min.) S 4-11

(10-15 min.) S 4-12

$ 3,500 2,900 1,700 800 8,900 6,100 $15,000

$ 4,500 1,100 1,900 7,500 2,300 9,800

(10-15 min.) S 4-13

Current Assets Current Liabilities

($3,500 + $2,900 + $1,700 + $800) = $4,500 + $1,100 + $1,900) = 1.19

(10-15 min.) E 4-15A

Accounts payable Inventory

3,400 3,298 102

(10-15 min.) E 4-16A

Accounts payable Inventory Returned damaged inventory to supplier.

(10-15 min.) E 4-17A

16 Delivery Expense Cash

900 900 540 540

(10-15 min.) E 4-18A

Accounts Receivable Cash Record prepayment of shipping charges.

250.00 250.00 162.50 162.50

1,408.00 27.00 1,435.00

(15-20 min.) E 4-19A

(10-15 min.) E 4-20A

= Net Sales + Sales Discounts

= $100,400 + $2,500 = $102,900

= Gross Profit + Cost of Goods Sold = $32,100 + $68,300 = $100,400

= Sales Sales Discounts

= $64,000 $1,700 = $62,300

= Net Sales Cost of Goods Sold

= $62,300 $44,600 = $17,700

= Sales Net Sales

= $102,000 - 93,500 = $8,500

Cost of Goods Sold = Net Sales Gross Profit

= $93,500 28,600 = $64,900

= Net Sales + Sales Discounts

= $86,300 + 2,100 = $88,400

= Net Sales Cost of Goods Sold

= $86,300 - $57,700 = $28,600

* You must find (b) before you find (a).

(10-15 min.) E 4-21A

(15-20 min.) E 4-22A