chapter 5 accounting for merchandising operations...
TRANSCRIPT
5-1
CHAPTER 5 Accounting for Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Describe the differences between a
service company and a merchandising company.
1, 2, 3, 4, 5 1
2. Explain and complete the entries for purchases under a perpetual inventory system.
6, 7 2, 4, 5 1, 3, 4, 5, 6
1, 2, 3, *9. *10
1, 2, 3, *9, *10
3. Explain and complete the entries for sales revenue under a perpetual inventory system.
7, 8, 9 3, 4, 5 2, 3, 4, 5 1, 2, 3, *9, *10
1, 2, 3, *9, *10
4. Explain and perform the steps in the accounting cycle for a merchandising company.
10, 11, 12 6, 7 6, 7 4, 5, *11 4, 5, *11
5. Distinguish between and be able to prepare both a multiple-step and a single-step income statement.
13, 14, 15, 16
8, 9, 10 7, 8, 9, 10 3, 4, 5, 6, 7, *10, *11
3, 4, 5, 6, 7, *10, *11
6. Explain the importance of and be able to calculate gross profit.
17 10, 11 10, 11 8 8
7. Calculate the inventory turnover and days sales in inventory ratios.
18, 19, 20 11 10, 11 8 8
*8. Describe and perform the accounting for sales taxes (Appendix 5A).
*21, *22 *12 *12 *9, *10 *9, *10
*9. Prepare a work sheet for a merchandising company (Appendix 5B).
*23 *13 *13 *11 *11
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendices to each chapter.
5-2
ASSIGNMENT CHARACTERISTIC TABLE Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A
Journalize and post inventory transactions. Moderate 30-40
2A
Journalize inventory transactions. Moderate 20-30
3A Journalize, post, and prepare partial income statement and balance sheet.
Moderate 60-70
4A Prepare financial statements and closing entries.
Moderate 30-40
5A Prepare financial statements, adjusting and closing entries.
Moderate 40-50
6A Classify the accounts of a merchandising company.
Simple 10-15
7A Prepare correct multiple-step and single-step income statements.
Complex 50-60
8A Calculate inventory ratios and comment.
Moderate 20-25
*9A Journalize inventory transactions with sales tax.
Moderate 40-50
*10A Journalize, post, and prepare trial balance and partial income statement, with sales taxes.
Moderate 70-80
*11A Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance.
Moderate 50-60
1B Journalize and post inventory transactions.
Moderate 30-40
2B Journalize inventory transactions.
Moderate 20-30
3B Journalize, post, and prepare partial income statement and balance sheet.
Moderate 60-70
4B Prepare financial statements, adjusting entries, and closing entries.
Moderate 30-40
5B Prepare financial statements, adjusting entries and closing entries.
Moderate 40-50
6B Classify the accounts of a merchandising company.
Simple 10-15
7B Prepare correct multiple-step and single-step income statements.
Complex 50-60
8B Calculate inventory ratios and comment.
Moderate 20-25
*9B Journalize inventory transactions, with sales tax.
Moderate 40-50
*10B Journalize, post, and prepare trial balance and partial income statement, with sales taxes.
Moderate 70-80
*11B Complete work sheet, financial statements, adjusting and closing entries, and post-closing trial balance.
Moderate 50-60
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BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe the differences
between a service company and a merchandising company.
Q5-1 Q5-2 Q5-3
Q5-4 Q5-5
BE5-1
2. Explain and complete the entries for purchases under a perpetual inventory system.
Q5-6 Q5-7
BE5-2 BE5-4 BE5-5 E5-1 E5-3 E5-4 E5-6 P5-1A P5-2A
P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B
E5-5
3. Explain and complete the entries for sales revenue under a perpetual inventory system.
Q5-8 Q5-7 Q5-9
BE5-3 BE5-4 BE5-5 E5-2 E5-3 E5-4 P5-1A P5-2A
P5-3A *P5-9A *P5-10A P5-1B P5-2B P5-3B *P5-9B *P5-10B
E5-5
4. Explain and perform the steps in the accounting cycle for a merchandising company.
Q5-12 Q5-10 Q5-11
BE5-6 BE5-7 E5-6 E5-7 P5-4A
P5-5A *P5-11A P5-4B P5-5B *P5-11B
5. Distinguish between and be able to prepare both a multiple-step and a single-step income statement.
Q5-14 P5-6A P5-6B
Q5-15 Q5-16
Q5-13 BE5-8 BE5-9 BE5-10 E5-7 E5-9 E-10 P5-3A P5-4A P5-5A
P5-7A *P5-10A *P5-11A P5-3B P5-4B P5-5B P5-7B *P5-10B *P5-11B
E5-8
6. Explain the importance of and be able to calculate gross profit.
Q5-17 BE5-10
BE5-11 E5-10
E5-11 P5-8A P5-8B
7. Calculate the inventory turnover and days sales in inventory ratios.
Q5-18 Q5-19 Q5-20
BE5-11 E5-10
E5-11 P5-8A P5-8B
*8. Describe and perform the accounting for sales taxes (Appendix 5A).
*Q5-21 *Q5-22 *BE5-12 *E5-12
*P5-9A *P5-10A *P5-9B *P5-10B
*9. Prepare a work sheet for a merchandising company (Appendix 5B).
*Q5-23 *BE5-13
*E5-13 *P5-11A *P5-10B *P5-11B
Broadening Your Perspective
BYP5-1 BYP 5-2 BYP5-3 BYP5-4 BYP5-5
BYP5-6 BYP5-7
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ANSWERS TO QUESTIONS
1. The components of revenues and expenses differ as follows:
Merchandising
Service
Revenue
Sales
Service Revenue, Fees Earned, Rent Revenue, Interest Revenue, Investment Income, Gains
Other Revenue
Rent Revenue, Interest Revenue, Investment Income, Gains
Expenses Cost of Goods Sold, Operating Expenses
All expenses
Other Expense
Interest Expense, Losses
2. The income measurement process in a merchandising company can
be summarized as follows:
Sales
Revenues
Less
Cost of Goods Sold
Equals
Gross Profit
Less
Operating Expenses
Equals
Net
Income
3. The normal operating cycle for a merchandising company is likely to
be longer than for a service company because inventory must first be purchased and sold, and then the receivables must be collected.
4. Under a perpetual inventory system, inventory quantities and
amounts are updated continually. At any point in time, the Cost of Goods Sold and Inventory accounts represent what has been sold to date, and what remains.
Under a periodic inventory system, temporary accounts are used to accumulate purchases of inventory throughout the period. The cost of goods sold and inventory are determined only at the end of the period (annually for example).
5-5
Questions Chapter 5 (Continued)
5. Computer technology enables perpetual inventory systems to be
used by any company that requires timely information about the quantities of inventory on hand. It is more complex and costly to maintain a perpetual inventory record of costs, so companies with point of sale systems integrated with their inventory systems tend to be larger.
6. The reason for recording the purchase of merchandise for resale in a
separate account is to enable a company to determine its gross profit. This information is useful in setting prices.
7. The letters FOB mean free on board. FOB shipping point means that
the goods are placed free on board the carrier by the seller, and the buyer pays the freight costs. FOB shipping point will result in a debit to the Inventory account by the buyer.
FOB destination means that the goods are placed free on board to the buyer’s place of business, and the seller pays the freight. FOB destination will result in a debit to the Freight Out account by the seller.
8. (a) The primary source documents are:
(1) Cash sales—cash register tapes, (2) Credit sales—sales invoices, and (3) Sales returns and allowances—credit memoranda.
5-6
Questions Chapter 5 (Continued) 8. (b)
Seller Debit Credit Cash sales— Cash............................................... XXX
Sales........................................ XXX
Cost of Goods Sold ...................... XXX Merchandise Inventory.......... XXX
Credit sales— Accounts Receivable.................... XXX
Sales........................................ XXX Cost of Goods Sold ...................... XXX
Merchandise Inventory.......... XXX
Sales returns Sales Returns and Allowances.... XXX & allowances – Accounts Receivable or Cash XXX
Merchandise Inventory................. XXX Cost of Goods Sold................ XXX
Purchaser
Cash purchase— Merchandise Inventory............... XXX Cash........................................ XXX
Credit purchase— Merchandise Inventory............... XXX
Accounts Payable ................. XXX
Purchase returns Cash or Accounts Payable .......... XXX & allowances – Merchandise Inventory ......... XXX 9. Sales returns are not debited directly to the Sales account because
this would not provide information on the cost of 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.
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Questions Chapter 5 (Continued)
10. Disagree. The steps in the accounting cycle are the same for both a
merchandising company and a service enterprise.
11. A physical count is an important control feature. Using a perpetual inventory system a company knows what should be on hand. Performing a physical counts and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock.
12. Of the merchandising accounts, only Merchandise Inventory (ending)
will appear in the post-closing trial balance.
13. Gross profit ....................................................................... $580,000 Less: Net income ............................................................. 0300,000 Operating expenses.......................................................... $280,000 14. (a) The operating activities part of the income statement has three
sections: sales revenues, cost of goods sold, and operating expenses.
(b) The non-operating activities part consists of two sections: other revenues and gains, and other expenses and losses.
15. The functional groupings are selling and administrative. The problem
with functional groupings is that some expenses may relate to both, and have to be allocated between the functions.
16. The single-step income statement differs from the multiple-step
income statement in that (1) all data are classified into two categories: Revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss).
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Questions Chapter 5 (Continued)
17. Sales revenues.......................................................... $100,000 Cost of goods sold ................................................... 70,000 Gross profit ............................................................... 30,000 Operating expenses ................................................. 20,000 Net income ................................................................ $ 10,000 Gross profit margin = $30,000 ÷ $100,000 = 30% Profit margin = $10,000 ÷ $100,000 = 10%
18. Two ratios that help management determine whether or not there is sufficient inventory on hand are Inventory turnover and days sales in inventory
19. Managing inventory is critical to a company’s success. It is often the
largest current asset (inventory) and the largest expense (cost of goods sold) on the income statement. Companies must manage the quantity of inventory on hand to avoid excessive cost and to ensure they can meet demand.
20. An increase in days sales in inventory would be viewed as a
deterioration because it means there is more inventory on hand in relation to sales.
