CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

CHAPTER STUDY OBJECTIVES

1. Describe the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has merchandise inventory, sales revenue, cost of goods sold, gross profit, and operating expenses. A merchandising company has a longer operating cycle than a service company. Merchandising companies must decide if they want to spend the extra resources to use a perpetual inventory system in which inventory records are updated with each purchase and sale. The benefit of the perpetual system is that it provides better information and control over inventory than a periodic system in which inventory records are updated only at the end of the accounting period.

2. Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited (increased) for all purchases of merchandise and freight, if freight is paid by the buyer. It is credited (decreased) for purchase returns and allowances and purchase discounts. Purchase discounts are cash reductions to the net invoice price for early payment.

3. Prepare entries for sales under a perpetual inventory system using the earnings approach. When inventory is sold, two entries are required: (1) Accounts Receivable (or Cash) is debited and Sales is credited for the selling price of the merchandise. (2) Cost of Goods Sold (an expense) is debited (increased) and Merchandise Inventory (a current asset) is credited (decreased) for the cost of the inventory items sold. Contra revenue accounts are used to record sales returns and allowances and sales discounts. If the returned merchandise can be sold again in the future, an additional entry is made to increase Merchandise Inventory (a debit) and decrease Cost of Goods Sold (a credit). Freight costs paid by the seller are recorded as an operating expense. A contra revenue account is used to record sales discounts.

4. Perform the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company is also done for a merchandising company. An additional adjusting journal entry may be required under a perpetual inventory system. The Merchandise Inventory account must be adjusted to agree with the physical inventory count if there is a difference in the amounts. Merchandising companies have additional temporary accounts that must also be closed at the end of the accounting year.

5. Prepare single-step and multiple-step income statements. In a single-step income statement, all data are classified under two categories (revenues or expenses), and profit is determined by one step. A multiple-step income statement shows several steps in determining profit. Net sales is calculated by deducting sales returns and allowances, and sales discounts from sales. Next, gross profit is calculated by deducting the cost of goods sold from net sales. Profit (loss) from operations is then calculated by deducting operating expenses from gross profit. Total non-operating activities are added to (or deducted from) profit from operations to determine profit.

6. Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit (total profit) earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties.

7. Prepare entries for purchases and sales under a periodic inventory system using the earnings approach and calculate cost of goods sold (Appendix 5A). In a periodic inventory system, separate temporary expense and contra expense accounts are used to record (a) purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs paid by the buyer. Purchases − purchase returns and allowances − purchase discounts = net purchases. Net purchases + freight in = cost of goods purchased.

In a periodic inventory system, only one journal entry is made to record a sale of merchandise, (1) Accounts Receivable (or Cash) is debited and Sales is credited Cost of goods sold is not recorded at the time of the sale. Instead, it is calculated as follows at the end of the period after the ending inventory has been counted: Beginning inventory + cost of goods purchased = cost of goods available for sale. Cost of goods available for sale − ending inventory = cost of goods sold.

8. Prepare entries for sales in a perpetual inventory system using the contract-based approach (Appendix 5B). The contract-based approach to revenue recognition is used by companies that follow IFRS. The core principle of this approach is that revenue is recognized when a performance obligation is complete and the amount of revenue recorded is the consideration (i.e., Cash) a company expects to receive. Merchandisers that offer their customers a right of return are obligated to provide a refund if requested by the buyer. The seller will estimate the potential return from a customer at the time of sale and will credit the liability account Refund Liability. At the same time, the seller estimates the cost of expected returned merchandise and debits an account called Estimated Inventory Returns. Refund Liability and Estimated Inventory Returns are balance sheet accounts. Merchandisers that offer their customers a cash discount for prompt payment will determine the probability that a customer will take advantage of the discount and the sales revenue recorded is reduced accordingly. If the customer does not take advantage of the discount, Sales revenue is credited to reflect the additional amount received.

Exercises

Exercise 1

Below are four independent scenarios:

1. A store manager checks the computer system to determine if there is enough inventory to fill a customer order.

2. A year-end inventory count is completed to determine the cost of goods sold.

3. A month-end inventory count is completed to verify the accuracy of the inventory balances.

4. As inventory is received, all items are scanned and input immediately into the inventory records.

Instructions

For each scenario determine if a perpetual or a periodic inventory system is used.

Exercise 2

Listed below are various accounts:

1. Merchandise inventory

2. Salaries expense

3. Cost of goods sold

4. Depreciation

5. Supplies

6. Advertising expense

7. Sales revenue

8. Insurance expense

9. Gross profit

10. Rent expense

Instructions

State which accounts would be classified as operating expenses.

Exercise 3

Discuss the difference between the periodic and perpetual inventory systems.

Exercise 4

Quigley Landscaping sells mowers and other lawn maintenance equipment. The following information relates to its inventory of mowers, which is accounted for using the perpetual inventory method:

June 3 Purchased 35 mowers at $ 400 each from Greensborough Equipment; terms 2/10, net 30, FOB shipping point.

4 The correct company paid freight of $ 1,200 on the June 4 purchase.

10 Returned 4 of the mowers purchased on June 3.

30 Paid the Greensborough account in full.

Instructions

a) Prepare the journal entries to record these transactions.

b) Determine the ending balance in the Merchandise Inventory account at June 30. (There was no inventory at the beginning of the period.)

c) Determine what the ending balance would be if Quigley had paid the Greensborough account on June 12 instead of on June 30.

