Warren SM Ch.06 Final

CHAPTER 6ACCOUNTING FOR MERCHANDISING BUSINESSES

EYE OPENERS

1. Merchandising businesses acquire mer-chandise for resale to customers. It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business.

2. Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.

3. a. Increase c. Decreaseb. Increase d. Decrease

4. Under the periodic system, the inventory records do not show the amount available for sale or the amount sold during the pe-riod. In contrast, under the perpetual system of accounting for merchandise inventory, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amount of merchandise available for sale and the amount sold are continuously (per-petually) disclosed in the inventory records.

5. The multiple-step form of income statement contains conventional groupings for rev-enues and expenses, with intermediate bal-ances, before concluding with the net in-come balance. In the single-step form, the total of all expenses is deducted from the to-tal of all revenues, without intermediate bal-ances.

6. The major advantages of the single-step form of income statement are its simplicity and its emphasis on total revenues and total expenses as the determinants of net in-come. The major objection to the form is that such relationships as gross profit to sales and income from operations to sales are not as readily determinable as when the multiple-step form is used.

7. Revenues from sources other than the prin-cipal activity of the business are classified as other income. Examples would include rent revenue and interest revenue.

8. Examples of such accounts include the fol-lowing: Sales, Sales Discounts, Sales Re-turns and Allowances, Cost of Merchandise Sold, Merchandise Inventory.

9. Sales to customers who use MasterCard or VISA cards are recorded as cash sales.

10. The date of sale as shown by the date of the invoice or bill.

11. a. 1% discount allowed if paid within 15 days of date of invoice; entire amount of invoice due within 60 days of date of in-voice.

b. Payment due within 30 days of date of invoice.

c. Payment due by the end of the month in which the sale was made.

12. a. A credit memo issued by the seller of merchandise indicates the amount for which the buyer's account is to be cred-ited (credit to Accounts Receivable) and the reason for the sales return or al-lowance.

b. A debit memo issued by the buyer of merchandise indicates the amount for which the seller's account is to be deb-ited (debit to Accounts Payable) and the reason for the purchases return or al-lowance.

13. a. The buyerb. The seller

14. Cost of Merchandise Sold would be debited; Merchandise Inventory would be credited.

15. Loss from Merchandise Inventory Shrinkage would be debited.

371371

PRACTICE EXERCISES

PE 6–1A

$162,300 ($32,800 + $379,500 – $250,000)

PE 6–1B

$490,000 ($375,000 + $815,000 – $700,000)

PE 6–2A

Cost of merchandise sold:Merchandise inventory, June 1................... $ 35,500Purchases...................................................... $384,000Less: Purchases returns and allowances. . $11,000

Purchases discounts......................... 3,000 14,000 Net purchases............................................... $370,000Add freight in................................................. 6,000

Cost of merchandise purchased............ 376,000 Merchandise available for sale.................... $411,500Less merchandise inventory, June 30........ 40,500 Cost of merchandise sold............................ $371,000

PE 6–2B

Cost of merchandise sold:Merchandise inventory, August 1............... $120,000Purchases...................................................... $780,000Less: Purchases returns and allowances. . $20,000

Purchases discounts......................... 10,000 30,000 Net purchases............................................... $750,000Add freight in................................................. 5,000

Cost of merchandise purchased............ 755,000 Merchandise available for sale.................... $875,000Less merchandise inventory, August 31.... 150,000 Cost of merchandise sold............................ $725,000

372372

PE 6–3A

a. Accounts Receivable.................................................... 41,000Sales......................................................................... 41,000

Cost of Merchandise Sold............................................ 22,500Merchandise Inventory........................................... 22,500

b. Cash............................................................................... 40,590Sales Discounts............................................................ 410

Accounts Receivable.............................................. 41,000

PE 6–3B

a. Accounts Receivable.................................................... 16,000Sales......................................................................... 16,000


b. Cash............................................................................... 15,680Sales Discounts............................................................ 320

Accounts Receivable.............................................. 16,000

PE 6–4A

a. $19,800. Purchase of $21,500 less the return of $1,500 less the discount of $200 [($21,500 – $1,500) × 1%].

b. Accounts Payable

PE 6–4B

a. $4,410. Purchase of $8,000 less the return of $3,500 less the discount of $90 [($8,000 – $3,500) × 2%)].

b. Merchandise Inventory

373373

PE 6–5A

a. $8,910. Purchase of $13,150 less return of $4,150 less the discount of $90 [($13,150 – $4,150) × 1%].

b. $27,458. Purchase of $32,100 less return of $5,000 less the discount of $542 [($32,100 – $5,000) × 2%] plus $900 of shipping.

PE 6–5B

a. $6,735. Purchase of $9,000 less return of $2,500 less the discount of $65 [($9,000 – $2,500) × 1%] plus $300 of shipping.

b. $6,958. Purchase of $7,500 less return of $400 less the discount of $142 [($7,500 – $400) × 2%].

PE 6–6A

Saddlebag Co. journal entries:

Cash ($17,500 – $350 + $600)............................................... 17,750Sales Discounts ($17,500 × 2%)........................................... 350

Accounts Receivable—Bioscan Co. ($17,500 + $600).. 18,100

Bioscan Co. journal entries:

Accounts Payable—Saddlebag Co. ($17,500 + $600)........ 18,100Merchandise Inventory ($17,500 × 2%).......................... 350Cash ($17,500 – $350 + $600)......................................... 17,750

PE 6–6B

Santana Co. journal entries:

Cash ($6,000 – $800 – $104)................................................. 5,096Sales Discounts [($6,000 – $800) × 2%].............................. 104

Accounts Receivable—Birch Co. ($6,000 – $800)........ 5,200

Birch Co. journal entries:

Accounts Payable—Santana Co. ($6,000 – $800).............. 5,200Merchandise Inventory [($6,000 – $800) × 2%]............. 104Cash ($6,000 – $800 – $104)........................................... 5,096

374374

PE 6–7A

Oct. 31 Cost of Merchandise Sold........................................ 80,250Merchandise Inventory....................................... 80,250

Inventory shrinkage ($975,000 – $894,750).

PE 6–7B

Apr. 30 Cost of Merchandise Sold........................................ 4,650Merchandise Inventory....................................... 4,650


375375

EXERCISES

Ex. 6–1

a. $318,000 ($795,000 – $477,000)

b. 40% ($318,000 ÷ $795,000)

c. No. If operating expenses are less than gross profit, there will be a net in -come. On the other hand, if operating expenses exceed gross profit, there will be a net loss.

Ex. 6–2

$27,165 million ($35,934 million – $8,769 million)

Ex. 6–3

a. Purchases discounts, purchases returns and allowances

b. Freight in

c. Merchandise available for sale

d. Merchandise inventory (ending)

Ex. 6–4

a. Cost of merchandise sold:

Merchandise inventory,December 1, 2009.................................. $ 210,000

Purchases................................................... $1,400,000Less: Purchases returns and

allowances..................................... $20,000Purchases discounts...................... 18,500 38,500

Net purchases............................................ $1,361,500Add freight in.............................................. 14,100

Cost of merchandisepurchased........................................ 1,375,600

Merchandise available for sale................. $1,585,600Less merchandise inventory,

November 30, 2010............................... 185,000 Cost of merchandise sold......................... $1,400,600

b. $849,400 ($2,250,000 – $1,400,600)

376376

Ex. 6–5

1. The schedule should begin with the August 1, 2009, not the July 31, 2010, merchandise inventory.

2. Purchases returns and allowances and purchases discounts should be de-ducted from (not added to) purchases.

3. The result of subtracting purchases returns and allowances and purchases discounts from purchases should be labeled “net purchases.”

4. Freight in should be added to net purchases to yield cost of merchandise purchased.

5. The merchandise inventory at July 31, 2010, should be deducted from mer-chandise available for sale to yield cost of merchandise sold.

A correct cost of merchandise sold section is as follows:

Cost of merchandise sold:

Merchandise inventory, August 1, 2009... $ 125,000Purchases................................................... $975,000Less: Purchases returns and allowances $12,000

Purchases discounts...................... 8,000 20,000 Net purchases............................................ $955,000Add freight in.............................................. 13,500

Cost of merchandise purchased......... 968,500 Merchandise available for sale................. $1,093,500Less merchandise inventory,

July 31, 2010.......................................... 140,000 Cost of merchandise sold......................... $ 953,500

Ex. 6–6

a. Net sales: $5,105,000 ($5,280,000 – $100,000 – $75,000)

b. Gross profit: $2,105,000 ($5,105,000 – $3,000,000)

Ex. 6–7

a. Selling expense, (1), (2), (7), (8)

b. Administrative expense, (3), (5), (6)

c. Other expense, (4)

377377

Ex. 6–8

PAPER PLUS COMPANYIncome Statement

For the Year Ended June 30, 2010

Revenues:Net sales....................................................................... $6,500,000Rent revenue................................................................ 100,000

Total revenues......................................................... $6,600,000Expenses:

Cost of merchandise sold.......................................... $4,000,000Selling expenses......................................................... 750,000Administrative expenses............................................ 500,000Interest expense.......................................................... 30,000

Total expenses......................................................... 5,280,000 Net income.......................................................................... $1,320,000

378378

Ex. 6–9

1. Sales returns and allowances and sales discounts should be deducted from (not added to) sales.

2. Sales returns and allowances and sales discounts should be deducted from sales to yield "net sales" (not gross sales).

3. Deducting the cost of merchandise sold from net sales yields gross profit.

4. Deducting the total expenses from gross profit would yield income from op-erations (or operating income).

5. Interest revenue should be reported under the caption “Other income” and should be added to income from operations to arrive at net income.

6. The final amount on the income statement should be labeled net income, not gross profit.

A correct income statement would be as follows:

ARMORTEC COMPANYIncome Statement

For the Year Ended February 28, 2010

Revenue from sales:Sales............................................................ $5,345,800Less: Sales returns and allowances........ $120,000

Sales discounts............................... 60,000 180,000 Net sales................................................ $5,165,800

Cost of merchandise sold............................... 3,100,800 Gross profit...................................................... $2,065,000Expenses:

Selling expenses........................................ $ 800,000Administrative expenses........................... 600,000Delivery expense........................................ 50,000

Total expenses...................................... 1,450,000 Income from operations.................................. $ 615,000Other income:

Interest revenue......................................... 40,000 Net income....................................................... $ 655,000

379379

Ex. 6–10

a. $15,000 ($250,000 – $10,000 – $225,000)

b. $135,000 ($225,000 – $90,000)

c. $552,000 ($600,000 – $30,000 – $18,000)

d. $222,000 ($552,000 – $330,000)

e. $50,000 ($1,000,000 – $40,000 – $910,000)

f. $623,500 ($910,000 – $286,500)

g. $539,000 ($520,000 + $11,500 + $7,500)

h. $520,000 ($400,000 + $120,000)

Ex. 6–11

a.EL DORADO FURNISHINGS COMPANY

Income StatementFor the Year Ended March 31, 2010



Cost of merchandise sold............................... 1,400,000 Gross profit...................................................... $ 950,000Expenses:

Selling expenses........................................ $ 410,000Administrative expenses........................... 250,000

Total expenses...................................... 660,000 Income from operations.................................. $ 290,000Other expense:

Interest expense......................................... 15,000 Net income....................................................... $ 275,000

b. The major advantage of the multiple-step form of income statement is that re-lationships such as gross profit to sales are indicated. The major disadvan-tages are that it is more complex and the total revenues and expenses are not indicated, as is the case in the single-step income statement.