*21. Accounts Receivable.................................................... 1,053
Sales ..................................................................... 900 GST Payable......................................................... 63 PST Payable ......................................................... 90 Cost of Goods Sold ...................................................... 600 Merchandise Inventory ....................................... 600
*22. Office Furniture [$2,000 + (8% x $2,000)] .................... 2,160 GST Recoverable ($2,000 x 7%)................................... 140 Accounts Payable ............................................... 2,300
*23. (a) Merchandise inventory – Trial balance debit column; Adjusted
trial balance debit column; and Balance sheet debit column (b) Cost of goods sold – Trial balance debit column; Adjusted trial
balance debit column; and Income statement debit column
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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 5-1 (a) Cost of goods sold = $43,500 ($75,000 – $31,500)
Operating expenses = $20,700 ($31,500 – $10,800) (b) Gross profit = $38,000 ($108,000 – $70,000)
Operating expenses = $8,500 ($38,000 – $29,500) (c) Sales = $181,500 ($71,900 + $109,600)
Net income = $70,100 ($109,600 – $39,500) BRIEF EXERCISE 5-2 Rowen Company (a) March 2 Merchandise Inventory ................................. 900,000
Accounts Payable ................................... 900,000 (b) March 6 Accounts Payable ......................................... 130,000
Merchandise Inventory ........................... 130,000 (c) March 31 Accounts Payable ($900,000 – $130,000).... 770,000
Cash ......................................................... 770,000
5-10
BRIEF EXERCISE 5-3 Hunt Company (a) March 2 Accounts Receivable ................................... 900,000
Sales ...................................................... 900,000 Cost of Goods Sold...................................... 600,000
Merchandise Inventory......................... 600,000 (b) March 6 Sales Returns and Allowances ................... 130,000
Accounts Receivable............................ 130,000 Merchandise Inventory ................................ 90,000 Cost of Goods Sold .............................. 90,000 (c) March 31 Cash ($900,000 – $130,000) ......................... 770,000
Accounts Receivable............................ 770,000
BRIEF EXERCISE 5-4 Keo Company
Nov. 12 Merchandise Inventory ............................... 900 Cash ...................................................... 900
Mayo Company
Nov. 12 Cash.............................................................. 900 Sales...................................................... 900
Cost of Goods Sold..................................... 700 Merchandise Inventory........................ 700
5-11
BRIEF EXERCISE 5-5 March 3 Merchandise Inventory (20 X $25) ................. 500 Accounts Payable ................................ 500 March 6 Accounts Payable ........................................... 75 Merchandise Inventory (3 X $25) ........ 75 March 21 Accounts Receivable (15 X $45) .................... 675 Sales ...................................................... 675 Cost of Goods Sold (15 x $25) ....................... 375 Merchandise Inventory ........................ 375 Quantity: 20 – 3 – 15 = 2 units remaining Cost: $500 - $75 - $375 = $50 Proof: 2 units x $25 = $50 BRIEF EXERCISE 5-6 Aug. 31 Cost of Goods Sold (Inventory shrinkage) .. 900
Merchandise Inventory ($98,000 – $97,100) .............................. 900
BRIEF EXERCISE 5-7 July 31 Sales ................................................................. 180,000 Prasad, Capital ..................................... 180,000 Prasad, Capital................................................. 102,000 Sales Returns and Allowances ........... 2,000 Cost of Goods Sold.............................. 100,000 Ending capital balance (not required): $150,000 + $180,000 - $102,000 = $228,000 Merchandise Inventory is a balance sheet (permanent) account and is not closed.
5-12
BRIEF EXERCISE 5-8 HULDA COMPANY Income Statement (Partial) For the Month Ended October 31, 2003 Sales revenues
Sales ($300,000 + $100,000) .............................................. $400,000 Less: Sales returns and allowances ............................... 30,000 Net sales ............................................................................. $370,000
BRIEF EXERCISE 5-9 (1) Multiple-Step Income Statement
Item
Section
a.
Gain on sale of equipment
Other revenues and gains
b. Interest expense Other expenses and losses c.
d. Cost of goods sold Rent revenue
Cost of goods sold Other revenues and gains
(2) Single-Step Income Statement
Item
Section
a.
Gain on sale of equipment
Revenues
b. Interest expense Expenses c.
d. Cost of goods sold Rent revenue
Expenses Revenues
5-13
BRIEF EXERCISE 5-10 (a) Net sales = $485,000 ($500,000 – $15,000) (b) Gross profit = $145,000 ($485,000 – $340,000) (c) Net income = $35,000 ($145,000 - $70,000- $40,000) BRIEF EXERCISE 5-11 (a) Gross profit margin = 45% [($550,000 – $300,000) ÷ $550,000] (b) Inventory turnover = 12 times ($300,000 ÷ $25,000) (c) Days sales in inventory = 30 days (365 ÷ 12) *BRIEF EXERCISE 5-12 Merchandise Inventory................................................... 8,000 Supplies [$1,000 + ($1,000 X 10%)] ............................... 1,100 GST Recoverable [($8,000 + $1,000) X 7%]................... 630 Accounts Payable ................................................... 9,730 *BRIEF EXERCISE 5-13 (a) Cash: Trial balance debit column; Adjusted trial balance debit column;
Balance sheet debit column. (b) Merchandise Inventory: Trial balance debit column; Adjusted trial
balance debit column; Balance sheet debit column. (c) Sales: Trial balance credit column; Adjusted trial balance credit column;
Income statement credit column. (d) Cost of Goods Sold: Trial balance debit column; Adjusted trial balance
debit column; Income statement debit column.
5-14
SOLUTIONS TO EXERCISES EXERCISE 5-1 1. April 5 Merchandise Inventory.................................. 18,000
Accounts Payable ................................... 18,000 2. April 6 Merchandise Inventory.................................. 900
Cash.......................................................... 900 3. April 7 Equipment ...................................................... 26,000
Accounts Payable ................................... 26,000 4. April 8 Accounts Payable .......................................... 3,000
Merchandise Inventory ..................... ..... 3,000 5. May 2 Accounts Payable ($18,000 – $3,000)........... 15,000
Cash.......................................................... 15,000
5-15
EXERCISE 5-2 (a) Pippen Company 1. Dec. 3 Accounts Receivable................................ 400,000
Sales .................................................... 400,000 Cost of Goods Sold .................................. 320,000 Merchandise Inventory. .................... 320,000 2. Dec. 8 Sales Returns and Allowances................ 20,000
Accounts Receivable ......................... 20,000 3. Dec. 13 Cash ($400,000 – $20,000)........................ 380,000
Accounts Receivable ......................... 380,000 (b) Thomas Co. 1. Dec. 3 Merchandise Inventory............................. 400,000
Accounts Payable .............................. 400,000 2. Dec. 8 Accounts Payable ..................................... 20,000
Merchandise Inventory ...................... 20,000 3. Dec. 13 Accounts Payable ..................................... 380,000 Cash..................................................... 380,000
5-16
EXERCISE 5-3 Sept. 6 Merchandise Inventory (60 X $20) ......................... 1,200
Accounts Payable............................................ 1,200
10 Accounts Payable (2 X $20).................................... 40 Merchandise Inventory ................................... 40
12 Accounts Receivable (26 X $30) ............................ 780 Sales ................................................................. 780 Cost of Goods Sold (26 X $20) ............................... 520 Merchandise Inventory ................................... 520
14 Sales Returns and Allowances .............................. 30 Accounts Receivable ...................................... 30 Merchandise Inventory ........................................... 20 Cost of Goods Sold ......................................... 20
20 Accounts Receivable (30 X $30) ............................ 900 Sales ................................................................. 900 Cost of Goods Sold (30 X $20) ............................... 600 Merchandise Inventory ................................... 600
5-17
EXERCISE 5-4 Sept. 2 Merchandise Inventory (90 X $15) ......................... 1,350
Accounts Payable............................................ 1,350
5 Accounts Payable ................................................... 60 Merchandise Inventory ................................... 60
8 Accounts Receivable .............................................. 1,250 Sales (50 x $25)................................................ 1,250
Cost of Goods Sold................................................. 750 Merchandise Inventory (50 x $15) .................. 750
12 Accounts Receivable .............................................. 750 Sales (30 x $25)................................................ 750 Cost of Goods Sold................................................. 450 Merchandise Inventory (30 x $15) .................. 450 20 Merchandise Inventory (15 x $16).......................... 240 Accounts Payable............................................ 240
30 Cost of Goods Sold (Inventory Loss).................... 15* Merchandise Inventory ................................... 15 10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase.
5-18
EXERCISE 5-5 1. Sales Returns and Allowances......................................... 150
Sales............................................................................ 150 2. Supplies .............................................................................. 250
Cash .................................................................................... 250 Accounts Payable ...................................................... 250 Merchandise Inventory .............................................. 250
3. Sales.................................................................................... 50
Merchandise Inventory .............................................. 50 4. Cash .................................................................................... 270
Merchandise Inventory .............................................. 270
5-19
EXERCISE 5-6 (a) Jun. 10 Merchandise Inventory..................................... 5,000
Accounts Payable ..................................... 5,000
11 Merchandise Inventory..................................... 300 Cash............................................................ 300
12 Accounts Payable ............................................. 500 Merchandise Inventory ............................. 500
July 7 Accounts Payable ($5,000 – $500).................. 4,500
Cash............................................................ 4,500
15 Cash .................................................................. 8,500 Sales ........................................................... 8,500
15 Cost of Goods Sold ($5,000 + $300 - $500) .... 4,800 Merchandise Inventory ............................. 4,800
(b) July 31 Sales.................................................................. 8,500 Capital ........................................................ 8,500 31 Capital ............................................................... 4,800 Cost of Goods Sold................................... 4,800
5-20
EXERCISE 5-7 (a)
CECILIE COMPANY Income Statement (Partial) For the Year Ended October 31, 2003
Sales revenues Sales..................................................................................... $900,000 Less: Sales returns and allowances................................. 24,000 Net sales............................................................................... $876,000
Note: Freight Out is a selling expense.
