FA Chapter 4 SM



Exercises

  

Exercise 4-1 (30 minutes)

Apr. 2 Merchandise Inventory 4,600

Accounts Payable—Lyon 4,600

Purchased merchandise on credit.

3 Merchandise Inventory 300

Cash 300

Paid shipping charges on purchased merchandise.

4 Accounts Payable—Lyon 600

Merchandise Inventory 600

Returned unacceptable merchandise.

17 Accounts Payable—Lyon 4,000

Merchandise Inventory* 80

Cash 3,920

*[($4,600 - $600) x 2%]

Paid balance (less 2%) within discount period.

18 Merchandise Inventory 8,500

Accounts Payable—Frist 8,500

Purchased merchandise on credit.

21 Accounts Payable—Frist 1,100

Merchandise Inventory 1,100

Received an allowance on purchase.

28 Accounts Payable—Frist 7,400

Merchandise Inventory* 148

Cash 7,252

*[($8,500 - $1,100) x 2%]

Paid balance (less 2%) within discount period.

Exercise 4-2 (30 minutes)

1. BUYER- Santa Fe Company

Credit Purchase

Merchandise Inventory 24,000

Accounts Payable 24,000

Purchased merchandise on credit.

Cash Payment

Accounts Payable 24,000

Merchandise Inventory* 720

Cash 23,280

*[24,000 x 3%]

Paid account payable within 3% discount period.

2. SELLER – Mesa Company

Credit Sale

Accounts Receivable 24,000

Sales 24,000

Sold merchandise on account.

Cost of Goods Sold 16,000

Merchandise Inventory 16,000

To record cost of sale.

Cash Collection

Cash 23,280

Sales Discounts 720

Accounts Receivable 24,000

Collected account receivable.

3. Amount borrowed to pay with discount $ 23,280

Annual rate of interest   x 8%

Interest per year $1,862.40

Interest per day ($1,862.40 / 365 days) $ 5.10

Savings from discount taken ($24,000 - $23,280) $ 720.00

Interest paid on 50-day loan (50 days x $5.10) (255.00)

Net savings from borrowing to pay in discount period $ 465.00

Exercise 4-3 (10 minutes)

1. J 6. D

2. A 7. G

3. B 8. H

4. F 9. I

5. E 10. C

Exercise 4-4 (30 minutes)

May 5 Accounts Receivable 21,000

Sales 21,000

Sold merchandise on credit (1,500 x $14).

5 Cost of Goods Sold 15,000

Merchandise Inventory 15,000

To record cost of sale (1,500 x $10).

a.

May 7 Sales Returns and Allowances 2,800

Accounts Receivable 2,800

Accepted a return from a customer (200 x $14).

7 Merchandise Inventory 2,000

Cost of Goods Sold 2,000

Returned merchandise to inventory (200 x $10).

b.

May 8 Sales Returns and Allowances 600

Accounts Receivable 600

Granted allowance for damaged merchandise.

c.

May 15 Sales Returns and Allowances 680

Accounts Receivable 680

Granted allowance for mis-colored merchandise and accepted a return from a customer for the mis-colored merchandise [$120 + (40 x $14)].

15 Merchandise Inventory 400

Cost of Goods Sold 400

Returned merchandise to inventory (40 x $10).

Exercise 4-5 (15 minutes)

May 5 Merchandise Inventory 21,000

Accounts Payable 21,000

Purchased merchandise on credit (1,500 x $14).

a.

May 7 Accounts Payable 2,800

Merchandise Inventory 2,800

Returned unwanted merchandise (200 x $14).

b.

May 8 Accounts Payable 600

Merchandise Inventory 600

To record allowance for damaged merchandise.

c.

May 15 Accounts Payable 680

Merchandise Inventory 680

To record allowance for mis-colored goods and return of mis-colored merchandise

$120 + (40 x $14).

Exercise 4-6 (25 minutes)

1. Entries for Sydney Company (BUYER):

May 11 Merchandise Inventory 40,000

Accounts Payable 40,000

Purchased merchandise on credit.

11 Merchandise Inventory 345

Cash 345

Paid shipping charges on purchased merchandise.

12 Accounts Payable 1,400

Merchandise Inventory 1,400

Returned unacceptable merchandise.

20 Accounts Payable 38,600

Merchandise Inventory* 1,158

Cash 37,442

Paid balance within the 3% discount period.

*($38,600 x .03).

