CHAPTER 5

 

ACCOUNTING FOR MERCHANDISING OPERATIONS

 

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

ItemLOBTItemLOBTItemLOBTItemLOBTItemLOBT

True-False Statements

1.1C10.3C19.5K28.5Ksg37.2K
2.1C11.3C20.5K29.5Ksg38.3K
3.1K12.3K21.5Ca30.6Ksg39.3K
4.1K13.4C22.5Ca31.7Ksg40.4C
5.1K14.4K23.5Ca32.7Ksg41.5K
6.2K15.4K24.5Ka33.7Ksg42.5K
7.2K16.5K25.5Ka34.7K   
8.3C17.5K26.5APsg35.1K   
9.3C18.5K27.5Ksg36.1K   

Multiple Choice Questions

43.1K73.2AP103.3K133.5APa163.7AP
44.1K74.3AP104.3C134.5APa164.7AP
45.1C75.3AP105.3C135.5APsg165.1AP
46.1K76.3AP106.3K136.5APsg166.2K
47.1K77.3C107.3K137.5APsg167.2K
48.1C78.3C108.4C138.5APst168.2K
49.1K79.3AP109.4C139.5APsg169.3K
50.1K80.3AP110.4K140.5APst170.4K
51.1C81.3C111.1C141.5APsg171.6AP
52.1K82.3C112.4C142.5APst172.5K
53.1C83.3C113.5AP143.5APsg173.6K
54.1C84.3K114.5K144.5APa,st174.7K
55.1C85.3K115.5C145.5AP175.8K
56.1K86.3C116.5Ca146.6K176.8K
57.1C87.3C117.5Ca147.6K177.8K
58.2K88.3K118.5APa148.7AP178.8K
59.2K89.3K119.5K149.7AP179.8K
60.2C90.3C120.5C150.7AP180.8K
61.2K91.3K121.5K151.7C1818K
62.2C92.3AP122.5Ka152.7K1828K
63.2C93.3C123.5Ka153.7K183.8K
64.2C94.3C124.5APa154.7K184.8K
65.2AP95.3C125.5APa155.7AP185.8K
66.2AP96.3C126.5Ka156.7AP186.8K
67.2C97.3C127.5Ca157.7K187.8K
68.2K98.3C128.5Ka158.7C188.8K
69.2AP99.3AP129.5Ka159.7C189.8K
70.2AP100.3AP130.5APa160.7K   
71.2K101.3AP131.5APa161.7K   
72.2AP102.3K132.5APa162.7C   

sg  This question also appears in the Study Guide.

st   This question also appears in a self-test at the student companion website.

a   This question covers a topic in an appendix to the chapter.

Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy

Brief Exercises

190.1AP193.3AP196.5AP199.7AP   
191.2AP194.3AP197.5AP200.7AP   
192.2,3AP195.4AP198.7APa201.7AP   

Exercises

202.1C207.2,3AN212.4AP217.5APa222.7AP
203.2,3AP208.2AP213.4AP218.5Ca223.7AP
204.2,3AP209.3AP214.5AN219.5APa224.7AP
205.2E210.3AP215.5AP220.5APa221.7AP
206.2,3AP211.4AP216.5APa221.6APa226.7AP

Completion Statements

227.1K229.1K231.2K233.3K235.5K
228.1K230.2K232.3K234.3K236.5K
Matching Statements
237.1K            
Short-Answer Essay
238.3K240.3K242.1K244.1K   
239.1K241.5K243.5K245.1K   

 

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

ItemTypeItemTypeItemTypeItemTypeItemTypeItemTypeItemType
Learning Objective 1
1.TF35.TF46.MC51.MC56.MC202.Ex239.SA
2.TF36.TF47.MC52.MC57.MC227.C242.SA
3.TF43.MC48.MC53.MC111.MC228.C244.SA
4.TF44.MC49.MC54.MC165.MC229.C245.SA
5.F45.MC50.MC55.MC190.BE237.MA  
Learning Objective 2
6.TF60.MC65.MC70.MC157.MC204.Ex230.C
7.TF61.MC66.MC71.MC158.MC205.Ex231.C
37.TF62.MC67.MC72.MC203.Ex206.Ex  
58.MC63.MC68.MC73.MC166.BE207.Ex  
59.MC64.MC69.MC156.MC167.BE208.Ex  
Learning Objective 3
8.TF75.MC83.MC91.MC99.MC107.MC209.Ex
9.TF76.MC84.MC92.MC100.MC169.MC210.Ex
10.TF77.MC85.MC93.MC101.MC192.BE232.C
11.TF78.MC86.MC94.MC102.MC193.BE233.C
12.TF79.MC87.MC95.MC103.MC194.BE234.C
38.TF80.MC88.MC96.MC104.MC203.Ex240.SA
39.TF81.MC89.MC97.MC105.MC204.Ex  
74.MC82.MC90.MC98.MC106.MC206.Ex  

 

SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE

 

Learning Objective 4
13.TF15.TF108.MC110.MC170.MC211.Ex213.Ex
14.TF40.TF109.MC112.MC195.BE212.Ex  
Learning Objective 5
16.TF26.TF117.MC127.MC137.MC172.MC235.C
17.TF27.TF118.MC128.MC138.MC173.MC236.C
18.TF28.TF119.MC129.MC139.MC196.BE241.SA
19.TF29.TF120.MC130.MC140.MC197.BE243.SA
20.TF41.TF121.MC131.MC141.MC215.Ex  
21.TF42.TF122.MC132.MC142.MC216.Ex  
22.TF113.MC123.MC133.MC143.MC217.Ex  
23.TF114.MC124.MC134.MC144.MC218.Ex  
24.TF115.MC125.MC135.MC145.MC219.Ex  
25.TF116.MC126.MC136.MC171.MC220.Ex  
Learning Objective a6
a34.TF175.MC178.MC181.MC184.MC187.MCa225.Ex
a146.MC176.MC179.MC182.MC185.MC188.MC  
a147.MC177.MC180.MC183.MC186.MC189.MC  

Learning Objective a7

a30.TFa149.MCa154.MCa159.MCa164.MCa201.BEa225.Ex
a31.TFa150.MCa155.MCa160.MCa174.MCa221.Exa226.Ex
a32.TFa151.MCa156.MCa161.MCa198.BEa222.Ex  
a33.TFa152.MCa157.MCa162.MCa199.BEa223.Ex  
a148.MCa153.MCa158.MCa163.MCa200.BEa224.Ex  
Learning Objective 8
175.MC177.MC179.MC181.MC183.MC185.MC  
176.MC178.MC180.MC182.MC184.MC    
              

 

 

Note:   TF  =  True-False                           BE  =  Brief Exercise                 C  =  Completion

MC  =  Multiple Choice                    Ex  =  Exercise                       SA  =  Short-Answer

MA  =  Matching

 

 

CHAPTER LEARNING OBJECTIVES

  1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.
  2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.
  3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.
  4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.
  5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.

a6.  Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

a7.  Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

 

 

 

TRUE-FALSE STATEMENTS

  1. Retailers and wholesalers are both considered merchandisers.

 

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. The steps in the accounting cycle are different for a merchandising company than for a service company.

 

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Sales minus operating expenses equals gross profit.

 

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

 

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. A periodic inventory system requires a detailed inventory record of inventory items.

 

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Freight terms of FOB Destination means that the seller pays the freight costs.

 

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

 

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Sales revenues are earned during the period cash is collected from the buyer.

 

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

 

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.

 

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

 

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

 

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. A company’s unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

 

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

 

  1. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

 

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A merchandising company has different types of adjusting entries than a service company.

 

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Operating expenses are different for merchandising and service enterprises.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Net sales appears on both the multiple-step and single-step forms of an income statement.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A multiple-step income statement provides users with more information about a company’s income performance.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The multiple-step form of income statement is easier to read than the single-step form.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Inventory is classified as a current asset in a classified balance sheet.

 

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

 

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

 

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

 

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

  1. Gross profit represents the merchandising profit of a company.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

 

  1. Gross profit is a measure of the overall profitability of a company.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Gross profit rate is computed by dividing cost of goods sold by net sales.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

a30.      In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

 

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a31.     Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

 

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a32.     Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

 

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a33.     Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

 

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a34.     Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

 

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Inventory is reported as a long-term asset on the balance sheet.

 

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

 

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

 

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Sales revenue should be recorded in accordance with the matching principle.

 

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

 

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

 

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

  1. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

 

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The major difference between the balance sheets of a service company and a merchandising company is inventory.

 

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Answers to True-False Statements

ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
1.T7.T13.T19.T25.Ta31.F37.F
2.F8.F14.T20.F26.Ta32.T38.F
3.F9.F15.F21.T27.Ta33.F39.T
4.T10.T16.F22.F28.Fa34.T40.T
5.F11.F17.F23.F29.F35.F41.F
6.T12.F18.T24.T30.T36.T42.T

 

 

 

MULTIPLE CHOICE QUESTIONS

  1. Net income is gross profit less
  2. financing expenses.
  3. operating expenses.
  4. other expenses and losses.
  5. other expenses.

 

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. An enterprise which sells goods to customers is known as a
  2. proprietorship.
  3. corporation.
  4. retailer.
  5. service firm.

 

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. Which of the following would not be considered a merchandising company?
  2. Retailer
  3. Wholesaler
  4. Service firm
  5. Dot Com firm

 

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. A merchandising company that sells directly to consumers is a
  2. retailer.
  3. wholesaler.
  4. broker.
  5. service company.

 

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

 

  1. Two categories of expenses for merchandising companies are
  2. cost of goods sold and financing expenses.
  3. operating expenses and financing expenses.
  4. cost of goods sold and operating expenses.
  5. sales and cost of goods sold.

 

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The primary source of revenue for a wholesaler is
  2. investment income.
  3. service fees.
  4. the sale of merchandise.
  5. the sale of fixed assets the company owns.

 

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. Sales revenue less cost of goods sold is called
  2. gross profit.
  3. net profit.
  4. net income.
  5. marginal income.

 

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. After gross profit is calculated, operating expenses are deducted to determine
  2. gross margin.
  3. net income.
  4. gross profit on sales.
  5. net margin.

 

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Cost of goods sold is determined only at the end of the accounting period in
  2. a perpetual inventory system.
  3. a periodic inventory system.
  4. both a perpetual and a periodic inventory system.
  5. neither a perpetual nor a periodic inventory system.

 

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Which of the following expressions is incorrect?
  2. Gross profit – operating expenses = net income
  3. Sales revenue – cost of goods sold – operating expenses = net income
  4. Net income + operating expenses = gross profit
  5. Operating expenses – cost of goods sold = gross profit

 

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Detailed records of goods held for resale are not maintained under a
  2. perpetual inventory system.
  3. periodic inventory system.
  4. double entry accounting system.
  5. single entry accounting system.