(b) Closing entries: Oct. 31 Sales ........................................................... 900,000
Capital ................................................. 900,000
31 Capital......................................................... 36,000 Sales Returns and Allowances ......... 24,000 Freight Out .......................................... 12,000
5-21
EXERCISE 5-8 Natural
Cosmetics Mattar
Grocery Allied
Wholesalers Sales $90,000 (c) $100,000 $144,000 Less: Sales returns (a) 16,000 6,000 12,000 Net sales 74,000 94,000 (f) 132,000 Less: Cost of goods sold 64,000 (d) 72,000 (g) 108,000 Gross profit 10,000 22,000 24,000 Less: Operating expenses 6,000 (e) 12,000 18,000 Net income (b) $ 4,000 $ 10,000 (h) $ 6,000 (a) Sales.......................................................................... $90,000
*Sales returns ............................................................ (16,000) Net sales ................................................................... $74,000
(b) Gross profit .............................................................. $10,000
Operating expenses................................................. (6,000) *Net income .............................................................. $ 4,000
(c) *Sales ........................................................................ $100,000
Sales returns ............................................................ (6,000) Net sales ................................................................... $ 94,000
(d) Net sales ................................................................... $94,000
*Cost of goods sold ................................................. (72,000) Gross profit .............................................................. $22,000
(e) Gross profit .............................................................. $22,000
*Operating expenses ............................................... (12,000) Net income................................................................ $10,000
(f) Sales.......................................................................... $144,000
Sales returns ............................................................ (12,000) *Net sales.................................................................. $132,000
(g) Net sales ................................................................... $132,000
*Cost of goods sold ................................................. (108,000) Gross profit .............................................................. $ 24,000
(h) Gross profit .............................................................. $24,000 Operating expenses................................................. (18,000) *Net income .............................................................. $ 6,000
5-22
EXERCISE 5-9 (a)
CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002
Net sales...................................................................... $2,359,000 Cost of goods sold ..................................................... 00,989,000 Gross profit ................................................................. 1,370,000 Operating expenses
Selling expenses................................................. $690,000 Administrative expenses.................................... 0435,000
Total operating expenses ........................... 1,125,000 Income from operations............................................. 245,000 Other revenues and gains
Interest revenue .................................................. $45,000 Other expenses and losses
Interest expense..................................... $70,000 Loss on sale of equipment..................... 10,000 80,000 35,000
Net income .................................................................. $ 210,000 (b) CHEVALIER COMPANY Income Statement For the Year Ended December 31, 2002
Revenues Net sales.............................................................. $2,359,000 Interest revenue.................................................. 0 45,000 Total revenues.............................................. 2,404,000
Expenses Cost of goods sold ............................................. $989,000 Selling expenses ................................................ 690,000 Administrative expenses ................................... 435,000 Interest expense ................................................. 70,000 Loss on sale of equipment ................................ 0010,000 Total expenses ............................................ 2,194,000
Net income .................................................................. $ 210,000
5-23
EXERCISE 5-10 (a) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands)
Revenues Revenue from products and services................. $94,317 Interest revenue .................................................... 2,868 Gain on sale of assets .......................................... 1,813 Other income......................................................... 295 Total revenues................................................. $ 99,293
Expenses Cost of products and services ............................. $24,426 Sales and marketing expenses ............................ 45,097 General and administrative expenses ................. 26,485 Amortization expense ........................................... 10,300 Income tax expense .............................................. 1,086
Total expenses ................................................ 107,394 Net loss........................................................................... ($ 8,101)
5-24
EXERCISE 5-10 (Continued) (b) JETFORM CORPORATION Income Statement For the Year Ended April 30, 2000 (in thousands) Revenue from products and services....................... $ 94,317 Cost of products and services .................................. 00, 24,426 Gross profit ................................................................. 69,891 Operating expenses
Sales and marketing expenses.......................... $45,097 General and administrative expenses (including amortization expense) .............. 0 36,785
Total operating expenses ........................... 81,882 Loss from operations ................................................. (11,991) Other revenues and gains
Interest revenue.................................................. $2,868 Gain on sale of assets........................................ 1,813 Other income ...................................................... 295
4,976 Other expenses and losses
Income tax expense* ........................................... 1,086 3,890 Net loss......................................................................... ($ 8,101) *Note to Instructor: You may wish to explain that income tax expense is usually presented differently (following an income (or loss) before income taxes caption) in corporate income statements.
5-25
EXERCISE 5-10 (Continued)
(c) Gross profit margin = 74% ($69,891 ÷ $94,317)
Profit margin = (8.6%) ($8,101 ÷ $94,317) Inventory turnover = 22 times ($24,426 ÷ $1,111) Days sales in inventory = 17 days (365 ÷ 22)
These results are misleading and likely overly high. The revenue includes revenue from services, in addition to products. Revenue from services does not have the same level of cost as does revenue from products. In other words, the revenue and costs from services does not have any “cost of goods sold” nor “inventory.” No further breakdown is available on Jetform’s financial statements. These ratios are still useful in determining trends, when compared against similar calculations for prior years.
5-26
EXERCISE 5-11 Inventory turnover 2000 = 7.3 times [$1,298,606 ÷ ($193,831 + $160,092) ÷ 2] 1999 = 7.5 times [$1,546,723 ÷ ($160,092 + $254,690) ÷ 2] Days sales in inventory 2000 = 50 days (365 ÷ 7.3) 1999 = 49 days (365 ÷ 7.5) Gross profit margin 2000 = 23% [($1,683,142 - $1,298,606) ÷ $1,683,142] 1999 = 21% [($1,960,274 - $1,546,723) ÷ $1,960,274] The gross profit margin has improved, increasing from 21% in 1999 to 23% in 2000. The inventory turnover and days sales in inventory are basically unchanged from one year to the next.
5-27
*EXERCISE 5-12 Sept. 2 Merchandise Inventory (90 X $15) ............... 1,350.00 GST Recoverable ($1,350 x 7%) ................... 94.50
Accounts Payable.................................. 1,444.50
5 Accounts Payable ......................................... 64.20 Merchandise Inventory ......................... 60.00 GST Recoverable................................... 4.20
8 Accounts Receivable .................................... 1,337.50 Sales (50 x $25)...................................... 1250.00 GST Payable ($1,250 x 7%) ................... 87.50
Cost of Goods Sold....................................... 750.00 Merchandise Inventory (50 x $15) ........ 750.00
12 Accounts Receivable .................................... 802.50 Sales (30 x $25)...................................... 750.00 GST Payable ($750 x 7%) ...................... 52.50 Cost of Goods Sold....................................... 450.00 Merchandise Inventory (30 x $15) ........ 450.00 20 Merchandise Inventory (15 x $16)................ 240.00 GST Recoverable ($240 x 7%) ...................... 16.80 Accounts Payable.................................. 256.80 30 Cost of Goods Sold (Inventory Loss).......... 15.00* Merchandise Inventory ......................... 15.00 10 + 90 – 4 – 50 – 30 + 15 = 31 desk sets per records; 30 desk sets per count = 1 missing * Note: We assumed that the missing desk set had a cost of $15. It could also have been assumed to be $16, from the September 20 purchase. There is no GST effect of this loss.
5-28
*EXERCISE 5-13
(a)
Accounts
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Debit
Credit
Debit
Credit
Debit
Credit
Cash Merchandise Inven. Sales Sales Returns Cost of Goods Sold Rent Expense
9,000
80,000
10,000 250,000 42,000
450,000
10,000 250,000 42,000
450,000
9,000
80,000
(b) The accounts appearing in the post-closing trial balance are the balance
sheet accounts of Cash ($9,000) and Merchandise Inventory ($80,000).
5-29
SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a) April 5 Merchandise Inventory–Custom Sedans (3 x $24,000)....................................................... 72,000
Accounts Payable ..................................... 72,000 13 Merchandise Inventory–Recreation Vehicles (2 x $28,000)....................................................... 56,000
Accounts Payable ..................................... 56,000
17 Accounts Receivable ........................................ 114,000 Sales (4 x $28,500)..................................... 114,000
Cost of Goods Sold (4 x $24,000) .................... 96,000 Merchandise Inventory–Custom Sedans 96,000 20 Merchandise Inventory–Convertibles (2 x $26,000)....................................................... 52,000
Accounts Payable ..................................... 52,000 22 Accounts Payable ............................................. 26,000
Merchandise Inventory–Convertibles ..... 26,000 24 Accounts Receivable ........................................ 102,000
Sales (3 x $34,000)..................................... 102,000 Cost of Goods Sold (3 x $28,000) .................... 84,000 Merchandise Inventory–Recreation Vehicles 84,000 28 Accounts Receivable ........................................ 31,000
Sales ........................................................... 31,000
Cost of Goods Sold........................................... 26,000 Merchandise Inventory–Convertibles ..... 26,000
5-30
PROBLEM 5-1A (Continued) (b)
Merchandise Inventory –Custom Sedans
Merchandise Inventory –Convertibles
Bal. 96,000 96,000 Bal. 78,000 26,000 72,000 52,000 26,000 72,000 78,000
Merchandise Inventory –Recreation Vehicles
Cost of Goods Sold Bal. 56,000 84,000 96,000
56,000 84,000 28,000 26,000
206,000
5-31
PROBLEM 5-2A
GENERAL JOURNAL Date Account Titles Ref. Debit Credit July 1
Merchandise Inventory (50 x $30) ........... Accounts Payable .............................
120 201
1,500
1,500 3 Accounts Receivable (40 x $50) ..............
Sales................................................... Cost of Goods Sold (40 x $30) ................. Merchandise Inventory .....................
112 401 505 120
2,000
1,200
2,000
1,200 9 Accounts Payable .....................................
Cash ................................................... 201 101
1,500 1,500
12 Cash ...........................................................
Accounts Receivable ........................ 101 112
2,000 2,000
17 Accounts Receivable (30 x $50) ..............
Sales................................................... Cost of Goods Sold (30 x $30) ................. Merchandise Inventory .....................
112 401 505 120
1,500
900
1,500
900 18 Merchandise Inventory ($1,700 + $100) ..
Accounts Payable ............................. Cash ...................................................
120 201 101
1,800 1,700 100
20 Accounts Payable ..................................... Merchandise Inventory .....................
201 120
300 300
21 Cash ...........................................................
Accounts Receivable ........................ 101 112
1,500 1,500
5-32
PROBLEM 5-2A (Continued) Date Account Titles Ref. Debit Credit July 22
Accounts Receivable (40 x $50) .............. Sales................................................... Cost of Goods Sold (40 x $30) ................. Merchandise Inventory .....................