Exercise 5

Below are six independent scenarios:

1. Krusty company sells DVDs to Sunny industries, FOB destination.

2. Bell purchases various products, FOB shipping point.

3. Yogi Company orders 500 yoga mats. Yogi has recorded the freight charges of $ 200 to inventory.

4. No Fees Company sells products with a promise that they will ensure all products reach their destination free of charge to the customer.

5. Thor Company advises all customers that they only ensure products meet the specified shipping point.

6. Easy Does It Company purchases 700 chairs, FOB shipping point.

Instructions

For each scenario determine who is responsible for paying and recording the freight charges: Buyer (B) or Seller (S).

Exercise 6

Below are five independent scenarios:

1. $ 50 discount for each 100 products ordered

2. $ 100 discount for accounts paid within 30 days

3. 5% discount for purchases over $ 1,000

4. 10% discount for purchases paid for in full in 10 days

5. $ 1,000 discount for purchases made in excess of $ 10,000

Instructions

State whether each item is a quantity discount (Q) or a purchase discount (P).

Exercise 7

Sandy Company purchases various types of beach toys for sale to consumers. Listed below are the transactions for the month of June. Sandy uses a perpetual inventory system.

June 1 Purchased 18 water tubes for $ 250 each terms n/30 FOB destination.

8 Returned 2 tubes purchased on June 1 due to defects. Received a full refund for the defective tubes.

10 Freight charges of $ 85 for the June 1 transaction are paid by the responsible party.

11 Made a complaint about competitive pricing. Received a $ 200 credit for the water tubes purchased on June 1.

15 Purchased 92 water tubes for $ 225 each terms 2/10 n/30.

18 Made payment for the amount owing for the June 1 transaction.

20 Made payment for the amount owing for the June 15 transaction.

Instructions

a) Journalize the transactions using the perpetual inventory system.

b) Determine the balance of the Inventory account for June. (There was no inventory at the beginning of the period.)

Exercise 8

Griffin Company purchases and resells various electronics to consumers. Listed below are the transactions for the month of September. Griffin has a beginning inventory balance of $ 5,900 at September 1.

Sep. 1 Purchased $ 11,000 of merchandise inventory; terms 1/15, n/30.

7 Purchased for cash $ 9,900 of merchandise inventory.

9 Contacted a major supplier to place an order for $ 55,000 to be shipped on October 31.

10 Purchased $ 16,500 of merchandise inventory; terms 2/15, n/45.

11 Purchased $ 2,700 of supplies; terms n/15.

15 Paid for the merchandise purchased on September 1.

18 Paid for the supplies purchased on September 11.

Oct. 20 Paid for the September 10 purchase.

Instructions

a) Journalize the transactions using the perpetual inventory system.

b) Determine the balance of the Inventory account at September 30.

Exercise 9

50 Cent Lollypops purchases and resells assorted candies to consumers. Listed below are the transactions for the month of September. 50 Cent has a beginning inventory balance of $ 6,350 at September 1.

Sep. 2 Purchased $ 11,000 of merchandise inventory; terms 1/15, n/30.

5 Sold all merchandise inventory included in the opening balance September 1 for $ 8,500 cash.

7 Purchased for cash $ 9,900 of merchandise inventory.

10 Purchased $ 16,500 of merchandise inventory; terms 2/15, n/45.

11 Sold all merchandise inventory originally purchased on September 2 for $ 18,500 on account.

18 Paid for the merchandise purchased on September 2.

18 Paid for the September 10 purchase.

Instructions

a) Journalize the transactions using the perpetual inventory system.

b) Determine the balance of the Inventory account at September 30.

Exercise 10

On September 1, Boathouse Marine had an inventory of 20 boats at a cost of $ 1,800 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred:

Sep. 3 Purchased 40 boats at $ 1,800 each from Hillside Fibreglass. The boats were shipped FOB destination terms n/30.

3 The appropriate party paid the freight costs.

6 Received credit of $ 7,200 for the return of 4 boats purchased on September 3 that were defective.

7 Paid for the September 3 purchase.

9 Sold 20 boats for $ 3,000 each to Billington Yacht Club on credit.

13 Cash sale of 15 boats for $ 3,000 each to Birch Island Ferry.

21 Purchased 25 boats at $ 1,800 each from Johnson Supply terms n/30.

Instructions

a) Journalize the September transactions for Boathouse Marine, using a perpetual inventory system.

b) Determine the number of boats the company should have remaining on September 30.

Exercise 11

On September 1, Stanton Supply had an inventory of 20 backpacks at a cost of $ 18 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred:

Sep. 3 Purchased 40 backpacks at $ 20 each from Janzen terms n/30. Received a 10% quantity discount.

6 Received credit of $ 72 for the return of 4 backpacks purchased on September 3 that were defective.

7 Paid for the September 3 purchase.

9 Sold 20 backpacks for $ 30 each to McGill Books terms n/30.

13 Cash sales of 15 backpacks for $ 30 each to Calvin Office Supply.

21 Purchased 25 backpacks at $ 18 each from Coleman Company terms 2/10, n/30.

30 A physical inventory count indicated an ending inventory balance of $ 774.

Instructions

Journalize the September transactions for Stanton Supply, using a perpetual inventory system.