 

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

 

  1. A perpetual inventory system would likely be used by a(n)
  2. automobile dealership.
  3. hardware store.
  4. drugstore.
  5. convenience store.

 

Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Which of the following is a true statement about inventory systems?
  2. Periodic inventory systems require more detailed inventory records.
  3. Perpetual inventory systems require more detailed inventory records.
  4. A periodic system requires cost of goods sold be determined after each sale.
  5. A perpetual system determines cost of goods sold only at the end of the accounting period.

 

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. In a perpetual inventory system, cost of goods sold is recorded
  2. on a daily basis.
  3. on a monthly basis.
  4. on an annual basis.
  5. with each sale.

 

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. If a company determines cost of goods sold each time a sale occurs, it
  2. must have a computer accounting system.
  3. uses a combination of the perpetual and periodic inventory systems.
  4. uses a periodic inventory system.
  5. uses a perpetual inventory system.

 

Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
  2. Inventory account.
  3. Purchases account.
  4. Supplies account.
  5. Cost of Goods Sold account.

 

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
  2. Accounts Payable.
  3. Purchase Returns and Allowances.
  4. Sales Revenue.
  5. Inventory.

 

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

 

  1. The Inventory account is used in each of the following except the entry to record
  2. goods purchased on account.
  3. the return of goods purchased.
  4. payment of freight on goods sold.
  5. payment within the discount period.

 

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
  2. Accounts Payable.
  3. Inventory.
  4. Purchase Discounts.
  5. Sales Discounts.

 

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
  2. Inventory account will be increased.
  3. Inventory account will not be affected.
  4. seller will bear the freight cost.
  5. carrier will bear the freight cost.

 

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Freight costs paid by a seller on merchandise sold to customers will cause an increase
  2. in the selling expense of the buyer.
  3. in operating expenses for the seller.
  4. to the cost of goods sold of the seller.
  5. to a contra-revenue account of the seller.

 

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the
  2. seller.
  3. buyer.
  4. transportation company.
  5. buyer and the seller.

 

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?
  2. $8,100
  3. $8,280
  4. $8,820
  5. $9,000

 

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $9,000 ´ (1 – .02) = $8,820

 

  1. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
  2. 20%
  3. 24%
  4. 18%
  5. 36%

 

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: [360 ¸ (30 – 10)] ´ 1% = 18%

 

  1. If a company is given credit terms of 2/10, n/30, it should
  2. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
  3. pay within the discount period and recognize a savings.
  4. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
  5. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

 

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

 

  1. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
  2. Inventory.
  3. Purchase Discounts.
  4. Purchase Allowance.
  5. Sales Discounts.

 

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $60,000, terms 2/10, n/30.

Returned $1,200 of the shipment for credit.

Paid $300 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory increased by

  1. $57,624.
  2. $57,918.
  3. $57,924.
  4. $59,100.

 

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: [($60,000 – $1,200´ .98)] + 300 = $57,924

 

 

  1. Costner’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $40,000, terms 2/10, n/30.

Returned $800 of the shipment for credit.

Paid $200 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

  1. increased by $38,416.
  2. increased by $38,612.
  3. increased by $38,616.
  4. increased by $39,400.

 

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: [($40,000 – $800) ´ .98] + $200 = $38,616

 

  1. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in
  2. Freight Expense.
  3. Freight – In.
  4. Inventory.

d    Freight – Out.

 

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:
  2. Accounts Payable………………………………………………………… 5,000

Inventory……………………………………………………………..                            5,000

  1. Accounts Payable………………………………………………………… 5,000

Inventory……………………………………………………………………..             150

Cash……………………………………………………………………                            5,150

  1. Accounts Payable………………………………………………………… 5,000

Purchase Discounts………………………………………………                               120

Inventory……………………………………………………………..                            4,850

  1. Accounts Payable………………………………………………………… 5,000

Inventory……………………………………………………………..                               120

Cash……………………………………………………………………                            4,850

 

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:
  2. Accounts Payable………………………………………………………… 9,000

Cash……………………………………………………………………                            9,000

  1. Accounts Payable………………………………………………………… 8,730

Cash……………………………………………………………………                            8,730

  1. Accounts Payable………………………………………………………… 9,000

Purchase Returns and Allowances…………………………                               270

  1. 73 (Cont.)

Cash……………………………………………………………………                            8,730

  1. Accounts Payable………………………………………………………… 9,000

Inventory……………………………………………………………..                               270

Cash……………………………………………………………………                            8,730

 

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $9,000 ´ .97 = $8,730

 

  1. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
  2. Cash…………………………………………………………………………… 5,000

Accounts Receivable…………………………………………….                            5,000

  1. Cash…………………………………………………………………………… 5,000

Sales Discounts……………………………………………………                                 50

Accounts Receivable…………………………………………….                            4,950

  1. Cash…………………………………………………………………………… 4,950

Sales Discounts……………………………………………………………               50

Accounts Receivable…………………………………………….                            5,000

  1. Cash…………………………………………………………………………… 5,050

Sales Discounts……………………………………………………                                 50

Accounts Receivable…………………………………………….                            5,000

 

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $5,000 ´ .99 = $4,950

 

  1. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day’s cash sales will include:
  2. a $3,600 credit to Cost of Goods Sold.
  3. a $6,000 credit to Cash.
  4. a $3,600 credit to Inventory.

d    a $6,000 debit to Accounts Receivable.

 

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28.  What amount is received as payment in full on May 4?
  2. $3,675
  3. $3,750
  4. $3,920

d    $4,000

 

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: ($4,000 – $250) ´ .98 = $3,675

 

 

  1. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to
  2. Sales Discounts for $40.
  3. Cash for $1,960.
  4. Accounts Receivable for $2,000.
  5. Sales Revenue for $2,000.

 

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. The collection of a $6,000 account within the 2 percent discount period will result in a
  2. debit to Sales Discounts for $120.
  3. debit to Accounts Receivable for $5,880.
  4. credit to Cash for $5,880.
  5. credit to Accounts Receivable for $5,880.

 

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $6,000 ´ .02 = $120

 

  1. Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y’s check?
  2. $630
  3. $720
  4. $810
  5. $882

 

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $900 ´ .98 = $882

 

  1. Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
  2. $3,920
  3. $4,000
  4. $4,900
  5. $4,920

 

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: ($5,000 – $1,000) ´ .98 = $3,920

 

  1. The collection of a $1,500 account after the 2 percent discount period will result in a
  2. debit to Cash for $1,470.
  3. debit to Accounts Receivable for $1,500.
  4. debit to Cash for $1,500.
  5. debit to Sales Discounts for $30.

 

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

 

  1. The collection of a $1,000 account after the 2 percent discount period will result in a
  2. debit to Cash for $980.
  3. credit to Accounts Receivable for $1,000.
  4. credit to Cash for $1,000.
  5. debit to Sales Discounts for $20.

 

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

  1. In a perpetual inventory system, the Cost of Goods Sold account is used
  2. only when a cash sale of merchandise occurs.
  3. only when a credit sale of merchandise occurs.
  4. only when a sale of merchandise occurs.
  5. whenever there is a sale of merchandise or a return of merchandise sold.

 

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. Sales revenues are usually considered earned when
  2. cash is received from credit sales.
  3. an order is received.
  4. goods have been transferred from the seller to the buyer.
  5. adjusting entries are made.

 

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

  1. A sales invoice is a source document that
  2. provides support for goods purchased for resale.
  3. provides evidence of incurred operating expenses.
  4. provides evidence of credit sales.
  5. serves only as a customer receipt.

 

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. Sales revenue
  2. may be recorded before cash is collected.
  3. will always equal cash collections in a month.
  4. only results from credit sales.
  5. is only recorded after cash is collected.

 

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The journal entry to record a credit sale is
  2. Cash

Sales Revenue

  1. Cash

Service Revenue

  1. Accounts Receivable

Service Revenue

  1. Accounts Receivable

Sales Revenue

 

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

 

  1. Sales Returns and Allowances is increased when
  2. an employee does a good job.
  3. goods are sold on credit.
  4. goods that were sold on credit are returned.
  5. customers refuse to pay their accounts.

 

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. The Sales Returns and Allowances account is classified as a(n)
  2. asset account.
  3. contra asset account.
  4. expense account.
  5. contra revenue account.

 

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A credit granted to a customer for returned goods requires a debit to
  2. Sales Revenue and a credit to Cash.
  3. Sales Returns and Allowances and a credit to Accounts Receivable.
  4. Accounts Receivable and a credit to a contra-revenue account.
  5. Cash and a credit to Sales Returns and Allowances.

 

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
  2. discount.
  3. return.
  4. contra asset.
  5. allowance.

 

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18.  What amount is received as payment in full on July 24?
  2. $3,332
  3. $3,440
  4. $3,528

d    $3,600

 

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: ($3,600 – $200) ´ .98 = $3,332

 

 

  1. When goods are returned that relate to a prior cash sale,
  2. the Sales Returns and Allowances account should not be used.
  3. the cash account will be credited.
  4. Sales Returns and Allowances will be credited.
  5. Accounts Receivable will be credited.

 

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

 

  1. The Sales Returns and Allowances account does not provide information to management about
  2. possible inferior merchandise.
  3. the percentage of credit sales versus cash sales.
  4. inefficiencies in filling orders.
  5. errors in overbilling customers.

 

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. A Sales Returns and Allowances account is not debited if a customer
  2. returns defective merchandise.
  3. receives a credit for merchandise of inferior quality.
  4. utilizes a prompt payment incentive.
  5. returns goods that are not in accordance with specifications.

 

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. As an incentive for customers to pay their accounts promptly, a business may offer its customers
  2. a sales discount.
  3. free delivery.
  4. a sales allowance.
  5. a sales return.

 

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
  2. the customer must pay the bill within 10 days.
  3. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
  4. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
  5. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

 

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A sales discount does not
  2. provide the purchaser with a cash saving.
  3. reduce the amount of cash received from a credit sale.
  4. increase a contra-revenue account.
  5. increase an operating expense account.