112 401 505 120
2,000
1,200
2,000
1,200
30 Accounts Payable ($1,700 - $300) ........... Cash ...................................................
210 101
1,400 1,400
31 Sales Returns and Allowances................
Accounts Receivable ........................ Merchandise Inventory............................. Cost of Goods Sold ..........................
412 112 120 505
250
150
250
150
5-33
PROBLEM 5-3A
(a)
GENERAL JOURNAL J1 Date Account Titles Ref. Debit Credit Apr. 2 Merchandise Inventory.............................
Accounts Payable ............................. 120 201
4,900 4,900
4 Accounts Receivable................................
Sales................................................... Cost of Goods Sold .................................. Merchandise Inventory .....................
112 401 505 120
5,000
4,000
5,000
4,000 5 Freight Out.................................................
Cash ................................................... 644 101
200 200
6 Accounts Payable .....................................
Merchandise Inventory ..................... 201 120
300 300
14 Merchandise Inventory.............................
Cash ................................................... 120 101
4,400 4,400
16 Cash ...........................................................
Merchandise Inventory ..................... 101 120
500 500
18 Merchandise Inventory.............................
Accounts Payable ............................. 120 201
4,200 4,200
20 Merchandise Inventory.............................
Cash ................................................... 120 101
100 100
23 Cash ...........................................................
Sales................................................... Cost of Goods Sold .................................. Merchandise Inventory .....................
101 401 505 120
6,400
5,200
6,400
5,200
5-34
PROBLEM 5-3A (Continued) (a) (Continued)
J2
Date Account Titles Ref. Debit Credit Apr. 26 Merchandise Inventory .............................
Cash .................................................... 120 101
2,300 2,300
27 Accounts Payable ($4,900 - $300) ............
Cash .................................................... 201 101
4,600 4,600
28 Cash............................................................
Accounts Receivable......................... 101 112
5,000 5,000
29 Sales Returns and Allowances.................
Cash .................................................... Merchandise Inventory ............................. Cost of Goods Sold ...........................
412 101 120 505
90
60
90
60 30 Accounts Receivable ................................
Sales.................................................... Cost of Goods Sold ................................... Merchandise Inventory......................
112 401 505 120
3,700
3,000
3,700
3,000 (b)
Cash No. 101 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 1 5 14 16 20 23 26 27 28 29
Balance
J1 J1 J1 J1 J1 J2 J2 J2 J2
500
6,400
5,000
200 4,400
100
2,300 4,600
90
9,000 8,800 4,400 4,900 4,800
11,200 8,900 4,300 9,300 9,210
5-35
PROBLEM 5-3A (Continued) (b) (Continued)
Accounts Receivable No. 112 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 4 28 30
J1 J2 J2
5,000
3,700
5,000
5,000
0 3,700
Merchandise Inventory No. 120 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 2 4 6 14 16 18 20 23 26 29 30
J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2
4,900
4,400
4,200 100
2,300
60
4,000 300
500
5,200
3,000
4,900
900 600
5,000 4,500 8,700 8,800 3,600 5,900 5,960 2,960
Accounts Payable No. 201 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 2 6 18 27
J1 J1 J1 J2
300
4,600
4,900
4,200
4,900 4,600 8,800 4,200
5-36
PROBLEM 5-3A (Continued) (b) (Continued)
M. Nisson, Capital No. 301 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 1
Balance
9,000
Sales No. 401 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 4 23 30
J1 J1 J2
5,000 6,400
3,700
5,000
11,400 15,100
Sales Returns and Allowances No. 412 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 29
J2
90
90
Cost of Goods Sold No. 505 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 4 23 29 30
J1 J1 J2 J2
4,000 5,200
3,000
60
4,000 9,200 9,140
12,140 Freight Out No. 644 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 5
J1
200
200
5-37
PROBLEM 5-3A (Continued) (c) NISSON DISTRIBUTING COMPANY Income Statement (Partial) For the Month Ended April 30, 2003 Sales revenues Sales................................................................................ $15,100 Less: Sales returns and allowances............................ 90 Net sales.......................................................................... 15,010 Cost of goods sold ................................................................ 12,140 Gross profit ............................................................................ $ 2,870 (d) NISSON DISTRIBUTING COMPANY Balance Sheet (Partial) April 30, 2003 Assets Current assets Cash................................................................................. $ 9,210 Accounts receivable....................................................... 3,700 Merchandise inventory .................................................. 2,960 Total current assets ............................................... 15,870
5-38
PROBLEM 5-4A
Adjusting entries—not required: Dec. 31 Insurance Expense .................................................. 800
Prepaid Insurance............................................. 800 Amortization Expense ............................................. 3,000 Accumulated Amortization—Store Equipment 3,000 Rent Expense ........................................................... 500 Rent Payable .................................................... 500 (a) WORLD ENTERPRISES Income Statement For the Year Ended December 31, 2002
Sales revenues Sales ......................................................................... $238,500 Less: Sales returns and allowances ..................... 4 4,600 Net sales ................................................................... 233,900
Cost of goods sold .......................................................... 177,000 Gross profit .................................................................... 56,900 Operating expenses
Salaries expense ..................................... $31,600 Amortization expense ............................. 3,000 Rent expense ($6,100 + $500)................. 6,600 Insurance expense ................................. 000800 Total operating expenses.................................. .. 42,000
Net income ....................................................................... $14,900 WORLD ENTERPRISES Statement of Owner’s Equity For the Year Ended December 31, 2002
R. Roger, Capital, January 1 ........................................... $50,300 Add: Net income .............................................................. 14,900 R. Roger, Capital, December 31 ..................................... $65,200
5-39
PROBLEM 5-4A (Continued) (a) (Continued) WORLD ENTERPRISES Balance Sheet December 31, 2002 Assets Current assets
Cash .................................................................................. $ 14,000 Accounts receivable ....................................................... 30,600 Merchandise inventory.................................................... 27,500 Prepaid insurance ($1,800 – $800).................................. 1,000
Total current assets ................................................. 73,100 Capital assets
Equipment .......................................................... $42,000 Less: Accumulated amortization – Equipment 12,000 30,000
Total assets.............................................................. $103,100
Liabilities and Owner's Equity Current liabilities
Accounts payable ($34,400 + $500)................................ $ 34,900 Sales taxes payable ......................................................... 3,000 Total current liabilities..................................................... 37,900
Owner's equity
R. Roger, Capital .............................................................. 65,200
Total liabilities and owner's equity ......................... $103,100
5-40
PROBLEM 5-4A (Continued) (b) Dec. 31 Sales............................................................ 238,500
R. Roger, Capital ................................ 238,500
31 R. Roger, Capital ........................................ 223,600 Sales Returns and Allowances ......... 4,600 Cost of Goods Sold............................ 177,000 Salaries Expense................................ 31,600 Rent Expense...................................... 6,600 Insurance Expense............................. 800 Amortization Expense........................ 3,000
5-41
PROBLEM 5-5A
(a) DAIGLE DEPARTMENT STORE Income Statement For the Year Ended November 30, 2003
Sales revenues Sales........................................................................................ $850,000 Less: Sales returns and allowances ................................... 10,000 Net sales ................................................................................. 840,000
Cost of goods sold ........................................................................ 633,220 Gross profit .................................................................................. 206,780 Operating expenses
Selling expenses Salaries expense ($139,000 X 70%) $97,300 Sales commissions expense............ 12,750 Amortization expense—building 9,500 Delivery expense.............................. 8,200 Insurance expense ($9,000 x 50%) 4,500 Amortization expense— delivery equipment........................ 00 4,000
Total selling expenses ............. $136,250 Administrative expenses
Salaries expense ($139,000 X 30%) . $41,700 Utilities expense................................ 10,600 Insurance expense ($9,000 x 50%) .. 4,500 Property tax expense ........................ 3,500
Total administrative expenses . 0 60,300 Total operating expenses.. 196,550
Income from operations..................................................... 10,230 Other revenues and gains
Interest revenue .......................................................... $5,000 Other expenses and losses
Interest expense.......................................................... 8,000 000 3,000 Net income .......................................................................... $ 7,230
5-42
PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Statement of Owner's Equity For the Year Ended November 30, 2003
B. Daigle, Capital, December 1, 2002 ................................................ $84,200 Add: Net income ............................................................................... 7,230 91,430 Less: Drawings .................................................................................. 012,000 B. Daigle, Capital, November 30, 2003.............................................. $79,430
5-43
PROBLEM 5-5A (Continued) (a) (Continued) DAIGLE DEPARTMENT STORE Balance Sheet November 30, 2003 Assets Current assets
Cash ............................................................................. $008,000 Accounts receivable ................................................... 11,770 Merchandise inventory............................................... 36,200 Prepaid insurance....................................................... 4,500
Total current assets ............................................ 60,470 Capital assets
Land ................................................... $50,000 Building.............................................. $125,000 Less: Accumulated amortization—
building ............................ 00 41,800 83,200 Delivery equipment........................... $57,000 Less: Accumulated amortization—
delivery equipment ............. 19,680 037,320 Total capital assets ................... 0170,520
Total assets................................................................... $230,990 Liabilities and Owner's Equity Current liabilities