Exercise 12

On October 1, Keiler Motorcycle Shop had an inventory of 20 dirt bikes at a cost of $ 1,150 each. During the month of October, the following transactions occurred:

Oct. 3 Purchased 10 bikes at a cost of $ 1,150 each from Lyons Bike Company, terms n/30.

6 Sold 10 bikes for $ 1,500 each, terms n/30.

6 Freight of $ 250 on the October 6 sale was FOB shipping point.

7 Received credit from Lyons Bike Company for the return of 2 defective bikes.

19 Purchased 8 bikes from Huffy Cycle Company at a cost of $ 1,125 each, terms 2/10, n/30.

20 Freight of $ 220 on the October 19 purchase was FOB shipping point.

29 Paid for the October 19 purchase.

Instructions

Using a perpetual inventory system, prepare the journal entries to record the transactions.

Exercise 13

ToneLife Music sells musical instruments. The following data relates to ToneLife’s inventory of guitars. On January 1, 2021, ToneLife had 12 guitars in inventory at a cost of $ 250 each. During January, the following transactions occurred:

Jan. 1 Purchased 15 guitars at $ 250 each from International Music Centre (IMC) on account, terms n/30

4 Sold 2 guitars for cash at $ 370 each.

6 One of the two guitars sold on January 4 was returned because it was defective. A full cash refund was paid.

7 The defective guitar was returned to IMC for a credit on account.

16 Sold 21 guitars at $ 300 on account, terms 2/10, n/30.

18 Purchased 10 guitars from IMC for $ 250 each on account, terms n/30.

25 Paid the full amount owing to IMC.

26 Collected the balance owing from the January 16 sale.

Instructions

Using the perpetual inventory system, prepare the journal entries to record ToneLife Music’s January transactions.

Exercise 14

High Roller sells gold necklaces. On December 1, 2021, High Roller had 230 necklaces in inventory at a cost of $ 120 each. During December, the following transactions occurred:

Dec. 1 Purchased 500 necklaces at $ 120 each from Mountain Gold Fashions on account, terms net 30.

4 Returned 30 necklaces purchased from Mountain because they were defective.

9 Paid the balance due on the Mountain account payable.

12 Sold 600 necklaces for $ 250 each, terms n/30, FOB destination.

13 Freight of $ 250 on the December 12 sale paid by the appropriate party.

16 Purchased 150 necklaces from Green Wholesale Jewellers for $ 120, terms n/30.

17 Sold 30 necklaces for cash, $ 325 each.

Instructions

Using the perpetual inventory system, prepare the journal entries to record the transactions.

Exercise 15

Martin Sports Equipment sells a variety of sports items. The following data relates to Martin’s inventory of golf club sets. Martin is a private company following ASPE and recognizes revenue using the earnings approach. On March 1, 2021, Martin had 22 sets of clubs in inventory at a cost of $ 395 each. During March, the following transactions occurred:

Mar 2 Sold 7 sets of clubs on account to Flex Golf Club for $ 560 each, terms 2/10 n/30.

4 Flex Golf Club returned 2 sets of clubs. Martin returned the clubs to inventory.

11 Flex Golf Club paid the account in full.

15 Purchased 8 sets of clubs from Taylor Sports Canada at $ 395, terms n/30.

17 Freight of $ 600 on the purchase from Taylor was FOB destination and was paid by the appropriate party.

18 Sold 6 sets of clubs at $ 560 each for cash, and gave a 5% discount to the customer for paying cash.

22 Purchased 11 sets of clubs from Lopez Golf for $ 400 each. Terms 3/10 net/30.

24 Returned one set of clubs to Lopez Golf because they were defective.

31 Paid the Lopez Golf account.

Instructions

Using the perpetual inventory system, prepare the journal entries to record the transactions. Round amounts to the nearest dollar.

Exercise 16

The following information is for Cappelio Appliance Company, which uses the perpetual inventory system:

June 2 Sold 70 toaster ovens to the Motor Inn for $ 7,700 on account. Credit terms: n/30. Quantity discounts of 10% are given on all orders of 65 or more items. Cost of each toaster oven was $ 50.

5 Cash sales of 50 toaster ovens amounted to $ 5,500. Cost was $ 50 each.

8 Credited the Motor Inn account for $ 495 as an adjustment on 5 damaged units purchased by the Motor Inn on June 2. The units cost $ 250 and were scrapped.

15 Received a cheque from the Motor Inn in full payment of its account.

Instructions

Record the above transactions in the general journal.

Exercise 17

Jabari Company produces and sells various types of beach toys. Jabari is a private company following ASPE and recognizes revenue using the earnings approach Listed below are the transactions for the month of June:

June 1 Sold 18 water tubes for $ 250 each terms n/30 FOB destination. Each tube cost $ 95.

8 Customer returned 2 tubes due to defects. Issued a full refund and scrapped the defective tubes.

10 Freight charges of $ 85 paid by the responsible party.

11 Customer complained about competitive pricing. Granted customer a $ 200 credit for tubes purchased.

15 Sold 92 tubes for $ 225 each terms 2/10 n/30. Each tube cost $ 95.

18 Received payment in full for June 1 transaction.

20 Received payment in full for June 15 transaction.

Instructions

a) Journalize transactions using the perpetual inventory system. Round amounts to the nearest dollar.

b) Determine the amount of net sales to be reported on the income statement of Jabari Company.