Exercise 4-6 — continued

2. Entries for Troy Corporation (SELLER):

May 11 Accounts Receivable 40,000

Sales 40,000

Sold merchandise on account.

11 Cost of Goods Sold 30,000

Merchandise Inventory 30,000

To record cost of sale.

13 Sales Returns and Allowances 1,400

Accounts Receivable 1,400

Accepted a return from a customer.

13 Merchandise Inventory 800

Cost of Goods Sold 800

Returned goods to inventory.

21 Cash 37,442

Sales Discounts 1,158

Accounts Receivable 38,600

Collected account receivable.

Exercise 4-7 (20 minutes)

In today’s competitive world, organizations must concentrate on meeting their customers’ needs and avoiding dissatisfaction. If these needs are not met and dissatisfaction grows, the customers will deal with other companies or entities. One measure of dissatisfaction of customers is the amount of sold goods that are later returned. Customer dissatisfaction needs to be understood and then dealt with promptly to encourage them to remain loyal. The reasons for the return also need to be determined to allow the problem to be avoided in the future. For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale, or fickle customers.

An important early step in controlling returns is to have information about their dollar amount. In addition, managers can set goals for reducing the dollar amount of sales returns. Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account. This approach captures the information at the time of the return and allows it to be easily reported.

While a company’s sales return record is important for managers, it is also valuable information for external decision makers. This information can help external users identify organizations focusing on customer satisfaction and product quality. Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported in financial statements provided to investors, creditors, and other external users.

Exercise 4-8 (30 minutes)

Note: The original missing numbers are blocked.

| |

|Balance, Dec. 31, 2007 |25,000 | |Purchase discounts received |1,700 |

|Invoice cost of purchases |192,500 | |Purchase returns and allow. |4,000 |

|Returns by customers |2,100 | |Cost of sales transactions |196,000 |

|Transportation-in |2,900 | |Shrinkage |800 |

|Balance, Dec. 31, 2008 |20,000* | | | |

|Cost of Goods Sold |

|Cost of sales transactions |196,000 | |Returns by customers and | |

|Inventory shrinkage | | |restored to inventory |2,100 |

|recorded in December 31, | | | | |

|2008, adjusting entry |800 | | | |

|Balance, Dec. 31, 2008 |194,700 | | | |

Exercise 4-10 (25 minutes)

Adjusting entries

Dec. 31 Sales Salaries Expense 1,700

Salaries Payable 1,700

To record accrued salaries.

Dec. 31 Selling Expenses 3,000

Prepaid Selling Expenses 3,000

To record expired prepaid selling expenses.

Dec. 31 Cost of Goods Sold 1,550

Merchandise Inventory 1,550

To record inventory shrinkage

($30,000 - $28,450).

Closing entries

Dec. 31 Sales 529,000

Income Summary 529,000

To close temporary accounts with credit balances.

Dec. 31 Income Summary 444,750

Sales Returns and Allowances 17,500

Sales Discounts 5,000

Cost of Goods Sold ($212,000 + $1,550) 213,550

Sales Salaries Exp. ($48,000 + $1,700) 49,700

Utilities Expense 15,000

Selling Expenses ($36,000 + $3,000) 39,000

Administrative Expenses 105,000

To close temporary accounts with debit balances.

Dec. 31 Income Summary 84,250

Retained Earnings 84,250

To close Income Summary account.

Dec. 31 Retained Earnings 33,000

Dividends 33,000

To close the dividends account.

Exercise 4-11 (20 minutes)

The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated. Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage of $3,000. An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount. As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $3,000.

As a result of this error:

• Return on assets would be understated (numerator impact outweighs the denominator impact).

• Debt ratio would be overstated because its denominator would be understated.

• Current ratio would be understated because its numerator would be understated.

• Profit margin (net income/sales) would be understated because the net income would be understated.

• Acid-test ratio would be unaffected because inventory is not a quick asset.

Exercise 4-12 (15 minutes)

| | Case X | Case Y | Case Z |

|Current ratio computation | | | |

|Current assets |$5,200 |$3,500 |$7,300 |

|Current liabilities |$2,200 |$1,200 |$3,750 |

|Current ratio |2.36 |2.92 |1.95 |

| | | | |

|Acid-test ratio computation | | | |

|Cash |$ 900 |$ 810 |$1,000 |

|Short-term investments |0 |0 |600 |

|Current receivables | 0 | 1,090 | 700 |

|Quick assets | $ 900 |$1,900 |$2,300 |

| | | | |

|Current liabilities |$2,200 |$1,200 |$3,750 |

|Acid-test ratio |0.41 |1.58 |0.61 |

Interpretation:

Case Y has the highest current ratio. Case Y also has the highest acid-test ratio. Based on this analysis, Case Y appears to be in the best position to meet its short-term obligations.

