Solution manual Financial accounting 6th kieso kimmel ch05

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CHAPTER 5
Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Questions

Brief
Exercises

Exercises

1. Identify the differences
between service and
merchandising
companies.

1, 2, 3, 4

1, 2

1

1A,
2A,*11A

1B, 2B,
*11B

1

2. Prepare entries for
purchases under a
perpetual inventory
system.

5, 6, 7, 8,
9, 10

3, 4, 5

2, 3, 4, 6,
*13

2A, 3A,
4A, 5A

2B, 3B,
4B, 5B

4, 5

3. Prepare entries for sales
under a perpetual
inventory system.

7, 8, 9, 10,
11, 12

4, 6

2, 3, 5, 6,
*13

2A, 3A,
4A, 5A

2B, 3B,
4B, 5B

4

4. Prepare a single-step
and a multiple-step
income statement.

13, 14, 15,
16, 17

7, 8, 9

7, 8, 9, 10

5A, 6A,
7A, 9A

5B, 6B,
7B, 9B

1, 3, 7

5. Calculate the gross profit 18, 19, 20,
margin and profit margin.

10, 11

6, 9, 10,
11

8A, 9A,
10A, *14A

8B, 9B,
10B, *14B

1, 2, 3,
4, 6, 7

6. Prepare entries for
purchases and sales
under a periodic
inventory system and
calculate cost of goods
sold (Appendix 5A).

*12, *13,
*14, *15,
*16

*12, *13,
*14, *15

*11A,
*12A,
*13A,
*14A, *15A

*11B,
*12B,
*13B,
*14B, *15B

Study Objectives

*21, *22,
*23

A
Problems

B
Problems

BYP

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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number

Description

Difficulty
Level

Time
Allotted (min.)

1A

Identify appropriate inventory system.

Moderate

15-20

2A

Record purchase and sales transactions.

Moderate

20-30

3A

Record purchase and sales transactions.

Moderate

20-30

4A

Record and post purchase and sales transactions;
prepare trial balance.

Simple

30-40

5A

Record and post transactions and prepare partial
financial statements.

Simple

30-40

6A

Prepare single- and multiple-step income statements.

Moderate

20-30

7A

Record and post adjusting entries; prepare adjusted
trial balance and financial statements.

Moderate

35-45

8A

Calculate profitability ratios and comment.

Moderate

15-20

9A

Calculate amounts and assess profitability.

Complex

30-40

10A

Calculate ratios and comment.

Simple

20-30

*11A

Record purchase and sales transactions; discuss
inventory systems.

Moderate

20-30

*12A

Record purchase and sales transactions.

Moderate

20-30

*13A

Record and post purchase and sales transactions;
prepare trial balance.

Simple

30-40

*14A

Prepare partial income statement; calculate gross
profit.

Simple

20-30

*15A

Prepare financial statements.

Moderate

40-50

Identify appropriate inventory system.

Moderate

15-20

1B

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ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem
Number
2B

Description
Record purchase and sales transactions.

Difficulty
Level
Moderate

Time
Allotted (min.)
20-30

3B

Record purchase and sales transactions.

Moderate

20-30

4B

Record and post purchase and sales transactions;
prepare trial balance.

Simple

30-40

5B

Record and post transactions and prepare partial
financial statements.

Simple

30-40

6B

Prepare single- and multiple-step income statements.

Moderate

20-30

7B

Record and post adjusting entries; prepare adjusted
trial balance and financial statements.

Moderate

35-45

8B

Calculate profitability ratios and comment.

Moderate

15-20

9B

Calculate amounts and assess profitability.

Complex

30-40

10B

Calculate ratios and comment.

Simple

20-30

*11B

Record purchase and sales transactions; discuss
inventory systems.

Moderate

20-30

*12B

Record purchase and sales transactions.

Moderate

20-30

*13B

Record and post purchase and sales transactions;
prepare trial balance.

Simple

30-40

*14B

Prepare partial income statement; calculate gross
profit.

Simple

20-30

*15B

Prepare financial statements.

Moderate

40-50

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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.

2.

(a) The income measurement process of a merchandising company is the same as the
service company in that profit 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).

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.
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.

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.

5.

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.

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Answers to Questions (Continued)
6.