Exercise 18

Jan Jenga Company manufactures and sells various kids toys. Jan Jenga is a public company following IFRS and records revenue using the contract-based approach. The company estimated that its product return rate is 15%. Listed below are the transactions for the month of September:

Sep. 2 Sold merchandise on account with a cost of $ 1,500 for $ 2,100; terms 2/10, n/30, FOB destination.

7 Paid $ 225 in cash to ship the merchandise sold on September 2.

9 The customer of September 2 returned half of the amount purchased because it was the incorrect product; it was returned to inventory.

15 Sold merchandise to a customer on account for $ 3,800 that cost $ 2,280; terms 2/10, n/30, FOB destination.

16 Collected the amount owing from the customer of September 2.

19 Sold merchandise to a customer for cash of $ 1,200 that cost $ 720.

22 The customer of September 15 paid the amount owing.

Instructions

a) Journalize transactions using the perpetual inventory system.

b) Determine the amount of net sales to be reported on the income statement of Jan Jenga Company.

Exercise 19

On June 1, Bridgette sold merchandise on account to Nepal for $ 16,000, terms 2/10, net 30. Bridgette acquired this merchandise inventory at a cost of $ 8,750. On June 10, Nepal returned merchandise with a sales price of $ 500. The merchandise that was returned could not be resold and was sent to recycling. On June 11, Bridgette received payment from Nepal for the balance due.

Instructions

Prepare journal entries to record the transactions for Bridgette under a perpetual inventory system.

Exercise 20

Moca Capa Company sells beverage supplies. The following transactions occurred during the month of November:

Nov. 4 Sold merchandise for $ 800 on account to Java Joe, terms 2/10, n/30, FOB destination. The original cost of the merchandise to Moca Capa was $ 300.

5 The correct company paid freight charges of $ 30.

8 Java Joe returned goods with a selling price of $ 100 and a cost of $ 38. The goods are restored to inventory.

14 Received the correct payment from Java Joe.

Instructions

Prepare journal entries to record the transactions for Moca Capa Company under a perpetual inventory system.

Exercise 21

The trial balance of Luigi Fur Company at its year end of December 31 shows Cash $ 376,560; Merchandise Inventory $ 76,000; Luigi, Capital $ 420,000; Sales $ 365,500; Sales Discounts $ 1,990; Cost of Goods Sold $ 201,000; Rental Revenue $ 14,000; Freight Out $ 4,200; Rent Expense $ 14,750; Salaries Expense $ 45,000; and Luigi, Drawings $ 80,000. Luigi Fur Company’s statement of owner’s equity for the year showed profit of $ 112,560 and closing owner’s capital of $ 452,560.

Instructions

1. Prepare the closing entries for the above accounts.
2. Create T accounts for Income Summary and Luigi, Capital, and post the closing entries to these T accounts.

Exercise 22

The adjusted trial balance of Small Book Company appears below. The company uses a perpetual inventory system.

SMALL BOOK COMPANY

Adjusted Trial Balance

December 31, 2021

Debit Credit

Cash $ 3,400

Accounts receivable 15,000

Merchandise inventory 35,000

Equipment 150,000

Accumulated depreciation—equipment $ 20,000

Accounts payable 12,000

GST recoverable 1,000

GST payable 1,400

J. Small, capital 132,000

J. Small, drawings 20,000

Sales 250,000

Sales returns and allowances 14,000

Cost of goods sold 140,000

Rent expense 16,000

Salaries expense 21,000 _______

$ 415,400 $ 415,400

Instructions

Prepare the end of the year closing entries.

Exercise 23

The adjusted trial balance of Singh Company includes the following income statement accounts:

Debit Credit

Sales $ 550,000

Sales Returns and Allowances $ 27,000

Cost of Goods Sold 346,400

Freight Out 2,000

Advertising Expense 15,000

Rent Expense 19,000

Salaries Expense 45,000

Utilities Expense 18,000

Depreciation Expense 7,500

It also includes the following accounts:

Debit Credit

Merchandise Inventory $ 42,000

M. Singh, Capital $ 50,000

M. Singh, Drawings 38,000

Singh Company uses a perpetual inventory system.

Instructions

Prepare the closing entries for Singh Company.

Exercise 24

The following is a random list of the accounts and their balances for Gordon Auto Sales (a proprietorship owned by A. Gordon) on December 31, 2021. The company uses a perpetual inventory system.

Accounts Payable $ 426,000

Merchandise Inventory 652,500

Sales 2,500,000

Interest Expense 2,500

Salary Expense 275,000

Cost of Goods Sold 1,950,000

Cash 53,000

A. Gordon, Capital 35,000

A. Gordon, Drawings 20,000

Accounts Receivable 8,000

A physical count of inventory on December 31, 2021 reveals $ 671,575 on hand.

Instructions

a) Prepare the entry to adjust inventory.

b) Prepare the closing entries on December 31, 2021.

c) Prepare the post-closing trial balance.

Exercise 25

Fahar Company has a current inventory balance of $ 864,200.

Instructions

Prepare the ending inventory adjustment required assuming a year-end inventory account revealed the following balance:

a) $ 862,500

b) $ 922,600

c) $ 864,200

Exercise 26

Fahar Company has an inventory balance of $ 903,950 on December 31, 2021. During 2022 Fahar purchased merchandise for $ 97,500 and sold merchandise that had a cost of $ 714,220.