 

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

  1. Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?
  2. $1,750
  3. $2,000
  4. $2,250
  5. $2,450

 

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

 

Solution: $2,500 ´ .98 = $2,450

  1. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
  2. $6,272
  3. $6,400
  4. $7,840
  5. $7,872

 

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

 

Solution: ($8,000 – $1,600) ´ .98 = $6,272

 

  1. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?
  2. Cash…………………………………………………………………………… 3,400

Accounts Receivable…………………………………………….                            3,400

  1. Cash…………………………………………………………………………… 3,332

Sales Returns and Allowances………………………………………             668

Accounts Receivable…………………………………………….                            4,000

  1. Cash…………………………………………………………………………… 3,332

Sales Returns and Allowances………………………………………             600

Sales Discounts……………………………………………………………               68

Accounts Receivable…………………………………………….                            4,000

  1. Cash…………………………………………………………………………… 3,920

Sales Discounts……………………………………………………………               80

Sales Returns and Allowances………………………………                               600

Accounts Receivable…………………………………………….                            3,400

 

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. Which of the following would not be classified as a contra account?
  2. Sales Revenue
  3. Sales Returns and Allowances
  4. Accumulated Depreciation
  5. Sales Discounts

 

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Which of the following accounts has a normal credit balance?
  2. Sales Returns and Allowances
  3. Sales Discounts
  4. Sales Revenue
  5. Selling Expense

 

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. With respect to the income statement,
  2. contra-revenue accounts do not appear on the income statement.
  3. sales discounts increase the amount of sales.
  4. contra-revenue accounts increase the amount of operating expenses.
  5. sales discounts are included in the calculation of gross profit.

 

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. When a seller grants credit for returned goods, the account that is credited is
  2. Sales Revenue.
  3. Sales Returns and Allowances.
  4. Inventory.
  5. Accounts Receivable.

 

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are
  2. credit, credit, credit.
  3. debit, credit, debit.
  4. credit, debit, debit.
  5. credit, debit, credit.

 

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. All of the following are contra revenue accounts except
  2. sales revenue.
  3. sales allowances.
  4. sales discounts.
  5. sales returns.

 

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. A merchandising company using a perpetual system will make
  2. the same number of adjusting entries as a service company does.
  3. one more adjusting entry than a service company does.
  4. one less adjusting entry than a service company does.
  5. different types of adjusting entries compared to a service company.

 

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of
  2. sales revenue.
  3. inventory.
  4. sales discounts.
  5. freight-out.

 

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. A merchandising company using a perpetual system may record an adjusting entry by
  2. debiting Income Summary.
  3. crediting Income Summary.
  4. debiting Cost of Goods Sold.
  5. debiting Sales Revenue.

 

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. The operating cycle of a merchandiser is
  2. always one year in length.
  3. generally longer than it is for a service company.
  4. about the same as for a service company.
  5. generally shorter than it is for a service company.

 

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. When the physical count of Rosanna Company inventory had a cost of $4,350 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:
  2. Cost of Goods Sold……………………………………………………… 150

Inventory……………………………………………………………..                               150

  1. Inventory…………………………………………………………………….. 150

Cost of Goods Sold………………………………………………                               150

  1. Income Summary………………………………………………………… 150

Inventory……………………………………………………………..                               150

  1. Cost of Goods Sold……………………………………………………… 4,500

Inventory……………………………………………………………..                            4,500

 

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $4,500 – $4,350 = $150

 

  1. Arquette Company’s financial information is presented below.

Sales Revenue                              $     ????         Cost of Goods Sold         540,000

Sales Returns and Allowances         40,000          Gross Profit                           ????

Net Sales                                         900,000

The missing amounts above are:

    Sales Revenue       Gross Profit

  1. $940,000 $360,000
  2. $860,000 $360,000
  3. $940,000 $420,000
  4. $860,000 $420,000

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

 

Solution: $900,000 + $40,000 = $940,000; $900,000 – $540,000 = $360,000

 

  1. The sales revenue section of an income statement for a retailer would not include
  2. Sales discounts.
  3. Sales revenue.
  4. Net sales.
  5. Cost of goods sold.

 

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The operating expense section of an income statement for a wholesaler would not include
  2. freight-out.
  3. utilities expense.
  4. cost of goods sold.
  5. insurance expense.

 

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Income from operations will always result if
  2. the cost of goods sold exceeds operating expenses.
  3. revenues exceed cost of goods sold.
  4. revenues exceed operating expenses.
  5. gross profit exceeds operating expenses.

 

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

  1. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
  2. Gross profit
  3. Operating expenses
  4. Sales revenues
  5. Cost of goods sold

 

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Conrad Company reported the following balances at June 30, 2014:

Sales Revenue                                                          $16,200

Sales Returns and Allowances                                        600

Sales Discounts                                                                300

Cost of Goods Sold                                                       7,500

Net sales for the month is

  1. $7,800
  2. $15,300.
  3. $15,600.
  4. $16,200.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $16,200 – $600 – $300 = $15,300

 

  1. Income from operations appears on
  2. both a multiple-step and a single-step income statement.
  3. neither a multiple-step nor a single-step income statement.
  4. a single-step income statement.
  5. a multiple-step income statement.

 

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Gross profit does not appear
  2. on a multiple-step income statement.
  3. on a single-step income statement.
  4. to be relevant in analyzing the operation of a merchandiser.
  5. on the income statement if the periodic inventory system is used because it cannot be calculated.

 

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Which of the following is not a true statement about a multiple-step income statement?
  2. Operating expenses are similar for merchandising and service enterprises.
  3. There may be a section for nonoperating activities.
  4. There may be a section for operating assets.
  5. There is a section for cost of goods sold.

 

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Which one of the following is shown on a multiple-step but not on a single-step income statement?
  2. Net sales
  3. Net income
  4. Gross profit
  5. Cost of goods sold

 

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

  1. All of the following items would be reported as other expenses and losses except
  2. freight-out.
  3. casualty losses.
  4. interest expense.
  5. loss from employees’ strikes.

 

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross profit percentage is
  2. 25%.
  3. 35%.
  4. 65%.
  5. 100%.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: ($700,000 – $455,000) ¸ $700,000 = 35%

 

  1. A company shows the following balances:

Sales Revenue                                               $2,500,000

Sales Returns and Allowances                           450,000

Sales Discounts                                                     50,000

Cost of Goods Sold                                          1,400,000

What is the gross profit percentage?

  1. 30%
  2. 44%
  3. 56%
  4. 70%

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $2,500,000 – $450,000 – $50,000 = $2,000,000; ($2,000,000 – $1,400,000) ¸ $2,000,000 = 30%

 

  1. The gross profit rate is computed by dividing gross profit by
  2. cost of goods sold.
  3. net income.
  4. net sales.
  5. sales revenue.

 

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. In terms of liquidity, inventory is
  2. more liquid than cash.
  3. more liquid than accounts receivable.
  4. more liquid than prepaid expenses.
  5. less liquid than store equipment.

 

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. On a classified balance sheet, inventory is classified as
  2. an intangible asset.
  3. property, plant, and equipment.
  4. a current asset.
  5. a long-term investment.

 

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Gross profit for a merchandiser is net sales minus
  2. operating expenses.
  3. cost of goods sold.
  4. sales discounts.
  5. cost of goods available for sale.

 

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

 

Parker’s gross profit is

  1. $24,000.
  2. $27,000.
  3. $45,000.
  4. $90,000.

 

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

 

Yoder’s income from operations is

  1. $18,000.
  2. $27,000.
  3. $45,000.
  4. $90,000.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

  1. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.

 

Yoder’s net income is

  1. $24,000.
  2. $27,000.
  3. $45,000.
  4. $90,000.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

  1. Financial information is presented below:

Operating Expenses   $  60,000

Sales Revenue             225,000

Cost of Goods Sold      135,000

 

Gross profit would be

  1. $30,000.
  2. $90,000.

 

  1. 133 (Cont.)
  2. $165,000.
  3. $225,000.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $225,000 – $135,000 = $90,000

 

  1. Financial information is presented below:

Operating Expenses   $  60,000

Sales Revenue             225,000

Cost of Goods Sold      135,000

 

The gross profit rate would be

  1. .133.
  2. .400.
  3. .600.
  4. .733.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: ($225,000 – $135,000) ¸ $225,000 = .40

 

  1. Financial information is presented below:

Operating Expenses                                       $  90,000

Sales Returns and Allowances                          26,000

Sales Discounts                                                  12,000

Sales                                                                 300,000

Cost of Goods Sold                                          158,000

 

Gross profit would be

  1. $104,000.
  2. $116,000.
  3. $130,000.
  4. $142,000.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $300,000 – $26,000 – $12,000 = $262,000; $262,000 – $158,000 = $104,000

 

  1. Financial information is presented below:

Operating Expenses                                       $  90,000

Sales Returns and Allowances                          26,000

Sales Discounts                                                  12,000

Sales Revenue                                                 300,000

Cost of Goods Sold                                          158,000

 

The gross profit rate would be

  1. .347.
  2. .397.
  3. .473.
  4. .542.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $300,000 – $26,000 – $12,000 = $262,000; ($262,000 – $158,000) ¸ $262,000 = .397

 

  1. Financial information is presented below:

Operating Expenses                                       $  90,000

Sales Returns and Allowances                          18,000

Sales Discounts                                                  12,000

Sales Revenue                                                 320,000

Cost of Goods Sold                                          174,000

 

The amount of net sales on the income statement would be

  1. $290,000.
  2. $302,000.
  3. $308,000.
  4. $320,000.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $320,000 – $18,000 – $12,000 = $290,000

 

  1. Financial information is presented below:

Operating Expenses                                       $  90,000

Sales Returns and Allowances                          18,000

Sales Discounts                                                  12,000

Sales Revenue                                                 320,000

Cost of Goods Sold                                          174,000

 

Gross profit would be

  1. $26,000.
  2. $116,000.
  3. $128,000.
  4. $134,000.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $320,000 – $18,000 – $12,000 = $290,000; $290,000 – $174,000 = $116,000

 

  1. Financial information is presented below:

Operating Expenses                                       $  90,000

Sales Returns and Allowances                          18,000

Sales Discounts                                                  12,000

Sales Revenue                                                 320,000

Cost of Goods Sold                                          174,000

 

The gross profit rate would be

  1. .363.
  2. .400.
  3. .456.
  4. .503.

 

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $320,000 – $18,000 – $12,000 = $290,000;($290,000 – $174,000) ¸ $290,000 = .40

 

 

  1. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $390,000, the gross profit rate is
  2. 35%.
  3. 38%
  4. 62%.
  5. 65%.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: ($600,000 – $390,000) ¸ $600,000 = 35%

 

  1. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000.  If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of
  2. $39,000 and $23,400.
  3. $39,000 and $24,000.
  4. $40,000 and $23,400.
  5. $40,000 and $24,000.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

  1. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

 

Baxter’s gross profit for August, 2014 is

  1. $20,000.
  2. $21,000.
  3. $23,000.
  4. $24,000.

 

Ans: D, LO:5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $60,000 – $36,000 = $24,000

 

  1. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

 

Baxter’s nonoperating income (loss) for the month of August, 2014 is

  1. $0.
  2. $1,000.
  3. $2,000.
  4. $3,000.

 

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $1,000 + $2,000 = $3,000

 

 

 

  1. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

 

Baxter’s operating income for the month of August, 2014 is

  1. $20,000.
  2. $21,000.
  3. $23,000.
  4. $24,000.

 

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $60,000 – $36,000 – $4,000 = $20,000

 

  1. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.