(a) The value of the purchase discount to Butler Roofing is $100.00 ($10,000 × 1%).
(b) Failing to take advantage of the discount terms, is like paying the supplier an extra
$100 in order to settle a $9,900 invoice 20 days later. This works out to 1.01% [$100
÷ $9,900] every 20 days. On an annual basis this amounts to 18.4% [($100 ÷
$9,900 × (365 ÷ 20)].

7.

The company should record the sale as revenue in June, when it is sold to a customer.
The merchandise purchased should be recorded as an asset, merchandise inventory, in
April. 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.

8.

(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 Merchandise 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.

9.

In a perpetual inventory system, purchase returns are credited to the Merchandise
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.

10. (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 Merchandise 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. When collected within the discount period, the seller
records the discount as a debit to the Sales Discounts account, which is a contra
revenue account to Sales. Buyers record purchase discounts when taken as a credit
to Merchandise Inventory under the perpetual system or Purchase Discounts when
using the periodic system.

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Answers to Questions (Continued)
11.

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

12.

By shipping more product than was ordered, customers will be annoyed with Agnew
Inc. and there will be damage done to customer relationships. Goods that are returned
will cost additional freight charges. Annoyed customers could possibly refuse the
whole order which will result in a lost sale. It is not an ethical tactic to implement this
procedure as the objective is obviously to manipulate sales results and boost profit in
the current year.

13.

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 profit before income tax. A multiple-step income statement requires several
steps to determine profit before income tax. First, cost of goods sold is deducted from

sales to determine gross profit. Operating expenses are then deducted to calculate
profit from operations. Finally, other revenues and expenses are added or deducted to
determine profit before income tax. The deduction of income tax to calculate profit
(loss) is the same under both formats. In addition, both formats produce the same
profit amount for the period.

14.

Shoppers Drug Mart uses a multiple-step income statement.

15. (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.
16.

Because the Katz Group 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. Shoppers, which follows IFRS must classify its
expenses by their nature or their function.

17.

Interest expense is a non-operating expense because it relates to how a company’s
operations are financed. This is not always within the company’s control and is usually
not a decision of the general manager but of the chief financial officer.

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Answers to Questions (Continued)
18.

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).

19.

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
dues 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.

20.

High gross profit
Computer services and
software companies
Pharmaceutical manufacturers
Luxury goods retailers

Low gross profit
Low-price retail companies such as
Walmart
Grocery stores
Forestry and wood products

*21.
Accounts
Purchase Returns and Allowances
Purchase Discounts
Freight In
*22.

(a)
Added/Deducted
Deducted
Deducted
Added

(b)
Normal Balance
Credit
Credit

Debit

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 as well as cost of goods sold for the period, is calculated at the end
of 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 Merchandise
Inventory account.

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Answers to Questions (Continued)
*23.

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.

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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.

BRIEF EXERCISE 5-2
(a)
[1] Profit before tax = $100 – $65 = $35
[2] Profit = $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.

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BRIEF EXERCISE 5-3

Beginning Balance
Purchases

Freight in
Ending Balance

Purchases

Merchandise Inventory
25,000
100,000
12,000 Purchase returns
4,400 Purchase discounts
2,400
93,000 Cost of goods sold
18,000

Merchandise Inventory............................................. 100,000
Accounts Payable ...............................................

Purchase
Returns

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

12,000

Purchase
Discounts

Accounts Payable ($100,000 – $12,000) .................
Merchandise Inventory ($88,000 × 5%) ..............
Cash ...................................................................

88,000

Freight In

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

2,400

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

93,000

Cost of
Sales

100,000
12,000

4,400
83,600

2,400

93,000

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

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

900
900

Wydell Inc. (Seller):
Aug. 24

24

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

900

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

590

900

590

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BRIEF EXERCISE 5-5
Jan.

2

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

15,000
15,000

5

No entry necessary – Freight costs paid by Fundy Corp.

6

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

2,000

Accounts Payable ....................................................
Merchandise Inventory ($13,000 × 2%) ..............
Cash ...................................................................

13,000

11

2,000

260
12,740

BRIEF EXERCISE 5-6
Jan.

2

2

5

6

6

11

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

15,000

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

11,250

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

300

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

2,000

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

1,500

Cash ........................................................................
Sales Discounts ($13,000 × 2%)..............................
Accounts Receivable ..........................................

