SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS
➢ Which account titles are likely to appear in a merchandising company’s ledger that do not appear in the ledger of a service enterprise?
➢ What entry is made to record a sale of merchandise on account under periodic inventory procedure?
➢ Describe trade discounts and chain discounts.
➢ Sales discounts and sales returns and allowances are deducted from sales on the income statement to arrive at net sales. Why not deduct these directly from the Sales account by debiting Sales each time a sales discount, return, or allowance occurs?
➢ What are the two basic procedures for accounting for inventory? How do these two procedures differ?
➢ What useful purpose does the Purchases account serve?
➢ What do the letters FOB stand for? When terms are FOB destination, who incurs the cost of freight?
➢ What type of an expense is delivery expense? Where is this expense reported in the income statement?
➢ Periodic inventory procedure is said to afford little control over inventory. Explain why.
➢ How does the accountant arrive at the total dollar amount of the inventory after taking a physical inventory?
➢ How is cost of goods sold determined under periodic inventory procedure?
➢ If the cost of goods available for sale and the cost of the ending inventory are known, what other amount appearing on the income statement can be calculated?
➢ What are the major sections in a classified income statement for a merchandising company, and in what order do these sections appear?
➢ What is gross margin? Why might management be interested in the percentage of gross margin to net sales?
➢ (Appendix) After closing entries are posted to the ledger, which types of accounts have balances? Why?
➢ Real World Example. Research the financial statements for a merchandiser. What company did you choose? What were the cost of goods sold, occupancy, and buying costs? For each of the three years shown, what percentage of net sales were these expenses? Is the trend favorable or unfavorable?
Exercise A In the following table, indicate how to increase or decrease (debit or credit) each account, and indicate its normal balance (debit or credit).
|Title of Account||Increased by debit or credit||Decreased by debit or credit||Normal Balance (debit or credit)|
|Sales Returns and Allowances|
|Purchase Returns and Allowances|
Exercise B a. Silver Company purchased $ 56,000 of merchandise from Milton Company on account. Before paying its account, Silver Company returned damaged merchandise with an invoice price of $ 11,680. Assuming use of periodic inventory procedure, prepare entries on both companies’ books to record both the purchase/sale and the return.
- Show how any of the required entries would change assuming that Milton Company granted an allowance of $ 3,360 on the damaged goods instead of giving permission to return the merchandise.
Exercise C What is the last payment date on which the cash discount can be taken on goods sold on March 5 for $ 51,200; terms 3/10/EOM, n/60? Assume that the bill is paid on this date and prepare the correct entries on both the buyer’s and seller’s books to record the payment.
Exercise D You have purchased merchandise with a list price of $ 36,000. Because you are a wholesaler, you are granted a trade discount of 49.6 per cent. The cash discount terms are 2/EOM, n/60. How much will you remit if you pay the invoice by the end of the month of purchase? How much will discounts on payment you remit if you do not pay the invoice until the following month?
Exercise E Lasky Company sold merchandise with a list price of $ 60,000 on July 1. For each of the following independent assumptions, calculate (1) the gross selling price used to record the sale and (2) the amount that the buyer would have to remit when paying the invoice.
|Trade Discount Granted||Credit Terms||Date Paid|
|30%, 20%||2/10, n/30||July 10|
|40%, 10%||2/EOM, n/60||August 10|
|30%, 10%, 5%||3/10/EOM, n/60||August 10|
|40%||1/10, n/30||July 12|
Exercise F Raiser Company purchased goods at a gross selling price of $ 2,400 on August 1. Discount terms of 2/10, n/30 were available. For each of the following independent situations, determine (1) the cash discount available on the final payment and (2) the amount paid if payment is made within the discount period.
|Transportation Terms||Freight Paid (by)||Purchase Allowance Granted|
|FOB shipping point||$240 (buyer)||$480|
|FOB destination||120 (seller)||240|
|FOB shipping point||180 (seller)||720|
|FOB destination||192 (buyer)||120|
Exercise G Stuart Company purchased goods for $ 84,000 on June 14, under the following terms: 3/10, n/ 30; FOB shipping point, freight collect. The bill for the freight was paid on June 15, $ 1,200.