 

Baxter’s net income for August, 2014 is

  1. $20,000.
  2. $21,000.
  3. $23,000.
  4. $24,000.

 

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $60,000 – $36,000 – 4,000 + $1,000 + $2,000 = $23,000

 

a146.    In a worksheet for a merchandising company, Inventory would appear in the

  1. trial balance and adjusted trial balance columns only.
  2. trial balance and balance sheet columns only.
  3. trial balance, adjusted trial balance, and balance sheet columns.
  4. trial balance, adjusted trial balance, and income statement columns.

 

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a147.    The Inventory account balance appearing in a perpetual inventory worksheet represents the

  1. ending inventory.
  2. beginning inventory.
  3. cost of merchandise purchased.
  4. cost of merchandise sold.

 

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a148.    The following information is available for Dennehy Company:

Sales Revenue                           $390,000     Freight-In                                           $30,000

Ending Inventory                            37,500     Purchase Returns and Allowances    15,000

Purchases                                    270,000     Beginning Inventory                            45,000

 

Dennehy’s cost of goods sold is

  1. $262,500.
  2. $285,000.

 

  1. 148 (Cont.)
  2. $292,500.
  3. $345,000.

 

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $45,000 + $270,000 – $15,000 + $30,000 – $37,500 = $292,500

,

a149.    At the beginning of September, 2014, Stella Company reported Inventory of $8,000. During the month, the company made purchases of $35,600. At September 30, 2014, a physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is

  1. $35,200.
  2. $35,600.
  3. $36,000.
  4. $43,600.

 

Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $8,000 + $35,600 – $8,400 = $35,200

,

a150.    At the beginning of the year, Hunt Company had an inventory of $750,000. During the year, the company purchased goods costing $2,400,000. If Hunt Company reported ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold and gross profit rate must be

  1. $1,500,000 and 66.7%.
  2. $2,250,000 and 40%.
  3. $1,500,000 and 40%.
  4. $2,250,000 and 60%.

 

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $$750,000 +$2,400,000 – $900,000 = $2,250,000; ($3,750,000 – $2,250,000) ¸ $3,750,000 = 40%

 

a151.    During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost of goods sold for the year was $500,000, purchases must have been

  1. $475,000.
  2. $500,000.
  3. $525,000.
  4. Unable to determine.

 

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $500,000 – $25,000 = $475,000

 

a152.    Cost of goods available for sale is computed by adding

  1. beginning inventory to net purchases.
  2. beginning inventory to the cost of goods purchased.
  3. net purchases and freight-in.
  4. purchases to beginning inventory.

 

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

a 153.    The Freight-In account

  1. increases the cost of merchandise purchased.
  2. is contra to the Purchases account.
  3. is a permanent account.
  4. has a normal credit balance.

 

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a 154.    Net purchases plus freight-in determines

  1. cost of goods sold.
  2. cost of goods available for sale.
  3. cost of goods purchased.
  4. total goods available for sale.

 

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a155.    Goldblum Company has the following account balances:

Purchases                                          $96,000

Sales Returns and Allowances           12,800

Purchase Discounts                               8,000

Freight-In                                               6,000

Delivery Expense                                 10,000

The cost of goods purchased for the period is

  1. $80,800.
  2. $88,000.
  3. $94,000.
  4. $104,000.

 

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution: $96,000 – $8,000 + $6,000 = $94,000

,

a156.    McKendrick Shoe Store has a beginning inventory of $45,000. During the period, purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical count of inventory at the end of the period revealed that $30,000 was still on hand. The cost of goods available for sale was

  1. $189,000.
  2. $204,000.
  3. $219,000.
  4. $249,000.

 

Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution: $45,000 + $195,000 – $6,000 + $15,000 = $249,000

 

a157.    In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting

  1. Accounts Payable.
  2. Inventory.
  3. Purchases.
  4. Purchase Returns and Allowances.

 

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a158.    Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?

  1. Cash received on account with a discount
  2. Payment of freight costs on a purchase
  3. Return of merchandise sold
  4. Sale of merchandise on credit

 

Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

 

a159.    The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be

  1. Accounts Payable

Purchase Returns and Allowances

  1. Purchase Returns and Allowances

Accounts Payable

  1. Accounts Payable

Inventory

  1. Inventory

Accounts Payable

 

Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a160.    Under a periodic inventory system, acquisition of merchandise is debited to the

  1. Inventory account.
  2. Cost of Goods Sold account.
  3. Purchases account.
  4. Accounts Payable account.

 

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

a161.    Which of the following accounts has a normal credit balance?

  1. Purchases
  2. Sales Returns and Allowances
  3. Freight-In
  4. Purchase Discounts

 

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a162.    The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are

  1. credit, credit, debit.
  2. debit, credit, credit.
  3. debit, credit, debit.
  4. debit, debit, debit.

 

Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a163.    Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

 

Purchase Discounts         $    11,200

Freight – In                              15,600

Purchases                            402,000

Beginning Inventory               47,000

Ending Inventory                    57,600

Purchase Returns                  12,800

 

Using the periodic system, the cost of goods purchased is

  1. $378,000.
  2. $383,000.
  3. $393,600.
  4. $404,200.

 

Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $402,000 – $11,200 – $12,800 + $15,600 = $393,600

 

a164.    Cobb Company’s accounting records show the following at the year ending on December 31, 2014:

 

Purchase Discounts         $    11,200

Freight – In                              15,600

Purchases                            402,000

Beginning Inventory               47,000

Ending Inventory                    57,600

Purchase Returns                  12,800

 

Using the periodic system, the cost of goods sold is

  1. $378,000.
  2. $383,000.
  3. $393,600.
  4. $404,200.

 

Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: $47,000 + $402,000 – $11,200 – $12,800 + $15,600 – $57,600 = $383,000

 

  1. Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is
  2. $0.
  3. $10,000.
  4. $24,000.
  5. $46,000.

 

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution: $60,000 – $36,000 = $24,000

 

  1. Rae Company uses a perpetual inventory system made a purchase of merchandise on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is
  2. Accounts Payable………………………………………………………… 9,000

Cash…………………………………………………………………….                            9,000

  1. Accounts Payable………………………………………………………… 8,820

Cash…………………………………………………………………….                            8,820

  1. Accounts Payable………………………………………………………… 9,000

Purchase Returns and Allowances…………………………..                               180

Cash…………………………………………………………………….                            8,820

  1. Accounts Payable………………………………………………………… 9,000

Inventory……………………………………………………………….                               180

Cash…………………………………………………………………….                            8,820

 

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution: $9,000 ´ .98 = $8,820

 

 

  1. Kate Company uses a perpetual inventory system purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:
  2. There is no entry on Kate’s books for this transaction.
  3. Freight Expense………………………………………………………….. 500

Cash……………………………………………………………………                               500

  1. Freight-Out………………………………………………………………….. 500

Cash……………………………………………………………………                               500

  1. Inventory…………………………………………………………………….. 500

Cash……………………………………………………………………                               500

 

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
  2. Purchases.
  3. Purchase Returns.
  4. Purchase Allowance.
  5. Inventory.

 

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

 

  1. On October 4, 2014, JT Corporation had credit sales transactions of $4,000 from merchandise having cost $2,400. The entries to record the day’s credit transactions include a
  2. debit of $4,000 to Inventory.
  3. credit of $4,000 to Sales Revenue.
  4. debit of $2,400 to Inventory.
  5. credit of $2,400 to Cost of Goods Sold.

 

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

  1. Which of the following accounts is not closed to Income Summary?
  2. Cost of Goods Sold
  3. Inventory
  4. Sales Revenue
  5. Sales Discounts

 

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. In the Augie Company, sales were $750,000, sales returns and allowances were $30,000, and cost of goods sold was $450,000. The gross profit rate was
  2. 36%.
  3. 37.5%.
  4. 40%.
  5. 41.7%.

 

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution: ($750,000 – $30,000) – $450,000 = $270,000; $270,000 ¸ $720,000 = 37.5%

 

  1. Net sales is sales revenue less
  2. sales discounts.
  3. sales returns.
  4. sales returns and allowances.
  5. sales discounts and sales returns and allowances.

 

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. In the balance sheet, ending inventory is reported
  2. in current assets immediately following accounts receivable.
  3. in current assets immediately following prepaid expenses.
  4. in current assets immediately following cash.
  5. under property, plant, and equipment.

 

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

a174.    Cost of goods available for sale is computed by adding

  1. freight-in to net purchases.
  2. beginning inventory to net purchases.
  3. beginning inventory to purchases and freight-in.
  4. beginning inventory to cost of goods purchased.

 

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The Income statement is
  2. required under GAAP but not under IFRS.
  3. required under IFRS in the same format as under GAAP.
  4. required under IFRS but not under GAAP.
  5. required under IFRS with some differences as compared to GAAP.

 

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The basic accounting entries for merchandising are
  2. the same under GAAP and under IFRS.
  3. required under GAAP but not under IFRS.
  4. required under IFRS but not under GAAP.
  5. required under IFRS with some differences as compared to GAAP.

 

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under GAAP, companies can choose which inventory system?

Perpetual                              Periodic

  1. Yes                                           No
  2. Yes                                           Yes
  3. No                                             Yes
  4. Yes                                           No

 

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under IFRS, companies can choose which inventory system?

Perpetual                              Periodic

  1. Yes                                           No
  2. Yes                                           Yes
  3. No                                             Yes
  4. Yes                                           No

 

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

 

  1. Companies cannot use the
  2. periodic inventory system under GAAP.
  3. periodic inventory system under IFRS.
  4. perpetual system under IFRS.
  5. both periodic and perpetual can be used under GAAP and IFRS.

 

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Inventories are defined by IFRS as
  2. held-for-sale in the ordinary course of business.
  3. in the process of production for sale in the ordinary course of business.
  4. in the form of materials or supplies to be consumed in the production process or in the providing of services.
  5. All of these answer choices are correct.

 

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under GAAP, companies generally classify income statement items by
  2. function.
  3. nature.
  4. nature or function
  5. date incurred.

 

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under IFRS, companies must classify income statement items by
  2. function.
  3. nature.
  4. nature or function
  5. date incurred.

 

IFRS. Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under GAPP, income statement items are generally described as
  2. administration, distribution, manufacturing, etc.
  3. salaries, depreciation, utilities, etc.
  4. administration, depreciation, manufacturing, etc.
  5. salaries, distribution, utilities, etc.

 

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under IFRS, income statement items are generally described as
  2. administration, distribution, manufacturing, etc.
  3. salaries, depreciation, utilities, etc.
  4. administration, depreciation, manufacturing, etc.
  5. salaries, distribution, utilities, etc.

 

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

 

  1. For the income statement, IFRS requires
  2. single-step approach.
  3. multiple-step approach.
  4. single-step approach or multiple-step approach.
  5. no specific income statement approach.

