financial accounting tools for business decision making solutions 7e chapter 05

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

CHAPTER 5
MERCHANDISING OPERATIONS
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
6.

Identify the differences between service and merchandising companies.
Prepare entries for purchases under a perpetual inventory system.
Prepare entries for sales under a perpetual inventory system.
Prepare a single-step and a multiple-step income statement.
Calculate the gross profit margin and profit margin.
Account and report inventory in a periodic inventory system (Appendix 5A).

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND
BLOOM’S TAXONOMY
Item LO
1.
2.
3.
4.
5.

1

1
1
1
1

BT

Item

LO

BT

C
C
C
C
C

6.
7.
8.
9.
10.

2
2
2,3
2,3
2,3

C
AP
C
C
C

Item LO BT
Questions
11.
12.
13.
14.
15.

2,3
3
3
3
4

C
C
C
C
C

Item

LO

BT

Item

LO

BT

16.
17.
18.
19.
20.

4
4
4
4
5

K
C
C
C
C

21.
22.
23.

24.
25.

5
5
6
6
6

C
C
C
C
C

Brief Exercises
1.
2.

1
1

C
AN

5.
6.

2
3

AP
AP

9.
10.

4
4,5

C
AN

13.
14.

6
6

AP
AP

3.
4.

2
2,3

AP
AP

7.
8.

4
4

AP
C

11.
12.

5
6

AN
AP

15.
16.

6
6

AP
AP

1.
2.

3.
4.

1
2,3
2,3
2

C
AN
AP
AP

5.
6.
7.
8.

2
2
2,3,5
4

AP
AN
AP
C

9.
10.

11.
12.

13.
14.
15.
16.

5
6
2,3,6
6

AN
AP
AP
AN

17.

6

AN

1.
2.
3.

1
1,2,3

2,3

AN
AN
AP

4.
5.
6.

2,3
2,3,4
4

AP
AP
AN

5
1,6
6

AN
AN
AP

13.
14.
15.

6
5,6
6

AP
AP
AP

Exercises
4
4,5
4,5
4,6

AP
AN
AN
AN

Problems: Set A and B
7.
8.
9.

4
5
4,5

AP
AN

AN

10.
11.
12.

Accounting Cycle Review
1.

2,3,4

AP

1.
2.

1,4,5
5

AN
AN

Cases
3.
4.

4,5
2,3,5

E

E

5.
6.

2
4,5

C
AN

Solutions Manual
5-1
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

Legend: The following abbreviations will appear throughout the solutions manual file.
LO

Learning objective

BT

Bloom's Taxonomy
K

Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to prepare in minutes

Difficulty:

Time:
AACSB

Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic

Technology
Tech.
Diversity
Diversity
Reflec. Thinking
Reflective Thinking

CPA CM
cpa-e001
cpa-e002
cpa-e003
cpa-e004
cpa-e005
cpa-t001
cpa-t002
cpa-t003
cpa-t004
cpa-t005
cpa-t006

CPA Canada Competency
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead

Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation

Solutions Manual
5-2
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

ANSWERS TO QUESTIONS
1.

(a)

The operating cycle is the time it takes to go from cash to cash in

producing revenues.

(b)

The normal operating cycle for a merchandising company is likely to be
longer than that of a service company because, in a merchandising
company, inventory must first be purchased and sold, and then the
receivables must be collected whereas, in a service company, the services
only need to be provided (not purchased first and then stored until sold)
and then the receivables must be collected.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

2.

(a)

The income measurement process of a merchandising company is the
same as the service company in that net income is arrived at by deducting
expenses from revenues.

(b)

The income measurement process of a merchandising company differs
from that of a service company in that its revenue is derived from sales
revenue, not service revenue. In addition, cost of goods sold is deducted
from sales revenue to determine gross profit, before operating and other
expenses, similar to both types of companies, are deducted (or other
revenues are added).

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

3.

The company needs to compare the cost of the detailed record keeping
required in a perpetual inventory system to the benefits of having the additional
information about the inventory. One of the benefits of a perpetual inventory
system is the ability to answer questions from customers about merchandise
availability. In a used clothing business, this may not be of much benefit unless
each inventory item is unique. Another benefit is the monitoring of inventory
quantities in order to avoid running out of stock. Again, this may not be of benefit
since the company does not order recurring or similar merchandise, and may
not have a supplier to order from. But if the company is selling used clothing on
consignment, it will need to track each item in order to determine which
consignor to pay when an item is sold.