- Assume that the invoice was paid on June 24, and prepare all entries required on Stuart Company’s books.
- Assume that the invoice was paid on July 11. Prepare the entry to record the payment made on that date.
Exercise H Cramer Company uses periodic inventory procedure. Determine the cost of goods sold for the company assuming purchases during the period were $ 40,000, transportation-in was $ 300, purchase returns and allowances were $ 1,000, beginning inventory was $ 25,000, purchase discounts were $ 2,000, and ending inventory was $ 13,000.
Exercise I In each case, use the following information to calculate the missing information:
|Case 1||Case 2||Case 3|
|Gross sales||$ 640,000||$ ?||$ ?|
|Sales returns and allowances||19,200||44,800||32,000|
|Merchandise inventory, January 1||256,000||384,000|
|Purchase returns and allowances||24,320||31,360||32,000|
|Net cost of purchases||377,600||761,600||?|
|Cost of goods available for sale||?||1,081,600||1,088,000|
|Merchandise inventory, December 31||?||384,000||448,000|
|Cost of goods sold||320,000||?||640,000|
Exercise J In each of the following equations supply the missing term(s):
- Net sales = Gross sales – (______________________ + Sales returns and allowances).
- Cost of goods sold = Beginning inventory + Net cost of purchases – ________ ________.
- Gross margin = ________ ________ – Cost of goods sold.
- Income from operations = __________ _________ – Operating expenses.
- Net income = Income from operations + _________ ________ – ________ ________.
Exercise K Given the balances in this partial trial balance, indicate how the balances would be treated in the work sheet. The ending inventory is $96.
|Sales Returns and Allow.||45|
|Purchase Returns and Allow.||24|
Exercise L Using the data in the previous exercise prepare closing entries for the preceding accounts. Do not close the Income Summary account.
Problem A Spencer Sporting Goods Company engaged in the following transactions in April 2010
Apr. 1 Sold merchandise on account for $ 288,000; terms 2/10, n/30, FOB shipping point, freight collect.
5 $ 43,200 of the goods sold on account on April 1 were returned for a full credit. Payment for these goods had not yet been received.
8 A sales allowance of $ 5,760 was granted on the merchandise sold on April 1 because the merchandise was damaged in shipment.
10 Payment was received for the net amount due from the sale of April 1.
b. High Stereo Company engaged in the following transactions in July 2010.
July 2 Purchased stereo merchandise on account at a cost of $ 43,200; terms 2/10, n/30, FOB destination, freight prepaid.
15 Sold merchandise for $ 64,800, terms 2/10, n/30, FOB destination, freight prepaid.
16 Paid freight costs on the merchandise sold, $ 2,160.
20 High Stereo Company was granted an allowance of $ 2,880 on the purchase of July 2 because of damaged merchandise.
31 Paid the amount due on the purchase of July 2.
Prepare journal entries to record the transactions.
Problem B Mars Musical Instrument Company and Tiger Company engaged in the following transactions with each other during July 2010:
July 2 Mars Musical Instrument Company purchased merchandise on account with a list price of $ 48,000 from Tiger Company. The terms were 3/EOM, n/60, FOB shipping point, freight collect. Trade discounts of 15 per cent, 10 per cent, and 5 per cent were granted by Tiger Company.
5 The buyer paid the freight bill on the purchase of July 2, $ 1,104.
6 The buyer returned damaged merchandise with an invoice price of $ 2,790 to the seller and received full credit.
On the last day of the discount period, the buyer paid the seller for the merchandise.
Prepare all the necessary journal entries for the buyer and the seller.
Problem C The following data for June 2010 are for Rusk Company’s first month of operations:
June 1 Rusk Company was organized, and the stockholders invested $ 1,008,000 cash, $ 336,000 of merchandise inventory, and a $ 288,000 plot of land in exchange for capital stock.