 

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Under IFRS, companies can apply revaluation to
  2. land, buildings, and intangible assets.
  3. land, buildings, but not intangible assets.
  4. intangible assets, but not land or beer.
  5. no assets.

 

IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The use of IFRS results in more transactions affecting
  2. net income but not other comprehensive income.
  3. other comprehensive income, but not net income.
  4. but net income and other comprehensive income.
  5. neither net income nor other comprehensive income.

 

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Comprehensive income under IFRS
  2. includes unrealized gains and losses included in net income, in contrast to GAAP.
  3. includes unrealized gains and losses included in net income, similar to GAAP.
  4. excludes unrealized gains and losses included in net income, in contrast to GAAP.
  5. excludes unrealized gains and losses included in net income, similar to GAAP.

 

IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. The number of years of income statement information to be presented is
  2. 2 years under both GAAP and IFRS.
  3. 3 years under both GAAP and IFRS.
  4. 2 years under GAAP and 3 years under IFRS.
  5. 3 years under GAAP and 2 years under IFRS.

 

IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

 

Answers to Multiple Choice Questions

ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.ItemAns.
43.b64.b85.c106.c127.ca148.c169.b
44.c65.c86.a107.a128.ca149.a170.b
45.c66.c87.d108.b129.ba150.b171.b
46.a67.b88.c109.a130.ca151.a172.d
47.c68.a89.d110.c131.ba152.b173.a
48.c69.c90.b111.b132.aa153.aa174.d
49.a70.c91.d112.a133.ba154.c175.d
50.b71.c92.a113.a134.ba155.c176.a
51.b72.a93.b114.d135.aa156.d177.b
52.d73.d94.b115.c136.ba157.d178.b
53.b74.c95.c116.d137.aa158.a179.d
54.a75.c96.a117.b138.ba159.a180.d
55.b76.a97.c118.b139.ba160.c181.a
56.d77.c98.d119.d140.aa161.d182.c
57.d78.a99.d120.b141.aa162.c183.a
58.a79.d100.a121.c142.da163.c184.b
59.d80.a101.c122.c143.da164.b185.d
60.c81.c102.a123.a144.a165.c186.a
61.b82.b103.c124.b145.c166.d187.b
62.a83.d104.d125.aa146.c167.d188.b
63.b84.c105.d126.ca147.a168.d189.d

 

 

BRIEF Exercises

BE 190

Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.

Sales                    Cost of                     Gross                 Operating                   Net

Revenue          Goods Sold                 _Profit                 Expenses                Income

$75,000                   (a)                       $35,000                     (b)                     $17,000

(c)                   $86,000                  $59,000                 $48,000                     (d)

 

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 190     (5 min.)
  1. $40,000
  2. $18,000
  3. $145,000
  4. $11,000

 

 

BE 191

Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):

(a)     Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.

(b)     Returned $3,000 of damaged merchandise for credit.

(c) Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 191  (5 min.)

(a)     Inventory……………………………………………………………………………..        45,000

Accounts Payable………………………………………………………                             45,000

(b)     Accounts Payable…………………………………………………………………          3,000

Inventory…………………………………………………………………..                               3,000

(c)     Accounts Payable ($45,000 – $3,000)…………………………………….        42,000

Inventory ($42,000 × .02)……………………………………………                                  840

Cash ($42,000 – $840)……………………………………………….                             41,160

 

BE 192

Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.

 

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 192     (3 min.)

Journal entry on Garth’s books:

 

Accounts Receivable……………………………………………………………..          1,100

Sales…………………………………………………………………………….                               1,100

Cost of Goods Sold….. …………………………………………………………..             600

Inventory……………………………………………………………………                                  600

 

Journal entry on Kyle’s books:

 

Inventory……………… …………………………………………………………..          1,100

Accounts Payable………………………………………………………….                               1,100

 

BE 193

Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?

 

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

 

Solution 193     (3 min.)

Sales Returns and Allowances………………………………………………..             200

Sales Discounts  ($2,300 × .03)………………………………………………               69

Cash ($2,500 – $200 – $69)…………………………………………………….          2,231

Accounts Receivable …………………………………………………….                               2,500

 

BE 194

Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.

 

May    13      Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.

 

May    16      One defective motor was returned to Charlie.

 

May   23      Received payment in full from Scruffy Brothers. Round to nearest dollar.

 

Instructions

Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system.  You may omit explanations. Round amounts to nearest dollar.

 

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 194     (8 min.)

May    13      Accounts Receivable………………………………………………….             360

Sales Revenue………………………………………………….                                  360

 

Cost of Goods Sold……………………………………………………             208

Inventory…………………………………………………………..                                  208

May    16      Sales Returns and Allowances……………………………………               45

Accounts Receivable………………………………………….                                    45

 

Inventory…………………………………………………………………..               26

Cost of Goods Sold……………………………………………                                    26

 

May    23      Cash…………………………………………………………………………             302

Sales Discounts ($315 × .04)………………………………………               13

Accounts Receivable ($360 – $45)………………………                                  315

 

 

BE 195

The income statement for Pepe Serna Company for the year ended December 31, 2014 is as follows:

 

PEPE SERNA COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Sales revenue……………………………………………………………………                             $58,000

Interest revenue…………………………………………………………………                                 3,000

Total revenues……………………………………………………………..                               61,000

Expenses

Cost of goods sold……………………………………………………………..         $33,000

Salaries and wages expense………………………………………………           13,000

Interest expense………………………………………………………………..             1,000

Total expenses…………………………………………………………….                               47,000

Net income………………………………………………………………………………….                          $   14,000

Prepare the entries to close the revenue and expense accounts at December 31, 2014. You may omit explanations for the transactions.

 

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 195     (5 min.)

Dec. 31     Sales Revenue…………………………………………………………….        58,000

Interest Revenue………………………………………………………….          3,000

Income Summary…………………………………………………                             61,000

 

31     Income Summary…………………………………………………………        47,000

Cost of Goods Sold………………………………………………                             33,000

Salaries and Wages Expense………………………………..                             13,000

Interest Expense…………………………………………………..                               1,000

 

BE 196

Hoyt Company provides this information for the month of November, 2014:  sales on credit $170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000.  Prepare the sales revenues section of the income statement based on this information.

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 196     (3 min.)

HOYT COMPANY

Income Statement (Partial)

For the Month Ended November 30, 2014

 

Sales Revenue…………………………………………………………….                            $240,000

Less:    Sales Returns and Allowances……………………………        $9,000

Sales Discounts…………………………………………………          2,000             11,000

Net Sales…………………………………………………………………….                            $229,000

 

BE 197

During October, 2014, Red’s Catering Company generated revenues of $14,000.  Sales discounts totaled $200 for the month.  Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.

 

Calculate (1) gross profit and (2) income from operations for the month.

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 197     (4 min.)

(1)   Gross profit: $6,100 ($14,000 – $200 – $7,700)

(2)   Income from operations: $4,100 ($6,100 – $2,000)

 

aBE 198

For each of the following, determine the missing amounts.

Beginning                                 Goods Available                  Cost of                   Ending

Inventory           Purchases              for Sale                     Goods Sold             Inventory

  1. $10,000 ________             $  45,000                        $25,000                 _______
  2. ______              $220,000              $265,000                        _______                $40,000

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

aSolution 198    (4 min.)
  1. Purchases $35,000 ($45,000 – $10,000), Ending inventory $20,000 ($45,000 – $25,000)

 

  1. Beginning inventory $45,000 ($265,000 – $220,000), Cost of Goods Sold $225,000 ($265,000 – $40,000)

 

aBE 199

Assume that Swann Company uses a periodic inventory system and has these account balances:  Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

aSolution 199    (4 min.)

Calculation of Net purchases and Cost of goods purchased

 

Purchases……………………………………………………………………                         $525,000

Less:    Purchase returns and Allowances………………………..      $14,000

Purchase discounts …………………………………………..          9,000          23,000

Net purchases………………………………………………………………                           502,000

Add: Freight-in……………………………………………………………..                            15,000

Cost of goods purchased……………………………………………….                         $517,000

 

 

aBE 200

Assume that Swann Company uses a periodic inventory system and has these account balances:  Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000.  Determine the cost of goods sold.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 200     (6 min.)

Inventory, beginning………………………………………………………                                             $  45,000

Purchases……………………………………………………………………                         $630,000

Less:    Purchase returns and allowances………………………..      $25,000

Purchase discounts……………………………………………        11,000          36,000

Net purchases………………………………………………………………                           594,000

Add: Freight-in……………………………………………………………..                             19,000

Cost of goods purchased……………………………………………….                                              613,000

Cost of goods available for sale……………………………………..                                              658,000

Inventory, ending………………………………………………………….                                                 55,000

Cost of goods sold………………………………………………………..                                             $603,000

 

aBE 201

Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

 

May    13      Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30.  The motors cost Charlie Company $26 each.

 

May    16      Returned 1 defective motor to Charlie.

 

May   23      Paid Charlie Company in full. Round to nearest dollar.

 

Instructions

Journalize the May transactions for Scruffy Brothers. You may omit explanations.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

aSolution 201    (6 min.)

May    13      Purchases…………………………………………………………………             360

Accounts Payable………………………………………………                                  360

May    16      Accounts Payable………………………………………………………               45

Purchase Returns and Allowances………………………                                    45

May    23      Accounts Payable ($360 – $45)…………………………………..             315

Purchase Discounts ($315 × .04)…………………………                                    13

Cash…………………………………………………………………                                  302

 

 

Exercises

Ex. 202

For each of the following, determine the missing amounts.

Sales                    Cost of                      Gross                Operating                   Net

Revenue          Goods Sold                 _Profit                 Expenses                Income

  1. $100,000 ________                _______               $30,000                   $12,000
  2. ________ $135,000                 $125,000              _______                  $80,000

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 202     (5 min.)
  1. Gross Profit = $42,000 ($30,000 + $12,000)

Cost of Goods Sold = $58,000  ($100,000 – $42,000)

  1. Sales = $260,000 ($135,000 + $125,000)

      Operating Expenses = $45,000  ($125,000 – $80,000)

 

Ex. 203

On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

 

Oct.   4      Purchased 40 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.

6      Sold 25 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.

7      Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.

13      Issued a credit memo to Team Wisconsin for the return of a defective bicycle.

14      Paid Monroe Bicycle Company in full, less discount.

 

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

 

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 203     (20 min.)

Oct.   4      Inventory……………………………………………………………………..          8,000

Accounts Payable…………………………………………………                               8,000

 

6      Accounts Receivable…………………………………………………….          8,250

Sales Revenue…………………………………………………….                               8,250

 

Cost of Goods Sold………………………………………………………          5,000

Inventory……………………………………………………………..                               5,000

 

7      Accounts Payable…………………………………………………………             400

Inventory……………………………………………………………..                                  400

Solution 203     (Cont.)

