DISCUSSION QUESTIONS - Benedictine
Chapter 5
accounting for merchandising BUSINESSES
DISCUSSION QUESTIONS
1. Merchandising businesses acquire merchandise for resale to customers. It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business.
2. Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.
3. Examples of such accounts include the following: Sales, Sales Discounts, Sales Returns and Allowances, Cost of Merchandise Sold, Merchandise Inventory.
4. Sales to customers who use MasterCard or VISA cards are recorded as cash sales.
5. The date of sale as shown by the date of the invoice or bill.
6. a. 1% discount allowed if paid within 15 days of date of invoice; entire amount of invoice due within 60 days of date of invoice.
b. Payment due within 30 days of date of invoice.
c. Payment due by the end of the month in which the sale was made.
7. a. A credit memo issued by the seller of merchandise indicates the amount for which the buyer’s account is to be credited (credit to Accounts Receivable) and the reason for the sales return or allowance.
b. A debit memo issued by the buyer of merchandise indicates the amount for which the seller’s account is to be debited (debit to Accounts Payable) and the reason for the purchases return or allowance.
8. a. The buyer
b. The seller
9. Cost of Merchandise Sold would be debited; Merchandise Inventory would be credited.
10. Loss from Merchandise Inventory Shrinkage would be debited.
PRACTICE EXERCISES
PE 5–1A
$315,000 ($275,000 + $990,000 – $950,000)
PE 5–1B
$95,000 ($40,000 + $415,000 – $360,000)
PE 5–2A
a. Accounts Receivable 29,000
Sales 29,000
Cost of Merchandise Sold 21,750
Merchandise Inventory 21,750
b. Cash 28,420
Sales Discounts 580
Accounts Receivable 29,000
PE 5–2B
a. Accounts Receivable 60,000
Sales 60,000
Cost of Merchandise Sold 40,000
Merchandise Inventory 40,000
b. Cash 59,400
Sales Discounts 600
Accounts Receivable 60,000
PE 5–3A
a. $7,350. Purchase of $9,000 less the return of $1,500 less the discount of
$150 [($9,000 – $1,500) × 2%)].
b. Merchandise Inventory
PE 5–3B
a. $25,740. Purchase of $30,000 less the return of $4,000 less the discount of
$260 [($30,000 – $4,000) × 1%].
b. Accounts Payable
PE 5–4A
a. $108,950. Purchase of $120,000 less return of $15,000 less the discount of
$1,050 [($120,000 – $15,000) × 1%] plus $5,000 of shipping.
b. $86,240. Purchase of $90,000 less return of $2,000 less the discount of
$1,760 [($90,000 – $2,000) × 2%].
PE 5–4B
a. $17,820. Purchase of $20,000 less return of $2,000 less the discount of
$180 [($20,000 – $2,000) × 1%].
b. $16,910. Purchase of $18,000 less return of $1,000 less the discount of
$340 [($18,000 – $1,000) × 2%] plus $250 of shipping.
PE 5–5A
Storall Co. journal entries:
Cash ($8,000 – $1,000 – $140) 6,860
Sales Discounts [($8,000 – $1,000) × 2%] 140
Accounts Receivable—Bunting Co. ($8,000 – $1,000) 7,000
Bunting Co. journal entries:
Accounts Payable—Storall Co. ($8,000 – $1,000) 7,000
Merchandise Inventory [($8,000 – $1,000) × 2%] 140
Cash ($8,000 – $1,000 – $140) 6,860
PE 5–5B
SPA Co. journal entries:
Cash ($25,000 – $500 + $675) 25,175
Sales Discounts ($25,000 × 2%) 500
Accounts Receivable—Boyd Co. ($25,000 + $675) 25,675
Boyd Co. journal entries:
Accounts Payable—SPA Co. ($25,000 + $675) 25,675
Merchandise Inventory ($25,000 × 2%) 500
Cash ($25,000 – $500 + $675) 25,175
PE 5–6A
June 30 Cost of Merchandise Sold 8,500
Merchandise Inventory 8,500
Inventory shrinkage ($375,000 – $366,500).
PE 5–6B
Aug. 31 Cost of Merchandise Sold 64,100
Merchandise Inventory 64,100
Inventory shrinkage
($1,380,000 – $1,315,900).
PE 5–7A
a. 2012 2011
Ratio of net sales to assets 1.6* 1.8**
*$880,000/[($500,000 + $600,000)/2]
**$787,500/[($375,000 + $500,000)/2]
b. The change from 1.8 to 1.6 indicates an unfavorable trend in using assets to generate sales.