12,740
260

15,000

11,250

300

2,000

1,500

13,000

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BRIEF EXERCISE 5-7
(a)

Sales..................................................................................
Less: Sales returns and allowances ................................. $25,000
Sales discounts ....................................................... 55,000
Net sales............................................................................

$650,000

(b)

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

$570,000
320,000
$250,000

(c)

Gross profit ........................................................................
Less: Administrative expenses ......................................... $100,000
Selling expenses .....................................................
25,000
Profit from operations ........................................................

$250,000

Profit from operations ........................................................
Add: Other revenues ....................................................... $20,000
Less: Other expenses....................................................... (30,000)
Profit before income tax .....................................................

$125,000
(10,000)
$115,000

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

$115,000
25,000
$ 90,000

(d)

(e)

80,000
$570,000

125,000
$125,000

BRIEF EXERCISE 5-8

As the name suggests, numerous steps are required in determining profit 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

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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).

BRIEF EXERCISE 5-10
(a)
2015
Gross profit
margin

Profit
margin

(b)

$250,000 – $137,500
$250,000

2014
= 45.0%

$250,000 – $137,500 –
= 17.0%
$50,000 – $20,000
$250,000

$200,000 – $114,000
$200,000

=

43.0%

$200,000 – $114,000 –
$40,000 + $10,000 –
$15,000
$200,000

=

20.5%

The Modder Corporation’s gross profit margin increased significantly in 2015 indicating
an increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2015, the company’s profit margin had dropped
significantly. The decrease in profit margin indicates that in spite of an increase in
gross profit, the increase operating expenses overtook this increase in gross profit,
leaving a decline in profit margin.

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

Profit
margin

(b)

2012

2011

$11,427.2 – $7,929.3
$11,427.2

=

30.6%

$10,387.1 – $7,326.4
$10,387.1

= 29.5%

$499.2
$11,427.2

=

4.4%

$467.0
$10,387.1

= 4.5%

The Canadian Tire Corporation’s gross profit margin increased marginally in 2012
indicating a slight increase in the percentage mark-up it has been able to command, or
a lowering of the costs of goods sold, or both. On the other hand, the profit margin
decreased slightly in 2012. This decrease is due to operating expenses or interest or
income tax expense increasing at a greater pace than the increase in gross profit.

*BRIEF EXERCISE 5-12
Jan.

2

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

15,000
15,000

5

No entry necessary - Freight costs paid by Fundy Corp.

6

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

2,000

Accounts Payable ....................................................
Purchase Discounts ($13,000 × 2%) ..................
Cash ..................................................................

13,000

11

2,000

260
12,740

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*BRIEF EXERCISE 5-13
Jan.

2

5

6

11

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

15,000

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

300

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

2,000

Cash ........................................................................
Sales Discounts .......................................................

Accounts Receivable ..........................................

12,740
260

15,000

300

2,000

13,000

*BRIEF EXERCISE 5-14
(a)

Sales..................................................................................
Less: Sales returns and allowances ................................. $75,000
Sales discounts ....................................................... 25,000
Net Sales ...........................................................................

$750,000

Purchases..........................................................................
Less: Purchase returns and allowances ........................... $11,000
Purchase discounts.................................................
9,000
Net purchases ...................................................................

$425,000

(c)

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

$405,000
10,000
$415,000

(d)

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

$ 60,000
415,000
475,000
100,000
$375,000

(e)

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

$650,000
375,000
$275,000

(b)

100,000
$650,000

20,000
$405,000

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*BRIEF EXERCISE 5-15
(a)

(b)

Cost of goods sold

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

$105,000
$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.

*BRIEF EXERCISE 5-16
Dec. 31

Merchandise Inventory (ending) .............................. 24,000
Cost of Goods Sold .................................................. 271,000*
Purchase Discounts .................................................
4,000
Merchandise Inventory (beginning) ....................
Purchases...........................................................
Freight In ............................................................

30,000
262,000
7,000

* Cost of goods sold = Beginning inventory + Purchases − Purchase discounts −
Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $30,000 + $262,000 − $4,000 + $7,000 – $24,000 =
$271,000

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SOLUTIONS TO EXERCISES
EXERCISE 5-1

(a)

Toys’ R Us, Inc. is a retailer, Fasken Martineau Dumoulin LLP is a service firm, and
Atlantic Grocery Distributors Ltd. is a 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 law firm that
does not sell inventory. The third company, the distributing wholesaler, will have an
operating cycle between that of the retailer and the service firm because its inventory
is more likely to sell faster.