380380

Ex. 6–12

Balance Sheet Accounts

100 Assets110 Cash112 Accounts Receivable114 Merchandise Inventory115 Store Supplies116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—

Store Equipment125 Office Equipment126 Accumulated Depreciation—

Office Equipment

200 Liabilities210 Accounts Payable211 Salaries Payable212 Notes Payable

300 Owner's Equity310 Jim Frazee, Capital311 Jim Frazee, Drawing312 Income Summary

Income Statement Accounts

400 Revenues410 Sales411 Sales Returns and

Allowances412 Sales Discounts

500 Expenses510 Cost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Store Supplies Expense524 Delivery Expense529 Miscellaneous Selling

Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Miscellaneous Admin-

istrative Expense

600 Other Expense610 Interest Expense

Note: The order of some of the accounts within subclassifications is somewhat arbitrary, as in accounts 115–117 and accounts 521–524. In a new business, the order of magnitude of balances in such accounts is not determinable in advance. The magnitude may also vary from period to period.

381381

Ex. 6–13

a. Cash............................................................................... 18,500Sales......................................................................... 18,500


b. Accounts Receivable.................................................... 12,000Sales......................................................................... 12,000


c. Cash............................................................................... 115,200Sales......................................................................... 115,200


d. Cash............................................................................... 45,000Sales......................................................................... 45,000


e. Credit Card Expense..................................................... 5,600Cash.......................................................................... 5,600

Ex. 6–14

It was acceptable to debit Sales for the $65,900. However, using Sales Returns and Allowances assists management in monitoring the amount of returns so that quick action can be taken if returns become excessive.

Accounts Receivable should also have been credited for $65,900. In addition, Cost of Merchandise Sold should only have been credited for the cost of the merchandise sold, not the selling price. Merchandise Inventory should also have been debited for the cost of the merchandise returned. The entries to correctly record the returns would have been as follows:

Sales (or Sales Returns and Allowances).................. 65,900Accounts Receivable.............................................. 65,900

Merchandise Inventory................................................. 40,000Cost of Merchandise Sold...................................... 40,000

Ex. 6–15

a. $24,750 [$25,000 – $250 ($25,000 × 1%)]

b. Sales Returns and Allowances.................................... 25,000Sales Discounts....................................................... 250Cash.......................................................................... 24,750


Ex. 6–16

(1) Sold merchandise on account, $20,000.

(2) Recorded the cost of the merchandise sold and reduced the merchandise in-ventory account, $12,000.

(3) Accepted a return of merchandise and granted an allowance, $2,000.

(4) Updated the merchandise inventory account for the cost of the merchandise returned, $1,000.

(5) Received the balance due within the discount period, $17,640. [Sale of $20,000, less return of $2,000, less discount of $360 (2% × $18,000).]

Ex. 6–17

a. $12,500

b. $12,900

c. $125 ($12,500 × 1%)

d. $12,775 ($12,900 – $125)

Ex. 6–18

a. $7,644 [Purchase of $9,000, less return of $1,200, less discount of $156 [($9,000 – $1,200) × 2%)]

b. Merchandise Inventory

Ex. 6–19

Offer A is lower than offer B. Details are as follows: A B

List price...................................................................... $20,000 $19,500Less discount.............................................................. 400 195

$19,600 $19,305Freight.......................................................................... 400

$19,600 $19,705

Ex. 6–20

(1) Purchased merchandise on account at a cost of $8,000.

(2) Paid freight, $250.

(3) An allowance or return of merchandise was granted by the creditor, $500.

(4) Paid the balance due within the discount period: debited Accounts Payable, $7,500, and credited Merchandise Inventory for the amount of the discount, $150, and Cash, $7,350.

Ex. 6–21

a. Merchandise Inventory................................................. 18,000Accounts Payable.................................................... 18,000

b. Accounts Payable......................................................... 3,000Merchandise Inventory........................................... 3,000

c. Accounts Payable......................................................... 15,000Cash.......................................................................... 14,700Merchandise Inventory........................................... 300

Ex. 6–22

a. Merchandise Inventory................................................. 25,000Accounts Payable—Presidio Co............................ 25,000

b. Accounts Payable—Presidio Co................................. 25,000Cash.......................................................................... 24,500Merchandise Inventory........................................... 500

c. Accounts Payable*—Presidio Co................................ 4,900Merchandise Inventory........................................... 4,900

d. Merchandise Inventory................................................. 4,000Accounts Payable—Presidio Co............................ 4,000

e. Cash............................................................................... 900Accounts Payable—Presidio Co............................ 900

*Note: The debit of $4,900 to Accounts Payable in entry (c) is the amount of cash refund due from Presidio Co. It is computed as the amount that was paid for the returned merchandise, $5,000, less the purchase discount of $100 ($5,000 × 2%). The credit to Accounts Payable of $4,000 in entry (d) reduces the debit balance in the account to $900, which is the amount of the cash refund in entry (e). The al-ternative entries below yield the same final results.

c. Accounts Receivable—Presidio Co............................ 4,900Merchandise Inventory........................................... 4,900

d. Merchandise Inventory................................................. 4,000Accounts Payable—Presidio Co............................ 4,000

e. Cash............................................................................... 900Accounts Payable—Presidio Co................................. 4,000

Accounts Receivable—Presidio Co....................... 4,900

Ex. 6–23

a. $14,200 ($15,000 – $800)

b. $9,024 [($10,000 – $1,200) – ($8,800 × 2%) + $400]

c. $7,425 [($8,250 – $750) – ($7,500 × 1%)]

d. $2,575 [($2,900 – $400) – ($2,500 × 2%) + $125]

e. $3,773 [$3,850 – ($3,850 × 2%)]

Ex. 6–24

a. At the time of sale

b. $13,750

c. $14,850 [$13,750 + ($13,750 × 8%)]

d. Sales Tax Payable

Ex. 6–25

a. Accounts Receivable.................................................... 3,570Sales......................................................................... 3,400Sales Tax Payable ($3,400 × 5%)............................ 170


b. Sales Tax Payable......................................................... 41,950Cash.......................................................................... 41,950

Ex. 6–26

a. Accounts Receivable—Bitone Co. ............................. 23,400Sales......................................................................... 23,400


b. Sales Returns and Allowances.................................... 4,400Accounts Receivable—Bitone Co.......................... 4,400


c. Cash............................................................................... 18,620Sales Discounts............................................................ 380

Accounts Receivable—Bitone Co.......................... 19,000

Ex. 6–27

a. Merchandise Inventory................................................. 23,400Accounts Payable—Summit Co. ........................... 23,400

b. Accounts Payable—Summit Co. ................................. 4,400Merchandise Inventory........................................... 4,400

c. Accounts Payable—Summit Co. ................................. 19,000Cash.......................................................................... 18,620Merchandise Inventory........................................... 380

Ex. 6–28

a. debit

b. debit

c. debit

d. credit

e. debit

f. debit

g. credit

Ex. 6–29



Ex. 6–30

(b) Advertising Expense

(c) Cost of Merchandise Sold

(e) Sales

(f) Sales Discounts

(g) Sales Returns and Allowances

(i) Supplies Expense

Note: (j) Talia Greenly, Drawing is closed to Talia Greenly, Capital not Income Summary.

Ex. 6–31

2010Mar. 31 Sales..................................................................... 2,550,000

Income Summary............................................ 2,550,000

31 Income Summary................................................. 2,275,000Sales Discounts.............................................. 40,000Sales Returns and Allowances..................... 160,000Cost of Merchandise Sold............................. 1,400,000Selling Expenses............................................ 410,000Administrative Expenses............................... 250,000Interest Expense............................................. 15,000

31 Income Summary................................................. 275,000Ricardo Cepeda, Capital................................ 275,000

31 Ricardo Cepeda, Capital..................................... 50,000Ricardo Cepeda, Drawing.............................. 50,000

Ex. 6–32

2010May 31 Sales..................................................................... 313,540

Income Summary............................................ 313,540

31 Income Summary................................................. 411,685Administrative Expenses............................... 65,300Cost of Merchandise Sold............................. 188,000Interest Expense............................................. 1,920Sales Discounts.............................................. 18,000Sales Returns and Allowances..................... 12,000Selling Expenses............................................ 124,000Store Supplies Expense................................ 2,465

31 Jessica Duerr, Capital......................................... 98,145Income Summary............................................ 98,145

31 Jessica Duerr, Capital......................................... 7,950Jessica Duerr, Drawing.................................. 7,950

Appendix 1—Ex. 6–33

a. and c.

SALES JOURNALCost of Merchandise

Sold Dr.Invoice Post. Accts. Rec. Dr. Merchandise

Date No. Account Debited Ref. Sales Cr. Inventory Cr.

2010Aug. 7 93 Wes McGill...................... 15,500 7,500

12 94 Joan Felt......................... 11,000 5,50023 95 Paula Larkin.................... 11,500 6,00030 96 Rajiv Kumar.................... 23,000 13,500

61,000 32,500(11)(41) (51)(12)

b. and c.

PURCHASES JOURNALAccounts Merchandise Other

Post. Payable Inventory Accounts Post.Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount

2010Aug. 10 Royal Importers...................... 18,000 18,000

12 Royal Importers...................... 8,500 8,50019 Royal Importers...................... 40,500 40,500

67,000 67,000(21) (12)

d.

