Chapter 5 Accounting for Merchandising Operations

Chapter 5 Accounting for Merchandising Operations Chapter 5 Accounting for Merchandising Operations Questions 11>. Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense). 2. Merchandising companies report Merchandise Inventory on the balance sheet, service companies do not. Also, merchandising companies report both Sales (of goods) and Cost of Goods Sold on the income statement, while service companies do not. 3. A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise. 4. A cash discount can be offered to encourage customers to promptly pay. This provides cash more quickly to the seller and avoids the costs of additional collection activities—of course, the seller must perform a costs vs. benefits analysis on the merits and terms of any cash discount offered to customers. 5. For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account. 6. Cash discounts are granted in return for early payment and reduce the amount paid below the negotiated price. Cash discounts are recorded in the accounting records (as a reduction of Merchandise Inventory). Trade discounts are deducted from the list or catalog price to determine the purchase (negotiated) price. Trade discounts are not recorded in the accounting records. 7. Sales discount is a term used by a seller to describe a cash discount granted to a customer. Purchase discount is a term used by a purchaser to describe a cash discount received from a seller. (It is a matter of perspective: seller versus buyer.) 8. A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise. More returns create more expenses. By knowing more about returns, the manager can decide if they are a problem and how they can be minimized. 9. The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender. 10. The single-step income statement format presents cost of goods sold and expenses in one list, totals the list, and subtracts the total from net sales in one step. The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities). 11. Best Buy calls its inventory account “Merchandise Inventories.” A detailed calculation of cost of goods sold is not presented for Best Buy. 12. Circuit City titles its cost of goods sold account “Cost of sales, buying, and warehousing.” 13. RadioShack titles its cost of goods sold account “Cost of products sold.” 14. Apple reports a separate gross margin figure on its consolidated statement of income. Its 2006 gross profit is $5,598 (in $ millions). 15. A buyer should attempt to negotiate the shipping terms FOB destination. In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller). Quick StudIES Quick Study 5-1 (10 minutes) Mar. 5 Merchandise Inventory 12,000 Accounts Payable 12,000 To record credit purchase (1,000 x $12). Mar. 7 Accounts Payable 600 Merchandise Inventory 600 Returned defective units [(50/1,000) x $12,000]. Mar. 15 Accounts Payable 11,400 Cash 11,172 Merchandise Inventory* 228 Paid for purchase less cash discount *[(12,000 - $600) x 2%]. Quick Study 5-2 (10 minutes) Apr. 1 Accounts Receivable 5,000 Sales 5,000 To record credit sale. 1 Cost of Goods Sold 3,000 Merchandise Inventory 3,000 To record cost of credit sale. 4 Sales Returns and Allowances 1,000 Accounts Receivable 1,000 To record sales return. 4 Merchandise Inventory 600 Cost of Goods Sold 600 Restore cost of returned goods to inventory. 