4 Merchandise was purchased for cash, $ 432,000; FOB shipping point, freight collect.
9 Cash of $ 10,080 was paid to a trucking company for delivery of the merchandise purchased June 4.
13 The company sold merchandise on account, $ 288,000; terms 2/10, n/ 30.
15 The company sold merchandise on account, $ 230,400; terms 2/10, n/30.
16 Of the merchandise sold June 13, $ 31,680 was returned for credit.
20 Salaries for services received were paid as follows: to office employees, $ 31,680; to salespersons, $ 83,520.
22 The company collected the amount due on the remaining $ 256,320 of accounts receivable arising from the sale of June 13.
24 The company purchased merchandise on account at a cost of $ 345,600; terms 2/10, n/30, FOB shipping point, freight collect.
26 The company returned $ 57,600 of the merchandise purchased June 24 to the vendor for credit.
27 A trucking company was paid $ 7,200 for delivery to Rusk Company of the goods purchased June 24.
29 The company sold merchandise on account, $ 384,000; terms 2/10, n/30.
30 Sold merchandise for cash, $ 172,800.
30 Payment was received for the sale of June 15.
30 Paid store rent for June, $ 43,200.
30 Paid the amount due on the purchase of June 24.
The inventory on hand at the close of business June 30 was $ 672,000 at cost.
- Prepare journal entries for the transactions.
- Post the journal entries to the proper ledger accounts.
- Prepare a trial balance as of June 30.
Problem D The Western Wear Company, a wholesaler of western wear clothing, sells to retailers. The company entered into the following transactions in May 2010:
May 1 The Western Wear Company was organized as a corporation. The stockholders purchased stock at par for the following assets in the business: $ 462,000 cash, $ 168,000 merchandise, and $ 105,000 land.
1 Paid rent on administrative offices for May, $ 25,200.
5 The company purchased merchandise from Carl Company on account, $ 189,000; terms 2/10, n/30. Freight terms were FOB shipping point, freight collect.
8 Cash of $ 8,400 was paid to a trucking company for delivery of the merchandise purchased May 5.
14 The company sold merchandise on account, $ 315,000; terms 2/10, n/30.
15 Paid Carl Company the amount due on the purchase of May 5.
16 Of the merchandise sold May 14, $ 13,860 was returned for credit.
19 Salaries for services received were paid for May as follows: office employees, $ 16,800; salespersons, $ 33,600.
24 The company collected the amount due on $ 126,000 of the accounts receivable arising from the sale of May 14.
25 The company purchased merchandise on account from Bond Company, $ 151,200; terms 2/10, n/30. Freight terms were FOB shipping point, freight collect.
27 Of the merchandise purchased May 25, $ 25,200 was returned to the vendor.
28 A trucking company was paid $ 2,100 for delivery to The Western Wear Company of the goods purchased May 25.
29 The company sold merchandise on open account, $ 15,120; terms 2/10, n/30.
30 Cash sales were $ 74,088.
30 Cash of $ 100,800 was received from the sale of May 14.
31 Paid Bond Company for the merchandise purchased on May 25, taking into consideration the merchandise returned on May 27.
The inventory on hand at the close of business on May 31 is $ 299,040.
From the data given for The Western Wear Company:
- Prepare journal entries for the transactions.
- Post the journal entries to the proper ledger accounts.
Alternate problem A a. Candle Carpet Company engaged in the following transactions in August 2010:
Aug. 2 Sold merchandise on account for $ 300,000; terms 2/10, n/30, FOB shipping point, freight collect.
18 Received payment for the sale of August 2.
20 A total of $ 10,000 of the merchandise sold on August 2 was returned, and a full refund was made because it was the wrong merchandise.
28 An allowance of $ 16,000 was granted on the sale of August 2 because some merchandise was found to be damaged; $ 16,000 cash was returned to the customer.