Accounts payable ........................................................ $ 47,310 Property taxes payable................................................ 3,500 Sales commissions payable ....................................... 4,750 Current portion of mortgage....................................... 6,000
Total current liabilities ......................................... 61,560 Long-term liabilities
Mortgage payable ........................................................ 0 90,000 Total liabilities ...................................................... 151,560
Owner's equity B. Daigle, Capital.......................................................... 0 79,430 Total liabilities and owner's equity............................. $230,990
5-44
PROBLEM 5-5A (Continued) (b) Nov. 30 Amortization Expense–Delivery Equip ....... 4,000
Amortization Expense–Building .................. 9,500 Accum. Amortiz.–Delivery .................... 4,000 Accum. Amortiz.–Building.................... 9,500
30 Insurance Expense ....................................... 9,000 Prepaid Expense ................................... 9,000 30 Property Tax Expense .................................. 3,500 Property Tax Payable............................ 3,500 30 Sales Commissions Expense ...................... 4,750 Sales Commissions Payable................ 4,750
(c) Nov. 30 Sales............................................................... 850,000
Interest Revenue ........................................... 5,000 B. Daigle, Capital ................................... 855,000
Nov. 30 B. Daigle, Capital........................................... 847,770
Sales Returns and Allowances ............ 10,000 Cost of Goods Sold............................... 633,220 Salaries Expense................................... 139,000 Amortization Expense—Delivery Equipment........................................... 4,000 Delivery Expense................................... 8,200 Sales Commission Expense................. 12,750 Amortization Expense—Store Equipment........................................... 9,500 Insurance Expense................................ 9,000 Property Tax Expense........................... 3,500 Utilities Expense.................................... 10,600 Interest Expense.................................... 8,000
30 B. Daigle, Capital............................................ 12,000 B. Daigle, Drawings................................ 12,000
5-45
PROBLEM 5-6A Account Statement Classification Accounts Payable
Balance Sheet Current Liabilities
Accounts Receivable
Balance Sheet Current Assets
Accumulated Amortization –Office Building
Balance Sheet Capital Assets (Contra Account)
Accumulated Amortization –Store Equipment
Balance Sheet Capital Assets (Contra Account)
Advertising Expense
Income Statement Selling Expenses
Amortization Expense –Office Building
Income Statement Administrative Expenses
Amortization Expense –Store Equipment
Income Statement Selling Expenses
Cash
Balance Sheet Current Assets
Swirsky, Capital Balance Sheet Owner’s Equity Freight Out
Income Statement Selling Expenses
Swirsky, Drawings
Statement of Owner’s Equity
Drawings
Income Tax Expense
Income Statement Other Expenses
Income Tax Payable Insurance Expense
Balance Sheet Income Statement
Current Liabilities Administrative Expenses
Interest Expense
Income Statement Other Expenses
Interest Payable Balance Sheet Current Liabilities
5-46
Account Statement Classification
Land
Balance Sheet Capital Assets
Merchandise Inventory
Balance Sheet Current Assets
Mortgage Payable
Balance Sheet Long-Term Liability
Office Building
Balance Sheet Capital Assets
Prepaid Insurance
Balance Sheet Current Assets
Salaries Expense –Office Staff
Income Statement Administrative Expenses
Salaries Expense –Store Staff
Income Statement Selling Expenses
Salaries Payable
Balance Sheet Current Liabilities
Sales Returns and Allowances
Income Statement Contra Revenue
Store Equipment
Balance Sheet Capital Assets
Utilities Expense–Office
Income Statement Administrative Expenses
Utilities Expense–Store
Income Statement Selling Expenses
Wages Payable Balance Sheet Current Liabilities
5-47
PROBLEM 5-7A
(a)
MCGRATH COMPANY Income Statement
For the Year Ended December 31, 2002 Sales revenues Sales......................................................................... $800,000 Less: Sales returns and allowances .................... 30,000 Net sales .................................................................. 770,000 Cost of goods sold ......................................................... 555,000 Gross profit ..................................................................... 215,000 Operating expenses Selling expenses Sales salaries expense ($80,000 + $16,000) ........................... $96,000 Delivery expense............................... 30,000 Advertising expense ......................... 10,000 Sales commissions expense............ 6,000 $142,000 Administrative expenses Office salaries expense .................... $27,000 Rent expense..................................... 24,000 Utilities expense................................ 12,000 Amortization expense—office equip. 8,000 71,000 Total operating expenses....................................... 213,000 Income from operations................................................. 2,000 Other revenues and gains Rent revenue ........................................................... $40,000 Other expenses and losses Interest expense...................................................... 2,000 38,000 Net income ...................................................................... $ 40,000
5-48
PROBLEM 5-7A (Continued) (b)
MCGRATH COMPANY
Income Statement For the Year Ended December 31, 2002
Revenues Net sales .................................................................. $770,000 Rent revenue ........................................................... 40,000 $810,000 Expenses Cost of sales............................................................ $555,000 Selling expenses ($80,000 + $16,000 + $30,000 + $10,000 + $6,000) 142,000 Administrative ($27,000 + $24,000 + $12,000 + $8,000) ................ 71,000 Interest expense...................................................... 2,000 770,000 Net income ...................................................................... $ 40,000
5-49
PROBLEM 5-8A
(a) 2000 1999 Gross profit margin
19.5% ($949,263 - $764,198) ÷ $949,263
23.8% ($808,251 – $615,827) ÷ $808,251
Inventory turnover
3.5 times $764,198 ÷ [($225,958 + $212,382) ÷ 2]
3.3 times $615,827 ÷ [($212,382 + $164,557) ÷ 2]
Days sales in inventory
104.3 days 365 days ÷ 3.5 times
110.6 days 365 days ÷ 3.3 times
(b) IPSCO’s gross profit margin declined in 2000. However, its management
of its inventories improved. It’s inventory turned over (sold) faster in 2000 and the number of days sales in inventory declined from 110.6 days to 104.3 days. This means that IPSCO is not holding its inventory for as long in 2000, as it did in 1999. The faster you sell your inventory, the faster the company will collect cash/receivables, the lower its carrying costs, and the reduced risk of inventory obsolescence.
5-50
*PROBLEM 5-9A
GENERAL JOURNAL Date
Account Titles and Explanation
Ref.
Debit
Credit
Sept. 2
GST Recoverable.....................................Merchandise Inventory ...........................
Accounts Payable............................
4,200 60,000
64,200
4 Merchandise Inventory ...........................Cash..................................................
02,000 02,000
5 Accounts Payable ...................................Merchandise Inventory ...................GST Recoverable.............................
07,490 07,000 490
6 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold.................................Merchandise Inventory ...................
23,520
15,000
21,000 1,470 1,050
15,000
15 GST Recoverable.....................................Supplies [$4,000 + (5% x $4,000)] ..........
Cash..................................................
280 4,200
04,480
18 GST Recoverable.....................................Merchandise Inventory ...........................
Cash..................................................
420 6,000
06,420
22 Accounts Receivable ..............................Sales .................................................GST Payable (7% x $28,000) ...........PST Payable (5% x $28,000)............
Cost of Goods Sold.................................Merchandise Inventory ...................
31,360
20,000
28,000 1,960 1,400
20,000
5-51
*PROBLEM 5-9A (Continued)
Date
Account Titles and Explanation
Ref.
Debit
Credit
Sept. 27
Delivery Equipment [$30,000 + (5% x $30,000)] ......................GST Recoverable (7% x $30,000) ...........
Accounts Payable............................
31,500 2,100
33,600
28 Accounts Payable ($64,200 – $7,490) ....
Cash..................................................
56,710
0
56,710
30 Cash..........................................................Accounts Receivable ......................
23,520 00,
23,520
5-52
*PROBLEM 5-10A
(a) GENERAL JOURNAL J1 Date
Account Titles and Explanation
Ref.
Debit
Credit
April 4 GST Recoverable.................................... Merchandise Inventory ..........................
Accounts Payable...........................
114 120 201
42.00 600.00
642.00
6 Merchandise Inventory .......................... Cash.................................................
120 101
060.00 060.00
8 Accounts Receivable ............................. Sales ................................................ GST Payable.................................... PST Payable ....................................
Cost of Goods Sold ................................ Merchandise Inventory ..................
112 401 214 215
505 120
1,053.00
630.00
900.00 63.00 90.00
630.00
10 Accounts Payable .................................. Merchandise Inventory ..................
GST Recoverable ($40 X 7%)........
201 120 114
042.80 040.00 2.80
11 GST Recoverable.................................... Merchandise Inventory ..........................
Cash.................................................
114 120 101
21.00 300.00
321.00
14 GST Recoverable.................................... Merchandise Inventory ..........................
Accounts Payable...........................
114 120 201
49.00 700.00
749.00
15 Cash......................................................... Merchandise Inventory .................. GST Recoverable............................
101 120 114
053.50 050.00 3.50
17 Merchandise Inventory .......................... Cash.................................................
120 101
070.00 070.00
5-53
*PROBLEM 5-10A (Continued) (a) (Continued)
J2 Date
Account Titles and Explanation
Ref.
Debit
Credit
April 18
Accounts Receivable ..............................
Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold................................. Merchandise Inventory ...................
112 401 214 215
505 120
936.00
560.00
800.00 56.00 80.00
560.00
20 Cash..........................................................Accounts Receivable ......................
101 112
500.00 500.00
27 GST Payable ............................................PST Payable.............................................Sales Returns and Allowances ..............
Accounts Receivable ......................
Merchandise Inventory .......................... Cost of Goods Sold .........................
214 215 412 112
120 505
2.10 3.00 30.00
25.00
035.10
25.00
29 Accounts Payable ...................................Cash..................................................
201 101
599.20 599.20
30 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold................................. Merchandise Inventory ...................
112 401 214 215
505 120
1,170.00
730.00
1,000.00
70.00 100.00
730.00
30 Cash..........................................................Accounts Receivable ......................
101 112
1,200.00 1,200.00
5-54
*PROBLEM 5-10A (Continued) (b) Cash No. 101 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 1 6 11 15 17 20 29 30
Balance
J1 J1 J1 J1 J2 J2 J2
053.50
500.00
1,200.00
060.00 321.00
070.00
599.20
2,500.00 2,440.00 2,119.00 2,172.50 2,102.50 2,602.50 2,003.30 3,203.30
Accounts Receivable No. 112
Explanation
Ref.