11 Cash 3,920 Sales Discounts* 80 Accounts Receivable 4,000 Received payment less cash discount *[($5,000 - $1,000) x 2%]. Quick Study 5-3 (10 minutes) (a) (b) (c) (d) Sales $140,000 $378,000 $42,500 $593,000 Sales discounts (1,700) (6,000) (400) (2,500) Sales returns and allowances (9,000) (17,000) (3,400) (15,300) Net sales 129,300 355,000 38,700 575,200 Cost of goods sold (82,493) (222,230) (28,676) (451,532) Gross profit $ 46,807 $132,770 $10,024 $123,668 Gross margin ratio: (Gross profit / Net sales) 36.2% 37.4% 25.9% 21.5% Interpretation of gross margin ratio for case a: The ratio of 36.2% implies that for each dollar in net sales the company earns 36.2 cents in gross profit. The company must still deduct other expenses that it incurs in running the business when computing net income. Quick Study 5-4 (10 minutes) July 31 Cost of Goods Sold 1,400 Merchandise Inventory 1,400 To adjust for shrinkage based on physical count [$42,000 - $40,600]. Quick Study 5-5 (10 minutes) July 31 Sales 275,300 Income Summary 275,300 To close temporary accounts with credit balances. July 31 Income Summary 193,200 Sales Discounts 5,200 Sales Returns and Allowances 7,600 Cost of Goods Sold* 116,400 Depreciation Expense 12,000 Salaries Expense 45,000 Miscellaneous Expenses 7,000 To close temporary accounts with debit balances. (*$115,000 + $1,400 —from QS 5-4) Quick Study 5-6 (10 minutes) Acid-test ratio = ($3,000 + $5,580) / ($11,500 + $1,700) = 0.65 Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on) the liquidity of a company. It helps in determining whether a company will be able to meet its current obligations as they come due with its most liquid assets. In this case, the company only has 65 cents available in quick assets to pay $1.00 in current liabilities as they come due. An acid-test ratio less than one usually suggests some concern and encourages further analysis of liquidity. Quick Study 5-7 (10 minutes) Similarities: Both the acid-test ratio and current ratio are used to assess liquidity. Both ratios are computed with current liabilities as the denominator. Differences: The current ratio includes current assets in the numerator. The acid-test ratio includes current assets less inventories and prepaids in its numerator (leaving cash & equivalents, current receivables, and short-term investments). Comparison and Description: Compared with the current ratio, the acid-test ratio is a more stringent test of a company’s ability to meet its current obligations. The acid-test ratio is more stringent as it does not assume a company relies on prepaids and inventory to pay current liabilities. This is because prepaids and inventory assets are not generally available to satisfy current obligations. Quick Study 5-8A (5 minutes) a. Perpetual inventory system b. Perpetual inventory system c. Perpetual inventory system d. Perpetual inventory system e. Periodic inventory system Quick Study 5-9A (10 minutes) Mar. 5 Purchases 12,000 Accounts Payable 12,000 To record credit purchase (1,000 x $12). 7 Accounts Payable 600 Purchases Returns & Allowances 600 Returned defective units [(50/1,000) x $12,000]. 15 Accounts Payable 11,400 Cash 11,172 Purchases Discounts* 228 Paid for purchase less cash discount * ($12,000 - $600) x 2%. Quick Study 5-10A (10 minutes) Apr. 1 Accounts Receivable 5,000 Sales 5,000 To record credit sale. 4 Sales Returns and Allowances 1,000 Accounts Receivable 1,000 To record sales return. 11 Cash 3,920 Sales Discounts* 80 Accounts Receivable 4,000 Received payment less cash discount *($5,000 - $1,000) x 2%. Exercises Exercise 5-1 (30 minutes) Apr. 2 Merchandise Inventory 5,900 Accounts Payable—Johns 5,900 Purchased merchandise on credit. 3 Merchandise Inventory 330 Cash 330 Paid shipping charges on purchased merchandise. 4 Accounts Payable—Johns 900 Merchandise Inventory 900 Returned unacceptable merchandise. 17 Accounts Payable—Johns 5,000 Merchandise Inventory* 100 Cash 4,900 *[($5,900 - $900) x 2%] Paid balance (less 2%) within discount period. 18 Merchandise Inventory 12,250 Accounts Payable—William 12,250 Purchased merchandise on credit. 21 Accounts Payable—William 3,250 Merchandise Inventory 3,250 Received an allowance on purchase. 