13      Sales Returns and Allowances………………………………………             330

Accounts Receivable…………………………………………….                                  330

 

Inventory……………………………………………………………………..             200

Cost of Goods Sold………………………………………………                                  200

 

14      Accounts Payable ($8,000 – $400)…………………………………          7,600

Cash ($7,600 × .99)………………………………………………                               7,524

Inventory ($7,600 × .01)………………………………………..                                    76

 

Ex. 204

On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

 

Sept.     4   Purchased 70 backpacks at $20 each from Hunter, terms 2/10, n/30.

 

Sept.     6   Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.

 

Sept.     9   Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.

 

Sept.   13   Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.

 

Sept.   14   Paid Hunter in full, less discount.

 

Instructions

Journalize the September transactions for Reid Supply.

 

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 204     (20 min.)

Sept.     4      Inventory…………………………………………………………………..          1,400

Accounts Payable………………………………………………                               1,400

 

Sept.     6      Accounts Payable………………………………………………………             100

Inventory…………………………………………………………..                                  100

 

Sept.     9      Accounts Receivable………………………………………………….          1,400

Sales Revenue………………………………………………….                               1,400

Cost of Goods Sold……………………………………………………             800

Inventory…………………………………………………………..                                  800

 

Sept.   13      Accounts Receivable………………………………………………….             525

Sales Revenue………………………………………………….                                  525

Cost of Goods Sold……………………………………………………             300

Inventory…………………………………………………………..                                  300

 

 

Solution 204               (Cont.)

 

Sept.   14      Accounts Payable ($1,400– $100)……………………………….          1,300

Cash ($1,300 × .98)……………………………………………                               1,274

Inventory ($1,300 × .02)……………………………………..                                    26

 

Ex. 205

Sam Wainwright is a new accountant with Ground floor Company. Ground floor purchased merchandise on account for $18,000. The credit terms are 1/10, n/30. Sam has talked with the company’s banker and knows that he could earn 4% on any money invested in the company’s savings account.

 

Instructions

(a)     Should Sam pay the invoice within the discount period or should he keep the $18,000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

 

(b)     If Sam forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $18,000for 20 days. Calculate the annual rate of interest that this is equivalent to.

 

Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

 

Solution 205     (10 min.)

Dan should pay the invoice within the discount period to save $140:

 

(a)     Discount of 1% on $18,000                                         $180

Interest received on $18,000 (for 20 days at 4%)           40      ($18,000 × 4% × 20 ÷ 360)

Savings by taking the discount                                    $140

 

(b)     The equivalent annual interest rate is:

1% × 360 ÷ 20 = 18%.

 

Ex. 206

(a)     Karns Company purchased merchandise on account from Bailey Office Suppliers for $174,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $156,800 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record:

(1)     the purchase of merchandise.

(2)     the return of merchandise.

(3)     the payment on account.

 

(b)     Hinds Company sold merchandise to Peter Company on account for $146,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $86,140. During the discount period, Peter Company returned $6,000 of merchandise and paid its account in full (minus the discount) by remitting $137,200 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record:

(1)     the sale of merchandise.

(2)     the return of merchandise.

(3)     the collection on account.

 

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 206     (20 min.)

(a)     To compute the amount due after returns but before the discount, divide $156.800 by .98    (100% – 2%).

$156,800 ÷ .98 = $60,000.

Subtract $60,000 from $174,000 to determine that $174,000 of merchandise was returned.

 

(1)     Inventory……………………………………………………………………..      174,000

Accounts Payable…………………………………………………                        174,000

 

(2)     Accounts Payable…………………………………………………………        14,000

Inventory……………………………………………………………..                          14,000

 

(3)     Accounts Payable…………………………………………………………      160,000

Inventory……………………………………………………………..                            3,200

Cash……………………………………………………………………                        156,800

 

(b)     Peter Company returns $6,000 of merchandise and owes $140,000 to Hinds Company.

$137,200 ÷ $140,000 = .98

100% – 98% = 2%

The missing discount percentage is 2%. $140,000 × 2% = $2,800 sales discount.

$140,000 – $2,800 = $137,200 cash received on account.

 

(1)     Accounts Receivable…………………………………………………….      146,000

Sales Revenue…………………………………………………….                        146,000

Cost of Goods Sold………………………………………………………        86,140

Inventory……………………………………………………………..                          86,140

 

(2)     Sales Returns and Allowances………………………………………          6,000

Accounts Receivable…………………………………………….                            6,000

Inventory [$6,000 × ($86,140 ÷ $146,000)]………………………          3,540

Cost of Goods Sold………………………………………………                            3,540

 

(3)     Cash……………………………………………………………………………      137,200

Sales Discounts……………………………………………………………          2,800

Accounts Receivable…………………………………………….                        140,000

 

Ex. 207

An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions.

  1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270.
  2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.
  3. A $190 sales return was debited to Sales Revenue.
  4. A cash payment of $40 for freight on merchandise purchases was debited to Freight-Out $400 and credited to Cash $400.

 

Instructions

Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.)

 

Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 207     (6-8 min.)
  1. Sales Returns and Allowances……………………………………………… 270

Sales Revenue…………………………………………………………….                               270

  1. Supplies …………………………………………………………………………….. 310

Cash …………………………………………………………………………………..             310

Accounts Payable…………………………………………………………                               310

Inventory……………………………………………………………………..                               310

 

  1. Sales Returns and Allowances……………………………………………… 190

Sales Revenue…………………………………………………………….                               190

 

  1. Inventory …………………………………………………………………………..               40

Cash …………………………………………………………………………………..             360

Freight-Out…………………………………………………………………..                               400

 

Ex. 208

Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system.

(a)        Purchased $35,000 of merchandise on account, terms 2/10, n/30.

(b)        Returned $700 of damaged merchandise for credit.

(c)        Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 208     (6-8 min.)

(a)        Inventory……………………………………………………….     35,000

Accounts Payable……………………………………..                              35,000

 

(b)        Accounts Payable…………………………………………..          700

Inventory………………………………………………….                                   700

(c)        Accounts Payable ($35,000 – $700)…………………     34,300

Inventory ($34,300 × .02)…………………………..                                   686

Cash ($33,614 – $686)………………………………                             33,314

Ex. 209

Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system.

(a)   Eustace sells $45,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.

(b)   The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400.

(c)   Eustace received the balance due within the discount period.

 

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

 

Solution 209     (7-9 min.)

(a)     Accounts Receivable…………………………………………………………….        45,000

Sales Revenue…………………………………………………………….                             45,000

Cost of Goods Sold………………………………………………………………        30,000

Inventory……………………………………………………………………..                             30,000

(b)     Sales Returns and Allowances………………………………………………          4,000

Accounts Receivable…………………………………………………….                               4,000

Inventory……………………………………………………………………………..          2,400

Cost of Goods Sold………………………………………………………                               2,400

(c)     Cash ($40,000 – $400)………………………………………………………….        40,590

Sales Discounts ($40,000 × .01)…………………………………………….             410

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

Ex. 210

Newell Company completed the following transactions in October:

 

       Credit Sales                                                         Sales Returns                      Date of

  Date                Amount         Terms                       Date             Amount           Collection

Oct.     3             $  600         2/10, n/30                                                                 Oct.     8

Oct.   11              1,700         3/10, n/30                 Oct. 14           $  400               Oct.   16

Oct.   17              5,000         1/10, n/30                 Oct. 20            1,000               Oct.   29

Oct.   21              1,400         2/10, n/60                 Oct. 23               200               Oct.   27

Oct.   23              2,300         2/10, n/30                 Oct. 27               400               Oct.   28

 

Instructions

(a)     Indicate the cash received for each collection. Show your calculations.

(b)     Prepare the journal entry for the

(1)     Oct. 17 sale. The merchandise sold had a cost of $3,500.

(2)     Oct. 23 sales return. The merchandise returned had a cost of $140.

(3)     Oct. 28 collection.

Newell uses a perpetual inventory system.

 

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 210     (20 min.)

(a)   Oct.   8     $588       [Sales $600 – Sales discount $12  ($600 × .02)]

 

Oct. 16     $1,261    [Sales $1,700 – Sales return $400 = $1,300

$1,300 – Sales discount $39 ($1,300 × .03)]

 

Oct. 29     $4,000    [Sales $5,000 – Sales return $1,000 = $4,000;

(Discount lapsed)]

 

Oct. 27     $1,176    [Sales $1,400 – Sales return $200 = $1,200;

$1,200 – Sales discount $24 ($1,200 × .02)]

 

Oct. 28     $1,862    [Sales $2,300 – Sales return $400 = $1,900;

$1,900 – Sales discount $38 ($1,900 × .02)]

 

Solution 210               (Cont.)

 

(b)  (1)     Oct. 17        Accounts Receivable…………………………………….          5,000

Sales Revenue…………………………………….                               5,000

 

Cost of Goods Sold………………………………………          3,500

Inventory……………………………………………..                               3,500

 

(2)     Oct. 23        Sales Returns and Allowances………………………             200

Accounts Receivable…………………………….                                  200

 

Inventory……………………………………………………..             140

Cost of Goods Sold………………………………                                  140

 

(3)     Oct. 28        Cash……………………………………………………………          1,862

Sales Discounts……………………………………………               38

Accounts Receivable…………………………….                               1,900

 

Ex. 211

The following information is available for Moiz Company:

    Debit                     Credit  

Owner’s Capital                                                                               $  50,000

Owner’s Drawings                                             $  30,000

Sales Revenue                                                                                  510,000

Sales Returns and Allowances                             20,000

Sales Discounts                                                       7,000

Cost of Goods Sold                                             310,000

Freight-Out                                                               2,000

Advertising Expense                                              15,000

Interest Expense                                                    19,000

Salaries and Wages Expense                               55,000

Utilities Expense                                                    18,000

Depreciation Expense                                             7,000

Interest Revenue                                                                                 23,000

 

Instructions

Using the above information, prepare the closing entries for Moiz Company.

 

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 211     (10 min.)

Dec.   31    Interest Revenue………………………………………………………….        23,000

Sales Revenue…………………………………………………………….      510,000

Income Summary…………………………………………………                           533,000

 

31    Income Summary…………………………………………………………      453,000

Sales Returns and Allowances………………………………                             20,000

Sales Discounts……………………………………………………                               7,000

Cost of Goods Sold………………………………………………                           310,000

Freight-Out…………………………………………………………..                               2,000

Advertising Expense……………………………………………..                             15,000

Solution 211               (Cont.)

Interest Expense…………………………………………………..                             19,000

Salaries and Wages Expense………………………………..                             55,000

Utilities Expense…………………………………………………..                             18,000

Depreciation Expense…………………………………………..                               7,000

 

31    Income Summary…………………………………………………………        80,000

Owner’s Capital……………………………………………………                             80,000

 

31    Owner’s Capital …………………………………………………………..        30,000

Owner’s Drawings ……………………………………………….                             30,000

 

Ex. 212

The adjusted trial balance of J. W. Hatch Company appears below.