PE 5–7B
a. 2012 2011
Ratio of net sales to assets 3.0* 2.5**
*$675,000/[($200,000 + $250,000)/2]
**$475,000/[($180,000 + $200,000)/2]
b. The change from 2.5 to 3.0 indicates a favorable trend in using assets to generate sales.
EXERCISES
Ex. 5–1
a. $348,750 ($775,000 – $426,250)
b. 45% ($348,750 ÷ $775,000)
c. No. If operating expenses are less than gross profit, there will be a net income. On the other hand, if operating expenses exceed gross profit, there will be a net loss.
Ex. 5–2
$34,017 million ($45,015 million – $10,998 million)
Ex. 5–3
a. Net sales: $6,540,000 ($6,750,000 – $120,000 – $90,000)
b. Gross profit: $2,540,000 ($6,540,000 – $4,000,000)
c. No, there could be other income and expense items that could affect the amount of net income.
Ex. 5–4
a. Selling expense, (1), (2), (7), (8)
b. Administrative expense, (3), (5), (6)
c. Other expense, (4)
Ex. 5–5
HEARTLAND COMPANY
Income Statement
For the Year Ended November 30, 2012
Revenues:
Net sales $4,200,000
Rent revenue 95,000
Total revenues $4,295,000
Expenses:
Cost of merchandise sold $2,500,000
Selling expenses 400,000
Administrative expenses 300,000
Interest expense 20,000
Total expenses 3,220,000
Net income $1,075,000
Ex. 5–6
1. Sales returns and allowances and sales discounts should be deducted from (not added to) sales.
2. Sales returns and allowances and sales discounts should be deducted from sales to yield "net sales" (not gross sales).
3. Deducting the cost of merchandise sold from net sales yields gross profit.
4. Deducting the total expenses from gross profit would yield income from operations (or operating income).
5. Interest revenue should be reported under the caption “Other income” and should be added to income from operations to arrive at net income.
6. The final amount on the income statement should be labeled net income, not gross profit.
A correct income statement would be as follows:
KEEPSAKES COMPANY
Income Statement
For the Year Ended February 29, 2012
Revenue from sales:
Sales $7,200,000
Less: Sales returns and allowances $275,000
Sales discounts 130,000 405,000
Net sales $6,795,000
Cost of merchandise sold 4,075,000
Gross profit $2,720,000
Expenses:
Selling expenses $ 950,000
Administrative expenses 475,000
Delivery expense 125,000
Total expenses 1,550,000
Income from operations $1,170,000
Other income:
Interest revenue 30,000
Net income $1,200,000
Ex. 5–7
a. $30,000 ($300,000 – $20,000 – $250,000)
b. $150,000 ($250,000 – $100,000)
c. $552,000 ($600,000 – $30,000 – $18,000)
d. $222,000 ($552,000 – $330,000)
e. $5,000 ($850,000 – $70,000 – $775,000)
f. $475,000 ($775,000 – $300,000)
g. $550,000 ($515,000 + $10,000 + $25,000)
h. $515,000 ($400,000 + $115,000)
Ex. 5–8
a.
WARM PLACE FURNISHINGS COMPANY
Income Statement
For the Year Ended December 31, 2012
Revenue from sales:
Sales $3,000,000
Less: Sales returns and allowances $160,000
Sales discounts 40,000 200,000
Net sales $2,800,000
Cost of merchandise sold 1,700,000
Gross profit $ 1,100,000
Expenses:
Selling expenses $ 450,000
Administrative expenses 250,000
Total expenses 700,000
Income from operations $ 400,000
Other expense:
Interest expense 30,000
Net income $ 370,000
b. The major advantage of the multiple-step form of income statement is that relationships such as gross profit to sales are indicated. The major disadvantages are that it is more complex and the total revenues and expenses are not indicated, as is the case in the single-step income statement.
Ex. 5–9
Balance Sheet Accounts
100 Assets
110 Cash
112 Accounts Receivable
114 Merchandise Inventory
115 Store Supplies
116 Office Supplies
117 Prepaid Insurance
120 Land
123 Store Equipment
124 Accumulated Depreciation—
Store Equipment
125 Office Equipment
126 Accumulated Depreciation—
Office Equipment
200 Liabilities
210 Accounts Payable
211 Salaries Payable
212 Notes Payable
300 Stockholders’ Equity
310 Capital Stock
311 Retained Earnings
312 Dividends
313 Income Summary
Income Statement Accounts
400 Revenues
410 Sales
411 Sales Returns and
Allowances
412 Sales Discounts
500 Expenses
510 Cost of Merchandise Sold
520 Sales Salaries Expense
521 Advertising Expense
522 Depreciation Expense—
Store Equipment
523 Store Supplies Expense
524 Delivery Expense
529 Miscellaneous Selling
Expense
530 Office Salaries Expense
531 Rent Expense
532 Depreciation Expense—
Office Equipment
533 Insurance Expense
534 Office Supplies Expense
539 Miscellaneous Admin-
istrative Expense
600 Other Expense
610 Interest Expense
Note: The order and number of some of the accounts within subclassifications is somewhat arbitrary, as in accounts 115–117, accounts 520–524, and accounts 530–534. For example, in a new business, the order of magnitude expense account balances often cannot be determined in advance. The magnitude may also vary from period to period.