Debit
Credit Balance
Apr. 8 18 20 27 30 30
J1 J2 J2 J2 J2 J2
1,053.00 936.00
1,170.00
500.00 035.10
1,200.00
1,053.00 1,989.00 1,489.00 1,453.90 2,623.90 1,423.90
GST Recoverable No. 114 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 4 10 11 14 15
J1
J1 J1 J1 J1
42.00
21.00 49.00
2.80
3.50
42.00 39.20 60.20 109.20 105.70
5-55
*PROBLEM 5-10A (Continued) (b) (Continued) Merchandise Inventory No. 120 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 1 4 6 8 10 11 14 15 17 18 27 30
Balance
J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2
600.00 60.00
300.00 700.00
70.00
25.00
630.00 40.00
50.00
560.00
730.00
3,500.00 4,100.00 4,160.00 3,530.00 3,490.00 3,790.00 4,490.00 4,440.00 4,510.00 3,950.00 3,975.00 3,245.00
Accounts Payable No. 201 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 4 10 14 29
J1 J1 J1 J2
42.80
599.20
642.00
749.00
642.00 599.20 1,348.20 749.00
GST Payable No. 214 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 8 18 27 30
J1 J2 J2 J2
2.10
63.00 56.00
70.00
63.00 119.00 116.90 186.90
5-56
*PROBLEM 5-10A (Continued) (b) (Continued) PST Payable No. 215 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 8 18 27 30
J1 J2 J2 J2
3.00
90.00 80.00
100.00
90.00 170.00 167.00 267.00
B. J. Evert, Capital No. 301 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 1
Balance
6,000.00
Sales No. 401 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 8 18 30
J1 J2 J2
900.00 800.00
1,000.00
0,900.00 1,700.00 2,700.00
Sales Returns and Allowances No. 412 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 27
J2
030.00
0,030.00
Cost of Goods Sold No. 505 Date
Explanation
Ref.
Debit
Credit
Balance
Apr. 8 18 27 30
J1 J2 J2 J2
630.00 560.00
730.00
25.00
0,630.00 1,190.00 1,165.00 1,895.00
5-57
*PROBLEM 5-10A (Continued) (c)
B. J.'S TENNIS SHOP Trial Balance April 30, 2003
Debit
Credit
Cash ................................................................Accounts Receivable.....................................GST Recoverable ...........................................Merchandise Inventory..................................Accounts Payable ..........................................GST Payable ...................................................PST Payable ...................................................B. J. Evert, Capital .........................................Sales................................................................Sales Returns and Allowances.....................Cost of Goods Sold .......................................
$3,203.30
1,423.90 105.70 3,245.00
30.00 1,895.00 $9,902.90
$ 749.00 186.90 267.00 6,000.00 02,700.00
00000000 $9,902.90
(d)
B. J.'S TENNIS SHOP Income Statement (Partial) For the Month Ended April 30, 2003
Sales revenues
Sales........................................................................................ $2,700 Less: Sales returns and allowances.................................... 30 Net sales.................................................................................. 2,670
Cost of goods sold ........................................................................ 1,895 Gross profit .................................................................................... 775
5-58
*PROBLEM 5-11A
(a) METIS WHOLESALE COMPANY
Work Sheet For the Year Ended December 31, 2002
Account Titles
Trial Balance
Adjustments
Adjusted Trial Balance
Income
Statement
Balance Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash Accounts Receivable Merchandise Inventory Land Buildings Accum. Amortization Equipment Accum. Amortization Notes Payable Accounts Payable G. Metis, Capital G. Metis, Drawings Sales Cost of Goods Sold Salaries Expense Utilities Expense Repair Expense Gas and Oil Expense Insurance Expense
Totals Amort. Expense—Bldings Amort. Expense— Equip. Interest Expense Interest Payable
Totals Net Income
Totals
33,400 37,600 92,400 92,000
197,000
83,500
10,000
712,100 69,800
9,400 5,900 7,200
0,00 3,500 1,353,800
54,000
42,400 50,000 37,500
267,800
902,100
00000000 1,353,800
(3) 2,400
(1) 10,000 (1) 9,000 (2) 4,000
000000 0025,400
(3) 2,400
(1) 10,000
(1) 9,000
(2) 04,000 25,400
33,400 37,600 90,000 92,000
197,000
83,500
10,000
714,500 69,800
9,400 5,900 7,200 3,500
10,000
9,000 4,000
00000000 1,376,800
64,000
51,400 50,000 37,500
267,800
902,100
0,004,000 1,376,800
714,500 69,800
9,400 5,900 7,200 3,500
10,000
9,000 4,000
0000000 0833,300
068,800 902,100
902,100
0000000 902,100
0000000 00902,100
33,400 37,600 90,000 92,000
197,000
83,500
10,000
0000000 543,500
0000000 543,500
64,000
51,400 50,000 37,500
267,800
004,000 474,700 068,800 543,500
Key: (1) Amortization expense—buildings, (1) Amortization expense—equipment, (2) Interest payable., (3) Inventory adjustment.
5-59
*PROBLEM 5-11A (Continued) (b)
METIS WHOLESALE COMPANY Income Statement
For the Year Ended December 31, 2002
Sales ..................................................................................................... $902,100 Cost of goods sold .............................................................................. 714,500 Gross profit ........................................................................................ 187,600 Operating expenses
Selling expenses Salaries expense ($69,800 X 80%) ..... $55,840 Gas and oil expense............................ 0007,200
Total selling expenses ................ $63,040 Administrative expenses
Salaries expense ($69,800 X 20%) ..... $13,960 Amortization expense—buildings ..... 10,000 Utilities expense.................................. 9,400 Amortization expense—equipment ... 9,000 Repair expense.................................... 5,900 Insurance expense .............................. 3,500
Total administrative expenses ... 00 51,760 Total operating expenses..................................... 0 114,800
Income from operations...................................................................... 72,800 Other expenses and losses
Interest expense .......................................................................... 00 4,000 Net income ........................................................................................... $ 68,800
METIS WHOLESALE COMPANY Statement of Owner’s Equity
For the Year Ended December 31, 2002
G. Metis, Capital January 1 ................................................................. $267,800 Add: Net income .................................................................................. 68,800 ............................................................................................................... 336,600 Less: Drawings .................................................................................... 10,000 G. Metis, Capital December 31 ........................................................... $326,600
5-60
*PROBLEM 5-11A (Continued) (b) (Continued)
METIS WHOLESALE COMPANY Balance Sheet
December 31, 2002
Assets Current assets Cash .............................................................................................. $ 33,400 Accounts receivable .................................................................... 37,600 Merchandise inventory ................................................................ 90,000 Total current assets.............................................................. 161,000 Capital assets Land............................................................ $ 92,000 Buildings.................................................... $197,000 Less: Accumulated amortization............. (64,000) 133,000 Equipment.................................................. 83,500 Less: Accumulated amortization............. (51,400) 32,100 257,100 Total assets .......................................................................... $418,100 Liabilities and Owner’s Equity Current liabilities Notes payable............................................................................... $ 50,000 Accounts payable ........................................................................ 37,500 Interest payable............................................................................ 4,000 Total liabilities ...................................................................... 91,500 Owner’s Equity G. Metis Capital ............................................................................ 326,600 Total liabilities and owner’s equity.................................... $418,100
5-61
*PROBLEM 5-11A (Continued) (c) Dec. 31 Amortization Expense–Building......... 10,000 Accum. Amortiz.–Building........... 10,000 Amortization Expense–Equipment..... 9,000 Accum. Amortiz.–Equipment....... 9,000 Interest Expense .................................. 4,000 Interest payable ............................ 4,000 Cost of Goods Sold ............................. 2,400 Merchandise Inventory ................ 2,400 (d) Dec. 31 Sales .................................................... 902,100 G. Methis, Capital ........................ 902,100 G. Metis, Capital .................................. 833,300 Cost of Goods Sold ..................... 714,500 Salaries Expense ......................... 69,800 Utilities Expense.......................... 9,400 Repair Expense............................ 5,900 Gas and Oil Expense................... 7,200 Insurance Expense...................... 3,500 Amortization Expense–Buildings 10,000 Amortization Expense–Equipment 9,000 Interest Expense.......................... 4,000 G. Metis, Capital .................................. 10,000 G. Metis, Drawings ...................... 10,000
5-62
*PROBLEM 5-11A (Continued) (e)
METIS WHOLESALE COMPANY Post-Closing Trial Balance
December 31, 2002
Debit Credit Cash .............................................................. $ 33,400 Accounts Receivable ................................... 37,600 Merchandise Inventory ................................ 90,000 Land............................................................... 92,000 Buildings....................................................... 197,000 Accumulated Amortization—Buildings...... $ 64,000 Equipment..................................................... 83,500 Accumulated Amortization—Equipment.... 51,400 Notes Payable............................................... 50,000 Accounts Payable ........................................ 37,500 Interest Payable............................................ 4,000 G. Metis, Capital ........................................... 00000 00 326,600
Totals $533,500 $533,500
5-63
PROBLEM 5-1B
(a) June 5 Merchandise Inventory–Jet Runners (2 x $22,000)................................................... 44,000
Accounts Payable ................................. 44,000 13 Merchandise Inventory–Skiffs (2 x $25,000)................................................... 50,000
Accounts Payable ................................. 50,000
17 Accounts Receivable (4 x $26,500).............. 106,000 Sales ....................................................... 106,000
Cost of Goods Sold (4 x $22,000) ................ 88,000 Merchandise Inventory–Jet Runners .. 88,000 18 Merchandise Inventory–Skiffs (2 x $26,000)................................................... 52,000
Accounts Payable ................................. 52,000 22 Accounts Payable ......................................... 26,000
Merchandise Inventory–Skiffs ............. 26,000 23 Accounts Receivable (2 x $33,000).............. 66,000
Sales ....................................................... 66,000 Cost of Goods Sold (2 x $27,000) ............... 54,000 Merchandise Inventory–Power ............ 54,000 24 Accounts Receivable (3 x $29,000).............. 87,000
Sales ....................................................... 87,000
Cost of Goods Sold (3 x $24,000) ................ 72,000 Merchandise Inventory–Skiffs ............. 72,000
5-64
PROBLEM 5-1B (Continued) (b)
Merchandise Inventory– Jet Runners
Merchandise Inventory– Skiffs
Bal. 88,000 88,000 Bal. 72,000 26,000 44,000 50,000 72,000 44,000 52,000
76,000
Merchandise Inventory–
Power
Cost of Goods Sold Bal. 54,000 54,000 88,000
0 54,000 72,000 214,000
5-65
PROBLEM 5-2B
GENERALJOURNAL
Date Account Titles Ref. Debit Credit June 1
Merchandise Inventory (130 x $5) ............ Accounts Payable .............................. Merchandise Inventory.............................. Cash ....................................................
120 201 120 101
650
50
650
50 3 Accounts Receivable (140 x $10) .............
