ExErcisEs: sEt BConcept IdentificationE1B. concEpt ▶ Braugh Company’s management made the decisions that follow. Indicate which of the following decisions relates primarily to (a) faithful representation, (b) merchandising company, (c) perpetual inventory system, or (d) gross margin.

1. Decided that the best way for the company to succeed would be to sell products. 2. Decided that the benefits of keeping track of each item of inventory as it is bought

and sold exceeded the costs of such a system. 3. Decided to purchase goods made by a Chinese supplier to reduce cost of goods sold. 4. Decided a multistep income statement form would give a better picture of the com-

pany than a single-step form.

Classification of Accounts: Income StatementE2B. Using the classification scheme below for a multistep income statement, match each account with the letter of the category in which it belongs.

a. Net salesb. Cost of salesc. Selling expensesd. General and administrative expensese. Other revenues and expensesf. Not on income statement

1. Sales Discounts 2. Cost of Goods Sold 3. Dividend Income 4. Advertising Expense 5. Office Salaries Expense 6. Freight Out Expense 7. Prepaid Insurance 8. Utilities Expense 9. Sales Salaries Expense 10. Rent Expense 11. Depreciation Expense—Delivery

Equipment 12. Interest Expense

Preparation of Income StatementsE3B. A company has the following data: net sales, $202,500; cost of goods sold, $110,000; selling expenses, $45,000; general and administrative expenses, $30,000; interest expense, $2,000; and interest income, $1,500.

1. Prepare a single-step income statement. 2. Prepare a multistep income statement.

Multistep Income StatementE4B. Accounting connEction ▶ A single-step income statement follows. Present the information in a multistep income statement, and indicate what insights can be obtained from the multistep form as opposed to the single-step form.

Acorn CompanyIncome Statement

For the Year Ended December 31, 2014

Revenues:

Net sales $1,207,132

Interest income 5,720

Total revenues $1,212,852

Costs and expenses:

Cost of goods sold $787,080

Selling expenses 203,740

General and administrative expenses 100,688

Interest expense 13,560

Total costs and expenses 1,105,068

Net income $ 107,784

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2 Chapter 6: Accounting for Merchandising Operations

Terms of SaleE5B. A household appliance dealer buys refrigerators from a manufacturer and resells them to its customers.

a. The manufacturer sets a list or catalogue price of $2,500 for a refrigerator. The manu-facturer offers its dealers a 30 percent trade discount.

b. The manufacturer sells the machine under terms of FOB destination. The cost of shipping is $240.

c. The manufacturer offers a sales discount of 2/10, n/30. Sales discounts do not apply to shipping costs.

What is the net cost of the refrigerator to the dealer, assuming it is paid for within 10 days of purchase?

Purchases Involving Discounts: Perpetual Inventory SystemE6B. Basie Company engaged in the following transactions:

June 2 Received merchandise purchased on credit from Ranbaxy Company, terms 2/10, n/30, FOB destination, invoice dated June 1, $4,000.

6 Returned some merchandise to Ranbaxy for full credit, $500. 11 Paid Ranbaxy for purchase of June 2 less return and discount. 14 Received merchandise purchased on credit from Ranbaxy, terms 2/10,

n/30, FOB destination, invoice dated June 12, $4,500. 30 Paid amount owed Ranbaxy for purchase of June 14.

Prepare journal entries and, assuming the perpetual inventory system, determine the total amount paid to Ranbaxy.

Purchases Involving Discounts: Perpetual Inventory SystemE7B. Given the following transactions engaged in by Benson Company, prepare jour-nal entries and, assuming the periodic inventory system, determine the total amount received from Ciepla Company:May 1 Sold merchandise on credit to Ciepla Company, terms 2/10, n/30, FOB

shipping point, $1,000. 3 Accepted a return from Ciepla for full credit, $400. 10 Collected amount due from Ciepla for the sale, less the return and discount. 11 Sold merchandise on credit to Ciepla, terms 2/10, n/30, FOB shipping

point, $1,600. 31 Collected amount due from Ciepla for the sale of May 11.