Instructions

a) Prepare the adjusting entry assuming the inventory count on December 31, 2021 revealed a balance of $ 914,450.

b) Prepare the adjusting entry assuming the inventory count on December 31, 2022 revealed a balance of $ 292,370.

Exercise 27

Using a perpetual inventory system, state the missing items identified by?.

1. Net sales – Cost of goods sold =?

2. Gross profit – Operating expenses =?

3. Sales –? –? = Net sales

4. Profit from operations +? –? = Profit

5. Cost of goods sold + Gross profit on sales =?

Exercise 28

Two items are missing in each of the following columns and are identified by a letter.

Sales $ a) $ 900,000

Sales returns and allowances 22,000 35,000

Net sales 490,000 c)

Cost of goods sold 240,000 610,000

Gross profit b) d)

Instructions

Assuming the company uses a perpetual inventory system, calculate the missing amounts and identify them by letter.

Exercise 29

The adjusted account balances of Johanna Ltd. at December 31, 2021, are as follows:

Accounts receivable $ 6,000 Bank overdraft $ 2,300

Notes receivable 6,000 Accounts payable 11,000

Merchandise inventory 17,600 Notes payable 56,800

Equipment 74,000 Accumulated depreciation—

Depreciation expense 22,900 equipment 9,200

J. Johanna, drawings 16,000 Sales 62,500

Maintenance expense 2,200 Rent revenue 10,000

Sales discounts 3,300 J. Johanna, capital 18,000

Cost of goods sold 20,000

Sales returns and allowances 1,800 ________

$ 169,800 $ 169,800

Instructions

a) Prepare a multi-step income statement for the year ended December 31, 2021.

b) Prepare closing entries for December 31, 2021.

c) Prepare a post-closing trial balance at December 31, 2021.

Exercise 30

Raji’s Hardware’s trial balance at its year end of December 31, 2021, is provided below. Raji’s uses the perpetual inventory system. A count of the inventory on hand shows the actual amount on hand is $ 26,500. All other year-end adjusting entries have been made.

RAJI’S HARDWARE

Trial Balance

December 31, 2021

Cash $ 3,500

Accounts receivable 9,250

Merchandise inventory 26,100

Long-term investment 10,000

Accounts payable $ 11,100

Interest payable 100

Note payable, due 2024 5,000

J. Raji, Capital 10,270

J. Raji, Drawings 6,000

Sales 195,000

Sales returns and allowances 620

Sales discounts 300

Cost of goods sold 122,500

Salaries expense 26,000

Advertising expense 4,500

Rent expense 12,600

Interest expense 100 _______

$ 221,470 $ 221,470

Instructions

a) Prepare the adjusting entry to record the correct inventory amount.

b) Prepare the closing entries.

c) Prepare a multiple-step income statement for Raji’s Hardware.

Exercise 31

The following information is taken from the general ledger of Ben’s BMX Bikes at September 30, 2021:

Accounts payable $ 3,900

Accounts receivable 2,150

B. Toews, capital 6,920

B. Toews, drawings 5,000

Cash 1,180

Cost of goods sold 45,800

Freight out 1,000

Insurance expense 720

Merchandise inventory 5,800

Rent expense 4,800

Salaries expense 12,620

Sales revenue 68,500

Sales returns and allowances 250

A physical count of the inventory indicates that the actual amount on hand is $ 5,450. Ben’s uses the perpetual inventory system.

Instructions

a) Prepare the journal entry to adjust inventory.

b) Prepare the closing entries.

c) Prepare the post-closing trial balance.

d) Prepare a multiple-step income statement.

e. Calculate Ben’s gross profit margin.

Exercise 32

Financial information is provided for three different businesses:

Company A Company B Company C

Sales $ 45,000 $ 18,200 i)

Sales returns and allowances 350 e) 1,200

Net sales a) 18,095 119,100

Cost of goods sold b) 10,100 j)

Gross profit 17,650 f) 61,100

Operating expenses 10,000 5,000 k)

Profit from operations c) g) l)

Other income d) 1,200 3,500

Profit $ 8,150 h) $ 16,000

Instructions

Calculate the missing amounts.

Exercise 33

Forest Company gathered the following condensed data for the year ended December 31, 2021:

Cost of goods sold $ 684,000

Net sales 1,250,000

Operating expenses 284,000

Interest expense 58,000

Dividend revenue 38,000

Loss from employee strike 233,000

The company uses a perpetual inventory system.

Instructions

Prepare a single-step income statement in good form.

Exercise 34

Kingbridge Range Company has sales in 2021 of $ 2,650,000. During the year, the company had $ 50,000 in sales returns and $ 30,000 in sales discounts. The cost of these sales was $ 1,800,000. Operating expenses excluding salaries and wages were $ 150,000 and salaries and wages incurred during the year were $ 300,000. Kingbridge uses a perpetual inventory system.

Instructions

Prepare a multiple-step income statement for Kingbridge Range Company for the year ended December 31, 2021.

Exercise 35

The adjusted trial balance of Cochrane Company includes the following accounts:

Debit Credit

Sales $ 595,000

Sales Returns and Allowances $ 47,000

Cost of Goods Sold 371,400

Salaries Expense 47,000

Advertising Expense 10,000

Rent Expense 18,000

Freight Out 7,000

Utilities Expense 12,000

Depreciation Expense 12,500

Interest Revenue 4,000

Loss Due to Vandalism 3,000

The company uses a perpetual inventory system.