Merchandise inventory, August 1..................................... $44,500Plus: August purchases.................................................... 67,000Less: Cost of merchandise sold....................................... (32,500 )Merchandise inventory, August 31................................... $ 79,000

OR

Quantity Rug Style Cost

3 10 by 8 Chinese* $23,5003 8 by 12 Persian 16,5002 8 by 10 Indian 12,0002 10 by 12 Persian 27,000

$ 79,000

*[($7,500 × 2) + $8,500]


(1) (b) perpetual inventory system

(2) (c) both

(3) (c) both

(4) (a) periodic inventory system



(7) (c) both

(8) (c) both

(9) (c) both



(a) credit

(b) debit

(c) credit

(d) debit

(e) credit

(f) debit

(g) debit


Feb. 2 Purchases............................................................. 17,500Accounts Payable.......................................... 17,500

5 Freight In.............................................................. 300Cash................................................................. 300

6 Accounts Payable................................................ 2,000Purchases Returns and Allowances............ 2,000

13 Accounts Receivable.......................................... 9,000Sales................................................................ 9,000

15 Delivery Expense................................................. 100Cash................................................................. 100

17 Accounts Payable................................................ 15,500Purchases Discounts..................................... 310Cash................................................................. 15,190

23 Cash...................................................................... 8,820Sales Discounts................................................... 180

Accounts Receivable..................................... 9,000


Feb. 2 Merchandise Inventory....................................... 17,500Accounts Payable.......................................... 17,500

5 Merchandise Inventory....................................... 300Cash................................................................. 300

6 Accounts Payable................................................ 2,000Merchandise Inventory.................................. 2,000

13 Accounts Receivable.......................................... 9,000Sales................................................................ 9,000

13 Cost of Merchandise Sold.................................. 6,600Merchandise Inventory.................................. 6,600


17 Accounts Payable................................................ 15,500Merchandise Inventory.................................. 310Cash................................................................. 15,190


Accounts Receivable..................................... 9,000


Oct. 31 Merchandise Inventory....................................... 35,750Sales..................................................................... 890,000Purchases Discounts.......................................... 12,000Purchases Returns and Allowances.................. 6,000

Income Summary............................................ 943,750

31 Income Summary................................................. 729,050Merchandise Inventory.................................. 43,800Sales Discounts.............................................. 5,000Sales Returns and Allowances..................... 10,000Purchases....................................................... 560,000Freight In......................................................... 8,000Salaries Expense............................................ 80,000Advertising Expense...................................... 16,500Depreciation Expense.................................... 4,000Miscellaneous Expense................................. 1,750

31 Income Summary................................................. 214,700Lin Endsley, Capital....................................... 214,700

31 Lin Endsley, Capital............................................ 30,000Lin Endsley, Drawing..................................... 30,000

Ex. 6–39

a. 2007: 1.88 {$90,837 ÷ [($52,263 + $44,482) ÷ 2]}

2006: 1.95 {$81,511 ÷ [($44,482 + $38,907) ÷ 2]}

b. These analyses indicate a decrease in the effectiveness in the use of the as -sets to generate profits. A comparison with similar companies or industry av-erages would be helpful in making a more definitive statement on the effec-tiveness of the use of the assets.

Note to Instructors: During 2006–2007, the U.S. economy slowed resulting in a decrease in construction and building. This slowdown likely affected the Home Depot’s sales and ratio of net sales to average total assets.

Ex. 6–40

a. 3.17 {$66,111 ÷ [($21,215 + $20,482) ÷ 2]}

b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry at a much slower velocity than Kroger sells groceries. Thus, Kroger is able to generate $3.17 of sales for every dollar of assets. Tiffany, however, is only able to generate $0.94 in sales per dollar of assets. This difference is reason-able when one considers the sales rate for jewelry and the cost of holding jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its slow sales velocity, relative to groceries, with higher gross profits, relative to groceries.

Note to Instructors: For 2007, Kroger’s gross profit percentage (gross profit divided by revenues) was 24.2%, while Tiffany’s gross profit percentage was 55.7%. Kroger’s ratio of operating income to revenues was 3.4%, while Tiffany’s ratio of operating income to revenues was 15.7%.

PROBLEMS

Prob. 6–1A

1.

CASE-IT CO.Income Statement

For the Year Ended November 30, 2010

Revenue from sales:Sales............................................................ $2,703,600Less: Sales returns and allowances........ $ 37,800


Cost of merchandise sold............................... 1,926,000 Gross profit...................................................... $ 720,000Expenses:

Selling expenses:Sales salaries expense......................... $378,000Advertising expense............................. 50,900Depreciation expense—store

equipment........................................ 8,300Miscellaneous selling expense........... 2,000

Total selling expenses.................... $ 439,200Administrative expenses:

Office salaries expense........................ $ 73,800Rent expense........................................ 39,900Insurance expense............................... 22,950Depreciation expense—office

equipment........................................ 16,200Office supplies expense....................... 1,650Miscellaneous administrative expense 1,900

Total administrative expenses....... 156,400 Total expenses........................................... 595,600

Income from operations.................................. $ 124,400Other expense:


Prob. 6–1A Continued

2.

CASE-IT CO.Statement of Owner’s Equity


Gina Hennessy, capital, December 1, 2009...................... $454,800Net income for the year..................................................... $120,000Less withdrawals................................................................ 45,000 Increase in owner’s equity................................................ 75,000 Gina Hennessy, capital, November 30, 2010................... $529,800


3.

CASE-IT CO.Balance Sheet

November 30, 2010

AssetsCurrent assets:

Cash............................................................. $ 37,700Accounts receivable.................................. 111,600Merchandise inventory.............................. 180,000Office supplies........................................... 5,000Prepaid insurance...................................... 12,000

Total current assets................................ $346,300Property, plant, and equipment:

Office equipment........................................ $115,200Less accumulated depreciation............. 49,500 $ 65,700

Store equipment......................................... $311,500Less accumulated depreciation............. 87,500 224,000

Total property, plant, andequipment.......................................... 289,700

Total assets...................................................... $636,000

LiabilitiesCurrent liabilities:

Accounts payable...................................... $ 48,600Note payable (current portion).................. 8,000Salaries payable......................................... 3,600

Total current liabilities............................ $ 60,200Long-term liabilities:

Note payable (final payment due 2025).... 46,000 Total liabilities.................................................. $

106,200

Owner’s EquityGina Hennessy, capital................................... 529,800 Total liabilities and owner’s equity................ $636,000

Prob. 6–1A Concluded

4. a. The multiple-step form of income statement contains various sections for revenues and expenses, with intermediate balances, and concludes with net income. In the single-step form, the total of all expenses is de-ducted from the total of all revenues. There are no intermediate bal-ances.

b. In the report form of balance sheet, the assets, liabilities, and owner’s equity are presented in that order in a downward sequence. In the ac-count form, the assets are listed on the left-hand side, and the liabilities and owner’s equity are listed on the right-hand side.

Prob. 6–2A

1.

CASE-IT CO.Income Statement


Revenues:Net sales....................................................................... $2,646,000

Expenses:Cost of merchandise sold.......................................... $1,926,000Selling expenses......................................................... 439,200Administrative expenses............................................ 156,400Interest expense.......................................................... 4,400

Total expenses......................................................... 2,526,000 Net income.......................................................................... $ 120,000

2.

CASE-IT CO.Statement of Owner’s Equity


Gina Hennessy, capital, December 1, 2009...................... $454,800Net income for the year..................................................... $120,000Less withdrawals................................................................ 45,000 Increase in owner’s equity................................................ 75,000 Gina Hennessy, capital, November 30, 2010................... $529,800


3.

CASE-IT CO.Balance Sheet

November 30, 2010

Assets Liabilities

Current assets: Current liabilities:Cash....................................... $ 37,700 Accounts payable............ $48,600Accounts receivable............. 111,600 Note payable (currentMerchandise inventory......... 180,000 portion).......................... 8,000Office supplies...................... 5,000 Salaries payable.............. 3,600 Prepaid insurance................. 12,000 Total current liabilities. $ 60,200

Total current assets........... $346,300 Long-term liabilities:Property, plant, and equipment: Note payable (final

Office equipment.................. $115,200 payment due 2025)....... 46,000 Less accum. depreciation. 49,500 $ 65,700 Total liabilities.................... $106,200

Store equipment................... $311,500 Owner’s EquityLess accum. depreciation. 87,500 224,000 Gina Hennessy, capital...... 529,800

Total property, plant, and equipment.............. 289,700 Total liabilities and

Total assets............................... $636,000 owner’s equity................. $636,000


4.

2010Nov. 30 Sales..................................................................... 2,703,600

Income Summary............................................ 2,703,600

30 Income Summary................................................. 2,583,600Sales Returns and Allowances..................... 37,800Sales Discounts.............................................. 19,800Cost of Merchandise Sold............................. 1,926,000Sales Salaries Expense................................. 378,000Advertising Expense...................................... 50,900Depreciation Expense—Store Equipment. . . 8,300Miscellaneous Selling Expense.................... 2,000Office Salaries Expense................................. 73,800Rent Expense.................................................. 39,900Insurance Expense......................................... 22,950Depreciation Expense—Office Equipment. . 16,200Office Supplies Expense............................... 1,650Miscellaneous Administrative Expense....... 1,900Interest Expense............................................. 4,400

30 Income Summary................................................. 120,000Gina Hennessy, Capital................................. 120,000

30 Gina Hennessy, Capital....................................... 45,000Gina Hennessy, Drawing............................... 45,000

Prob. 6–3A

Aug. 1 Accounts Receivable—Tomahawk Co. ............ 12,500Sales................................................................ 12,500


2 Cash...................................................................... 21,400Sales................................................................ 20,000Sales Tax Payable.......................................... 1,400


5 Accounts Receivable—Epworth Company....... 30,000Sales................................................................ 30,000


8 Cash...................................................................... 12,305Sales................................................................ 11,500Sales Tax Payable.......................................... 805


13 Cash...................................................................... 8,000Sales................................................................ 8,000


14 Accounts Receivable—Osgood Co. ................. 11,800Sales................................................................ 11,800



Accounts Receivable—Epworth Company 30,000


Aug. 16 Sales Returns and Allowances.......................... 1,800Accounts Receivable—Osgood Co. ............ 1,800

16 Merchandise Inventory....................................... 1,000Cost of Merchandise Sold............................. 1,000

18 Accounts Receivable—Horton Company.......... 6,850Sales................................................................ 6,850

18 Accounts Receivable—Horton Company.......... 210Cash................................................................. 210



Accounts Receivable—Osgood Co. ............ 10,000


Accounts Receivable—Horton Company.... 7,060

31 Delivery Expense................................................. 2,100Cash................................................................. 2,100

31 Cash...................................................................... 12,500Accounts Receivable—Tomahawk Co. ....... 12,500

Sept. 3 Credit Card Expense........................................... 980Cash................................................................. 980

10 Sales Tax Payable................................................ 1,750Cash................................................................. 1,750

Prob. 6–4A

Oct. 1 Merchandise Inventory....................................... 15,900Accounts Payable—Wood Co. ..................... 15,900

5 Merchandise Inventory....................................... 14,150Accounts Payable—Davis Co. ..................... 14,150

10 Accounts Payable—Wood Co. .......................... 15,900Cash................................................................. 15,590Merchandise Inventory.................................. 310

13 Merchandise Inventory....................................... 8,000Accounts Payable—Folts Co. ...................... 8,000

14 Accounts Payable—Folts Co. ............................ 1,500Merchandise Inventory.................................. 1,500

18 Merchandise Inventory....................................... 12,250Accounts Payable—Lakey Company........... 12,250


19 Merchandise Inventory....................................... 11,150Accounts Payable—Noman Co. ................... 11,150

23 Accounts Payable—Folts Co. ............................ 6,500Cash................................................................. 6,435Merchandise Inventory.................................. 65

29 Accounts Payable—Noman Co. ........................ 11,150Cash................................................................. 10,927Merchandise Inventory.................................. 223

31 Accounts Payable—Lakey Company................ 12,250Cash................................................................. 12,250

31 Accounts Payable—Davis Co. ........................... 14,150Cash................................................................. 14,150

Prob. 6–5A

Dec. 3 Merchandise Inventory....................................... 29,400Accounts Payable—Hillsboro Co. ............... 29,400[$38,000 – ($38,000 × 25%)] = $28,500;$28,500 + $900 = $29,400.