Preparation of the Income Statement: Perpetual Inventory SystemE8B. Selected account balances at December 31, 2014, for Engagement, Etc., follow. Prepare a multistep income statement for the year ended December 31, 2014. Show detail of net sales. The company uses the perpetual inventory system, and Freight-In has not been included in Cost of Goods Sold.

Account Name Debit CreditSales $498,000

Sales Returns and Allowances $ 23,500

Cost of Goods Sold 284,000

Freight-In 14,700

Selling Expenses 43,000

General and Administrative Expenses 87,000

Recording Purchases: Perpetual Inventory SystemE9B. The transactions that follow took place under the perpetual inventory system. Record each transaction using T accounts.

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Chapter Assignments 3

a. Purchased merchandise on credit, terms n/30, FOB shipping point, $2,500.b. Paid freight on the shipment in transaction a, $135.c. Purchased merchandise on credit, terms n/30, FOB destination, $1,400.d. Purchased merchandise on credit, terms n/30, FOB shipping point, $2,600, which

includes freight paid by the supplier of $200.e. Returned part of the merchandise purchased in transaction c, $500.f. Paid the amount owed on the purchase in transaction a.g. Paid the amount owed on the purchase in transaction d.h. Paid the amount owed on the purchase in transaction c less the return in e.

Recording Sales: Perpetual Inventory SystemE10B. On August 15, KOT Company sold merchandise for $5,200 on terms of n/30 to Shannon Company. On August 20, Shannon returned some of the merchandise for a credit of $1,200, and on August 25, Shannon paid the balance owed. Use T accounts to record the sale, return, and receipt of cash under the perpetual inventory system for KOT. The cost of the merchandise sold on August 15 was $3,000, and the cost of the merchandise returned to inventory on August 20 was $700.

Preparation of the Income Statement: Periodic Inventory SystemE11B. Using the selected year-end account balances at December 31, 2014, for Life-line General Store that follow, prepare a multistep 2014 income statement. Show detail of net sales. The company uses the periodic inventory system. Beginning merchandise inventory was $28,000; ending merchandise inventory is $21,000.

Account Name Debit CreditSales $309,000

Sales Returns and Allowances $ 15,200

Purchases 114,800

Purchases Returns and Allowances 7,000

Freight-In 5,600

Selling Expenses 56,400

General and Administrative Expenses 37,200

Merchandising Income Statement: Missing Data, Multiple YearsE12B. Determine the missing data for each letter in the following three income state-ments for Blanco Company (in thousands):

2014 2013 2012Sales $ p $ h $572

Sales returns and allowances 48 38 aNet sales q 634 bMerchandise inventory, beginning r i 76

Purchases 384 338 cPurchases returns and allowances 62 j 34

Freight-in s 58 44

Net cost of purchases 378 k dCost of goods available for sale 444 424 364

Merchandise inventory, ending 78 l 84

Cost of goods sold t 358 eGross margin 284 m 252

Selling expenses u 156 fGeneral and administrative expenses 78 n 66

Total operating expenses 260 256 gNet income v o 54

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4 Chapter 6: Accounting for Merchandising Operations

Recording Purchases: Periodic Inventory SystemE13B. Using the data in E9B, use T accounts to record each of the transactions under the periodic inventory system.

Recording Sales: Periodic Inventory SystemE14B. Using the relevant data in E10B, use T accounts to record each of the transactions under the periodic inventory system.

Foreign Merchandising TransactionsE15B. BusinEss ApplicAtion ▶ Koz Company purchased a special-purpose machine from Adair Company, a French firm, on credit for €75,000. At the date of purchase, the exchange rate was $1.00 per euro. On the date of the payment, which was made in euros, the value of the euro was $1.25. Did Koz incur an exchange gain or loss? How much was it?

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