 

  1. W. HATCH

Adjusted Trial Balance

December 31, 2014

  Debit                     Credit 

Cash                                                                 12,000

Accounts Receivable                                       25,000

Inventory                                                          35,000

Buildings                                                        140,000

Accumulated Depreciation—

Buildings                                                                                      20,000

Accounts Payable                                                                          12,000

Owner’s Capital                                                                           144,000

Owner’s Drawings                                           30,000

Sales Revenue                                                                            310,000

Sales Discounts                                                 6,000

Sales Returns & Allowances                             8,000

Cost of Goods Sold                                       188,000

Operating Expenses                                        42,000                             

486,000                 486,000

 

Instructions

Using the information given, prepare the year-end closing entries.

 

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 212     (10 min.)

Dec. 31     Sales Revenue…………………………………………………………….      310,000

Income Summary…………………………………………………                           310,000

(To close credit balance accounts)

 

31     Income Summary…………………………………………………………      244,000

Sales Discounts……………………………………………………                               6,000

Sales Returns and Allowances………………………………                               8,000

Cost of Goods Sold………………………………………………                           188,000

Operating Expense……………………………………………….                             42,000

Solution 212               (Cont.)

(To close accounts with debit balances)

 

31     Income Summary…………………………………………………………        66,000

Owner’s Capital……………………………………………………                             66,000

(To transfer net income to capital)

 

31     Owner’s Capital……………………………………………………………        30,000

Owner’s Drawings………………………………………………..                             30,000

(To close drawings account to capital)

Ex. 213

Kennedy Company had the following account balances at year-end: cost of goods sold $85,000; inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that inventory on hand is $14,400.

 

Instructions

(a)  Prepare the adjusting entry necessary as a result of the physical count.

(b)  Prepare closing entries.

 

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 213     (10 min.)

(a)     Cost of Goods Sold………………………………………………………………             600

Inventory……………………………………………………………………..                                  600

(b)     Sales Revenue…………………………………………………………………….      144,000

Income Summary………………………………………………………..                           144,000

Income Summary…………………………………………………………………      128,500

Cost of Goods Sold………………………………………………………                             85,600

Operating Expenses……………………………………………………..                             39,000

Sales Returns and Allowances………………………………………                               2,300

Sales Discounts……………………………………………………………                               1,600

Income Summary ($144,000 – $128,500)………………………………..        15,500

Owner’s, Capital……………………………………………………………                             15,500

 

Ex. 214

Financial information is presented below for two different companies.

 

Gower              Martini

Drugs                   Food and Liquor

Sales revenue$90,000$       (e)
Sales returns and allowances(a)3,000
Net sales86,00095,000
Cost of goods sold56,000(f)
Gross profit(b)36,000
Operating expenses22,000(g)
Income from operations(c)(h)
Other expenses and losses4,0007,000
Net income(d)11,000
Ex. 214         (Cont)

 

Instructions

Determine the missing amounts.

 

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 214     (15 min.)

(*Missing amount)

(a)     Sales…………………………………………………………………………………..                          $ 90,000

Sales returns and allowances………………………………………………..                                4,000*

Net sales……………………………………………………………………………..                          $ 86,000

 

(b)     Net sales……………………………………………………………………………..                          $ 86,000

Cost of goods sold………………………………………………………………..                             56,000

Gross profit………………………………………………………………………….                          $ 30,000*

 

(c) and (d)

Gross profit………………………………………………………………………….                          $ 30,000

Operating expenses………………………………………………………………                             22,000

Income from operations (c)……………………………………………………                            $ 8,000*

Other expenses and losses……………………………………………………                              4,000

Net income (d)……………………………………………………………………..                          $   4,000*

 

(e)     Sales…………………………………………………………………………………..                          $ 98,000*

Sales returns and allowances………………………………………………..                               3,000

Net sales……………………………………………………………………………..                          $ 95,000

 

(f)     Net sales……………………………………………………………………………..                          $ 95,000

Cost of goods sold………………………………………………………………..                             59,000*

Gross profit………………………………………………………………………….                          $ 36,000

 

(g) and (h)

Gross profit………………………………………………………………………….                          $ 36,000

Operating expenses (g)…………………………………………………………                             18,000*

Income from operations (h)……………………………………………………                          $ 18,000*

Other expenses and losses……………………………………………………                               7,000

Net income ………………………………………………………………………….                          $ 11,000

 

Ex. 215

Presented below is information for Annie Company for the month of March 2015.

 

Cost of goods sold                      $245,000             Rent expense                           $  36,000

Freight-out                                         7,000             Sales discounts                               8,000

Insurance expense                         5,000               Sales returns and allowances      11,000

Salaries and wages expense         63,000             Sales revenue                             410,000

 

Instructions

(a)  Prepare a multiple -step income statement.

(b)  Compute the gross profit rate.

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 215     (10 min.)

(a)

ANNIE COMPANY

Income Statement

For the Month Ended March 31, 2014

_______________________________________________________________________________________________________________

Sales Revenues

Sales…………………………………………………………………………..                            $410,000

Less:    Sales returns and allowances……………………………..      $11,000

Sales discounts………………………………………………….         8,000             19,000

Net sales……………………………………………………………………..                              391,000

Cost of goods sold………………………………………………………..                              245,000

Gross profit………………………………………………………………….                              146,000

Operating expenses

Salaries and wages expense……………………………….        63,000

Rent expense…………………………………………………….        36,000

Insurance expense……………………………………………..        5,000

Freight-out………………………………………………………………    7,000

Total operating expenses…………………………………….                               111,000

Net income ………………………………………………………………….                             $  35,000

 

(b)     Gross profit rate = $146,000 ¸ $391,000 = 37.3%.

 

Ex. 216

In 2014, Rondelli Company had net sales of $650,000 and cost of goods sold of $455,000. Operating expenses were $150,000, and interest expense was $10,000. Rondelli prepares a multiple-step income statement.

 

Instructions

(a)     Compute Rondelli gross profit.

(b)     Compute the gross profit rate.

(c)     What is Rondelli income from operations and net income?

(d)    If Rondelli prepared a single-step income statement, what amount would it report for net income?

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

 

Solution 216     (10 min.)

(a)     $650,000 – $455,000 = $195,000.

(b)     $195,000/$650,000 = 30%.

(c)     Income from operations is $45,000 ($195,000 – $150,000), and net income is $35,000 ($45,000 – $10,000).

(d)     The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Therefore, net income in Rondelli single-step income statement is also $35,000.

 

 

Ex. 217

Argentina Company gathered the following condensed data for the year ended December 31, 2014:

 

Cost of goods sold                                                $   750,000

Net sales                                                                 1,200,000

Operating expenses                                                  275,000

Interest expense                                                          48,000

Dividend revenue                                                         38,000

Casualty loss from vandalism                                    125,000

 

Instructions

  1. Prepare a single-step income statement for the year ended December 31, 2014.
  2. Prepare a multiple-step income statement for the year ended December 31, 2014.

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 217     (25 min.)
  1. ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Net sales…………………………………………………………………………..                            $1,200,000

Dividend revenue……………………………………………………………….                                   38,000

Total revenues……………………………………………………………..                              1,238,000

Expenses

Cost of goods sold……………………………………………………………..       $750,000

Operating expenses……………………………………………………………         275,000

Casualty loss from vandalism……………………………………………..         125,000

Interest expense………………………………………………………………..           48,000

Total expenses…………………………………………………………….                              1,198,000

Net income …………………………………………………………………………….                            $     40,000

 

  1. ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2014

 

Net sales…………………………………………………………….                                                   $1,200,000

Cost of goods sold……………………………………………….                                                        750,000

Gross profit…………………………………………………………                                                        450,000

Operating expenses…………………………………………….                                                       275,000

Income from operations……………………………………….                                                        175,000

Other revenues and gains

Dividend revenue………………………………………..                                  38,000

Other expenses and losses

Casualty loss from vandalism……………………….         $125,000

Interest expense………………………………………….            48,000        173,000           135,000

Net income…………………………………………………………                                                   $     40,000

Ex. 218

Instructions

State the missing items identified by ?.

  1. Gross profit – Operating expenses = ?
  2. Cost of goods sold + Gross profit on sales = ?
  3. Sales Revenue – (? + ?) = Net sales
  4. Income from operations + ? – ? = Net income
  5. Net sales – Cost of goods sold = ?

 

Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 218     (5 min.)
  1. Income from operations (or Net income)
  2. Net sales
  3. Sales discounts, Sales returns and allowances
  4. Other revenues and gains, Other expenses and losses
  5. Gross profit

 

Ex. 219

The adjusted trial balance of Nick Company contained the following information:

  Debit                       Credit 

Sales Revenue                                                                                                  $570,000

Sales Returns and Allowances                                           $  15,000

Sales Discounts                                                                         7,000

Cost of Goods Sold                                                               323,000

Freight-Out                                                                                 2,000

Advertising Expense                                                                15,000

Interest Expense                                                                      18,000

Salaries and Wages Expense                                                 85,000

Utilities Expense                                                                      28,000

Depreciation Expense                                                               7,000

Interest Revenue                                                                                                   27,000

Instructions

  1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.

 

  1. Prepare a single-step income statement for the year ended December 31, 2014.

 

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

 

Solution 219     (20 min.)
  1. NICK COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Sales revenue……………………………………………………                                             $570,000

Less:    Sales returns and allowances…………………..                         $  15,000

Sales discounts……………………………………….                               7,000         22,000

Net sales…………………………………………………………..                                               548,000

Cost of goods sold……………………………………………..                                               323,000

Gross profit……………………………………………………….                                               225,000

Operating expenses

Salaries and wages expense……………………      $85,000

Utilities expense………………………………………        28,000

Advertising expense………………………………..        15,000

Depreciation expense………………………………          7,000

Freight-out………………………………………………          2,000

Total operating expenses………………                                               137,000

Income from operations………………………………………                                                 88,000

Other revenues and gains

Interest revenue……………………………………………                             27,000

Other expenses and losses

Interest expense…………………………………………..                             18,000           9,000

Net income                                                                                                             $  97,000

 

 

  1. NICK COMPANY

Income Statement

For the Year Ended December 31, 2014

Revenues

Net sales…………………………………………………………………………..                           $548,000

Interest revenue…………………………………………………………………                               27,000

Total revenues……………………………………………………………..                             575,000

Expenses

Cost of goods sold……………………………………………………………..       $323,000

Salaries and wages expense……………………………… ……………          85,000

Utilities expense………………………………………………… ……………          28,000

Advertising expense………………………………………….. ……………          15,000

Depreciation expense………………………………………… ……………            7,000

Freight-out………………………………………………………… ……………            2,000

Interest expense………………………………………………………………..           18,000

Total expenses…………………………………………………………….                             478,000

Net income………………………………………………………………………………….                          $   97,000

 

 

Ex. 220

The following information is available for Sheldon Leonard Company:

Operating expenses                  $  85,000

Cost of goods sold                      200,000

Sales                                           325,000

Sales returns and allowances             16,000

Instructions

Compute each of the following:

(a)        Net sales

(b)        Gross profit

(c)        Income from operations

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 220     (6 min.)