28 Accounts Payable—William 9,000 Merchandise Inventory* 180 Cash 8,820 *[($12,250 - $3,250) x 2%] Paid balance (less 2%) within discount period. Exercise 5-2 (30 minutes) 1. BUYER- Fortuna Company Credit Purchase Merchandise Inventory 30,000 Accounts Payable 30,000 Purchased merchandise on credit. Cash Payment Accounts Payable 30,000 Merchandise Inventory* 600 Cash 29,400 Paid account payable within 2% discount period. *$30,000 x 2% 2. SELLER – Lemar Company Credit Sale Accounts Receivable 30,000 Sales 30,000 Sold merchandise on account. Cost of Goods Sold 20,100 Merchandise Inventory 20,100 To record cost of sale. Cash Collection Cash 29,400 Sales Discounts 600 Accounts Receivable 30,000 Collected account receivable. 3. Amount borrowed to pay with discount $29,400.00 Annual rate of interest x 8% Interest per year $ 2,352.00 Interest per day ($2,352.00 / 365 days) $ 6.44 Savings from discount taken $ 600.00 Interest paid on 50-day loan (50 days x $6.44) (322.19) Net savings from borrowing to pay in discount period $ 277.81 Exercise 5-3 (10 minutes) 1. C 6. E 2. J 7. D 3. A 8. G 4. B 9. H 5. F 10. I Exercise 5-4 (30 minutes) May 5 Accounts Receivable 7,920 Sales 7,920 Sold merchandise on credit (720 x $11). 5 Cost of Goods Sold 5,040 Merchandise Inventory 5,040 To record cost of sale (720 x $7). a. May 7 Sales Returns and Allowances 2,761 Accounts Receivable 2,761 Accepted a return from a customer (251 x $11). 7 Merchandise Inventory 1,757 Cost of Goods Sold 1,757 Returned merchandise to inventory (251 x $7). b. May 8 Sales Returns and Allowances 180 Accounts Receivable 180 Granted allowance for damaged merchandise. c. May 15 Sales Returns and Allowances 411 Accounts Receivable 411 Granted allowance for mis-colored merchandise and accepted a return from a customer for the mis-colored merchandise [$92 + (29 x $11)]. 15 Merchandise Inventory 203 Cost of Goods Sold 203 Returned merchandise to inventory (29 x $7). Exercise 5-5 (15 minutes) May 5 Merchandise Inventory 7,920 Accounts Payable 7,920 Purchased merchandise on credit (720 x $11). a. May 7 Accounts Payable 2,761 Merchandise Inventory 2,761 Returned unwanted merchandise (251 x $11). b. May 8 Accounts Payable 180 Merchandise Inventory 180 To record allowance for damaged merchandise. c. May 15 Accounts Payable 411 Merchandise Inventory 411 To record allowance for mis-colored goods and return of mis-colored merchandise $92 + (29 x $11). Exercise 5-6 (25 minutes) 1. Entries for York Company (BUYER): May 11 Merchandise Inventory 38,000 Accounts Payable 38,000 Purchased merchandise on credit. 11 Merchandise Inventory 520 Cash 520 Paid shipping charges on purchased merchandise. 12 Accounts Payable 2,000 Merchandise Inventory 2,000 Returned unacceptable merchandise. 20 Accounts Payable 36,000 Merchandise Inventory* 1,080 Cash 34,920 Paid balance within the 3% discount period. *($38,000 - $2,000) x 3% Exercise 5-6 — continued 2. Entries for Troy Corporation (SELLER): May 11 Accounts Receivable 38,000 Sales 38,000 Sold merchandise on account. 11 Cost of Goods Sold 25,460 Merchandise Inventory 25,460 To record cost of sale. 13 Sales Returns and Allowances 2,000 Accounts Receivable 2,000 Accepted a return from a customer. 13 Merchandise Inventory 1,393 Cost of Goods Sold 1,393 Returned goods to inventory. 21 Cash 34,920 Sales Discounts 1,080 Accounts Receivable 36,000 Collected account receivable. Exercise 5-7 (20 minutes) In today’s competitive world, organizations must concentrate on meeting their customers’ needs and avoiding dissatisfaction. If these needs are not met and dissatisfaction grows, the customers will deal with other companies or entities. One measure of dissatisfaction of customers is the amount of sold goods that are later returned. Customer dissatisfac tion needs to be understood and then dealt with promptly to encourage them to remain loyal. The reasons for the return also need to be determined to allow the problem to be avoided in the future. For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers. An important early step in controlling returns is to have information about their dollar amount. In addition, managers can set goals for reducing the dollar amount of sales returns. Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account. This approach captures the information at the time of the return and allows it to be easily reported. While a company’s sales return record is important for managers, it is also valuable information for external decision makers. This information can help external users identify organizations focusing on customer satisfaction and product quality. Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported in financial statements provided to investors, creditors, and other external users. Exercise 5-8 (30 minutes) Note: The original missing numbers are blocked. (a) (b) (c) (d) (e) Sales $82,800 $58,622 $50,094 $107,640 $32,540 Cost of goods sold Merch. inv. (beg.) 7,866 3,507 10,519 9,902 3,351 Total cost of merch. purchases 35,439 22,139 46,988 45,252 7,439 Merch. inv. (end.) (8,355) (3,714) (12,019) (9,527) (2,431) Cost of goods sold 34,950 21,932 45,488 45,627 8,359 Gross profit 47,850 36,690 4,606 62,013 24,181 Expenses 9,000 10,650 14,923 32,600 6,100 Net income (loss) $38,850 $26,040 $(10,317) $ 29,413 $18,081 Explanations: a. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale. Find gross profit as the difference between the sales and cost of goods sold. Find net income as the gross profit less the expenses. b. Find total cost of merchandise purchases by finding the number that makes the total equal the cost of goods sold. Find gross profit from sales less cost of goods sold. c. Find cost of goods sold from sales less gross profit. Find cost of merchandise purchases by finding the number to make the calculation equal cost of goods sold. Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of goods sold. e. Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale. Find gross profit from sales less cost of goods sold. Find net income as gross profit less expenses. Exercise 5-9 (30 minutes) Merchandise Inventory Balance, Dec. 31, 2008 42,979 Purchase discounts received 2,427 Invoice cost of purchases 303,459 Purchase returns and allow. 3,900 Returns by customers 2,700 Cost of sales transactions 296,000 Transportation-in 3,034 Shrinkage 790 Balance, Dec. 31, 2009 49,055 Cost of Goods Sold Cost of sales transactions Inventory shrinkage recorded in December 31, 2009, adjusting entry 296,000 790 Returns by customers and restored to inventory 2,700 Balance, Dec. 31, 2009 294,090 Exercise 5-10 (25 minutes) Adjusting entries Dec. 31 Sales Salaries Expense 1,700 Salaries Payable 1,700 To record accrued salaries. Dec. 31 Selling Expenses 1,600 Prepaid Selling Expenses 1,600 To record expired prepaid selling expenses. Dec. 31 Cost of Goods Sold 574 Merchandise Inventory 574 To record inventory shrinkage ($30,200 - $29,626). Closing entries Dec. 31 Sales 543,600 Income Summary 543,600 To close temporary accounts with credit balances. Dec. 31 Income Summary 541,839 Sales Returns and Allowances 20,656 Sales Discounts 5,783 Cost of Goods Sold ($267,451 + $574) 268,025 Sales Salaries Exp. ($59,796 + $1,700) 61,496 Utilities Expense 17,395 Selling Expenses ($46,749 + $1,600) 48,349 Administrative Expenses 120,135 To close temporary accounts with debit balances. Dec. 31 Income Summary 1,761 K. Yamiko, Capital 1,761 To close Income Summary account. Dec. 31 K. Yamiko, Capital 1,500 K. Yamiko, Withdrawals 1,500 To close the withdrawals account. Exercise 5-11 (20 minutes) The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated. Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage of $5,000. An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount. As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $5,000. As a result of this error: Return on assets would be understated (numerator impact outweighs the denominator impact). Debt ratio would be overstated because its denominator would be understated. Current ratio would be understated because its numerator would be understated. Profit margin (net income/sales) would be understated because the net income would be understated. Acid-test ratio would be unaffected because inventory is not a quick asset. Exercise 5-12 (15 minutes) Case X Case Y Case Z Current ratio computation Current assets $4,420 $3,987 $8,110 Current liabilities $2,563 $1,281 $4,254 Current ratio 1.72 3.11 1.91 Acid-test ratio computation Cash $ 920 $1,046 $1,220 Short-term investments 0 0 500 Current receivables 0 1,126 890 Quick assets $ 920 $2,172 $2,610 Current liabilities $2,563 $1,281 $4,254 Acid-test ratio 0.36 1.70 0.61 Interpretation: Case Y has the highest current ratio. Case Y also has the highest acid-test ratio. Based on this analysis, Case Y appears to be in the best position to meet its short-term obligations. Exercise 5-13 Perpetual Inventory System 1) Nov. 1 Merchandise Inventory 2,800 Accounts Payable 2,800 To record merchandise purchases on credit. 2) Nov. 5 Accounts Payable 2,800 Merchandise Inventory* 56 Cash 2,744 To record cash payment in discount period. *$2,800 x 0.02 3) Nov. 7 Cash 98 Merchandise Inventory* 98 To record check received for return of purchases previously paid for with discount already taken. *$100 – ($100 x 0.02) 4) Nov. 10 Merchandise Inventory 140 Cash 140 To record payment of freight charges. 5) Nov. 13 Accounts Receivable 3,024 Sales 3,024 To record sale of merchandise on credit. Nov. 13 Cost of Goods Sold 1,512 Merchandise Inventory 1,512 To record cost of merchandise sold. 6) Nov. 16 Sales Returns and Allowances 205 Accounts Receivable 205 To record return of merchandise sold on credit. Nov. 16 Merchandise Inventory 115 Cost of Goods Sold 115 To record cost of merchandise returned. Exercise 5-14A (30 minutes) Apr. 2 Purchases 5,900 Accounts Payable—Johns 5,900 Purchased merchandise on credit. 3 Transportation-In 330 Cash 330 Paid shipping charges on purchased merchandise. 4 Accounts Payable—Johns 900 Purchases Returns & Allowances 900 Returned unacceptable merchandise. 17 Accounts Payable—Johns 5,000 Purchases Discounts* 100 Cash 4,900 Paid balance (less 2%) within discount period. *($5,900 - $900) x 2% 18 Purchases 12,250 Accounts Payable—William 12,250 Purchased merchandise on credit. 21 Accounts Payable—William 3,250 Purchases Returns & Allowances 3,250 Received an allowance on purchase. 28 Accounts Payable—William 9,000 Purchases Discounts* 180 Cash 8,820 Paid balance (less 2%) within discount period. *($12,250 - $3,250) x 2% Exercise 5-15A (30 minutes) 1. BUYER – Fortuna Credit Purchase Purchases 30,000 Accounts Payable 30,000 Purchased merchandise on credit. Cash Payment Accounts Payable 30,000 Purchases Discounts* 600 Cash 29,400 Paid account payable within 2% discount period. *$30,000 x 2% 2. SELLER - Lemar Credit Sale Accounts Receivable 30,000 Sales 30,000 Sold merchandise on account. Cash Collection Cash 29,400 Sales Discounts* 600 Accounts Receivable 30,000 Collected account receivable. *$30,000 x 2% Exercise 5-16A (25 minutes) 1. Entries for York Company (BUYER): May 11 Purchases 38,000 Accounts Payable 38,000 Purchased merchandise on credit. 11 Transportation-In 520 Cash 520 Paid shipping charges on purchased merchandise. 12 Accounts Payable 2,000 Purchases Returns and Allowances 2,000 Returned unacceptable merchandise. 20 Accounts Payable 36,000 Purchases Discounts* 1,080 Cash 34,920 Paid balance within the 3% discount period. *($38,000 - $2,000) x 3% 2. Entries for Troy Corporation (SELLER): May 11 Accounts Receivable 38,000 Sales 38,000 Sold merchandise on account. 