Solutions Manual
5-3
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

3. (continued)
The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system
requires more record keeping and therefore is more expensive to use. For

example, a perpetual inventory system usually requires an investment in a
point-of-sale system that is integrated with the inventory system.
LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

4.

A physical count is an important control feature. By using a perpetual inventory
system, a company knows what should be on hand. Performing a physical
count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock.

LO 1 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

5.

The key distinction between a periodic inventory system and a perpetual
inventory system is whether or not information on inventory and cost of goods
sold (units and dollars) are always (perpetually) available or only known when
inventory counts are conducted (periodically). Because information on the cost
of goods sold is only known after an inventory count has been carried out under
the periodic system, no entry is made for the cost of goods sold at the time of
each sale. Instead, cost of goods sold is a residual number, determined by
subtracting ending inventory (as determined by the inventory account) from cost
of goods available for sale. This means that any goods not included in ending
inventory are assumed to have been sold. In order to arrive at the cost of goods
available for sale, separate accounts are set up in the general ledger to keep
track of the purchases, freight-in, purchase returns and allowances, and
purchase discounts. Under the periodic inventory system, management is not
able to look up in the general ledger accounts for the balance of inventory at a
particular point in time. In order to arrive at the inventory value, a physical count

of the inventory must be performed.

LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-4
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

6.

Financial Accounting, Seventh Canadian Edition

The reason for recording the purchase of merchandise for resale in a separate
account is to enable a company to determine its cost of goods sold and gross
profit. This information is useful in managing costs and setting prices.

LO 2 BT: C Difficulty: M Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

7.

(a)

The value of the purchase discount to Butler’s Roofing is $480 ($48,000 ×
1%).

(b)

Failing to take advantage of the discount terms is like paying the supplier
an extra $480 in order to settle a $47,520 invoice 20 days later. This works
out to 1.01% [$480 ÷ $47,520] every 20 days. On an annual basis this
amounts to 18.4% [($480 ữ $47,520 ì (365 ữ 20)]. Butler’s should take
advantage of the cash discount offered.

LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

8.

(a)

Lebel Ltée should record the sale as revenue in June, when it is sold to a
customer. When the merchandise was purchased in April, it should be
recorded as an asset, inventory. It should be recorded as cost of goods
sold (an expense) in June when the inventory is sold and the revenue is
recognized. This is necessary in order to match the cost with the related
revenue

(b)

Lebel’s customer should recognize the purchase in June, when the
inventory is received.

LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-5
Chapter 5

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

9.

Financial Accounting, Seventh Canadian Edition

(a)

FOB shipping point means that the goods are placed free on board by the
seller at the point of shipping. The buyer pays the freight costs from the
point of shipping to the buyer’s destination because title passes at
shipping point. FOB destination means the goods are delivered by the
seller to their destination, where the title passes. The seller pays for
shipping to the buyer’s destination.

(b)

FOB shipping point will result in a debit to the Inventory account by the
buyer because title has transferred at shipping point and the inventory is
now owned by the buyer. FOB destination will result in a debit to Freight
Out by the seller because they are paying for the freight.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

10.

In a perpetual inventory system, purchase returns are credited to Inventory

because the items purchased have been returned to the vendor and are no
longer available to be sold to customers. Sales returns are not debited directly
to the Sales account because this would not provide information about the
goods returned. This information can be useful in making decisions. Debiting
returns directly to sales may also cause problems in comparing sales for
different periods.

LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

11.

(a)

A quantity discount gives a reduction in the price according to the volume
of the purchase. A purchase discount is offered by a seller to a buyer for
early payment of an invoice. When the buyer pays the invoice within the
discount period, the amount of the discount decreases the Inventory
account. A sales discount is the same as a purchase discount but from the
seller’s point of view.

(b)

Quantity discounts are not recorded or accounted for separately but
become part of the recorded sales price. Buyers record purchase
discounts taken as a credit to Inventory under the perpetual system or to
Purchase Discounts when using the periodic system. The seller records a
sales discount as a debit to the Sales Discounts account, which is a contra
revenue account to Sales, when the invoice is paid within the discount
period.

LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-6
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

12.

Financial Accounting, Seventh Canadian Edition

Contra accounts are used to reduce the account they are contra to, such as
accumulated depreciation reducing equipment. A debit (decrease) recorded
directly to Sales would make it more difficult for management to determine the
percentage of total sales that ends up being lost through sales returns and
allowances, so a contra revenue account (sales returns and allowances) is
used. Another example of a contra revenue account is sales discounts. This
account keeps track of the costs incurred for discounts taken by customers for
paying early, in accordance with the discount terms offered. The contra revenue
accounts reduce sales to net sales, reported on the income statement.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

13.

If the merchandise is not resaleable, it cannot be included in inventory since it
cannot be resold and it has no value. The cost remains in cost of goods sold

since it is a cost of doing business. If the merchandise is resaleable, it still has
value to the company. In this case, the cost of the merchandise is debited to
inventory again and cost of goods sold is credited.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

14.

The sales taxes are collected on behalf of the federal and provincial
governments, and must be periodically remitted to these authorities. Sales
taxes that are collected from selling a product or service are not recorded as
revenue, instead they are recorded as a liability until they are paid to the
government.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-7
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

15.

Financial Accounting, Seventh Canadian Edition

In a single-step income statement, all data are classified into two categories:
(1) revenues and (2) expenses. It is referred to as a single-step income

statement because only a single step—subtracting expenses from revenues—
is needed to determine income before income tax. A multiple-step income
statement requires several steps to determine income before income tax. First,
cost of goods sold is deducted from net sales to determine gross profit.
Operating expenses are then deducted to calculate income from operations.
Finally, other revenues and expenses are added or deducted to determine
income before income tax. The deduction of income tax to calculate net income
(loss) is the same under both formats. In addition, both formats produce the
same profit amount for the period.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

16.

North West Company uses a multiple-step income statement.

LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

17.

(a)

When classifying expenses by their nature, they are reported in
accordance with their natural classification (for example, salaries,
deprecation, and so on). When classifying expenses by their function, they
are reported according to the activity (business function) for which they
were incurred (for example, cost of goods sold, administrative, selling).

(b)

It does not matter whether a single-step or multiple-step income statement
is prepared, expenses must be classified either by nature or by function.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

18.

Because the Overwaitea is a private enterprise, it can follow Accounting
Standards for Private Enterprises (ASPE). Companies following ASPE can
classify their expenses in whatever manner is useful to them. Loblaws, which
follows IFRS, must classify its expenses by their nature or their function.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-8
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

19.

Financial Accounting, Seventh Canadian Edition

Interest expense is a non-operating expense because it relates to how a
company’s operations are financed, not to the company’s main operations.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

20.

The difference between gross profit margin and profit margin is that the gross
profit margin measures the amount by which the selling price exceeds the cost
of goods sold while the profit margin measures the extent to which sales cover
all expenses (including the cost of goods sold).

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

21.

Factors affecting a company’s gross profit margin include the selling price and
the cost of the merchandise. Recall that gross profit = net sales  cost of goods
sold. Selling products with a higher price or “mark-up” or selling products with
a lower cost would result in an increased gross profit margin. Selling products
with a lower price (perhaps due to increased competition that results in lower
selling prices) or selling products with a higher cost (perhaps due to price
increases from suppliers and shippers) would result in a lower gross profit
margin.

LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

22.

High gross profit
Computer services and
such as
software companies
Pharmaceutical manufacturers

Luxury goods retailers

Low gross profit
Low-price retail

companies

Walmart
Grocery stores
Forestry and wood products

LO 5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-9
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*23.
Accounts
Purchase Returns and Allowances
Purchase Discounts
Freight In

(a)

Added/Deducted
Deducted
Deducted
Added

(b)
Normal Balance
Credit
Credit
Debit

LO 6 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

*24.

Periodic System
Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased
(Purchases – Purchase Discounts – Purchase Returns and Allowances +
Freight In) – Ending Inventory
Ending inventory and cost of goods sold for the period are calculated at the end
of the period.
Perpetual System
Cost of Goods Sold = the cost of the item(s) sold
Cost of goods sold is calculated at the time of each sale and recorded as an
increase (debit) to the Cost of Goods Sold account and a decrease (credit) to
the Inventory account.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

5-10
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

*25.