5 Merchandise Inventory....................................... 18,750Accounts Payable—Deepwater Co. ............. 18,750

6 Accounts Receivable—Zion Co. ....................... 17,550Sales................................................................ 17,550

[$27,000 – ($27,000 × 35%)] = $17,550.


7 Accounts Payable—Deepwater Co. .................. 3,000Merchandise Inventory.................................. 3,000

13 Accounts Payable—Hillsboro Co. ..................... 29,400Cash................................................................. 28,830Merchandise Inventory.................................. 570

15 Accounts Payable—Deepwater Co. .................. 15,750Cash................................................................. 15,435Merchandise Inventory.................................. 315


Accounts Receivable—Zion Co. .................. 17,550

19 Cash...................................................................... 58,000Sales................................................................ 58,000


22 Accounts Receivable—Smith River Co. ........... 15,400Sales................................................................ 15,400


23 Cash...................................................................... 33,600Sales................................................................ 33,600


Dec. 23 Cost of Merchandise Sold.................................. 20,000Merchandise Inventory.................................. 20,000

28 Sales Returns and Allowances.......................... 2,400Accounts Receivable—Smith River Co........ 2,400


31 Credit Card Expense........................................... 1,750Cash................................................................. 1,750

Prob. 6–6A

1.

Nov. 2 Accounts Receivable—Bonita Company.......... 16,000Sales................................................................ 16,000

2 Accounts Receivable—Bonita Company.......... 375Cash................................................................. 375


8 Accounts Receivable—Bonita Company.......... 24,750Sales................................................................ 24,750



12 Sales Returns and Allowances.......................... 5,750Accounts Receivable—Bonita Company..... 5,750



Accounts Receivable—Bonita Company..... 16,375





30 Cash...................................................................... 13,200Accounts Receivable—Bonita Company..... 13,200


2.

Nov. 2 Merchandise Inventory....................................... 16,375Accounts Payable—Sycamore Company.... 16,375$16,000 + $375 = $16,375.

8 Merchandise Inventory....................................... 24,750Accounts Payable—Sycamore Company.... 24,750

12 Accounts Payable—Sycamore Company.......... 5,750Merchandise Inventory.................................. 5,750

12 Accounts Payable—Sycamore Company.......... 16,375Cash................................................................. 16,055Merchandise Inventory.................................. 320

23 Accounts Payable—Sycamore Company.......... 19,000Cash................................................................. 18,810Merchandise Inventory.................................. 190

24 Merchandise Inventory....................................... 13,200Accounts Payable—Sycamore Company.... 13,200


30 Accounts Payable—Sycamore Company.......... 13,200Cash................................................................. 13,200

Appendix 2—Prob. 6–7A

Oct. 1 Purchases............................................................. 15,500Freight In.............................................................. 400

Accounts Payable—Wood Co. ..................... 15,900

5 Purchases............................................................. 14,150Accounts Payable—Davis Co. ..................... 14,150

10 Accounts Payable—Wood Co............................ 15,900Cash................................................................. 15,590Purchases Discounts..................................... 310

13 Purchases............................................................. 8,000Accounts Payable—Folts Co. ...................... 8,000

14 Accounts Payable—Folts Co. ............................ 1,500Purchases Returns and Allowances............ 1,500

18 Purchases............................................................. 12,250Accounts Payable—Lakey Company........... 12,250

18 Freight In.............................................................. 180Cash................................................................. 180

19 Purchases............................................................. 11,150Accounts Payable—Noman Co. ................... 11,150

23 Accounts Payable—Folts Co. ............................ 6,500Cash................................................................. 6,435Purchases Discounts..................................... 65

29 Accounts Payable—Noman Co. ........................ 11,150Cash................................................................. 10,927Purchases Discounts..................................... 223

31 Accounts Payable—Lakey Company................ 12,250Cash................................................................. 12,250

31 Accounts Payable—Davis Co. ........................... 14,150Cash................................................................. 14,150


Dec. 3 Purchases............................................................. 28,500Freight In.............................................................. 900

Accounts Payable—Hillsboro Co. ............... 29,400[$38,000 – ($38,000 × 25%)] = $28,500.

5 Purchases............................................................. 18,750Accounts Payable—Deepwater Co. ............. 18,750

6 Accounts Receivable—Zion Co. ....................... 17,550Sales................................................................ 17,550

[$27,000 – ($27,000 × 35%)] = $17,550.

7 Accounts Payable—Deepwater Co. .................. 3,000Purchases Returns and Allowances............ 3,000

13 Accounts Payable—Hillsboro Co. ..................... 29,400Cash................................................................. 28,830Purchases Discounts..................................... 570

15 Accounts Payable—Deepwater Co. .................. 15,750Cash................................................................. 15,435Purchases Discounts..................................... 315


Accounts Receivable—Zion Co. .................. 17,550

19 Cash...................................................................... 58,000Sales................................................................ 58,000

22 Accounts Receivable—Smith River Co. ........... 15,400Sales................................................................ 15,400

23 Cash...................................................................... 33,600Sales................................................................ 33,600

28 Sales Returns and Allowances.......................... 2,400Accounts Receivable—Smith River Co. ...... 2,400



1.

Nov. 2 Accounts Receivable—Bonita Company.......... 16,000Sales................................................................ 16,000

2 Accounts Receivable—Bonita Company.......... 375Cash................................................................. 375



12 Sales Returns and Allowances.......................... 5,750Accounts Receivable—Bonita Company..... 5,750






30 Cash...................................................................... 13,200Accounts Receivable—Bonita Company..... 13,200

Appendix 2—Prob. 6–9A Concluded

2.

Nov. 2 Purchases............................................................. 16,000Freight In.............................................................. 375

Accounts Payable—Sycamore Company.... 16,375

8 Purchases............................................................. 24,750Accounts Payable—Sycamore Company.... 24,750

12 Accounts Payable—Sycamore Company.......... 5,750Purchases Returns and Allowances............ 5,750

12 Accounts Payable—Sycamore Company.......... 16,375Cash................................................................. 16,055Purchases Discounts..................................... 320

23 Accounts Payable—Sycamore Company.......... 19,000Cash................................................................. 18,810Purchases Discounts..................................... 190

24 Purchases............................................................. 13,200Accounts Payable—Sycamore Company.... 13,200

26 Freight In.............................................................. 290Cash................................................................. 290

30 Accounts Payable—Sycamore Company.......... 13,200Cash................................................................. 13,200


1. Periodic inventory system. Andover Company uses a periodic inventory sys-tem since it maintains accounts for purchases, purchases returns and al-lowances, purchases discounts, and freight in.

2. See page 413.

Appendix 2—Prob. 6–10A Continued

2.ANDOVER COMPANY

Income StatementFor the Year Ended June 30, 2010

Revenue from sales:Sales............................................................. $2,212,900Less: Sales returns and allowances......... $ 20,000

Sales discounts................................ 18,750 38,750 Net sales................................................. $2,174,150

Cost of merchandise sold:Merchandise inventory, July 1, 2009......... $ 175,450Purchases..................................................... $1,073,000Less: Purchases returns and allowances 12,000

Purchases discounts........................ 9,000 Net purchases........................................ $1,052,000

Add freight in............................................... 21,800 Cost of merchandise purchased.......... 1,073,800

Cost of merchandise available for sale..... $1,249,250Less merchandise inventory, June 30, 2010 188,200

Cost of merchandise sold................................ 1,061,050 Gross profit....................................................... $

1,113,100Expenses:

Selling expenses:Sales salaries expense.......................... $ 312,500Advertising expense.............................. 110,000Delivery expense.................................... 18,000Depreciation expense—store equip. ... 11,800Miscellaneous selling expense............. 21,400

Total selling expenses..................... $ 473,700Administrative expenses:

Office salaries expense......................... $ 200,000Rent expense.......................................... 62,500Insurance expense................................. 6,000Office supplies expense........................ 4,600Depreciation expense—office equip. . . 3,000Miscellaneous administrative expense 11,700

Total administrative expenses........ 287,800 Total expenses............................................. 761,500

Income from operations................................... $ 351,600Other income and expense:

Rent revenue................................................ $ 12,500Less interest expense................................. 1,500 11,000

Net income......................................................... $ 362,600

Appendix 2—Prob. 6–10A Concluded

3.

Merchandise Inventory................................................. 188,200Sales............................................................................... 2,212,900Purchases Returns and Allowances........................... 12,000Purchases Discounts................................................... 9,000Rent Revenue................................................................ 12,500

Income Summary..................................................... 2,434,600

Income Summary.......................................................... 2,072,000Merchandise Inventory........................................... 175,450Sales Returns and Allowances.............................. 20,000Sales Discounts....................................................... 18,750Purchases................................................................. 1,073,000Freight In.................................................................. 21,800Sales Salaries Expense........................................... 312,500Advertising Expense............................................... 110,000Delivery Expense..................................................... 18,000Depreciation Expense—Store Equipment............. 11,800Miscellaneous Selling Expense............................. 21,400Office Salaries Expense.......................................... 200,000Rent Expense........................................................... 62,500Insurance Expense.................................................. 6,000Office Supplies Expense......................................... 4,600Depreciation Expense—Office Equipment............ 3,000Miscellaneous Administrative Expense................ 11,700Interest Expense...................................................... 1,500

Income Summary.......................................................... 362,600Vanessa Andover, Capital....................................... 362,600

Vanessa Andover, Capital............................................ 37,500Vanessa Andover, Drawing.................................... 37,500

Prob. 6–1B

1.