EXERCISE 5-2
Item
(a)
1. Asset
2. Asset
3. Asset
4. Liability
5. Liability

6. Asset

Account Debited
(b)
Merchandise
Inventory
Merchandise

Inventory
Merchandise
Inventory
Accounts
Payable
Accounts
Payable
Accounts
Receivable

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

Merchandise
Inventory
Sales Returns
and Allowances
Cash

(c)
(a)

+$3,500 Asset
+$4,000 Liability
+$400 Asset
–$750 Asset
–$3,500 Asset
Asset
+$10,000 Revenue

+$4,000 Asset
+$600 Asset
+$1,000 Asset

+$400 Expense
+$750 Asset

+$6,000 Asset

Account Credited
(b)
(c)
Cash
–$3,500
Accounts
Payable
Cash

+$4,000
–$400

Merchandise

–$750
Inventory
Cash
–$3,430
Merchandise
Inventory
–$70
Sales
+$10,000

Merchandise
Inventory
Cash
Accounts
Receivable

–$4,000
–$600
–$1,000

Cost of
Goods Sold
Cash

–$400

Accounts
Receivable

–$6,000

–$750

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EXERCISE 5-3
(a)
Sept.

2 Merchandise Inventory (75 × $20) ..............................
Accounts Payable .................................................

1,500

10 Accounts Payable .......................................................
Merchandise Inventory ..........................................

40

11 Accounts Receivable (26 × $30) .................................
Sales .....................................................................

780

Cost of Goods Sold (26 × $20) ...................................
Merchandise Inventory ..........................................

520

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

30

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

20

21 Accounts Receivable (30 × $30) .................................
Sales .....................................................................

900

Cost of Goods Sold (30 × $20) ...................................
Merchandise Inventory ..........................................

600

29 Accounts Payable ($1,500 – $40)...............................
Cash ......................................................................

1,460

30 Cash ($900 – $9) ........................................................
Sales Discounts ($900 × 1%) .....................................
Accounts Receivable .............................................

891
9

1,500

40

780

520

30

20

900

600

1,460

900

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EXERCISE 5-3 (Continued)
(b)
Sept. 1
2
14
Sept. 30

Merchandise Inventory
Bal.
200 Sept.10
1,500
11
20
21
Bal.
560

Cost of Goods Sold
Sept. 11

520 Sept. 14
21
600
Sept. 30 Bal.
1,100

40
520
600

20

(c)
Number of calculators at September 30: 10 + 75 – 2 – 26 + 1 – 30 = 28
Cost of calculators at September 30: 28 × $20 = $560

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EXERCISE 5-4
(a)

April

3

6

7

8

30

(b)

April

12

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

28,000

Merchandise Inventory ..................................
Cash ........................................................

700

Supplies ........................................................
Accounts Payable ....................................

5,000

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

3,500

Accounts Payable ($28,000 – $3,500) ..........
Cash .......................................................

24,500

Accounts Payable ($28,000 – $3,500) ..........
Cash ($24,500 – $245) ............................
Merchandise Inventory ($24,500 × 1%) ...

24,500

28,000

700

5,000

3,500

24,500

24,255

245

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EXERCISE 5-5
(a)

April

3

April

28,000

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

19,000

28,000

19,000

6

No entry necessary - Freight costs paid by Olaf.

7

No entry necessary.

8

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

3,500

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

2,300

Cash ..............................................................
Accounts Receivable ($28,000 – $3,500)

24,500

Cash ($28,000 − $3,500 – $245)...................
Sales Discounts [($28,000 – $3,500) × 1%] ..

Accounts Receivable ($28,000 – $3,500)

24,255
245

30

(b)

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

12

3,500

2,300

24,500

24,500

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EXERCISE 5-6
(a)

Dec.

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

18,000

3 Cost of Goods Sold ............................................
Merchandise Inventory ..................................

10,000

18,000

10,000

7 No entry necessary.

(b)

(c)

Dec.

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

1,200

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

650

11 Cash ($16,800 – $336) .......................................
Sales Discounts [($18,000 – $1,200) × 2%] .......
Accounts Receivable ($18,000 – $1,200) .....