13 Sales Returns and Allowances 2,000 Accounts Receivable 2,000 Accepted a return from a customer. 21 Cash 34,920 Sales Discounts* 1,080 Accounts Receivable 36,000 Collected account receivable. *($38,000 - $2,000) x 3% Exercise 5-17A (20 minutes) Periodic Inventory System 1) Nov. 1 Purchases 2,800 Accounts Payable 2,800 To record purchases on credit. 2) Nov. 5 Accounts Payable 2,800 Purchases Discount* 56 Cash 2,744 To record cash payment in discount period. *$2,800 x 2% 3) Nov. 7 Cash 98 Purchases Returns and Allowances 98 To record check received for return of purchases previously paid for with discount already taken. *$100 – ($100 x 2%) 4) Nov. 10 Transportation-In 140 Cash 140 To record payment of freight charges. 5) Nov. 13 Accounts Receivable 3,024 Sales 3,024 To record sale of merchandise on credit. 6) Nov. 16 Sales Returns and Allowances 205 Accounts Receivable 205 To record return of merchandise sold on credit. Problem sET A Problem 5-1A (40 minutes) July 1 Merchandise Inventory 6,400 Accounts Payable—Arch 6,400 Purchased goods on credit, terms 1/15, n/30. 2 Accounts Receivable—Driver 900 Sales 900 Sold goods on credit, terms 1/10, n/60. 2 Cost of Goods Sold 533 Merchandise Inventory 533 To record cost of the July 2 sale. 3 Merchandise Inventory 130 Cash 130 Paid freight on incoming goods. 8 Cash 2,100 Sales 2,100 Sold goods for cash. 8 Cost of Goods Sold 1,700 Merchandise Inventory 1,700 To record cost of the July 8 sale. 9 Merchandise Inventory 2,200 Accounts Payable—Kew 2,200 Purchased goods on credit, terms 1/15, n/60. 11 Accounts Payable—Kew 200 Merchandise Inventory 200 Received credit memo from returning goods to supplier. 12 Cash 891 Sales Discounts* 9 Accounts Receivable—Driver 900 Collected receivable within the discount period. *($900 x 1% = $9) Problem 5-1A (Concluded) July 16 Accounts Payable—Arch 6,400 Merchandise Inventory* 64 Cash 6,336 Paid payable within discount period. *($6,400 x 1% = $64) 19 Accounts Receivable—Surtis 1,200 Sales 1,200 Sold goods on credit, terms 1/15, n/60. 19 Cost of Goods Sold 800 Merchandise Inventory 800 To record cost of the July 19 sale. 21 Sales Returns and Allowances 200 Accounts Receivable—Surtis 200 Issued credit memo for allowance on goods sold to customer. 24 Accounts Payable—Kew 2,000 Merchandise Inventory* 20 Cash 1,980 Paid payable in discount period. *($2,000 x 1%) 30 Cash 990 Sales Discounts* 10 Accounts Receivable—Surtis 1,000 Collected receivable within discount period. *($1,000 x 1%) 31 Accounts Receivable—Driver 6,900 Sales 6,900 Sold goods on credit. 31 Cost of Goods Sold 5,200 Merchandise Inventory 5,200 To record cost of the July 31 sale. Problem 5-2A (40 minutes) Aug. 1 Merchandise Inventory 7,800 Accounts Payable—Arotek 7,800 Purchased goods on credit, terms 1/10, n/30. 4 Accounts Payable—Arotek 270 Cash 270 Paid freight for Arotek. 5 Accounts Receivable—Larton 5,460 Sales 5,460 Sold goods on credit, terms 2/10, n/60. 5 Cost of Goods Sold 3,898 Merchandise Inventory 3,898 To record the cost of August 5 sale. 8 Merchandise Inventory 7,100 Accounts Payable—Frees 7,100 Purchased goods on credit, terms 1/10, n/45. 8 Merchandise Inventory 240 Accounts Payable—Frees 240 To record shipping charges paid by Frees on August 8 purchase. Instructor note: It is fine to combine the two August 8 entries into one. 9 Delivery Expense 120 Cash 120 Paid shipping charges on August 5 sale. 10 Sales Returns and Allowances 910 Accounts Receivable—Larton 910 Customer returned merchandise. 10 Merchandise Inventory 649 Cost of Goods Sold 649 Returned goods to inventory. 12 Accounts Payable—Frees 1,100 Merchandise Inventory 1,100 Received a credit memorandum for August 8 purchase. Problem 5-2A (Concluded) Aug. 15 Cash 4,459 Sales Discounts* 91 Accounts Receivable—Larton 4,550 Collected receivable within 2% discount period. *($5,460 - $910) x 2% 18 Accounts Payable—Frees* 6,240 Merchandise Inventory ** 60 Cash 6,180 Paid payable within discount period. *($7,100 + $240 - $1,100) **($7,100 - $1,100) x 1% 19 Accounts Receivable—Jones 4,680 Sales 4,680 Sold goods on credit, terms 1/10, n/30. 