Exercise 4-13A (20 minutes)

Part a - Periodic

1)

Nov. 1 Purchases 1,500

Accounts Payable 1,500

To record purchases on credit.

2)

Nov. 5 Accounts Payable 1,500

Purchases Discount 30

Cash 1,470

To record cash payment in discount period.

3)

Nov. 7 Cash 196

Purchases Returns and Allowances 196

To record check received for return of purchases previously paid for with discount already taken.

4)

Nov. 10 Transportation-In 90

Cash 90

To record payment of freight charges.

5)

Nov. 13 Accounts Receivable 1,600

Sales 1,600

To record sale of merchandise on credit.

6)

Nov. 16 Sales Returns and Allowances 300

Accounts Receivable 300

To record return of merchandise sold on credit.

Part b - Perpetual

1)

Nov. 1 Merchandise Inventory 1,500

Accounts Payable 1,500

To record merchandise purchases on credit.

2)

Nov. 5 Accounts Payable 1,500

Merchandise Inventory 30

Cash 1,470

To record cash payment in discount period.

Exercise 4-13A (Continued)

3)

Nov. 7 Cash 196

Merchandise Inventory 196

To record check received for return of purchases previously paid for with discount already taken.

4)

Nov. 10 Merchandise Inventory 90

Cash 90

To record payment of freight charges.

5)

Nov. 13 Accounts Receivable 1,600

Sales 1,600

To record sale of merchandise on credit.

Nov. 13 Cost of Goods Sold 800

Merchandise Inventory 800

To record cost of merchandise sold.

6)

Nov. 16 Sales Returns and Allowances 300

Accounts Receivable 300

To record return of merchandise sold on credit.

Nov. 16 Merchandise Inventory 150

Cost of Goods Sold 150

To record cost of merchandise returned.

Exercise 4-14A (30 minutes)

Apr. 2 Purchases 4,600

Accounts Payable—Lyon 4,600

Purchased merchandise on credit.

3 Transportation-In 300

Cash 300

Paid shipping charges on purchased merchandise.

4 Accounts Payable—Lyon 600

Purchases Returns & Allowances 600

Returned unacceptable merchandise.

17 Accounts Payable—Lyon 4,000

Purchases Discounts 80

Cash 3,920

Paid balance (less 2%) within discount period.

18 Purchases 8,500

Accounts Payable—Frist 8,500

Purchased merchandise on credit.

21 Accounts Payable—Frist 1,100

Purchases Returns & Allowances 1,100

Received an allowance on purchase.

28 Accounts Payable—Frist 7,400

Purchases Discounts 148

Cash 7,252

Paid balance (less 2%) within discount period.

Exercise 4-15A (30 minutes)

1. BUYER – Santa Fe

Credit Purchase

Purchases 24,000

Accounts Payable 24,000

Purchased merchandise on credit.

Cash Payment

Accounts Payable 24,000

Purchases Discounts 720

Cash 23,280

Paid account payable within 3% discount period.

2. SELLER - Mesa

Credit Sale

Accounts Receivable 24,000

Sales 24,000

Sold merchandise on account.

Cash Collection

Cash 23,280

Sales Discounts 720

Accounts Receivable 24,000

Collected account receivable.

Exercise 4-16A (25 minutes)

1. Entries for Sydney Company (BUYER):

May 11 Purchases 40,000

Accounts Payable 40,000

Purchased merchandise on credit.

11 Transportation-In 345

Cash 345

Paid shipping charges on purchased merchandise.

12 Accounts Payable 1,400

Purchases Returns and Allowances 1,400

Returned unacceptable merchandise.

20 Accounts Payable 38,600

Purchases Discounts 1,158

Cash 37,442

Paid balance within the 3% discount period.

2. Entries for Troy Corporation (SELLER):

May 11 Accounts Receivable 40,000

Sales 40,000

Sold merchandise on account.

13 Sales Returns and Allowances 1,400

Accounts Receivable 1,400

Accepted a return from a customer.

21 Cash 37,442

Sales Discounts 1,158

Accounts Receivable 38,600

Collected account receivable.

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