Chapter 4 Solution

Chapter 4
True-False Statements
1-6: TTTTFT

Multiple-Choice Questions
1-5: CAADA
6-10: ABCDC
11-15: BBACC
Answers to Completion Statements
1.
2.
3.
4.
5.
6.

merchandising
gross profit
perpetual
Inventory
operating expense
Sales Returns and Allowances,
Accounts Receivable

7.
8.
9.
10.

an invoice
a contra revenue, debit
cost of goods sold, net sales
net sales

Solution Ex. 1
Olivias Organic Produce Ltd
Statement of Profit or Loss
For the year ended 31 March 2016
Operating Revenue
Sales revenue:
Gross sales revenue
Less: sales returns and allowances
Net sales revenue
Less: Cost of goods sold
Gross Profit
Other operating revenue:
Interest revenue
Total operating revenue

$346,000
0
346,000
235,000
111,000
2,650

Operating Expenses:
Selling expenses:
Advertising
Depreciation expense
- storage equipment
Freight out
Sales commissions expense

5,000
3,750
5,000
3,250
1

2,650
113,650

Chapter 4 Solution

Sales salaries expense

Administrative expenses:
Insurance expense
Office salaries expense
Rent expense office space
Electricity expense
Financial expenses:
Discount allowed
Interest expense
Bank charges
Total operating expenses
Profit before income tax

38,000

55,000

2,900
9,500
8,000
4,000

24,400

5,650
2,000
500

8,150
87,550
26,100

Solution Ex. 2
(a)
Date
Feb

General Journal

Account Titles
Inventory
Accounts Payable

Debit
840

Credit
840

Inventory
40
Cash
40
(Note: Freight-in charge is part of cost of inventory. You could debit inventory or a
freight-in account. In this question, you were instructed to debit the inventory account
when accounting for freight-in, however use a Freight-in account unless specifically
told otherwise in ACCT1006)
8
Accounts Receivable
900
Sales
900
Cost of Goods Sold
Inventory
10

11
13

600
600

Accounts Payable
Inventory

84
84

Inventory
Cash
Accounts Payable ($840 - $84)
Discount received ($756 x 3%)
2

300
300
756
23

Chapter 4 Solution

Cash
14

15

17

18

20

733

Inventory
Accounts Payable

500
500

Accounts Payable
Inventory

50

Inventory
Cash

30

50

30

Accounts Receivable
Sales

900

Cost of Goods Sold

Inventory

530

Cash

500

900

530

Accounts Receivable
21

27

28

500

Accounts Payable
Discount received [($500-50) x 2%)]
Cash
Sales Returns and Allowances
Accounts Receivable
Cash

450
9
441
30
30
500

Accounts Receivable

500

(b)
1-Feb Opening balance

Cash
2,500

20- Feb Accounts receivable

500

30- Feb Accounts receivable

500

7- Feb Inventory
11- Feb Inventory
13- Feb Accounts payable

40
300
733

17- Feb Inventory

21- Feb Accounts payable

30
441

28-Feb Closing balance

1-Mar Opening balance

3,500
1,956
3

1,956
3,550

Chapter 4 Solution

8- Feb Sales
Sales

1-Mar Opening balance

1-Feb Opening balance

6-Feb Accounts payable
7-Feb Cash
11-Feb Cash
14-Feb Accounts payable
17-Feb Cash

Accounts Receivable
900
20- Feb Cash
900
27- Feb Sales returns
28- Feb Cash
28-Feb Closing balance
1,800
770

Inventory
1,700
840
40
300
500
30

8-Feb COGS
10-Feb Accounts payable
15-Feb Accounts Payable
18-Feb COGS
28-Feb Closing balance

1-Mar Opening balance

3,410
2,146

500
30
500
770
1,800

600
84
50
530
2,146
3,410

Accounts Payable
10-Feb Inventory
13-Feb Discount and cash
15-Feb Inventory
21-Feb Discount and cash

84
756
50
450

6-Feb Inventory
14-Feb Inventory

1,340

840
500

1,340

Share capital
1-Feb Opening balance

4,200

Sales
8-Feb Accounts receivable
18-Feb Accounts receivable
28-Feb Closing balance

1800
1,800
1-Mar Opening balance
4

900
900
1,800
1,800

Chapter 4 Solution

27-Feb Accounts receivable

28-Feb Closing balance

8-Feb Inventory
18-Feb Inventory

Sales returns and allowances

30

Discount received
13-Feb Accounts payable
21-Feb Accounts payable
32
32
1-Mar Opening balance

32
32

COGS
600
530
28-Feb Closing balance

1-Mar Opening balance

23
9

1,130
1,130

(c)
Metal Music Limited
Trial Balance
28 February, 2016
Debit
1,956
770
2,146

Cash
Accounts receivable
Inventory
Accounts payable
Share capital
Sales
Sales returns and allowances
Discount received
Cost of goods sold

Credit

4,200
1,800
30
32
1,130
6,032

6,032

(d)
Metal Music Limited
Statement of Profit or Loss (Partial)
For the Month Ended 28, February 2016

1,130
1,130

Chapter 4 Solution

Sales revenues
Sales.......................................................................................................$1,800
Less: Sales returns and allowances.......................................................
Net sales.................................................................................................$1,770
Cost of goods sold............................................................................................1,130
Gross profit......................................................................................................$ 640

Answers to Matching
1.
2.
3.
4.
5.
6.

B
I
E
A
C
H

7.
8.
9.
10.

G
D
J
F

Short-Answer Essay Questions

Solution 1
Cost of goods sold includes the cost of obtaining goods that are held for resale; it is
deducted directly from net sales on the income statement. Operating expenses, on the
other hand, includes selling, administrative, and financial expenses, and appears
directly below the gross profit on the income statement.
Solution 2
Gross profit is expressed as a percentage by dividing the amount of gross profit by the
amount of net sales. In this way, the gross profit shows the rate of profit earned
relative to the net sales generated by an enterprise and is more useful than simply
stating either the amount of gross profit or the amount of net sales. For example, X
Company may have generated net sales of $1,000,000. In isolation, this amount has
limited usefulness does it represent an efficient operation, is it better (or worse)
than last years sales level, does it result in a profit (or a loss), is it favourable
compared to similar businesses? Gross profit allows a more meaningful comparison to
be made.