Financial Accounting, Seventh Canadian Edition

The calculation of cost of goods sold is shown in detail in the income statement
of a company using the periodic system. In a perpetual system, it is one line
and amount only.
Periodic System
Cost of Goods Sold =
1. Add the cost of goods purchased (where the cost of goods purchased is
equal to purchases less purchases discounts, and purchases returns and
allowances plus freight in) to the cost of goods on hand at the beginning of
the period (beginning inventory). The result is the cost of goods available for
sale.
2. Subtract the cost of goods on hand at the end of the period (ending inventory)
from the cost of goods available for sale. The result is the cost of goods sold.
Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as
previously determined and recorded for all sales.

LO 6 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

5-11
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a)

The company with the most efficient operating cycle is Company A as it uses
the fewest number of days in its cycle to obtain cash.

(b)

The company which is most likely a service company is Company A as it does
not have to manufacture or deliver inventory and consequently takes the fewest
number of days to obtain cash. Company C, with the highest number of days in
its operating cycle, is likely the manufacturing company, and the merchandising
company would be in the middle (Company B), with neither the highest nor the
lowest number of days in its operating cycle.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-2
(a)

[1] Income before tax = $100 – $65 = $35
[2] Net income = $35 (from [1]) – $9 = $26
[3] Cost of goods sold = $100 – $60 = $40
[4] Operating expenses = $60 – $35 = $25
[5] Income tax expense = $35 – $26 = $9

(b)

Company A is the service company, since it has no cost of goods sold.
Company B is the merchandising company, since it has cost of goods sold.

LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-12
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-3
Beginning Balance
Purchases

Inventory
55,000
220,000

26,000 Purchase returns
9,700 Purchase discounts

Freight in

2,700
218,000 Cost of goods sold

Ending Balance

24,000

Although not required, the following are the journal entries of the transactions.

Purchases

Inventory .................................................................. 220,000
Accounts Payable ...............................................
220,000

Purchase
Returns

Accounts Payable ....................................................
Inventory .............................................................

Purchase
Discounts

Accounts Payable ($220,000 – $26,000) ................. 194,000

Inventory ($194,000 × 5%) .................................
9,700
Cash ...................................................................
184,300

Freight In

Inventory ..................................................................
Accounts Payable ...............................................

Cost of
Sales

26,000
26,000

2,700
2,700

Cost of Goods Sold .................................................. 218,000
Inventory .............................................................
218,000

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-13
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-4
Pocras Corporation (Buyer):
Aug. 24
Inventory .................................................................
Accounts Payable ...............................................

32,000

Wydell Inc. (Seller):
Aug. 24
Accounts Receivable ................................................
Sales ...................................................................

32,000

24

Cost of Goods Sold ..................................................
Inventory .............................................................

32,000

32,000
14,400
14,400

LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-5
Jan.

2

Inventory .................................................................
Accounts Payable ...............................................

45,000
45,000

5

No entry necessary – Freight costs paid by Fundy Corp.

6

Accounts Payable ....................................................
Inventory .............................................................

6,000

Accounts Payable ($45,000 - $6,000) ......................
Inventory ($39,000 × 2%) ...................................
Cash ...................................................................

39,000

11

6,000

780
38,220

LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-14
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-6
Jan.

2

2

5

6

6

11

Accounts Receivable ................................................
Sales ...................................................................

45,000

Cost of Goods Sold ..................................................
Inventory .............................................................

25,200

Freight Out ...............................................................
Cash ...................................................................

900

Sales Returns and Allowances.................................
Accounts Receivable ..........................................

6,000

Inventory ..................................................................
Cost of Goods Sold .............................................

3,360

Cash .........................................................................
Sales Discounts ($39,000 × 2%) ..............................
Accounts Receivable ($45,000 - $6,000) ............

38,220
780

45,000

25,200

900

6,000

3,360

39,000

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-15
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-7
(a)

Sales ....................................................................
Less: Sales returns and allowances ...................
Sales discounts .........................................
Net sales ..............................................................

$1,110,000
$22,000
18,000

40,000
$1,070,000

(b)

Net sales .....................................................................
Less: Cost of goods sold ...........................................
Gross profit .................................................................