Instructions

Prepare a multiple-step income statement for the year ended December 31, 2021.

Exercise 36

Financial information is presented here for two companies:

Pippy Company Hum Company

Sales $ 90,000 ?

Sales Returns ? $ 5,000

Net Sales 81,000 95,000

Cost of Goods Sold 56,000 ?

Gross Profit ? 38,000

Operating Expenses 15,000 ?

Profit ? 15,000

Instructions

a) Fill in the missing amounts. Show all calculations.

b) Calculate the gross profit margin and profit margin for each company.

Exercise 37

Presented below is the adjusted trial balance of Katie’s Pet Supplies as at its fiscal year end, June 30, 2021. All accounts are their normal balance (debit or credit). Katie’s uses the perpetual inventory system.

Accounts payable $ 34,850 K. Milani, capital $ 50,770

Accounts receivable 27,300 K. Milani, drawings 24,000

Accum. depreciation, computers 1,500 Long-term note receivable 14,000

Accum. depreciation, equipment 32,000 Merchandise inventory 55,000

Advertising expense 3,200 Note payable, due 2022 47,000

Cash 9,500 Prepaid rent 1,500

Computers 4,500 Rent expense 14,000

Cost of goods sold 195,000 Salaries expense 46,800

Depreciation expense 4,000 Salaries payable 6,200

Equipment 80,000 Sales discounts 100

Freight out 6,200 Sales returns and allowances 1,000

Insurance expense 2,200 Sales revenue 320,000

Interest expense 2,350 Supplies 900

Interest payable 280 Supplies expense 1,750

Interest revenue 700

Instructions

a) Prepare a single-step income statement.

b) Prepare a multiple-step income statement.

c) Calculate Katie’s gross profit margin. Katie’s gross profit margin for 2020 was 45%. Comment on the change in gross profit margin from the prior year.

Exercise 38

The adjusted account balances of Johanna Ltd. at December 31, 2021, are as follows:

Accounts receivable 6,000 Bank overdraft $ 2,300

Notes receivable 6,000 Accounts payable 11,000

Merchandise inventory 17,600 Notes payable 56,800

Equipment 74,000 Accumulated depreciation—

Depreciation expense 22,900 equipment 9,200

J. Johanna, drawings 16,000 Sales 62,500

Maintenance expense 2,200 Rent revenue 10,000

Sales discounts 3,300 J. Johanna, capital 18,000

Cost of goods sold 20,000

Sales returns and allowances 1,800 _______

$ 169,800 $ 169,800

Instructions

a) Prepare a multi-step income statement for the year ended December 31, 2021.

b) Compute the gross profit margin and profit margin for Johanna Ltd. (round to the nearest whole percentage).

Exercise 39

Kingbridge Range Company has sales in 2021 of $ 2,650,000. During the year, the company had $ 80,000 in sales returns. The cost of these sales was $ 1,800,000. Operating expenses excluding salaries and wages were $ 150,000 and salaries and wages incurred during the year were $ 300,000. Kingbridge uses a perpetual inventory system.

Instructions

Calculate Kingbridge Range Company’s gross profit margin and profit margin for 2021.

Exercise 40

Tantramar Shipbuilding Company had the following information available at its year end September 30, 2021.

Advertising Expense 15,000

Cost of Goods Sold 476,500

Depreciation Expense 41,000

Freight Out 7,500

Interest Revenue 11,000

Salaries Expense 65,000

Supplies 6,000

Supplies Expense 7,500

Sales 750,000

Sales Discounts 12,800

Sales Returns and Allowances 25,700

Instructions

a) Calculate the gross profit margin for Tantramar.

b) Calculate the profit from operations for Tantramar.

c) Calculate the profit margin for Tantramar.

d) List three actions that Tantramar could take to increase its profit margin.

e) If last year’s gross profit margin was 39%, comment on the company’s results this year.

Exercise 41

Hernandez Clothing Store employs the perpetual inventory system and prepares monthly financial statements with an October 31 year end. All accounts have been adjusted except for merchandise inventory. A physical count of merchandise inventory on November 30, 2021, indicates that $ 21,000 was on hand. A partial listing of account balances follows:

Accounts Receivable $ 9,000

Merchandise Inventory 23,000

Commissions Expense 600

Sales Returns and Allowances 1,800

Freight Out 1,200

Cost of Goods Sold 31,000

Sales 55,000

Instructions

a) Prepare a partial income statement for Hernandez Clothing Store for the month ended November 30, 2021. The income statement should show items through the gross profit category.

b) Calculate Hernandez’s gross profit margin for November, 2021.

Exercise 42

The following information is taken from the financial statements of Down Home Deli for the past three years. The owner, John Walton is quite pleased to see that his sales are growing steadily.

2021 2020 2019

Sales $ 61,500 $ 50,400 $ 42,000

Cost of goods sold 27,670 21,170 16,800

Profit from operations 7,530 6,050 4,620

Profit 3,075 4,030 2,940

Instructions

a) Calculate gross profit margin, profit margin, and profit margin using profit from operations.

b) Comment on whether the Deli is, in fact, doing better over the three years as John believes.

*Exercise 43

The Cost of Goods Sold sections of three companies’ financial statements are provided below. All of the companies use the periodic inventory method.