DRAPERY LAND CO.Income Statement

For the Year Ended July 31, 2010

Revenue from sales:Sales............................................................ $3,855,000Less: Sales returns and allowances........ $ 69,300


Cost of merchandise sold............................... 2,325,000 Gross profit...................................................... $1,395,000Expenses:

Selling expenses:Sales salaries expense......................... $519,600Advertising expense............................. 131,400Depreciation expense—store

equipment........................................ 19,200Miscellaneous selling expense........... 4,800


Office salaries expense........................ $252,450Rent expense........................................ 94,050Depreciation expense—office

equipment........................................ 38,100Insurance expense............................... 11,700Office supplies expense....................... 3,200Miscellaneous administrative

expense............................................ 5,500 Total administrative expenses....... 405,000

Total expenses........................................... 1,080,000 Income from operations.................................. $ 315,000Other expense:


Prob. 6–1B Continued

2.

DRAPERY LAND CO.Statement of Owner’s Equity


Tanya Xavier, capital, August 1, 2009.............................. $1,312,250Net income for the year..................................................... $300,000Less withdrawals................................................................ 105,000 Increase in owner’s equity................................................ 195,000 Tanya Xavier, capital, July 31, 2010.................................. $1,507,250


3.

DRAPERY LAND CO.Balance SheetJuly 31, 2010


Cash............................................................. $161,250Accounts receivable.................................. 363,000Merchandise inventory.............................. 525,000Office supplies........................................... 16,800Prepaid insurance...................................... 10,200

Total current assets................................ $1,076,250Property, plant, and equipment:

Office equipment........................................ $255,000Less accumulated depreciation............. 138,400 $116,600

Store equipment......................................... $759,000Less accumulated depreciation............. 102,600 656,400

Total property, plant, andequipment........................................ 773,000

Total assets...................................................... $1,849,250


Accounts payable...................................... $166,800Note payable (current portion).................. 16,800Salaries payable......................................... 7,200

Total current liabilities............................ $ 190,800Long-term liabilities:

Note payable (final payment due 2020).... 151,200 Total liabilities.................................................. $ 342,000

Owner’s EquityTanya Xavier, capital....................................... 1,507,250 Total liabilities and owner’s equity................ $1,849,250

Prob. 6–1B Concluded

4. a. The multiple-step form of income statement contains various sections for revenues and expenses, with intermediate balances, and concludes with net income. In the single-step form, the total of all expenses is de-ducted from the total of all revenues. There are no intermediate bal-ances.

b. In the report form of balance sheet, the assets, liabilities, and owner’s equity are presented in that order in a downward sequence. In the ac-count form, the assets are listed on the left-hand side, and the liabilities and owner’s equity are listed on the right-hand side.

Prob. 6–2B

1.

DRAPERY LAND CO.Income Statement


Revenues:Net sales....................................................................... $3,720,000

Expenses:Cost of merchandise sold.......................................... $2,325,000Selling expenses......................................................... 675,000Administrative expenses............................................ 405,000Interest expense.......................................................... 15,000

Total expenses......................................................... 3,420,000 Net income.......................................................................... $ 300,000

2.

DRAPERY LAND CO.Statement of Owner’s Equity


Tanya Xavier, capital, August 1, 2009.............................. $1,312,250Net income for the year..................................................... $300,000Less withdrawals................................................................ 105,000 Increase in owner’s equity................................................ 195,000 Tanya Xavier, capital, July 31, 2010.................................. $1,507,250


3.

DRAPERY LAND CO.Balance SheetJuly 31, 2010

Assets Liabilities

Current assets: Current liabilities:Cash....................................... $161,250 Accounts payable............ $166,800Accounts receivable............. 363,000 Note payableMerchandise inventory......... 525,000 (current portion)............ 16,800Office supplies...................... 16,800 Salaries payable.............. 7,200 Prepaid insurance................. 10,200 Total current

Total current assets........... $1,076,250 liabilities........................ $ 190,800Property, plant, and equipment: Long-term liabilities:

Office equipment................ $255,000 Note payable (finalLess accumulated payment due 2020)....... 151,200

depreciation..................... 138,400 $116,600 Total liabilities.................... $ 342,000

Store equipment................... $759,000 Owner’s EquityLess accumulated Tanya Xavier, capital.......... 1,507,250

depreciation........................ 102,600 656,400 Total property, plant,

and equipment.............. 773,000 Total liabilities andTotal assets............................... $1,849,250 owner’s equity................. $1,849,250


4.

2010July 31 Sales..................................................................... 3,855,000

Income Summary............................................ 3,855,000

31 Income Summary................................................. 3,555,000Sales Returns and Allowances..................... 69,300Sales Discounts.............................................. 65,700Cost of Merchandise Sold............................. 2,325,000Sales Salaries Expense................................. 519,600Advertising Expense...................................... 131,400Depreciation Expense—Store Equipment. . . 19,200Miscellaneous Selling Expense.................... 4,800Office Salaries Expense................................. 252,450Rent Expense.................................................. 94,050Depreciation Expense—Office Equipment. . 38,100Insurance Expense......................................... 11,700Office Supplies Expense............................... 3,200Miscellaneous Administrative Expense....... 5,500Interest Expense............................................. 15,000

31 Income Summary................................................. 300,000Tanya Xavier, Capital..................................... 300,000

31 Tanya Xavier, Capital........................................... 105,000Tanya Xavier, Drawing................................... 105,000

Prob. 6–3B

Jan. 2 Accounts Receivable—Oakley Co. ................... 8,000Sales................................................................ 8,000


3 Cash...................................................................... 23,544Sales................................................................ 21,800Sales Tax Payable.......................................... 1,744


4 Accounts Receivable—Rawlins Co. ................. 7,500Sales................................................................ 7,500


5 Cash...................................................................... 10,800Sales................................................................ 10,000Sales Tax Payable.......................................... 800



Accounts Receivable—Oakley Co. .............. 8,000

14 Cash...................................................................... 6,000Sales................................................................ 6,000


16 Accounts Receivable—Keystone Co. ............... 16,500Sales................................................................ 16,500


18 Sales Returns and Allowances.......................... 2,000Accounts Receivable—Keystone Co. ......... 2,000



Jan. 19 Accounts Receivable—Cooney Co. .................. 15,750Sales................................................................ 15,750

19 Accounts Receivable—Cooney Co. .................. 400Cash................................................................. 400



Accounts Receivable—Keystone Co. ......... 14,500


Accounts Receivable—Cooney Co. ............ 16,150

31 Cash...................................................................... 7,500Accounts Receivable—Rawlins Co. ............ 7,500

31 Delivery Expense................................................. 3,875Cash................................................................. 3,875

Feb. 3 Credit Card Expense........................................... 1,150Cash................................................................. 1,150

15 Sales Tax Payable................................................ 3,600Cash................................................................. 3,600

Prob. 6–4B

Jan. 1 Merchandise Inventory....................................... 13,600Accounts Payable—Guinn Co. .................... 13,600

3 Merchandise Inventory....................................... 18,300Accounts Payable—Cybernet Co. ............... 18,300

4 Merchandise Inventory....................................... 22,000Accounts Payable—Berry Co. ...................... 22,000

6 Accounts Payable—Berry Co. ........................... 3,500Merchandise Inventory.................................. 3,500

13 Accounts Payable—Cybernet Co. ..................... 18,300Cash................................................................. 17,940Merchandise Inventory.................................. 360

14 Accounts Payable—Berry Co. ........................... 18,500Cash................................................................. 18,130Merchandise Inventory.................................. 370

19 Merchandise Inventory....................................... 18,000Accounts Payable—Cleghorne Co. ............. 18,000


20 Merchandise Inventory....................................... 10,000Accounts Payable—Lenn Co. ...................... 10,000

30 Accounts Payable—Lenn Co. ............................ 10,000Cash................................................................. 9,900Merchandise Inventory.................................. 100

31 Accounts Payable—Guinn Co. .......................... 13,600Cash................................................................. 13,600

31 Accounts Payable—Cleghorne Co. .................. 18,000Cash................................................................. 18,000

Prob. 6–5B

Apr. 3 Merchandise Inventory....................................... 25,200Accounts Payable—Prescott Co. ................. 25,200

[$42,000 – ($42,000 × 40%)] = $25,200.

4 Cash...................................................................... 18,200Sales................................................................ 18,200


5 Merchandise Inventory....................................... 21,900Accounts Payable—Stafford Co. ................. 21,900

6 Accounts Payable—Prescott Co. ...................... 6,000Merchandise Inventory.................................. 6,000

11 Accounts Receivable—Logan Co. .................... 6,800Sales................................................................ 6,800

[$8,500 – ($8,500 × 20%)] = $6,800.


13 Accounts Payable—Prescott Co. ...................... 19,200Cash................................................................. 18,816Merchandise Inventory.................................. 384

14 Cash...................................................................... 60,000Sales................................................................ 60,000


15 Accounts Payable—Stafford Co. ...................... 21,900Cash................................................................. 21,474Merchandise Inventory.................................. 426


Accounts Receivable—Logan Co. ............... 6,800

24 Accounts Receivable—Alma Co. ...................... 9,200Sales................................................................ 9,200


Apr. 24 Cost of Merchandise Sold.................................. 5,500Merchandise Inventory.................................. 5,500


30 Sales Returns and Allowances.......................... 1,200Accounts Receivable—Alma Co. ................. 1,200

30 Merchandise Inventory....................................... 720Cost of Merchandise Sold............................. 720

Prob. 6–6B

1.

Aug. 1 Accounts Receivable—Boulder Co. ................. 28,600Sales................................................................ 28,600



5 Accounts Receivable—Boulder Co. ................. 18,000Sales................................................................ 18,000


6 Sales Returns and Allowances.......................... 1,600Accounts Receivable—Boulder Co. ............ 1,600

6 Merchandise Inventory....................................... 960Cost of Merchandise Sold............................. 960


15 Accounts Receivable—Boulder Co. ................. 900Cash................................................................. 900



Accounts Receivable—Boulder Co. ............ 27,000



31 Cash...................................................................... 18,000Accounts Receivable—Boulder Co. ............ 18,000


2.

Aug. 1 Merchandise Inventory....................................... 28,600Accounts Payable—Salem Company........... 28,600

5 Merchandise Inventory....................................... 18,000Accounts Payable—Salem Company........... 18,000

6 Accounts Payable—Salem Company................ 1,600Merchandise Inventory.................................. 1,600


15 Merchandise Inventory....................................... 37,100Accounts Payable—Salem Company........... 37,100

$36,200 + $900 = $37,100.