- Lee Furniture Company engaged in the following transactions in August 2010:
Aug. 4 Purchased merchandise on account at a cost of $ 140,000; terms 2/10, n/30, FOB shipping point, freight collect.
6 Paid freight of $ 2,000 on the purchase of August 4.
10 Sold goods for $ 100,000; terms 2/10, n/30.
12 Returned $ 24,000 of the merchandise purchased on August 4.
14 Paid the amount due on the purchase of August 4.
Prepare journal entries for the transactions.
Alternate problem B Edwardo Auto Parts Company and Spoon Company engaged in the following transactions with each other during August 2010:
Aug.15 Edwardo Auto Parts Company purchased merchandise on account with a list price of $ 192,000 from Spoon Company. Trade discounts of 20 per cent and 10 per cent were allowed. Terms were 2/10, n/30, FOB destination, freight prepaid.
16 The seller paid the freight charges, $ 2,400.
17 The buyer requested an allowance of $ 4,512 against the amount due because the goods were damaged in transit.
20 The seller granted the allowance requested on August 17.
The buyer paid the amount due on the last day of the discount period. Record all of the entries required on the books of both the buyer and the seller.
Alternate problem C Gardner Company engaged in the following transactions in June 2010, the company’s first month of operations:
June 1 Stockholders invested $ 384,000 cash and $ 144,000 of merchandise inventory in the business in exchange for capital stock.
3 Merchandise was purchased on account, $ 192,000; terms 2/10, n/30, FOB shipping point, freight collect.
4 Paid height on the June 3 purchase, $ 5,280.
7 Merchandise was purchased on account, $ 96,000; terms 2/10, n/30, FOB destination, freight prepaid.
10 Sold merchandise on account, $ 230,400; terms 2/10, n/30, FOB shipping point, freight collect.
11 Returned $ 28,800 of the merchandise purchased on June 3.
12 Paid the amount due on the purchase of June 3.
13 Sold merchandise on account, $ 240,000; terms 2/10, n/30, FOB destination, height prepaid.
14 Paid height on sale of June 13, $ 14,400.
20 Paid the amount due on the purchase of June 7.
21 $ 48,000 of the goods sold on June 13 were returned for credit.
22 Received the amount due on sale of June 13.
25 Received the amount due on sale of June 10.
29 Paid rent for the administration building for June, $ 19,200.
30 Paid sales salaries of $ 57,600 for June.
30 Purchased merchandise on account, $ 48,000; terms 2/10, n/30, FOB destination, freight prepaid.
The inventory on hand on June 30 was $ 288,000.
- Prepare journal entries for the transactions.
- Post the journal entries to the proper ledger accounts.
- Prepare a trial balance as of 2010 June 30.
Alternate problem D Organized on 2010 May 1, Noah Cabinet Company engaged in the following transactions:
May 1 The stockholders invested $ 900,000 in this new business by purchasing capital stock.
1 Purchased merchandise on account from String Company, $ 46,800; terms n/60, FOB shipping point, freight collect.
3 Sold merchandise for cash, $ 28,800.
6 Paid transportation charges on May 1 purchase, $ 1,440 cash.
7 Returned $ 3,600 of merchandise to String Company due to improper size.
10 Requested and received an allowance of $ 1,800 from String Company for improper quality of certain items.
14 Sold merchandise on account to Texas Company, $ 18,000; terms 2/20, n/30, FOB shipping point, freight collect.
16 Issued cash refund for return of merchandise relating to sale made on May 3, $ 180.
18 Purchased merchandise on account from Tan Company invoiced at $ 28,800; terms 2/15, n/30, FOB shipping point, freight collect.
18 Received a bill for freight charges of $ 900 from Ball Trucking Company on the purchase from Tan Company.
19 Texas Company returned $ 360 of merchandise purchased on May 14.
24 Returned $ 2,880 of defective merchandise to Tan Company. Received full credit.
28 Texas Company remitted balance due on sale of May 14.
31 Paid Tan Company for the purchase of May 18 after adjusting for transaction of May 24.
31 Paid miscellaneous selling expenses of $ 7,200.
31 Paid miscellaneous administrative expenses of $ 10,800.
The May 31st inventory is $ 57,600. From the data for Noah Cabinet Company:
- Journalize the transactions. Round all amounts to the nearest dollar.
