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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