A B C

Beginning inventory $ 1,100 $ 90 $ 580

Purchases 105,000 e) 49,700

Purchase returns and allowances 3,500 110 750

Purchase discounts a) 65 230

Net purchases 101,030 6,665 h)

Freight in b) f) 990

Cost of goods purchased 103,080 6,875 i)

Cost of goods available for sale c) g) j)

Ending inventory d) 125 840

Cost of goods sold 102,400 6,840 k)

Instructions

Determine the missing amounts.

*Exercise 44

On January 1, University Supplies had an inventory of 30 MP3 Players at a cost of $ 80 each. The company uses a periodic inventory system. During January the following transactions occurred:

Jan 7 Purchased 60 MP3 players at $ 75 each from Digital Co. for cash.

9 Paid freight of $ 80 on the MP3 players purchased from Digital Co.

10 Returned two players to Digital Co. for $ 150 because they did not meet specifications.

12 Sold 26 MP3 players costing $ 80 (including freight) for $ 120 each, terms n/30.

14 Granted credit on account to customer of January 12 for $ 120 related to the return of one MP3 player.

Instructions

Journalize the January transactions.

*Exercise 45

Consider the information in Exercise 44. On January 31, a physical count revealed 63 MP3 players on hand: five at a cost of $ 80, and the remainder at a cost of $ 75.

Instructions

Calculate the cost of goods sold for January.

*Exercise 46

On October 1, Ki's Bicycle Store had an inventory of 10 mountain bicycles at a cost of $ 150 each. During the month of October, the following transactions occurred:

Oct 3 Purchased 20 bicycles at a cost of $ 150 each from the Lyons Bicycle Company, terms n/30.

6 Sold 20 bicycles to Team Canada for $ 250 each, terms n/30.

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

19 Purchased 10 BMX bicycles from Huffy Bicycle Company at a cost of $ 125 each, terms n/30.

20 Paid freight of $ 80 on the October 19 purchase.

Instructions

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

*Exercise 47

Rebecca’s Equestrian Supplies sells riding saddles. On July 1, 2021, Rebecca had 9 saddles in inventory at a cost of $ 900 each. During July, the following transactions occurred:

Jul. 1 Purchased 5 saddles at $ 900 each from North Country Equipment on account, terms net 30.

4 Returned 1 of the saddles purchased from North Country because it was defective.

9 Paid the balance due on the North Country account payable.

12 Sold 8 saddles for $ 1,250 each, terms n/30.

13 Paid freight of $ 250 on the July 12 sale.

16 Purchased 7 saddles from Anders Tack Suppliers for $ 900 each, terms n/30.

17 Sold 6 saddles for cash, $ 1,080 each.

31 Counted the saddles on hand and determined the total cost of the remaining inventory was $ 5,650.

Instructions

a) Using the periodic inventory system, prepare the journal entries to record the transactions.

b) Calculate the July cost of goods sold.

c) Calculate Rebecca’s gross profit margin.

*Exercise 48

Millwood Framing sells picture frames. On February 1, 2021, Millwood had 420 frames in inventory at a cost of $ 10.50 each. During February, the following transactions occurred:

Feb. 2 Sold 355 frames on account for $ 24 each, terms 2/10 n/30.

11 Customer paid the account in full.

15 Purchased 250 frames from Mitch’s Art Supplies at $ 10.50, terms n/30.

17 Freight of $ 600 on the purchase from Mitch’s was FOB destination and was paid by the appropriate party.

18 Sold 200 frames at $ 25 each for cash, providing a 5% cash discount to the customer.

19 Purchased 90 frames from Canada Wood Products for $ 10.71 each. Terms 2/10 net/30.

21 Returned 5 frames to Canada Wood Products because they were defective.

27 Paid the Canada Wood Products account within the discount period.

28 Counted the remaining inventory and determined that it has a value of $ 2,365.

Instructions

a) Using the periodic inventory system, prepare the journal entries to record the transactions.

b) Calculate the cost of goods sold in February.

c) Calculate the gross profit and gross profit margin for February.

Exercise 49

Carter Company purchases and resells various electronics to consumers. Listed below are the transactions for the month of September. Carter has a beginning inventory balance of $ 5,900 at September 1.

Sep. 1 Purchased $ 11,000 of merchandise inventory; terms 1/15, n/30.

7 Purchased for cash $ 9,900 of merchandise inventory.

9 Contacted a major supplier to place an order for $ 55,000 to be shipped on October 31.

10 Purchased $ 16,500 of merchandise inventory; terms 2/15, n/45.

11 Purchased $ 2,700 of supplies; terms n/15.

15 Paid for the merchandise purchased on September 1.

18 Paid for the supplies purchased on September 11.

Oct. 20 Paid for the September 10 purchase.

Instructions

a) Journalize transactions using the periodic inventory system.

b) Assume that Carter’s year end is September 30 and that the physical inventory count revealed that inventory on hand carries a cost of $ 41,500. Prepare the appropriate closing entries required to update the inventory account.

Exercise 50

Jan Jenga Company manufactures and sells various kids toys. Listed below are the transactions for the month of September:

Sep 2 Sold merchandise on account for $ 2,100; terms 2/10, n/30, FOB destination.

7 Paid $ 225 in cash to ship the merchandise sold on September 2.

9 The customer of September 2 returned half of the amount purchased because it was the incorrect product; it was returned to inventory.