16 Accounts Payable—Salem Company................ 27,000Cash................................................................. 26,460Merchandise Inventory.................................. 540

25 Accounts Payable—Salem Company................ 37,100Cash................................................................. 36,738Merchandise Inventory.................................. 362

31 Accounts Payable—Salem Company................ 18,000Cash................................................................. 18,000

Appendix 2—Prob. 6–7B

Jan. 1 Purchases............................................................. 13,600Accounts Payable—Guinn Co. .................... 13,600

3 Purchases............................................................. 18,000Freight In.............................................................. 300

Accounts Payable—Cybernet Co. ............... 18,300

4 Purchases............................................................. 22,000Accounts Payable—Berry Co. ...................... 22,000

6 Accounts Payable—Berry Co. ........................... 3,500Purchases Returns and Allowances............ 3,500

13 Accounts Payable—Cybernet Co. ..................... 18,300Cash................................................................. 17,940Purchases Discounts..................................... 360

14 Accounts Payable—Berry Co. ........................... 18,500Cash................................................................. 18,130Purchases Discounts..................................... 370

19 Purchases............................................................. 18,000Accounts Payable—Cleghorne Co. ............. 18,000

19 Freight In.............................................................. 500Cash................................................................. 500

20 Purchases............................................................. 10,000Accounts Payable—Lenn Co. ...................... 10,000

30 Accounts Payable—Lenn Co. ............................ 10,000Cash................................................................. 9,900Purchases Discounts..................................... 100

31 Accounts Payable—Guinn Co. .......................... 13,600Cash................................................................. 13,600

31 Accounts Payable—Cleghorne Co. .................. 18,000Cash................................................................. 18,000


Apr. 3 Purchases............................................................. 25,200Accounts Payable—Prescott Co. ................. 25,200

[$42,000 – ($42,000 × 40%)] = $25,200.

4 Cash...................................................................... 18,200Sales................................................................ 18,200


Accounts Payable—Stafford Co. ................. 21,900

6 Accounts Payable—Prescott Co. ...................... 6,000Purchases Returns and Allowances............ 6,000

11 Accounts Receivable—Logan Co. .................... 6,800Sales................................................................ 6,800

[$8,500 – ($8,500 × 20%)] = $6,800.

13 Accounts Payable—Prescott Co. ...................... 19,200Cash................................................................. 18,816Purchases Discounts..................................... 384

14 Cash...................................................................... 60,000Sales................................................................ 60,000

15 Accounts Payable—Stafford Co. ...................... 21,900Cash................................................................. 21,474Purchases Discounts..................................... 426


Accounts Receivable—Logan Co. ............... 6,800

24 Accounts Receivable—Alma Co. ...................... 9,200Sales................................................................ 9,200


30 Sales Returns and Allowances.......................... 1,200Accounts Receivable—Alma Co. ................. 1,200


1.

Aug. 1 Accounts Receivable—Boulder Co. ................. 28,600Sales................................................................ 28,600



6 Sales Returns and Allowances.......................... 1,600Accounts Receivable—Boulder Co. ............ 1,600


15 Accounts Receivable—Boulder Co. ................. 900Cash................................................................. 900





31 Cash...................................................................... 18,000Accounts Receivable—Boulder Co. ............ 18,000

Appendix 2—Prob. 6–9B Concluded

2.

Aug. 1 Purchases............................................................. 28,600Accounts Payable—Salem Company........... 28,600

5 Purchases............................................................. 18,000Accounts Payable—Salem Company........... 18,000

6 Accounts Payable—Salem Company................ 1,600Purchases Returns and Allowances............ 1,600

9 Freight In.............................................................. 350Cash................................................................. 350


Accounts Payable—Salem Company........... 37,100

16 Accounts Payable—Salem Company................ 27,000Cash................................................................. 26,460Purchases Discounts..................................... 540

25 Accounts Payable—Salem Company................ 37,100Cash................................................................. 36,738Purchases Discounts..................................... 362

31 Accounts Payable—Salem Company................ 18,000Cash................................................................. 18,000


1. Periodic inventory system. Triple Creek Company uses a periodic inventory system since it maintains accounts for purchases, purchases returns and al-lowances, purchases discounts, and freight in.

2. See page 434.

Appendix 2—Prob. 6–10B Continued

2.TRIPLE CREEK COMPANY

Income StatementFor the Year Ended October 31, 2010

Revenue from sales:Sales............................................................. $1,106,400Less: Sales returns and allowances......... $ 10,000

Sales discounts................................ 9,300 19,300 Net sales................................................. $1,087,100

Cost of merchandise sold:Merchandise inventory, November 1, 2009 $ 87,700Purchases..................................................... $536,500Less: Purchases returns and allows. ....... 6,000

Purchases discounts........................ 4,500 Net purchases........................................ $526,000

Add freight in............................................... 10,900 Cost of merchandise purchased.......... 536,900

Cost of merchandise available for sale..... $624,600Less merchandise inventory, Oct. 31, 2010 94,100

Cost of merchandise sold................................ 530,500 Gross profit....................................................... $ 556,600Expenses:

Selling expenses:Sales salaries expense.......................... $156,250Advertising expense.............................. 55,000Delivery expense.................................... 9,000Depreciation expense—store equip. ... 5,900Miscellaneous selling expense............. 10,700

Total selling expenses..................... $236,850Administrative expenses:

Office salaries expense......................... $100,000Rent expense.......................................... 31,250Insurance expense................................. 3,000Office supplies expense........................ 2,300Depreciation expense—office equip. . . 1,500Miscellaneous administrative expense 5,850

Total administrative expenses........ 143,900 Total expenses............................................. 380,750

Income from operations................................... $ 175,850Other income and expense:

Rent revenue................................................ $ 6,250Less interest expense................................. 750 5,500

Net income......................................................... $ 181,350

Appendix 2—Prob. 6–10B Concluded

3.

Merchandise Inventory................................................. 94,100Sales............................................................................... 1,106,400Purchases Returns and Allowances........................... 6,000Purchases Discounts................................................... 4,500Rent Revenue................................................................ 6,250

Income Summary..................................................... 1,217,250

Income Summary.......................................................... 1,035,900Merchandise Inventory........................................... 87,700Sales Returns and Allowances.............................. 10,000Sales Discounts....................................................... 9,300Purchases................................................................. 536,500Freight In.................................................................. 10,900Sales Salaries Expense........................................... 156,250Advertising Expense............................................... 55,000Delivery Expense..................................................... 9,000Depreciation Expense—Store Equipment............. 5,900Miscellaneous Selling Expense............................. 10,700Office Salaries Expense.......................................... 100,000Rent Expense........................................................... 31,250Insurance Expense.................................................. 3,000Office Supplies Expense......................................... 2,300Depreciation Expense—Office Equipment............ 1,500Miscellaneous Administrative Expense................ 5,850Interest Expense...................................................... 750

Income Summary.......................................................... 181,350Shawn Hayes, Capital.............................................. 181,350

Shawn Hayes, Capital................................................... 18,750Shawn Hayes, Drawing........................................... 18,750

COMPREHENSIVE PROBLEM 2

1., 2., 6., and 9.

Cash 110Post. Balance

Date Item Ref. Dr. Cr. Dr. Cr.

2010July 1 Balance.................... ............. ............. 63,600 .............

1 ................................. 20 ............. 5,000 ............. .............4 ................................. 20 ............. 600 ............. .............7 ................................. 20 26,500 ............. ............. .............

10 ................................. 20 80,000 ............. ............. .............13 ................................. 20 ............. 39,200 ............. .............15 ................................. 20 ............. 7,500 ............. .............16 ................................. 20 18,620 ............. ............. .............19 ................................. 20 ............. 36,000 ............. .............19 ................................. 20 ............. 18,000 ............. .............21 ................................. 21 ............. 1,100 ............. .............21 ................................. 21 17,600 ............. ............. .............26 ................................. 21 ............. 3,000 ............. .............28 ................................. 21 ............. 38,000 ............. .............29 ................................. 21 ............. 2,400 ............. .............30 ................................. 21 40,700 ............. ............. .............31 ................................. 21 ............. 17,820 78,400 .............

Accounts Receivable 112

2010July 1 Balance.................... ............. ............. 153,900 .............

6 ................................. 20 25,000 ............. ............. .............7 ................................. 20 ............. 26,500 ............. .............

14 ................................. 20 ............. 6,000 ............. .............16 ................................. 20 ............. 19,000 ............. .............20 ................................. 21 40,000 ............. ............. .............21 ................................. 21 1,100 ............. ............. .............21 ................................. 21 ............. 17,600 ............. .............30 ................................. 21 18,750 ............. ............. .............30 ................................. 21 ............. 41,100 128,550 .............

Comp. Prob. 2 Continued

Merchandise Inventory 115Post. Balance


2010July 1 Balance.................... ............. ............. 602,400 .............

3 ................................. 20 40,000 ............. ............. .............4 ................................. 20 600 ............. ............. .............6 ................................. 20 ............. 15,000 ............. .............

10 ................................. 20 ............. 50,000 ............. .............13 ................................. 20 ............. 800 ............. .............14 ................................. 20 4,500 ............. ............. .............19 ................................. 20 36,000 ............. ............. .............20 ................................. 21 ............. 25,000 ............. .............21 ................................. 21 20,000 ............. ............. .............24 ................................. 21 ............. 2,000 ............. .............26 ................................. 21 1,800 ............. ............. .............30 ................................. 21 ............. 11,250 ............. .............31 ................................. 21 ............. 180 601,070 .............31 Adjusting................. 22 ............. 11,220 589,850 .............

Prepaid Insurance 116

2010July 1 Balance.................... ............. ............. 16,800 .............

31 Adjusting................. 22 ............. 12,500 4,300 .............

Store Supplies 117

2010July 1 Balance.................... ............. ............. 11,400 .............

29 ................................. 21 2,400 ............. 13,800 .............31 Adjusting................. 22 ............. 9,100 4,700 .............

Store Equipment 123

2010July 1 Balance.................... ............. ............. 469,500 .............


Accumulated Depreciation—Store Equipment 124Post. Balance


2010July 1 Balance.................... ............. ............. ............. 56,700

31 Adjusting................. 22 ............. 18,800 ............. 75,500

Accounts Payable 210

2010July 1 Balance.................... ............. ............. ............. 96,600

3 ................................. 20 ............. 40,000 ............. .............13 ................................. 20 40,000 ............. ............. .............19 ................................. 20 18,000 ............. ............. .............21 ................................. 21 ............. 20,000 ............. .............24 ................................. 21 2,000 ............. ............. .............31 ................................. 21 18,000 ............. ............. 78,600

Salaries Payable 211

2010July 31 Adjusting................. 22 ............. 7,100 ............. 7,100

Rocky Hansen, Capital 310

2009Aug. 1 Balance.................... ............. ............. ............. 555,300

2010July 31 Closing.................... 23 ............. 693,800 ............. .............

31 Closing.................... 23 135,000 ............. ............. 1,114,100

Rocky Hansen, Drawing 311

2010July 1 Balance.................... ............. ............. 135,000 .............

31 Closing.................... 23 ............. 135,000 — —


Income Summary 312Post. Balance


2010July 31 Closing.................... 23 ............. 3,384,850 ............. .............