- Post the entries to the proper ledger accounts.
- Prepare a trial balance.
Beyond the numbers—Critical thinking
Business decision case A Candy’s Shirts, Inc., has an opportunity to purchase 40,000 shirts with the logo of her favorite school in January 2009. Candy, who is not currently in business, is considering buying these shirts and then renting a display cart from which to sell these shirts (called a kiosk) in a shopping mall. Based on the following information and estimates, Candy needs to decide if the business would be profitable:
- Cost of the 40,000 shirts, all of which must be purchased in January 2009, is $ 440,000.
- Candy thinks it would take two years to sell all of the shirts. She estimates her sales at 25,000 shirts in 2009 and 15,000 shirts in 2010.
- Rent of the kiosk would be $ 1,500 per month in 2009 and $ 1,600 per month in 2010.
- Candy can buy some counters on which to display the merchandise for $ 4,000. She could sell the counters for $ 500 at the end of the second year.
- Candy estimates the cost to decorate her kiosk would be $ 2,500.
- Candy would hire employees and pay them $ 1 per shirt sold.
- Candy plans to sell the shirts for $ 17 each.
- Candy and her husband purchased $ 100,000 of capital stock in the business. Therefore, she plans to borrow $ 400,000 from their family banker. Interest expense on this loan will be $ 52,000 in 2009 and $ 6,500 in 2010. Candy plans to repay $ 300,000 on 2010 January 2, and the remaining $ 100,000 on 2010 July 1
- Candy needs to rent some storage space because all 40,000 shirts cannot be stored at the kiosk. Storage space costs $ 2,500 per year.
- Prepare estimated income statements for 2009 and 2010 for Candy’s business. Does it appear that the business will be profitable?
- Will Candy have the cash available to pay the bank loan as she planned?
Business decision case B In the Annual report appendix, refer to the consolidated statements of earnings for The Limited’s most recent three years. Calculate the gross margin percentage and write an explanation of what the results mean for each of the three years.
Annual report analysis C Refer to the consolidated statements of income of The Limited in the Annual report appendix. Identify the 2000, 1999, and 1998 net sales; cost of goods sold; gross profit; selling, administrative, and general expenses; and operating income. Do the results present a favorable trend? Comment on the results.
Ethics case – Writing experience D Based on the ethics case related to World Auto Parts Corporation, respond in writing to the following questions:
- Do you agree that the total impact of this practice could be as much as $ 10 million?
- Are the small suppliers probably better off going along with the practice?
- Is this practice ethical?
Group project E In teams of two or three students, go to the library (or find an annual report at www.sec.gov/edgar.shtml) to locate one merchandising company’s annual report for the most recent year. Calculate the company’s gross margin percentage for each of the most recent three years. As a team, write a memorandum to the instructor showing your calculations and commenting on the results. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.
Group project F In a team of two or three students, contact a variety of businesses in your area and inquire as to the types of sales discount terms they offer to credit customers and the types of purchase discount terms they are offered by their suppliers. Calculate the approximate annual rate of interest implied in several of the more common discount terms. For instance, the book states that the implied annual rate of interest on terms of 2/10, n/30 is 36 per cent, assuming we use a 360-day year. Present your findings in a written report to your instructor.
Group project G In a team of two or three students, obtain access to several annual reports of companies in different industries (see www.sec.gov/edgar.shtml.) Examine their income statements and identify differences in their formats. Discuss these differences within your group and then present your findings in a report to your instructor.
Using the Internet—A view of the real world
Visit the Fat Brains Toys website at:
Browse around the site for interesting information. What products do they sell? What journal entries would they make to record sales of these products? Write a report to your instructor summarizing your experience at this site.