Ex. 5–10
a. Cash 30,000
Sales 30,000
Cost of Merchandise Sold 18,000
Merchandise Inventory 18,000
b. Accounts Receivable 120,000
Sales 120,000
Cost of Merchandise Sold 72,000
Merchandise Inventory 72,000
c. Cash 100,000
Sales 100,000
Cost of Merchandise Sold 70,000
Merchandise Inventory 70,000
d. Cash 45,000
Sales 45,000
Cost of Merchandise Sold 27,000
Merchandise Inventory 27,000
e. Credit Card Expense 9,000
Cash 9,000
Ex. 5–11
It was acceptable to debit Sales for the $80,000. However, using Sales Returns and Allowances assists management in monitoring the amount of returns so that quick action can be taken if returns become excessive.
Accounts Receivable should also have been credited for $80,000. In addition, Cost of Merchandise Sold should only have been credited for the cost of the merchandise sold, not the selling price. Merchandise Inventory should also have been debited for the cost of the merchandise returned. The entries to correctly record the returns would have been as follows:
Sales (or Sales Returns and Allowances) 80,000
Accounts Receivable 80,000
Merchandise Inventory 48,000
Cost of Merchandise Sold 48,000
Ex. 5–12
a. $39,200 [$40,000 – ($40,000 × 2%)]
b. Sales Returns and Allowances 40,000
Sales Discounts 800
Cash 39,200
Merchandise Inventory 24,000
Cost of Merchandise Sold 24,000
Ex. 5–13
(1) Sold merchandise on account, $35,000.
(2) Recorded the cost of the merchandise sold and reduced the merchandise inventory account, $21,000.
(3) Accepted a return of merchandise and granted an allowance, $2,000.
(4) Updated the merchandise inventory account for the cost of the merchandise returned, $1,200.
(5) Received the balance due within the discount period, $32,340. [Sale of $35,000, less return of $2,000, less discount of $660 (2% × $33,000).]
Ex. 5–14
a. $18,000
b. $18,600
c. $360 ($18,000 × 2%)
d. $18,240 ($18,600 – $360)
Ex. 5–15
a. $8,910 [Purchase of $12,000, less return of $3,000, less discount of $90 [($12,000 – $3,000) × 1%)]
b. Merchandise Inventory
Ex. 5–16
Offer F is lower than offer E. Details are as follows:
E F
List price $30,000 $29,500
Less discount 300 590
$29,700 $28,910
Freight 375
$29,700 $29,285
Ex. 5–17
(1) Purchased merchandise on account at a cost of $15,000.
(2) Paid freight, $400.
(3) An allowance or return of merchandise was granted by the creditor, $3,000.
(4) Paid the balance due within the discount period: debited Accounts Payable, $12,000, and credited Merchandise Inventory for the amount of the discount, $240, and Cash, $11,760.
Ex. 5–18
a. Merchandise Inventory 36,000
Accounts Payable 36,000
b. Accounts Payable 4,000
Merchandise Inventory 4,000
c. Accounts Payable 32,000
Cash 31,360
Merchandise Inventory 640
Ex. 5–19
a. Merchandise Inventory 60,000
Accounts Payable—Sierra Co. 60,000
b. Accounts Payable—Sierra Co. 60,000
Cash 59,400
Merchandise Inventory 600
c. Accounts Payable*—Sierra Co. 9,900
Merchandise Inventory 9,900
d. Merchandise Inventory 7,500
Accounts Payable—Sierra Co. 7,500
e. Cash 2,400
Accounts Payable—Sierra Co. 2,400
*Note: The debit of $9,900 to Accounts Payable in entry (c) is the amount of cash refund due from Sierra Co. It is computed as the amount that was paid for the returned merchandise, $10,000, less the purchase discount of $100 ($10,000 × 1%). The credit to Accounts Payable of $7,500 in entry (d) reduces the debit balance in the account to $2,400, which is the amount of the cash refund in entry (e). The alternative entries below yield the same final results.