Sales.................................................... Cost of Goods Sold (140 x $6) .................. Merchandise Inventory ......................
112 401 505 120
1,400
840
1,400
840 6 Accounts Payable ......................................
Merchandise Inventory ...................... 201 120
50 50
9 Accounts Payable ......................................
Cash .................................................... 201 101
600 600
15 Cash ............................................................
Accounts Receivable ......................... 101 112
1,400 1,400
17 Accounts Receivable (120 x $10) .............
Sales.................................................... Cost of Goods Sold ................................... Merchandise Inventory ......................
112 401 505 120
1,200
682
1,200
682 20 Merchandise Inventory (120 x $5) ............
Accounts Payable .............................. 120 201
600 600
24 Cash ............................................................
Accounts Receivable ......................... 101 112
1,200 1,200
5-66
PROBLEM 5-2B (Continued) Date Account Titles Ref. Debit Credit June 26
Accounts Payable ..................................... Cash ...................................................
201 101
600
600 28 Accounts Receivable (110 x $10) ............
Sales................................................... Cost of Goods Sold .................................. Merchandise Inventory .....................
112 401 505 120
1,100
609
1,100
609 30 Sales Returns and Allowances................
Accounts Receivable ........................ Merchandise Inventory............................. Cost of Goods Sold ..........................
412 112 120 505
150
75
150
75
5-67
PROBLEM 5-3B
(a)
GENERAL JOURNAL J1 Date
Account Titles and Explanation
Ref.
Debit
Credit
May 1
Merchandise Inventory ...........................
Accounts Payable............................
120 201
5,000
5,000
2 Accounts Receivable ..............................Sales .................................................
Cost of Goods Sold................................. Merchandise Inventory ...................
112 401
505 120
4,000
3,000
4,000
3,000
5
7
Accounts Payable ...................................Merchandise Inventory ...................
Freight Out ............................................... Cash .................................................
201 120
644 101
0,200
200
0,200
200
11 Supplies ...................................................Cash..................................................
126 101
0,900 0,900
12 Merchandise Inventory ...........................Cash..................................................
120 101
2,400 2,400
15 Cash .........................................................Merchandise Inventory ...................
101 120
0,230 0,230
17 Merchandise Inventory ...........................Accounts Payable............................
120 201
1,900 1,900
19
Merchandise Inventory ...........................
Cash..................................................
120 101
0,250
0,250
5-68
PROBLEM 5-3B (Continued) (a) (Continued)
J2 Date
Account Titles and Explanation
Ref.
Debit
Credit
May 24
Cash ........................................................
Sales ................................................ Cost of Goods Sold................................ Merchandise Inventory ..................
101 401
505 120
6,200
4,340
6,200
4,340
25 Merchandise Inventory .......................... Accounts Payable...........................
120 201
1,000 1,000
27 Cash ....................................................... Accounts Receivable .....................
101 112
4,000 0,0
4,000
29 Sales Returns and Allowances ............. Cash.................................................
Merchandise Inventory .......................... Cost of Goods Sold ........................
412 101
120 505
0,100
70
0,100
70
30 Accounts Payable ($5,000 – $200) ........ Cash.................................................
201 101
4,800
4,800
31 Accounts Receivable ............................. Sales ................................................
Cost of Goods Sold................................ Merchandise Inventory ..................
112 401
505 120
1,600
1,000
1,600
1,000
5-69
PROBLEM 5-3B (Continued) (b) Cash No. 101 Date
Explanation
Ref.
Debit
Credit
Balance
May 1 7
11 12 15 19 24 27 29 30
Balance
J1 J1 J1 J1 J1 J2 J2 J2
J2
230
6,200 4,000
200 900 2,400
250
100 4,800
5,000 4,800 3,900 1,500 1,730 1,480 7,680 11,680 11,580 6,780
Accounts Receivable No. 112 Date
Explanation
Ref.
Debit
Credit
Balance
May 2 27 31
J1 J2 J2
4,000
1,600
4,000
04,000 00,000 01,600
Merchandise Inventory No. 120 Date
Explanation
Ref.
Debit
Credit
Balance
May 1 2 5 12 15 17 19 24 25 29 31
J1 J1 J1 J1 J1 J1 J1 J2 J2 J2 J2
5,000
2,400
1,900 250
1,000
70
3,000 200
230
4,340
1,000
5,000 2,000 1,800 4,200 3,970 5,870 6,120 1,780 2,780 2,850 1,850
5-70
PROBLEM 5-3B (Continued) (b) (Continued) Supplies No. 126 Date
Explanation
Ref.
Debit
Credit
Balance
May 11
J1
0,900
00,900
Accounts Payable No. 201 Date
Explanation
Ref.
Debit
Credit
Balance
May 1 5 17 25 30
J1 J1 J1 J2 J2
0,200
4,800
5,000
1,900 1,000
05,000 04,800 6,700 7,700 2,900
S. Eagle, Capital No. 301 Date
Explanation
Ref.
Debit
Credit
Balance
May 1
Balance
05,000
Sales No. 401 Date
Explanation
Ref.
Debit
Credit
Balance
May 2 24 31
J1 J2 J2
4,000 6,200 1,600
04,000 10,200 11,800
Sales Returns and Allowances No. 412 Date
Explanation
Ref.
Debit
Credit
Balance
May 29
J2
0,100
00,100
5-71
PROBLEM 5-3B (Continued) (b) (Continued) Cost of Goods Sold No. 505 Date
Explanation
Ref.
Debit
Credit
Balance
May 2 24 29 31
J1 J2 J2 J2
3,000 4,340
1,000
70
03,000 07,340 07,270 8,270
Freight Out No. 644 Date
Explanation
Ref.
Debit
Credit
Balance
May 7
J1
0,200
00,200
(c) EAGLE HARDWARE STORE
Income Statement (Partial) For the Month Ended May 31, 2003
Sales revenues Sales.............................................................................. $11,800
Less: Sales returns and allowances.......................... 100 Net sales........................................................................ 11,700 Cost of goods sold .............................................................. 8,270 Gross profit .......................................................................... 3,430
(d) EAGLE HARDWARE STORE
Balance Sheet (Partial) May 31, 2003
Assets
Current assets Cash............................................................................... $ 6,780 Accounts receivable .................................................... 1,600 Merchandise inventory ................................................ 1,850 Supplies ........................................................................ 900 Total current assets ............................................. $11,130
5-72
PROBLEM 5-4B
Adjusting entries—not required: Dec. 31 Cost of Goods Sold (Inventory Loss)..................... 100
Merchandise Inventory..................................... 100 Insurance Expense .................................................. 900
Prepaid Insurance............................................. 900 Amortization Expense ............................................. 4,000 Accumulated Amortization—Building ............ 4,000 Amortization Expense ............................................. 2,850 Accumulated Amortization—Store Equipment 2,850 Property Tax Expense ............................................. 6,000 Property Tax Payable ....................................... 6,000 (a) GLOBAL ENTERPRISES Income Statement For the Year Ended December 31, 2002
Sales revenues Sales ............................................................................ $243,700 Less: Sales returns and allowances ........................ 4 4,800 Net sales ...................................................................... 238,900
Cost of goods sold ($180,300 + $100)............................... 180,400 Gross profit ....................................................................... 58,500 Operating expenses
Salaries expense ...................................... $31,600 Utilities expense...................................... 5,100 Amortization expense ($4,000 + $2,850) 6,850 Property tax expense ............................. 6,000 Insurance expense ................................. 900
Total operating expenses.............................. 50,450 Net income .......................................................................... $ 8,050
5-73
PROBLEM 5-4B (Continued) (a) (Continued) GLOBAL ENTERPRISES Statement of Owner’s Equity For the Year Ended December 31, 2002 T. Brown, Capital, January 1.............................................. $50,000 Add: Net income ................................................................. 8,050 T. Brown, Capital, December 31 ........................................ $58,050
5-74
PROBLEM 5-4B (Continued) (a) (Continued)
GLOBAL ENTERPRISES Balance Sheet
December 31, 2002 Assets Current assets
Cash ............................................................................................ $ 13,000 Accounts receivable .................................................................. 31,700 Merchandise inventory............................................................... 28,000 Prepaid insurance ($1,900 – $900)............................................. 1,000
Total current assets ............................................................ 73,700 Capital assets
Land ......................................................... $ 30,000 Building.................................................... $150,000 Less: Accumulated amortization –Building ($18,750 + $4,000) .................. 22,750 127,250 Store equipment...................................... $45,000 Less: Accumulated amortization –Store Equipment ($9,100 + $2,850)...... 11,950 33,050 190,300
Total assets.......................................................................... $264,000
Liabilities and Owner's Equity Current liabilities
Accounts payable ....................................................................... $ 34,700 Sales taxes payable .................................................................... 4,000 Property tax payable................................................................... 6,000 Current portion of mortgage payable........................................ 5,000 Total current liabilities................................................................ 49,700
Long-term liabilities Mortgage payable........................................................................ 156,250 Total liabilities ..................................................................... 205,950 Owner's equity
T. Brown, Capital......................................................................... 58,050 Total liabilities and owner's equity .................................... $264,000
5-75
PROBLEM 5-4B (Continued) (b) Dec. 31 Sales............................................................ 243,700
T. Brown, Capital ................................ 243,700
31 T. Brown, Capital........................................ 235,650 Sales Returns and Allowances ......... 4,800 Cost of Goods Sold............................ 180,400 Salaries Expense................................ 31,600 Utilities Expense................................. 5,100 Insurance Expense............................. 900 Property Tax Expense........................ 6,000 Amortization Expense........................ 6,850
5-76
PROBLEM 5-5B
(a) VEITCH DEPARTMENT STORE Income Statement For the Year Ended December 31, 2002
Sales revenues Sales........................................................................................... $624,000 Less: Sales returns and allowances ...................................... 8,000 Net sales .................................................................................... 616,000
Cost of goods sold ........................................................................... 427,200 Gross profit ....................................................................................... 188,800 Operating expenses
Selling expenses Sales salaries expense ..................... $76,000 Sales commissions expense............ 15,500 Amortization expense — equipment 13,300 Utilities expense ($11,000 X 60%) .... 6,600 Insurance expense ($7,200 X 60%) .. 000 4,320
Total selling expenses .............. $115,720 Administrative expenses
Office salaries expense .................... $32,000 Amortization expense — building ... 10,400 Property taxes expense .................... 4,800 Utilities expense ($11,000 X 40%) .... 4,400 Insurance expense ($7,200 X 40%) .. 000 2,880
Total administrative expenses 0054,480 Total operating expenses 0 170,200
Income from operations..................................................... 18,600 Other revenues and gains
Interest revenue .......................................................... $ 4,000 Other expenses and losses