31 Closing.................... 23 2,691,050 ............. ............. .............31 Closing.................... 23 693,800 ............. — —

Sales 410

2010July 1 Balance.................... ............. ............. ............. 3,221,100

6 ................................. 20 ............. 25,000 ............. .............10 ................................. 20 ............. 80,000 ............. .............20 ................................. 21 ............. 40,000 ............. .............30 ................................. 21 ............. 18,750 ............. 3,384,85031 Closing.................... 23 3,384,850 ............. — —

Sales Returns and Allowances 411

2010July 1 Balance.................... ............. ............. 92,700 .............

14 ................................. 20 6,000 ............. ............. .............26 ................................. 21 3,000 ............. 101,700 .............31 Closing.................... 23 ............. 101,700 — —

Sales Discounts 412

2010July 1 Balance.................... ............. ............. 59,400 .............

16 ................................. 20 380 ............. ............. .............30 ................................. 21 400 ............. 60,180 .............31 Closing.................... 23 ............. 60,180 — —


Cost of Merchandise Sold 510Post. Balance


2010July 1 Balance.................... ............. ............. 1,623,000 .............

6 ................................. 20 15,000 ............. ............. .............10 ................................. 20 50,000 ............. ............. .............14 ................................. 20 ............. 4,500 ............. .............20 ................................. 21 25,000 ............. ............. .............26 ................................. 21 ............. 1,800 ............. .............30 ................................. 21 11,250 ............. 1,717,950 .............31 Adjusting................. 22 11,220 ............. 1,729,170 .............31 Closing.................... 23 ............. 1,729,170 — —

Sales Salaries Expense 520

2010July 1 Balance.................... ............. ............. 334,800 .............

28 ................................. 21 22,800 ............. 357,600 .............31 Adjusting................. 22 4,400 ............. 362,000 .............31 Closing.................... 23 ............. 362,000 — —

Advertising Expense 521

2010July 1 Balance.................... ............. ............. 81,000 .............

15 ................................. 20 7,500 ............. 88,500 .............31 Closing.................... 23 ............. 88,500 — —

Depreciation Expense 522

2010July 31 Adjusting................. 22 18,800 ............. 18,800 .............

31 Closing.................... 23 ............. 18,800 — —

Store Supplies Expense 523

2010July 31 Adjusting................. 22 9,100 ............. 9,100 .............

31 Closing.................... 23 ............. 9,100 — —


Miscellaneous Selling Expense 529Post. Balance


2010July 1 Balance.................... ............. ............. 12,600 .............

31 Closing.................... 23 ............. 12,600 — —

Office Salaries Expense 530

2010July 1 Balance.................... ............. ............. 182,100 .............

28 ................................. 21 15,200 ............. 197,300 .............31 Adjusting................. 22 2,700 ............. 200,000 .............31 Closing.................... 23 ............. 200,000 — —

Rent Expense 531

2010July 1 Balance.................... ............. ............. 83,700 .............

1 ................................. 20 5,000 ............. 88,700 .............31 Closing.................... 23 ............. 88,700 — —

Insurance Expense 532

2010July 31 Adjusting................. 22 12,500 ............. 12,500 .............

31 Closing.................... 23 ............. 12,500 — —

Miscellaneous Administrative Expense 539

2010July 1 Balance.................... ............. ............. 7,800 .............

31 Closing.................... 23 ............. 7,800 — —


1. and 2. JOURNAL PAGE 20

Post.Date Description Ref. Debit Credit

2010July 1 Rent Expense........................................... 531 5,000

Cash.................................................... 110 5,000

3 Merchandise Inventory........................... 115 40,000Accounts Payable—Belmont Co. . . . . 210 40,000

4 Merchandise Inventory........................... 115 600Cash.................................................... 110 600

6 Accounts Receivable—Modesto Co. .... 112 25,000Sales.................................................... 410 25,000

6 Cost of Merchandise Sold...................... 510 15,000Merchandise Inventory...................... 115 15,000

7 Cash.......................................................... 110 26,500Accounts Receivable—Yuba Co. ..... 112 26,500

10 Cash.......................................................... 110 80,000Sales.................................................... 410 80,000


13 Accounts Payable—Belmont Co. .......... 210 40,000Cash.................................................... 110 39,200Merchandise Inventory...................... 115 800

14 Sales Returns and Allowances.............. 411 6,000Accounts Receivable—Modesto Co. 112 6,000

14 Merchandise Inventory........................... 115 4,500Cost of Merchandise Sold................. 510 4,500

15 Advertising Expense............................... 521 7,500Cash.................................................... 110 7,500

16 Cash.......................................................... 110 18,620Sales Discounts....................................... 412 380

Accounts Receivable—Modesto Co. 112 19,000

19 Merchandise Inventory........................... 115 36,000Cash.................................................... 110 36,000

19 Accounts Payable—Bakke Co. .............. 210 18,000Cash.................................................... 110 18,000

Comp. Prob. 2 Continued JOURNAL PAGE 21

Post.

Date Description Ref. Debit Credit

2010July 20 Accounts Receivable—Reedley Co. ..... 112 40,000

Sales.................................................... 410 40,000


21 Accounts Receivable—Reedley Co. ..... 112 1,100Cash.................................................... 110 1,100

21 Cash.......................................................... 110 17,600Accounts Receivable—Owen Co. .... 112 17,600

21 Merchandise Inventory........................... 115 20,000Accounts Payable—Nye Co. ............ 210 20,000

24 Accounts Payable—Nye Co. .................. 210 2,000Merchandise Inventory...................... 115 2,000

26 Sales Returns and Allowances.............. 411 3,000Cash.................................................... 110 3,000

26 Merchandise Inventory........................... 115 1,800Cost of Merchandise Sold................. 510 1,800

28 Sales Salaries Expense........................... 520 22,800Office Salaries Expense.......................... 530 15,200

Cash.................................................... 110 38,000

29 Store Supplies......................................... 117 2,400Cash.................................................... 110 2,400

30 Accounts Receivable—Whitetail Co. .... 112 18,750Sales.................................................... 410 18,750


30 Cash.......................................................... 110 40,700Sales Discounts....................................... 412 400

Accounts Receivable—Reedley Co. 112 41,100

31 Accounts Payable—Nye Co. .................. 210 18,000Cash.................................................... 110 17,820Merchandise Inventory...................... 115 180


3.

SOUTH COAST BOARDS CO.Unadjusted Trial Balance

July 31, 2010

Debit CreditBalances Balances

Cash............................................................................. 78,400Accounts Receivable................................................. 128,550Merchandise Inventory.............................................. 601,070Prepaid Insurance...................................................... 16,800Store Supplies............................................................ 13,800Store Equipment......................................................... 469,500Accumulated Depreciation—Store Equipment........ 56,700Accounts Payable...................................................... 78,600Salaries Payable.........................................................Rocky Hansen, Capital............................................... 555,300Rocky Hansen, Drawing............................................ 135,000Sales............................................................................ 3,384,850Sales Returns and Allowances................................. 101,700Sales Discounts.......................................................... 60,180Cost of Merchandise Sold......................................... 1,717,950Sales Salaries Expense.............................................. 357,600Advertising Expense.................................................. 88,500Depreciation Expense................................................Store Supplies Expense............................................Miscellaneous Selling Expense................................ 12,600Office Salaries Expense............................................. 197,300Rent Expense.............................................................. 88,700Insurance Expense.....................................................Miscellaneous Administrative Expense................... 7,800

4,075,450 4,075,450


4. and 6. JOURNAL PAGE 22


Adjusting Entries2010July 31 Cost of Merchandise Sold...................... 510 11,220

Merchandise Inventory...................... 115 11,220Inventory shrinkage

($601,070 –$589,850).

31 Insurance Expense.................................. 532 12,500Prepaid Insurance.............................. 116 12,500

Insurance expired.

31 Store Supplies Expense.......................... 523 9,100Store Supplies.................................... 117 9,100

Supplies used ($13,800 – $4,700).

31 Depreciation Expense............................. 522 18,800Accum. Depr.—Store Equipment...... 124 18,800

Store equipment depreciation.

31 Sales Salaries Expense........................... 520 4,400Office Salaries Expense.......................... 530 2,700

Salaries Payable................................. 211 7,100Accrued salaries.


7.

SOUTH COAST BOARDS CO.Adjusted Trial Balance

July 31, 2010


Cash............................................................................. 78,400Accounts Receivable................................................. 128,550Merchandise Inventory.............................................. 589,850Prepaid Insurance...................................................... 4,300Store Supplies............................................................ 4,700Store Equipment......................................................... 469,500Accumulated Depreciation—Store Equipment........ 75,500Accounts Payable...................................................... 78,600Salaries Payable......................................................... 7,100Rocky Hansen, Capital............................................... 555,300Rocky Hansen, Drawing............................................ 135,000Sales............................................................................ 3,384,850Sales Returns and Allowances................................. 101,700Sales Discounts.......................................................... 60,180Cost of Merchandise Sold......................................... 1,729,170Sales Salaries Expense.............................................. 362,000Advertising Expense.................................................. 88,500Depreciation Expense................................................ 18,800Store Supplies Expense............................................ 9,100Miscellaneous Selling Expense................................ 12,600Office Salaries Expense............................................. 200,000Rent Expense.............................................................. 88,700Insurance Expense..................................................... 12,500Miscellaneous Administrative Expense................... 7,800

4,101,350 4,101,350


8. SOUTH COAST BOARDS CO.Income Statement




Cost of merchandise sold............................... 1,729,170 Gross profit...................................................... $

1,493,800Expenses:

Selling expenses:Sales salaries expense......................... $362,000Advertising expense............................. 88,500Depreciation expense........................... 18,800Store supplies expense........................ 9,100Miscellaneous selling expense........... 12,600


Office salaries expense........................ $200,000Rent expense........................................ 88,700Insurance expense............................... 12,500Miscellaneous administrative expense 7,800

Total administrative expenses....... 309,000 Total expenses........................................... 800,000

Net income....................................................... $ 693,800

SOUTH COAST BOARDS CO.Statement of Owner’s Equity


Rocky Hansen, capital, August 1, 2009............................ $ 555,300Net income for the year..................................................... $693,800Less withdrawals................................................................ 135,000 Increase in owner’s equity................................................ 558,800 Rocky Hansen, capital, July 31, 2010............................... $1,114,100


SOUTH COAST BOARDS CO.Balance SheetJuly 31, 2010


Cash.................................................................................. $ 78,400Accounts receivable........................................................ 128,550Merchandise inventory.................................................... 589,850Prepaid insurance............................................................ 4,300Store supplies.................................................................. 4,700

Total current assets................................................... $ 805,800Property, plant, and equipment:

Store equipment.............................................................. $469,500Less accumulated depreciation................................ 75,500

Total property, plant, and equipment................. 394,000 Total assets........................................................................... $1,199,800


Accounts payable............................................................ $ 78,600Salaries payable............................................................... 7,100

Total liabilities............................................................ $ 85,700

Owner’s EquityRocky Hansen, capital.......................................................... 1,114,100 Total liabilities and owner’s equity..................................... $1,199,800


9. JOURNAL PAGE 23


Closing Entries2010July 31 Sales......................................................... 410 3,384,850

Income Summary............................... 312 3,384,850

31 Income Summary..................................... 312 2,691,050Sales Returns and Allowances......... 411 101,700Sales Discounts................................. 412 60,180Cost of Merchandise Sold................. 510 1,729,170Sales Salaries Expense..................... 520 362,000Advertising Expense.......................... 521 88,500Depreciation Expense........................ 522 18,800Store Supplies Expense.................... 523 9,100Miscellaneous Selling Expense........ 529 12,600Office Salaries Expense.................... 530 200,000Rent Expense..................................... 531 88,700Insurance Expense............................ 532 12,500Miscellaneous Administrative Exp. . 539 7,800

31 Income Summary..................................... 312 693,800Rocky Hansen, Capital...................... 310 693,800

31 Rocky Hansen, Capital............................ 310 135,000Rocky Hansen, Drawing.................... 311 135,000


10.