(a)     Net sales = $309,000  ($325,000 – $16,000)

(b)     Gross profit = $109,000  ($309,000 – $200,000)

(c)     Income from operations = $24,000  ($109,000 – $30,000 – $55,000)

 

aEx. 221

The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method.

Instructions

Complete the worksheet below.

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2014

 

Adjusted

   Trial Balance                Income Statement                Balance Sheet  

Debit          Credit              Debit          Credit              Debit          Credit

Cash                                   11,000

Inventory                            19,000

Supplies                               3,500

Equipment                          80,000

Accum. Depreciation—

Equipment                                          15,000

Accounts Payable                                20,000

Owner’s Capital                                   92,000

Owner’s Drawings               8,000

Sales Revenue                                    39,000

Sales Discounts                   2,000

Cost of Goods Sold           23,000

Advertising Expense            7,000

Supplies Expense                6,000

Depreciation Expense         1,000

 

Ex. 221            (Cont.)

 

Rent Expense                      2,500

Utilities Expense                  1,000                  

166,000     166,000

                                                                         

                                                                        

 

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

aSolution 221    (15 min.)

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2014

 

Adjusted

    Trial Balance               Income Statement               Balance Sheet   

 Debit         Credit              Debit          Credit            Debit          Credit   

Cash                                  11,000                                                                      11,000

Inventory                            19,000                                                                      19,000

Supplies                               3,500                                                                        3,500

Equipment                         80,000                                                                      80,000

Accum. Depreciation—

Equipment                                         15,000                                                                        15,000

Accounts Payable                                20,000                                                                        20,000

Owner’s Capital                                   92,000                                                                        92,000

Owner’s Drawings               8,000                                                                        8,000

Sales Revenue                                    39,000                              39,000

Sales Discounts                   2,000                                2,000

Cost of Goods Sold           25,000                              25,000

Advertising Expense           7,000                                7,000

Supplies Expense                6,000                                6,000

Depreciation Expense         1,000                                1,000

Rent Expense                      2,500                                2,500

Utilities Expense                   1,000                                 1,000                                                            

166,000     166,000           44,500       39,000         121,500       127,000

Net Loss                                                                                         5,500              5,500                   

44,500       44,500          127,000      127,000

 

aEx. 222

Three items are missing in each of the following columns and are identified by letter.

Sales revenue                                                    $        (a)                     $840,000

Sales returns and allowances                               15,000                         22,000

Sales discounts                                                     10,000                         15,000

Net sales                                                              440,000                                (d)

Beginning inventory                                                     (b)                       300,000

Cost of goods purchased                                    220,000                                (e)

Ending inventory                                                  170,000                       303,000

Cost of goods sold                                               252,000                       575,000

Gross profit                                                                   (c)                                (f)

Ex. 222            (Cont.)

 

Instructions

Calculate the missing amounts and identify them by letter.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

aSolution 222    (15 min.)

(a)     $465,000                                                (d)     $803,000

(b)     $202,000                                                (e)     $578,000

(c)     $188,000                                                (f)     $228,000

 

aEx. 223

Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

 

Sept.     3      Purchased 90 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.

Sept.     6      Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.

Sept.     9      Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.

Sept.   13      Paid Zuzu Company in full.

 

Instructions

Journalize the September transactions for Reineman Supply Company.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

aSolution 223    (12 min.)

Sept.     3      Purchases…………………………………………………………………          2,250

Accounts Payable………………………………………………                               2,250

Sept.     6      Accounts Payable………………………………………………………             150

Purchase Returns and Allowances………………………                                  150

Sept.     9      Accounts Receivable………………………………………………….             630

Sales Revenue………………………………………………….                                  630

Sept.   13      Accounts Payable ($2,250 – $150)………………………………          2,100

Purchase Discounts ($2,100 × .02)………………………                                    42

Cash…………………………………………………………………                               2,058

 

aEx. 224

The following information is available for Hopkins Company:

Beginning inventory                            $  45,000

Ending inventory                                     70,000

Freight-in                                                 10,000

Purchases                                             290,000

Purchase returns and allowances            8,000

 

 

Ex. 224            (Cont.)

 

Instructions

Compute each of the following:

(a)        Net purchases

(b)        Cost of goods purchased

(c)        Cost of goods sold

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

aSolution 224    (6 min.)

(a)   Net purchases = $282,000  ($290,000 – $8,000)

(b)   Cost of goods purchased = $292,000  ($282,000 + $10,000)

(c)   Cost of goods sold = $267,000  ($45,000 + $292,000 – $70,000)

Ex. 225

The income statement of Jue’s Luggage. includes the items listed below:

Net sales                                                      $900,000

Gross profit                                                    315,000

Beginning inventory                                         80,000

Purchase discounts                                         15,000

Purchase returns and allowances                     8,000

Freight-in                                                          10,000

Operating expenses                                      300,000

Purchases                                                      560,000

 

Instructions

Use the appropriate items listed above as a basis for determining:

(a)     Cost of goods sold.

(b)     Cost of goods available for sale.

(c)     Ending inventory.

 

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

 

Solution 225     (15 min.)

(a)     Net sales – Cost of goods sold = Gross profit

$900,000 – Cost of goods sold = $315,000

Cost of goods sold = $585,000

 

(b)    Beginning inventory                                                                                              $  80,000

Purchases                                                                                        $560,000

Less:    Purchase discounts                                          $15,000

Purchase returns and allowances                        8,000          23,000

Net Purchases                                                                                   537,000

Add:     Freight-in                                                                                 10,000

Cost of goods purchased                                                                                       547,000

Cost of goods available for sale                                                                           $627,000

 

(c)     Cost of goods available for sale – Ending inventory = Cost of goods sold

$627,000 – Ending inventory = $585,000

Ending inventory = $42,000

 

aEx. 226

Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:

(a)     Purchased $450,000 of merchandise on account, terms 2/10, n/30.

(b)     Returned $30,000 of damaged merchandise for credit.

(c)     Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

aSolution 226    (6 min.)

(a)     Purchases……………………………………………………………………………      450,000

Accounts Payable………………………………………………………                           450,000

(b)     Accounts Payable…………………………………………………………………        30,000

Purchase Returns and Allowances………………………………                             30,000

(c)     Accounts Payable ($450,000 – $30,000)…………………………………      420,000

Purchase Discounts ($420,000 × .02)…………………………..                               8,400

Cash ($420,000 – $8,400)…………………………………………..                           411,600

 

 

COMPLETION STATEMENTS

  1. A ________________ buys and sells goods rather than performing services to earn a profit.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

 

  1. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

 

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.

 

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.

 

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.

 

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

 

  1. Every sales transaction should be supported by a ________________ that provides written evidence of the sale.

 

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

 

  1. Gross profit is obtained by subtracting ________________ from ________________.

 

Ans: N/A, LO:5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

  1. Income from operations is determined by subtracting total operating expenses from ________________.

 

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

 

Answers to Completion Statements

  1. merchandising company 233.    contra revenue, debit
  2. gross profit 234.    business document
  3. perpetual 235.    cost of goods sold, net sales
  4. Inventory 236.    gross profit
  5. freight-out
  6. Sales Returns and Allowances,

Accounts Receivable

 

 

 

 

MATCHING

  1. Match the items below by entering the appropriate code letter in the space provided.

 

  1. Net sales                                         F.    FOB shipping point
  2. Sales discounts                              G.    Freight-out
  3. Purchase invoice                            H.    Gross profit
  4. Periodic inventory system              I.      Operating expenses
  5. FOB destination                              J.     Income from operations

 

_____    1.  An incentive to encourage customers to pay their accounts early.

_____    2.  Expenses incurred in the process of earning sales revenue.

_____    3.  Freight terms that require the seller to pay the freight cost.

_____    4.  Sales revenue less sales returns and allowances and sales discounts.

_____    5.  A document that supports each credit purchase.

_____    6.  Net sales less cost of goods sold.

_____    7.  Freight cost to deliver goods to customers reported as a selling expense.

_____    8.  Requires a physical count of goods on hand to compute cost of goods sold.

_____    9.  Gross profit less total operating expenses.

_____ 10.  Freight terms that require the buyer to pay the freight cost.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Answers to Matching

  1. B 6.     H
  2. I 7.     G
  3. E 8.     D
  4. A 9.     J
  5. C 10.     F

 

 

 

SHORT-ANSWER ESSAY QUESTIONS

S-A E  238

A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

 

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

 

Solution 238

The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue.

 

S-A E  239

Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

Solution 239

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus the seller pays the freight and debits Freight-out.

 

S-A E  240

Adrland Caselotti believes revenues from credit sales may be recognized before they are collected in cash. Do you agree? Explain.

 

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution 240

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The recognized of revenue is not dependent on the collection of credit sales.

 

S-A E  241

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

 

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution 241

The items reported in a multiple-step income statement that are not reported in a single-step income statement are:  gross revenues as well as net revenues, gross profit, detailed operating expenses, income from operations, and other revenues and gains, and other expenses and losses.

 

S-A E  242

You are at a company picnic and the company president starts a conversation with you.  The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.”  What is your response to the president’s remarks?

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution 242

You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded.  Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records.  It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated.

 

S-A E 243

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

 

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution 243

The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold.

 

S-A E  244   (Ethics)

Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes’s dock. She did not record the purchase until after month end.

 

Required:

  1. Why are accountants concerned with the timing in the recording of purchases?
  2. Was there a violation of ethical standards here? Explain.

 

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

 

Solution 244
  1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.
  2. The only ethical principle that may be involved is one of competence. Monya does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Buzz as soon as they left the shipper’s dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Monya compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents.

 

S-A E  245   (Communication)

Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen’s sale was FOB shipping point, and Bryn’s was FOB destination. The company “counts” sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Jill is quite upset. She has asked you to just include it, or to take Ellen’s off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method.

Write a memo to Bryn. Explain your position.

 

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

 

 

Solution 245

 

M E M O

TO:         Bryn Davi’s

FROM:   Helen Dictison, Accounting

RE:         Sales Bonuses

DATE:    June 15, 200x

 

As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $110,000. This total does not include the $19,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else’s sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing.

 

I do understand your disappointment, but this sale does count in June—and it just may make the difference in June’s bonus. Please call me if I can be of further help.