$1,070,000
658,000
$ 412,000

(c)

Gross profit .................................................................
Less: Administrative expenses ..................................

Selling expenses ..............................................
Income from operations ..............................................

$412,000
$160,000
110,000 270,000
$142,000

(d)

Income from operations ..............................................
Add: Other revenues ................................................
Less: Other expenses ................................................
Income before income tax...........................................

$142,000
$26,000
(35,000)_ (9,000)
$133,000

(e)

Income before income tax...........................................
Less: Income tax expense .........................................
Net income .................................................................

$133,000
27,000
$106,000

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-16
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-8
As the name suggests, numerous steps are required in determining net income in a
multiple-step statement.
(a)
(b)
Item
Single-Step
Multiple-Step
Depreciation expense
Cost of goods sold
Freight out
Income tax expense
Interest expense
Interest revenue
Rent revenue
Salaries expense
Sales
Sales discounts

Sales returns and allowances

Expenses
Expenses
Expenses
Income tax expense
Expenses
Revenues
Revenues
Expenses
Revenues
Revenues
Revenues

Operating expenses
Cost of goods sold
Operating expenses
Income tax expense
Other revenues and expenses
Other revenues and expenses
Other revenues and expenses
Operating expenses
Sales revenue
Sales revenue
Sales revenue

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-9
(a)

The company is using a multiple-step form of income statement.

(b)

The company is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-17
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-10
(a)
Sales
Cost of goods sold
Gross profit
Operating expenses
Income from operations
Other revenues
Income before income taxes

Income tax expense
Net income

2018
$250,000
137,500
112,500
50,000
62,500
______
62,500
20,000
$42,500

2017
$200,000
114,000
86,000
40,000
46,000
10,000
56,000
15,000
$41,000

(b)
2018
Gross profit
margin

Profit
margin

(c)

2017

$112,500
$250,000

= 45.0%

$86,000
$200,000

=

43.0%

$42,500
$250,000

= 17.0%

$41,000

=

20.5%

$200,000

Modder Corporation’s gross profit margin increased in 2018 indicating an
increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2018, the company’s profit margin dropped. The
decrease in profit margin is caused by the other revenues in 2017 that were not
available in 2018. Operating expenses were 20% of sales in both years.

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and
Finance

Solutions Manual
5-18
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

BRIEF EXERCISE 5-11
(a)
($ in millions)
Gross profit
margin

Profit
margin

(b)

2015

2014

$12,279.6 – $7,747.1
$12,279.6

=

36.9%

$12,462.9 – $8,033.2
$12,462.9

= 35.5%

$735.9
$12,279.6

=

6.0%

$639.3
$12,462.9

= 5.1%

Canadian Tire Corporation’s gross profit margin increased in 2015. Although
sales dropped 1.5%, [($12,279.6 - $12,462.9) ÷ $12,462.9] cost of goods sold
dropped 3.6% [($7,747.1 - $8,033.2) ÷ $8,033.2] which lead to the increased
gross profit margin. The profit margin also increased in 2015, but not as much.
Operating expenses or interest or income tax expense must have increased as
a percentage of sales.

LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance

*BRIEF EXERCISE 5-12
Jan.

2

Purchases ................................................................
Accounts Payable ...............................................

45,000
45,000

5

No entry necessary - Freight costs paid by Fundy Corp.

6

Accounts Payable ....................................................
Purchase Returns and Allowances .....................

6,000

Accounts Payable ($45,000 - $6,000) ......................
Purchase Discounts ($39,000 × 2%) ..................
Cash ...................................................................

39,000

11

6,000

780
38,220

LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-19
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 5-13
Jan.

2

Accounts Receivable ................................................
Sales ...................................................................

45,000
45,000

2

No cost of goods sold entry at time of sale

5

Freight Out ...............................................................
Cash ...................................................................

900

Sales Returns and Allowances.................................
Accounts Receivable ..........................................

6,000

6

6
11

900

6,000

No cost of goods sold entry at the time of sale
Cash .........................................................................
Sales Discounts ($39,000 × 2%) ..............................
Accounts Receivable ($45,000 - $6,000) ............