19 Cost of Goods Sold 3,247 Merchandise Inventory 3,247 To record cost of the August 19 sale. 22 Sales Returns and Allowances 780 Accounts Receivable—Jones 780 Issued credit memorandum. 29 Cash 3,861 Sales Discounts* 39 Accounts Receivable—Jones 3,900 Collected receivable within discount period. *($4,680 - $780) x 1% 30 Accounts Payable—Arotek 7,530 Cash 7,530 Paid payable ($7,800 - $270). Problem 5-3A (60 minutes) Part 1 Adjustment (a) Jan 31 Store Supplies Expense 2,950 Store Supplies 2,950 To record store supplies expense ($5,500 - $2,550). Adjustment (b) Jan 31 Insurance Expense 1,450 Prepaid Insurance 1,450 To record expired insurance. Adjustment (c) Jan 31 Depreciation Expense—Store Equip 1,975 Accumulated Depreciation—Store Equip 1,975 To record depreciation expense. Adjustment (d) Jan 31 Cost of Goods Sold 2,700 Merchandise Inventory 2,700 To adjust inventory for shrinkage ($13,000 - $10,300). Problem 5-3A (Continued) Part 2 Multiple-step income statement HELIX COMPANY Income Statement For Year Ended January 31, 2009 Sales $115,800 Less: Sales discounts $ 1,900 Sales returns and allowances 2,300 4,200 Net sales 111,600 Cost of goods sold* 40,700 Gross profit 70,900 Expenses Selling expenses Depreciation expense—Store equipment 1,975 Sales salaries expense** 13,700 Rent expense—Selling space** 7,500 Store supplies expense 2,950 Advertising expense 9,700 Total selling expenses 35,825 General and administrative expenses Insurance expense 1,450 Office salaries expense 13,700 Rent expense—Office space 7,500 Total general and administrative expenses 22,650 Total expenses 58,475 Net income $ 12,425 * $40,700 = $38,000 + $2,700 (shrinkage) **Salaries and rent expenses are equally divided between selling activities and general and administrative activities. Problem 5-3A (Concluded) Part 3 Single-step income statement HELIX COMPANY Income Statement For Year Ended January 31, 2009 Net sales $111,600 Expenses Cost of goods sold $40,700 Selling expenses 35,825* General and administrative expense 22,650* Total expenses 99,175 Net income $ 12,425 *From Part 2 Part 4 Current assets Cash $ 28,750 Merchandise inventory 10,300 Store supplies 2,550 Prepaid insurance 950* Total current assets $ 42,550 Current liabilities $ 14,000 Current ratio ($42,550 / $14,000) 3.04 *$2,400 - $1,450 = $950 Quick assets (Cash) $ 28,750 Current liabilities $ 14,000 Acid-test ratio ($28,750 / $14,000) 2.05 Net Sales $111,600 Cost of Goods Sold 40,700 Gross margin $ 70,900 Gross margin ratio ($70,900 / $111,600) 63.5% Problem 5-4A (40 minutes) 1. Net sales Sales $297,540 Less: Sales discounts (4,552) Sales returns and allowances (19,637) Net sales $273,351 2. Cost of Merchandise purchased Invoice cost of merchandise purchased $127,890 Purchase discounts received (2,685) Purchase returns and allowances (6,138) Costs of transportation-in 3,900 Total cost of merchandise purchased $122,967 Problem 5-4A (Continued) 3. Multiple-step income statement RUSIO COMPANY Income Statement For Year Ended August 31, 2009 Sales $297,540 Less: Sales discounts $ 4,552 Sales returns and allowances 19,637 24,189 Net sales 273,351 Cost of goods sold * 114,571 Gross profit 158,780 Expenses Selling expenses Sales salaries expense 40,762 Rent expense—Selling space 13,984 Store supplies expense 3,570 Advertising expense 25,290 Total selling expenses 83,606 General and administrative expenses Office salaries expense 37,192 Rent expense—Office space 3,570 Office supplies expense 1,190 Total general and administrative expenses 41,952 Total expenses 125,558 Net income $ 33,222 *Cost of goods sold (alternative computation): Merchandise