16,464
336

3 Merchandise Inventory .......................................
Accounts Payable .........................................

18,000

7 Merchandise Inventory .......................................
Cash ..............................................................

450

8 Accounts Payable ...............................................
Merchandise Inventory ..................................

1,200

11 Accounts Payable ($18,000 – $1,200)................
Merchandise Inventory
[($18,000 – $1,200) × 2%].........................
Cash ($16,800 – $336) .................................

16,800

Sales...................................................................................
Less: Sales returns and allowances ..................................
Sales discounts ........................................................
Net sales.............................................................................
Cost of goods sold ($10,000 – $650)..................................
Gross profit .........................................................................

1,200

650

16,800

18,000

450

1,200

336
16,464

$18,000
$1,200
336

1,536
16,464
9,350
$7,114

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EXERCISE 5-7
Account

Statement

Classification

Accounts payable
Accounts receivable
Accumulated depreciation

Statement of financial position Current liabilities
Statement of financial position Current assets
Statement of financial position Property, plant, and equipment
(contra account)
Administrative expenses
Income statement
Operating expenses
Buildings
Statement of financial position Property, plant, and equipment
Cash
Statement of financial position Current assets
Common shares
Statement of financial position Shareholders’ equity
Equipment
Statement of financial position Property, plant, and equipment
Income tax expense
Income statement
Income tax expenses
Interest expense
Income statement
Other revenues and expenses
Interest payable
Statement of financial position Current liabilities
Land
Statement of financial position Property, plant, and equipment
Merchandise inventory
Statement of financial position Current assets
Mortgage payable
Statement of financial position Non-current liabilities

Prepaid insurance
Statement of financial position Current assets
Property tax payable
Statement of financial position Current liabilities
Salaries payable
Statement of financial position Current liabilities
Sales
Income statement
Revenue
Sales discounts
Income statement
Revenue (contra account)
Sales returns and allowances Income statement
Revenue (contra account)
Unearned revenue
Statement of financial position Current liabilities

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EXERCISE 5-8
(a)

BLUE DOOR CORPORATION
Income Statement (Single-Step)
Year Ended December 31, 2015
Revenues
Sales ................................................................................
$2,400,000
Less: Sales returns and allowances .................. $41,000
Sales discounts ........................................ 8,500
49,500
Net sales ..........................................................................
2,350,500
Interest revenue ..............................................................
30,000
Rent revenue ..................................................................
24,000
Expenses
Cost of goods sold ...........................................................
$1,085,000
Salaries expense .............................................................
675,000
Depreciation expense ......................................................
125,000
Interest expense ..............................................................
70,000
Advertising expense .........................................................
55,000
Freight out ........................................................................
25,000
Insurance expense...........................................................
15,000

Profit before income tax ...............................................................................
Income tax expense .....................................................................................
Profit .............................................................................................................

$2,404,500

2,050,000
354,500
70,000
$ 284,500

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EXERCISE 5-8 (Continued)
(b)
BLUE DOOR CORPORATION
Income Statement (Multiple-Step)
Year Ended December 31, 2015
Sales ........................................................................................................ $2,400,000
Less: Sales returns and allowances .................................
$41,000

Sales discounts ......................................................
8,500
49,500
Net sales ..................................................................................................
2,350,500
Cost of goods sold....................................................................................
1,085,000
Gross profit ...............................................................................................
1,265,500
Operating expenses
Salaries expense .........................................................
$675,000
Depreciation expense ..................................................
125,000
Advertising expense .....................................................
55,000
Freight out ....................................................................
25,000
Insurance expense.......................................................
15,000
Total operating expenses ..............................................................
895,000
Profit from operations ...............................................................................
370,500
Other revenues and expenses
Interest revenue ..........................................................
$30,000
Rent revenue ...............................................................
24,000
Interest expense ..........................................................

(70,000)
(16,000)
Profit before income tax ...........................................................................
354,500
Income tax expense .................................................................................
70,000
Profit ......................................................................................................... $ 284,500

(c)

The Blue Door Corporation is classifying its expenses by function, which is a method
of classifying expenses by functional areas. For smaller companies such as this one,
the difference between classification of items on the income statement by function or
nature is not significant although if listed by nature, cost of goods sold would typically
be shown in two parts: goods purchased and changes in inventory.

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