15 Sold merchandise to a customer on account for $ 3,800; terms 2/10, n/30, FOB destination.

16 Collected the amount owing from the customer of September 2.

19 Sold merchandise to a customer for cash of $ 1,200.

22 The customer of September 15 paid the amount owing.

Instructions

a) Journalize transactions using the periodic inventory system.

b) Assume that Jan Jenga’s year end is September 30 and that the physical inventory count revealed that inventory on hand carries a cost of $ 29,900. Prepare the appropriate closing entries required to update the inventory account. The last time the inventory was counted was during the prior year-end procedures which totalled $ 35,250.

Exercise 51

The following information is for Cappelio Appliance Company, which uses the perpetual inventory system:

Jun. 2 Sold 70 toaster ovens to the Motor Inn for $ 7,700 on account. Credit terms: n/30. Quantity discounts of 10% are given on all orders of 65 or more items. Cost of each toaster oven was $ 50. Cappelio provides a flexible return policy and expects a sales return rate of 10%.

5 Cash sales of 50 toaster ovens amounted to $ 5,500. Cost was $ 50 each.

8 Credited the Motor Inn account for $ 495 as an adjustment on 5 damaged units purchased by the Motor Inn on June 2. The units cost $ 225 and were scrapped.

15 Received a cheque from the Motor Inn in full payment of its account.

Instructions

Record the following transactions in the general journal.

Exercise 52

Fairway Sports Equipment sells a variety of sports items. The following data relates to Fairway’s inventory of golf club sets. On March 1, 2021, Fairway had 22 sets of clubs in inventory at a cost of $ 395 each. Management expects approximately 10% of sales to be returned. During March, the following transactions occurred:

Mar. 2 Sold 7 sets of clubs on account to Flex Golf Club for $ 560 each, terms, n/30.

4 Flex Golf Club returned 2 sets of clubs. Fairway returned the clubs to inventory.

11 Flex Golf Club paid the account in full.

15 Purchased 8 sets of clubs from Taylor Sports Canada at $ 395, terms n/30.

17 Freight of $ 600 on the purchase from Taylor was FOB destination and was paid by the appropriate party.

18 Sold 6 sets of clubs at $ 530 each for cash

22 Purchased 11 sets of clubs from Lopez Golf for $ 400 each. Terms 3/10 net/30.

24 Returned one set of clubs to Lopez Golf because they were defective.

31 Paid the Lopez Golf account.

Instructions

Using the perpetual inventory system and the contract-based approach, prepare the journal entries to record the transactions. Round all amounts to the nearest dollar.

Exercise 53

Beachy Company produces and sells various types of beach toys. The company provides a flexible return policy and management estimates that returns will approximate 15%. Listed below are the transactions for the month of June:

June 1 Sold 18 water tubes for $ 250 each terms n/30 FOB destination. Each tube cost $ 95.

8 Customer from June 1 returned 2 tubes due to defects. The defective tubes were scrapped.

10 Freight charges of $ 85 paid by the responsible party.

15 Sold 92 tubes for $ 225 each terms n/30. Each tube cost $ 95.

18 Received payment in full for June 1 transaction.

20 Received payment in full for June 15 transaction.

Instructions

Journalize transactions using the perpetual inventory system and the contract-based approach to revenue recognition.

Exercise 54

On June 1, Bridgette sold merchandise on account to Nepal for $ 16,000, net 30. Bridgette acquired this merchandise inventory at a cost of $ 8,750. Bridgette has a stated return policy of 10 days from the date of sale and estimates that returns will be 5% of sales. On June 10, Nepal returned merchandise with a sales price of $ 800 and a cost of $ 438. The goods were returned to inventory. On June 30, Bridgette received payment from Nepal for the balance due.

Instructions

Prepare journal entries to record the transactions for Bridgette under a perpetual inventory system using the contract-based approach.

Exercise 55

Moca Capa Company sells beverage supplies. The company has a return policy of 10 days from the date of sale. Moca Capa’s management estimates that returns will be 15% of sales. The following transactions occurred during the month of November:

Nov. 4 Sold merchandise for $ 800 on account to Java Joe, n/30, FOB destination. The original cost of the merchandise to Moca Capa was $ 300.

5 The correct company pays freight charges of $ 30.

8 Java Joe returned goods with a selling price of $ 100 and a cost of $ 38. The goods are restored to inventory.

14 Received the correct payment from Java Joe.

Instructions

Prepare journal entries to record the transactions for Moca Capa Company under a perpetual inventory system using the contract-based approach.

Exercise 56

Tundra Sports Ltd. sells a variety of sports items. The following data relates to Fairway’s inventory of golf club sets. Tundra is a public company following IFRS and records revenue using the contract-based approach and offers to all of its customers terms of 2/10, n/60 but accepts no returns. On March 1, 2021, Tundra had 12 sets of clubs in inventory at a cost of $ 395 each. Management expects all of its customers to take advantage of the sales discount offered. During March, the following transactions occurred:

Mar. 2 Sold 7 sets of clubs on account to Flex Golf Club for $ 600 each, terms 2/10 n/60.

11 Flex Golf Club paid the account in full.

18 Sold 5 sets of clubs on account to Granite Golf Club for $ 560 each, terms 2/10 n/60.

May 15 Granite Golf Club paid the account in full.

Instructions

Using the perpetual inventory system, prepare the journal entries to record the transactions. Round amounts to the nearest dollar.