c. Accounts Receivable—Sierra Co. 9,900
Merchandise Inventory 9,900
d. Merchandise Inventory 7,500
Accounts Payable—Sierra Co. 7,500
e. Cash 2,400
Accounts Payable—Sierra Co. 7,500
Accounts Receivable—Sierra Co. 9,900
Ex. 5–20
a. $35,000 ($36,000 – $1,000)
b. $8,999 [($10,000 – $1,200) – ($8,800 × 2%) + $375]
c. $7,425 [($8,250 – $750) – ($7,500 × 1%)]
d. $3,630 [($4,000 – $500) – ($3,500 × 2%) + $200]
e. $8,415 [$8,500 – ($8,500 × 1%)]
Ex. 5–21
a. At the time of sale
b. $28,000
c. $29,960 [$28,000 + ($28,000 × 7%)]
d. Sales Tax Payable
Ex. 5–22
a. Accounts Receivable 13,416
Sales 12,900
Sales Tax Payable ($12,900 × 4%) 516
Cost of Merchandise Sold 7,800
Merchandise Inventory 7,800
b. Sales Tax Payable 32,750
Cash 32,750
Ex. 5–23
a. Accounts Receivable—Boyle Co. 45,000
Sales 45,000
Cost of Merchandise Sold 27,000
Merchandise Inventory 27,000
b. Sales Returns and Allowances 9,000
Accounts Receivable—Boyle Co. 9,000
Merchandise Inventory 5,400
Cost of Merchandise Sold 5,400
c. Cash 35,280
Sales Discounts 720
Accounts Receivable—Boyle Co. 36,000
Ex. 5–24
a. Merchandise Inventory 45,000
Accounts Payable—Skycrest Co. 45,000
b. Accounts Payable—Skycrest Co. 9,000
Merchandise Inventory 9000
c. Accounts Payable—Skycrest Co. 36,000
Cash 35,280
Merchandise Inventory 720
Ex. 5–25
a. debit
b. debit
c. debit
d. credit
e. debit
f. debit
g. credit
Ex. 5–26
Cost of Merchandise Sold 22,275
Merchandise Inventory 22,275
Inventory shrinkage ($715,950 – $693,675).
Ex. 5–27
(b) Advertising Expense
(c) Cost of Merchandise Sold
(e) Sales
(f) Sales Discounts
(g) Sales Returns and Allowances
(i) Supplies Expense
Note: (j) Dividends is closed to Retained Earnings, not Income Summary.
Ex. 5–28
2012
Dec. 31 Sales 3,000,000
Income Summary 3,000,000
31 Income Summary 2,630,000
Sales Discounts 40,000
Sales Returns and Allowances 160,000
Cost of Merchandise Sold 1,700,000
Selling Expenses 450,000
Administrative Expenses 250,000
Interest Expense 30,000
31 Income Summary 370,000
Retained Earnings 370,000
31 Retained Earnings 50,000
Dividends 50,000
Ex. 5–29
2012
Aug. 31 Sales 800,000
Income Summary 800,000
31 Income Summary 641,000
Administrative Expenses 90,000
Cost of Merchandise Sold 350,000
Interest Expense 1,000
Sales Discounts 18,000
Sales Returns and Allowances 12,000
Selling Expenses 150,000
Store Supplies Expense 20,000
31 Income Summary 159,000
Retained Earnings 159,000
31 Retained Earnings 5,000
Dividends 5,000
Ex. 5–30
a. 2009: 1.67 {$71,288 ÷ [($41,164 + $44,324) ÷ 2]}
2008: 1.60 {$77,349 ÷ [($44,324 + $52,263) ÷ 2]}
b. These analyses indicate a slight increase in the effectiveness in the use of the assets to generate profits. A comparison with similar companies or industry averages would be helpful in making a more definitive statement on the effectiveness of the use of the assets.
Note to Instructors: During 2006–2009, the U.S. economy slowed resulting in a decrease in construction and building. This slowdown likely affected The Home Depot’s sales and ratio of net sales to total assets.
Ex. 5–31
a. 3.34 {$76,000 ÷ [($23,211 + $22,299) ÷ 2]}
b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry at a much slower velocity than Kroger sells groceries. Thus, Kroger is able to generate $3.34 of sales for every dollar of assets. Tiffany, however, is only able to generate $0.95 in sales per dollar of assets. This difference is reasonable when one considers the sales rate for jewelry and the cost of holding
jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its slow sales velocity, relative to groceries, with higher gross profits, relative to groceries.
Note to Instructors: For 2009, Kroger’s gross profit percentage (gross profit divided by revenues) was 22.9%, while Tiffany’s gross profit percentage was 57.5%. Kroger’s ratio of operating income to revenues was 3.2%, while Tiffany’s ratio of operating income to revenues was 13.1%.