inventory, August 31, 2008 $ 35,104 Total cost of merchandise purchased (from part 2) 122,967 Merchandise available for sale 158,071 Merchandise inventory, August 31, 2009 43,500 Cost of goods sold $114,571 Problem 5-4A (Concluded) 4. Single-step income statement RUSIO COMPANY Income Statement For Year Ended August 31, 2009 Net sales $273,351 Expenses Cost of goods sold $114,571 Selling expenses 83,606 General and administrative expenses 41,952 Total expenses 240,129 Net income $ 33,222 Problem 5-5A (30 minutes) Part 1 Closing entries Aug. 31 Sales 297,540 Income Summary 297,540 To close temporary accounts with credit balances. Aug. 31 Income Summary 264,318 Sales Discounts 4,552 Sales Returns and Allowances 19,637 Cost of Goods Sold 114,571 Sales Salaries Expense 40,762 Rent Expense—Selling Space 13,984 Store Supplies Expense 3,570 Advertising Expense 25,290 Office Salaries Expense 37,192 Rent Expense—Office Space 3,570 Office Supplies Expense 1,190 To close temporary accounts with debit balances. Aug. 31 Income Summary 33,222 C. Rusio, Capital 33,222 To close the Income Summary account. Aug. 31 C. Rusio, Capital 8,000 C. Rusio, Withdrawals 8,000 To close the withdrawals account. Problem 5-5A (Concluded) Part 2 The first step is to determine the amount of purchases that are subject to a discount during the year: Invoice cost of merchandise purchases $127,890 Purchase returns and allowances (6,138) Total cost of merchandise payable $121,752 This amount is used to determine the maximum discount, which is then compared to the actual discount: Maximum discount available (3% x $121,752) $ 3,653 Purchase discounts received (2,685) Purchase discounts missed $ 968 As a percent of available discounts ($968/$3,653) 26.5% This analysis suggests that nearly 27% of available discounts have been missed. As a result, it would appear that cash is not being well managed. Management should try to identify a better system for ensuring that all favorable discounts are taken. It is possible that the discounts not taken are actually not favorable to the company—further information is required to assess this possibility. Part 3 The first step is to compute this year’s sales returns and allowances rate: Sales $297,540 Sales returns and allowances $ 19,637 Percent of returns and allowances to sales 6.6% This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 4% rate observed in prior years. It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years. Problem 5-6AB (50 minutes) HELIX COMPANY Work Sheet For Year Ended January 31, 2009 Unadjusted Trial Balance Adjustments . Adjusted Trial Balance Income Statement Balance Sheet Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 28,750 28,750 28,750 Merchandise inventory 13,000 (d) 2,700 10,300 10,300 Store supplies 5,500 (a) 2,950 2,550 2,550 Prepaid insurance 2,400 (b) 1,450 950 950 Store equipment 42,600 42,600 42,600 Accum. depreciation—Store eq 19,750 (c) 1,975 21,725 21,725 Accounts payable 14,000 14,000 14,000 A. Helix, Capital 39,000 39,000 39,000 A. Helix, Withdrawals 2,000 2,000 2,000 Sales 115,800 115,800 115,800 Sales discounts 1,900 1,900 1,900 Sales returns and allowances 2,300 2,300 2,300 Cost of goods sold 38,000 (d) 2,700 40,700 40,700 Depreciation expense—Store eq 0 (c) 1,975 1,975 1,975 Salaries expense 27,400 27,400 27,400 Insurance expense 0 (b) 1,450 1,450 1,450 Rent expense 15,000 15,000 15,000 Store supplies expense 0 (a) 2,950 2,950 2,950 Advertising expense 9,700 ______ ____ ____ 9,700 ______ 9,700 ______ ______ ______ Totals 188,550 188,550 9,075 9,075 190,525 190,525 103,375 115,800 87,150 74,725 Net income 12,425 ______ ______ 12,425 Totals 115,800 115,800 87,150 87,150 ?McGraw-Hill Companies, 2009 PAGE 296 Fundamental Accounting Principles, 19th Edition ?McGraw-Hill Companies, 2009 PAGE 295 Solutions Manual, Chapter 5