38,220
780
39,000

LO 6 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-20
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 5-14
(a)

Sales .............................................................................
$1,860,000
Less: Sales returns and allowances ............................ $124,000

Sales discounts ..................................................
28,000
152,000
Net Sales ......................................................................
$1,708,000

(b)

Purchases .....................................................................
Less: Purchase returns and allowances ......................
Purchase discounts ............................................
Net purchases ...............................................................

$880,000
$13,000
14,000

27,000
$853,000

(c)

Net purchases ...............................................................
Add: Freight in ............................................................
Cost of goods purchased ..............................................

$853,000
16,000
$869,000

(d)

Beginning inventory ......................................................
Add: Cost of goods purchased ...................................
Cost of goods available for sale ....................................
Less: Ending inventory ................................................
Cost of goods sold ........................................................

$ 96,000
869,000
965,000
82,000
$883,000

(e)

Net sales .......................................................................
Less: Cost of goods sold ...............................................
Gross profit ...................................................................

$1,708,000
883,000
$825,000

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-21
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 5-15
(a)

(b)

Cost of goods sold
Beginning inventory ...........................................
$105,000
Purchases ..........................................................
Less: Purchase returns and allowances ............
Purchase discounts ..................................
Net purchases ....................................................
Add: Freight In ...................................................
Cost of goods purchased ...................................
Cost of goods available for sale .........................
Ending inventory ................................................
Cost of goods sold .............................................

$195,000
$ 6,600
20,400

27,000
168,000

5,250
173,250
278,250
120,000
$158,250

There would be no difference in the remainder of the income statement for
Halifax Limited whether the periodic or perpetual inventory systems were used.
Purchases – Purchase returns and allowances – Purchase discounts + Freight-in =
Cost of goods purchased
(Beginning inventory+ Cost of goods purchased – Ending inventory = Cost of goods
sold)

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-22
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

*BRIEF EXERCISE 5-16
Dec. 31

Inventory (ending) .................................................... 68,000
Cost of Goods Sold .................................................. 401,000*

Purchase Discounts .................................................
6,000
Inventory (beginning) ..........................................
75,000
Purchases ...........................................................
388,000
Freight In.............................................................
12,000
* Cost of goods sold = Beginning inventory + Purchases  Purchase
discounts  Purchase returns and allowances + Freight in – Ending
inventory
Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 –
$68,000 = $401,000

LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-23
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a)

Toys “R” Us, Inc. is a merchandiser (retailer), Fasken Martineau LLP is a
service company, and Atlantic Grocery Distributors Ltd. is a merchandiser
(wholesaler).

(b)

The operating cycle of these three businesses will be different. The longest
operating cycle will be experienced by the retailer, as the sales of merchandise
will be the slowest. The organization with the shortest operating cycle will be
the service firm that does not sell inventory. The third company, the distributing
wholesaler, will have an operating cycle between that of the retailer and the law
firm because its inventory is more likely to sell faster and the law firm has no
inventory to sell.

LO 1 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual
5-24
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley

Financial Accounting, Seventh Canadian Edition

EXERCISE 5-2
Item
(a)
1. Asset

Account Debited
(b)
Inventory

(c)
(a)
+$3,500 Asset

Account Credited
(b)
(c)
Cash
–$3,500

–$750 Asset

Inventory

–$750

3. Asset

Accounts
Payable
Inventory

+$4,000 Liability

+$4,000

4. Asset

Inventory

+$400 Asset

Accounts
Payable
Cash

5. Liability

Accounts
Payable
Accounts
Receivable

–$3,500 Asset
Asset
+$10,000 Revenue

Cash
Inventory
Sales

–$3,430
–$70
+$10,000

Inventory

–$4,000

2. Liability

6. Asset

Expense Cost of Goods
Sold
7. Contra
Sales Returns
Sales
and Allowances
8. Expense Freight Out
9. Contra
Sales
Asset

10. Asset

Sales Returns
and Allowances
Inventory

Cash

+$4,000 Asset

–$400

+$750 Asset

Cash

–$750

+$600 Asset

Cash

–$600

+$1,000 Asset

+$400 Expense

+$6,000 Asset

Accounts
Receivable

–$1,000

Cost of
Goods
Sold
Accounts
Receivable

–$400
–$6,000

LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual
5-25
Chapter 5
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.