Appendix Ex. 5–32
a. Purchases discounts, purchases returns and allowances
b. Freight in
c. Merchandise available for sale
d. Merchandise inventory (ending)
Appendix Ex. 5–33
a. Cost of merchandise sold:
Merchandise inventory, July 1, 2011 $ 250,000
Purchases $2,100,000
Less: Purchases returns and
allowances $50,000
Purchases discounts 39,000 89,000
Net purchases $2,011,000
Add freight in 12,500
Cost of merchandise purchased 2,023,500
Merchandise available for sale $2,273,500
Less merchandise inventory,
June 30, 2012 325,000
Cost of merchandise sold $1,948,500
b. $1,301,500 ($3,250,000 – $1,948,500)
c. No. Gross profit would be the same if the perpetual inventory system was used.
Appendix Ex. 5–34
Cost of merchandise sold:
Merchandise inventory, April 1 $ 15,000
Purchases $290,000
Less: Purchases returns and allowances $10,000
Purchases discounts 5,800 15,800
Net purchases $274,200
Add freight in 4,200
Cost of merchandise purchased 278,400
Merchandise available for sale $ 293,400
Less merchandise inventory, April 30 28,000
Cost of merchandise sold $265,400
Appendix Ex. 5–35
Cost of merchandise sold:
Merchandise inventory, March 1 $ 100,000
Purchases $800,000
Less: Purchases returns and allowances $15,000
Purchases discounts 12,000 27,000
Net purchases $773,000
Add freight in 8,000
Cost of merchandise purchased 781,000
Merchandise available for sale $881,000
Less merchandise inventory, March 31 90,000
Cost of merchandise sold $791,000
Appendix Ex. 5–36
1. The schedule should begin with the April 1, 2011, not the March 31, 2012, merchandise inventory.
2. Purchases returns and allowances and purchases discounts should be deducted from (not added to) purchases.
3. The result of subtracting purchases returns and allowances and purchases discounts from purchases should be labeled “net purchases.”
4. Freight in should be added to net purchases to yield cost of merchandise purchased.
5. The merchandise inventory at March 31, 2012, should be deducted from merchandise available for sale to yield cost of merchandise sold.
A correct cost of merchandise sold section is as follows:
Cost of merchandise sold:
Merchandise inventory, April 1, 2011 $ 80,000
Purchases $900,000
Less: Purchases returns and allowances $18,000
Purchases discounts 12,000 30,000
Net purchases $870,000
Add freight in 10,000
Cost of merchandise purchased 880,000
Merchandise available for sale $960,000
Less merchandise inventory,
March 31, 2012 75,000
Cost of merchandise sold $885,000
Appendix Ex. 5–37
a) debit
b) debit
c) credit
d) credit
e) credit
f) debit
g) credit
Appendix Ex. 5–38
July 2 Purchases 24,000
Accounts Payable 24,000
5 Freight In 500
Cash 500
6 Accounts Payable 4,000
Purchases Returns and Allowances 4,000
13 Accounts Receivable 15,000
Sales 15,000
15 Delivery Expense 100
Cash 100
17 Accounts Payable 20,000
Purchases Discounts 400
Cash 19,600
23 Cash 14,850
Sales Discounts 150
Accounts Receivable 15,000
Appendix Ex. 5–39
July 2 Merchandise Inventory 24,000
Accounts Payable 24,000
5 Merchandise Inventory 500
Cash 500
6 Accounts Payable 4,000
Merchandise Inventory 4,000
13 Accounts Receivable 15,000
Sales 15,000
13 Cost of Merchandise Sold 9,000
Merchandise Inventory 9,000
15 Delivery Expense 100
Cash 100
17 Accounts Payable 20,000
Merchandise Inventory 400
Cash 19,600
23 Cash 14,850
Sales Discounts 150
Accounts Receivable 15,000
Appendix Ex. 5–40
Jan. 31 Merchandise Inventory 300,000
Sales 1,200,000
Purchases Discounts 12,000
Purchases Returns and Allowances 8,000
Income Summary 1,520,000
31 Income Summary 1,317,000
Merchandise Inventory 250,000
Sales Discounts 20,000
Sales Returns and Allowances 30,000
Purchases 750,000
Freight In 8,000
Salaries Expense 175,000
Advertising Expense 40,000
Depreciation Expense 15,000
Miscellaneous Expense 29,000
31 Income Summary 203,000
Retained Earnings 203,000
31 Retained Earnings 60,000
Dividends 60,000
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