SOUTH COAST BOARDS CO.Post-Closing Trial Balance

July 31, 2010


Cash..................................................................................... 78,400Accounts Receivable......................................................... 128,550Merchandise Inventory...................................................... 589,850Prepaid Insurance.............................................................. 4,300Store Supplies.................................................................... 4,700Store Equipment................................................................. 469,500Accumulated Depreciation—Store Equipment................ 75,500Accounts Payable.............................................................. 78,600Salaries Payable................................................................. 7,100Rocky Hansen, Capital....................................................... 1,114,100

1,275,300 1,275,300

Comp. Prob. 2 Concluded5. Optional. This solution is applicable only if the end-of-period spreadsheet (work sheet) is used.

A B C D E F G H I J K 1 SOUTH COAST BOARDS CO.

2 End-of-Period Spreadsheet (Work Sheet)

3 For the Year Ended July 31, 2010

4 UnadjustedTrial Balance Adjustments

AdjustedTrial Balance

IncomeStatement

BalanceSheet 5

6 Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 7 Cash 78,400 78,400 78,400 8 Accounts Receivable 128,550 128,550 128,550 9 Merchandise Inventory 601,070 (a) 11,220 589,850 589,850 10 Prepaid Insurance 16,800 (b) 12,500 4,300 4,300 11 Store Supplies 13,800 (c) 9,100 4,700 4,700 12 Store Equipment 469,500 469,500 469,500 13 Acc. Depr.—Store Equipment 56,700 (d) 18,800 75,500 75,500 14 Accounts Payable 78,600 78,600 78,600 15 Salaries Payable (e) 7,100 7,100 7,100 16 Rocky Hansen, Capital 555,300 555,300 555,300 17 Rocky Hansen, Drawing 135,000 135,000 135,000 18 Sales 3,384,850 3,384,850 3,384,850 19 Sales Returns and Allow. 101,700 101,700 101,700 20 Sales Discounts 60,180 60,180 60,180 21 Cost of Merchandise Sold 1,717,950 (a) 11,220 1,729,170 1,729,170 22 Sales Salaries Expense 357,600 (e) 4,400 362,000 362,000 23 Advertising Expense 88,500 88,500 88,500 24 Depreciation Expense (d) 18,800 18,800 18,800 25 Store Supplies Expense (c) 9,100 9,100 9,100 26 Misc. Selling Expense 12,600 12,600 12,600 27 Office Salaries Expense 197,300 (e) 2,700 200,000 200,000 28 Rent Expense 88,700 88,700 88,700 29 Insurance Expense (b) 12,500 12,500 12,500 30 Misc. Admin. Expense 7,800 7,800 7,800

31 4,075,450 4,075,450 58,720 58,720 4,101,350 4,101,350 2,691,050 3,384,850 1,410,300 716,500 32 Net income 693,800 693,800 33 3,384,850 3,384,850 1,410,300 1,410,300

SPECIAL ACTIVITIES

Activity 6–1

Standards of Ethical Conduct for Management Accountants requires manage-ment accountants to perform in a competent manner and to comply with relevant laws, regulations, and technical standards. If Lydia DeLay intentionally sub-tracted the discount with knowledge that the discount period had expired, she would have behaved in an unprofessional manner. Such behavior could eventu-ally jeopardize Tropical Connection Company's buyer/supplier relationship with Midwest Seed Co.

Activity 6–2

Sergio Alzono is correct. The accounts payable due suppliers could be included on the balance sheet at an amount of $118,000 ($98,000 + $20,000). This is the amount that will be expected to be paid to satisfy the obligation (liability) to sup-pliers. However, this is proper only if The Encore Video Store Co. has a history of taking all purchases discounts, has a properly designed accounting system to identify available discounts, and has sufficient liquidity (cash) to pay the ac-counts payable within the discount period. In this case, The Encore Video Store Co. apparently meets these criteria, since it has a history of taking all available discounts, as indicated by Suzie Engel. Thus, The Encore Video Store Co. could report total accounts payable of $118,000 on its balance sheet. Merchandise In-ventory would also need to be reduced by the discount of $2,000 in order to maintain consistency in approach.

Activity 6–3

1. If Ted doesn’t need the stereo immediately (by the next day), Sound Unlim-ited offers the best buy, as shown below.

Sound Unlimited:

List price................................................................................ $499.99Shipping and handling (not including next-day air).......... 13.99 Total........................................................................................ $513.98

Classic Audio:

List price................................................................................ $490.00Sales tax (6%)........................................................................ 29.40 Total........................................................................................ $519.40

Even if the 1% cash discount offered by Classic Audio is considered, Sound Unlimited still offers the best buy, as shown below.

List price................................................................................ $490.00Less 1% cash discount........................................................ 4.90 Subtotal.................................................................................. $485.10Sales tax (6%)........................................................................ 29.11 Total........................................................................................ $514.21

If Ted needs the stereo immediately (the next day), then Classic Audio has the best price. This is because a shipping and handling charge of $24.99 would be added to the Sound Unlimited price, as shown below.

Sound Unlimited list price.................................................... $499.99Next-day freight charge........................................................ 24.99 Total........................................................................................ $524.98

Since both Sound Unlimited and Classic Audio will accept Ted’s VISA, the ability to use a credit card would not affect the buying decision. Classic Au-dio will, however, allow Ted to pay his bill in three installments (the first due immediately). This would allow Ted to save some interest charges on his VISA for two months. If we assume that Ted would have otherwise used his VISA and that Ted’s VISA carries an interest of 1.5% per month on the unpaid balance, the potential interest savings would be calculated as follows:

Activity 6–3 Concluded

Classic Audio price (see previous page)............................ $519.40Less first installment (down payment)............................... 173.14 Remaining balance............................................................... $346.26

Interest for first month at 1.5%............................................ $ 5.19 ($346.26 × 1.5%)

Remaining balance ($346.26 + $5.19).................................. $351.45Less second installment...................................................... 173.13 Remaining balance............................................................... $178.32

Interest for second month at 1.5%...................................... $ 2.67 ($178.32 × 1.5%)

The total interest savings would be $7.86 ($5.19 + $2.67). This interest sav-ings would be enough to just offset the price advantage of Sound Unlimited, as shown below, resulting in a $2.44 price advantage ($513.98 – $511.54) to Classic Audio.

Classic Audio price (see above).......................................... $519.40Less interest savings........................................................... 7.86 Total........................................................................................ $511.54

2. Other considerations in buying the stereo include the ability to have the stereo repaired locally by Classic Audio. In addition, Classic Audio employ-ees would presumably be available to answer questions on the operation and installation of the stereo. In addition, if Ted purchased the stereo from Clas-sic Audio, he would have the stereo the same day rather than the next day, which is the earliest that Sound Unlimited could deliver the stereo.

Activity 6–4

1.

ENNIS PARTS COMPANYProjected Income Statement

For the Year Ended March 31, 2011

Revenues:Net sales (a)................................................................. $460,000Interest revenue........................................................... 5,000

Total revenues......................................................... $465,000Expenses:

Cost of merchandise sold (b)..................................... $299,000Selling expenses (c).................................................... 36,750Administrative expenses (d)...................................... 24,500Interest expense.......................................................... 7,500

Total expenses......................................................... 367,750 Net income.......................................................................... $ 97,250

Notes:

(a) Projected net sales[$400,000 + (15% × $400,000)]................................ $460,000

(b) Projected cost of merchandise sold($460,000 × 65%)...................................................... $299,000

(c) Total selling expenses for year ended March 31, 2010......................................................... $ 45,000

Add: Increase in store supplies expense($6,000 × 15%)............................................. $900

Increase in miscellaneous selling expense($1,500 × 15%)............................................. 225 1,125

Less delivery expenses.............................................. (9,375 )Projected total selling expenses............................... $ 36,750

(d) Total administrative expenses for year endedMarch 31, 2010......................................................... $ 24,275

Add: Increase in office supplies expense($1,000 × 15%)............................................. $150

Increase in miscellaneous administrative expense ($500 × 15%)................................ 75 225

Projected total administrative expenses.................. $ 24,500

Activity 6–4 Concluded

2. a. Yes. The proposed change will increase net income from $68,225 to $97,250, a change of $29,025.

b. Possible concerns related to the proposed changes include the follow-ing:

The primary concern is with the accuracy of the estimates used for project-ing the effects of the proposed changes. If the increase in sales does not materialize, Ennis Parts Company could incur significant costs of carrying excess inventory stocked in anticipation of increasing sales. At the same time it is incurring these additional inventory costs, cash col-lections from customers will be reduced by the amount of the discounts. This could create a liquidity problem for Ennis Parts Company.

Another concern arises from the proposed change in shipping terms so as to eliminate all shipments of merchandise FOB destination, thereby elimi-nating delivery expenses. Ennis Parts Company assumes that this change will have no effect on sales. However, some (perhaps a signifi-cant number of) customers may object to this change and may seek other vendors with more favorable shipping terms. Hence, an unantici-pated decline in sales could occur because of this change.

As with any business decision, risks (concerns) such as those mentioned above must be thoroughly considered before final action is taken.

Activity 6–5

Note to Instructors: The purpose of this activity is to familiarize students with the variety of possible purchase prices for a fairly common household item. Stu-dents should report several alternative prices when they consider the source of the purchase and the other factors that affect the purchase, e.g., delivery, financ-ing, warranties, etc.

Documents

Warren SM Ch.06 Final