Interest expense.......................................................... 11,000 00 07,000 Net income .......................................................................... $ 11,600
5-77
PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Statement of Owner's Equity For the Year Ended December 31, 2002
S. Veitch, Capital, January 1.............................................................. $226,600 Add: Net income ............................................................................... 0 11,600 238,200 Less: Drawings .................................................................................. 0 28,000 S. Veitch, Capital, December 31 ........................................................ $210,200
5-78
PROBLEM 5-5B (Continued) (a) (Continued) VEITCH DEPARTMENT STORE Balance Sheet December 31, 2002 Assets Current assets
Cash ............................................................................................. $023,000 Accounts receivable ................................................................... 50,300 Merchandise inventory............................................................... 72,500 Prepaid insurance....................................................................... 0 2,400
Total current assets ............................................................ 148,200 Capital assets
Land ........................................................... $ 50,000 Building...................................................... $190,000 Less: Accum. amortization—building.... 52,500 137,500 Equipment ................................................. $110,000 Less: Accum. amortization—equipment 42,900 00 67,100 0254,600
Total assets........................................ $402,800 Liabilities and Owner's Equity Current liabilities
Accounts payable ...................................................................... $089,300 Mortgage payable due next year .............................................. 20,000 Property taxes payable.............................................................. 4,800 Sales commissions payable ..................................................... 4,500 Interest payable.......................................................................... 0008,000 Sales taxes payable ................................................................... 00 06,000
Total current liabilities ....................................................... 132,600 Long-term liabilities
Mortgage payable (less current portion) ................................. 00 60,000 Total liabilities .................................................................... 192,600
Owner's equity S. Veitch, Capital........................................................................ 0210,200
Total liabilities and owner's equity ................................... $402,800
5-79
PROBLEM 5-5B (Continued) (b) Dec. 31 Amortization Expense—Building .................... 10,400
Accumulated Amortization—Building..... 10,400
31 Amortization Expense—Equipment ................ 13,300 Accumulated Amortization—Equipment. 13,300
31 Insurance Expense ........................................... 7,200 Prepaid Insurance ..................................... 7,200
31 Interest Expense ................................................. 8,000 Interest Payable......................................... 8,000
31 Property Taxes Expense .................................... 4,800 Property Taxes Payable............................ 4,800
31 Sales Commissions Expense ............................ 4,500 Sales Commissions Payable.................... 4,500 31 Cost of Goods Sold (Inventory Loss).............. 2,500 Merchandise Inventory ............................. 2,500
5-80
PROBLEM 5-5B (Continued) (c) Dec. 31 Sales............................................................... 624,000
Interest Revenue ........................................... 4,000 S. Veitch, Capital ................................... 628,000
31 S. Veitch, Capital ........................................... 616,400 Cost of Goods Sold............................... 427,200 Sales Returns and Allowances ............ 8,000 Office Salaries Expense........................ 32,000 Sales Salaries Expense ........................ 76,000 Sales Commissions Expense............... 15,500 Property Taxes Expense....................... 4,800 Utilities Expense.................................... 11,000 Amortization Expense—Building......... 10,400 Amortization Expense—Equipment..... 13,300 Insurance Expense................................ 7,200 Interest Expense.................................... 11,000
31 S. Veitch, Capital ........................................... 28,000 S. Veitch, Drawings ............................... 28,000
5-81
PROBLEM 5-6B
Account Statement Classification Accumulated Depreciation
Balance Sheet Capital Assets (Contra Account)
Cash and Time Deposits
Balance Sheet Current Assets
Cost of Sales
Income Statement Cost of Goods Sold
Depreciation Expense
Income Statement Operating Expenses (Administrative Expenses)
Income Taxes Expense
Income Statement Other Expenses (or Income Tax Expense)
Interest Expense
Income Statement Other Expenses
Inventories–Aluminum
Balance Sheet Current Assets
Inventories–Other Supplies
Balance Sheet Current Assets
Inventories–Raw Materials
Balance Sheet Current Assets
Operating Income
Income Statement Operating Income
Other Expenses
Income Statement Other Expenses
Payables
Balance Sheet Current Liabilities
Property, Plant, and Equipment
Balance Sheet Capital Assets
Receivables
Balance Sheet Current Assets
Sales
Income Statement Revenue
Selling, Administrative and General Expenses
Income Statement Operating Expenses
5-82
PROBLEM 5-7B
(a) TAO COMPANY
Income Statement For the Year Ended December 31, 2002
Sales revenues Sales ($702,000 - $10,000) ....................................................... $692,000 Less: Sales returns and allowances ..................................... 4,100 Net sales ................................................................................... 687,900 Cost of goods sold .......................................................................... 470,000 Gross profit ...................................................................................... 217,900 Operating expenses Selling expenses Sales salaries expense .................. $76,000 Freight out....................................... 17,200 Advertising expense ...................... 10,000 Amortization expense—store equip. 7,500 Sales commissions expense ($6,500 + $1,000)......................... 7,500 $118,200 Administrative expenses Office salaries expense ................. $19,000 Rent expense ($16,000 - $1,250) ... 14,750 Utilities expense............................. 8,000 Insurance expense ($7,000 - $1,200) 5,800 47,550 Total operating expenses.......... 165,750 Income from operations.................................................. 52,150 Other revenues and gains Interest revenue ....................................................... $5,300 Other expenses and losses Interest expense....................................................... 4,000 1,300 Net income ....................................................................... $ 53,450 Reconciliation Net Income as prepared by bookkeeper......................................... $50,000 Sales revenue unearned .................................................................. (10,000) Insurance expense applicable to 2003 ........................................... 1,200 Rent expense applicable to 2003 .................................................... 1,250 Sales commission expense applicable to 2002 ............................. (1,000) Drawings............................................................................................ 12,000 As adjusted ....................................................................................... $53,450
5-83
PROBLEM 5-7B (Continued) (b) TAO COMPANY
Income Statement For the Year Ended December 31, 2002
Revenues Net sales .............................................................. $687,900 Interest revenue .................................................. 5,300 Total revenue............................................... $693,200 Expenses Cost of goods sold ............................................. $470,000 Selling expenses (1) ........................................... 118,200 Administrative expenses (2) .............................. 47,550 Interest expense.................................................. 4,000 Total expenses ............................................ 639,750 Net income .................................................................. $ 53,450 (1) Selling expenses Sales salaries expense ....................................... $ 76,000 Freight out............................................................ 17,200 Advertising expense ........................................... 10,000 Amortization expense—store equipment .......... 7,500 Sales commissions expense ($6,500 + $1,000) 7,500 Total ..................................................................... $118,200 (2) Administrative expenses Office salaries expense ....................................... $19,000 Rent expense ($16,000 - $1,250) ......................... 14,750 Utilities expense................................................... 8,000 Insurance expense ($7,000 - $1,200).................. 5,800 Total ...................................................................... $47,550 Reconciliation Net income as prepared by bookkeeper........................................... $50,000 Sales revenue unearned .................................................................... (10,000) Insurance expense applicable to 2003 ............................................. 1,200 Rent expense applicable to 2003 ...................................................... 1,250 Sales commission expense applicable to 2002 ............................... (1,000) Drawings.............................................................................................. 12,000 As adjusted ......................................................................................... $53,450
5-84
PROBLEM 5-8B (a) 8 Months Ended
December 31, 1999 Year Ended
April 30 1999 Gross profit margin
85.3% ($74,314 – $10,931) ÷ $74,314
57.1% ($1,472 – $631) ÷ $1,472
Inventory turnover
1.64 times $10,931 ÷ [($4,966 + $8,330) ÷ 2]
0.25 times $631 ÷ [($4,966 + $0) ÷ 2]
Days sales in inventory
148 days 365 days x 8/12 ÷ 1.64 times
1,460 days 365 days ÷ 0.25 times
Current ratio
1.42:1 $1,973,457 ÷ $1,390,850
1.15:1 $298,499 ÷ $259,851
(b) SAM’s current ratio of more than 1 to 1 indicates that SAM does not
have a liquidity problem. Its current assets are more than its current liabilities. It appears to managing inventory better in its second year of operations, with a substantial reduction of days sales in inventory. The inventory ratios for the year ended April 1999 are probably reflective of the start up phase of the company.
5-85
*PROBLEM 5-9B
GENERAL JOURNAL Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 1
GST Recoverable.....................................Merchandise Inventory ...........................
Accounts Payable............................
5,250 75,000
80,250
3 Merchandise Inventory ...........................Cash..................................................
01,800 01,800
5 Accounts Payable ...................................Merchandise Inventory ...................GST Recoverable.............................
06,420 06,000 420
8 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold.................................Merchandise Inventory ...................
24,640
16,000
22,000 1,540 1,100
16,000
12 GST Recoverable.....................................Supplies ($5,000 + $250).........................
Cash..................................................
350 5,250
05,600
15 GST Recoverable.....................................Merchandise Inventory ...........................
Cash..................................................
350 5,000
05,350
18 Accounts Receivable ..............................Sales .................................................GST Payable (7% x $ 30,000) ..........PST Payable (5% x $ 30,000) ..........
Cost of Goods Sold.................................Merchandise Inventory ...................
33,600
23,000
30,000 2,100 1,500
23,000
5-86
*PROBLEM 5-9B (Continued) Date
Account Titles and Explanation
Ref.
Debit
Credit
Oct. 20
Delivery Equipment [$44,000 + (5% x $ 44,000)] .....................GST Recoverable (7% x $44,000) ...........
Accounts Payable............................
46,200 3,080
049,280
25 Accounts Payable ($80,250 – $6,420) ....
Cash..................................................
73,830
0
73,830
27 Cash .........................................................Accounts Receivable ......................
24,640 00,
24,640
5-87
*PROBLEM 5-10B
(a) GENERAL JOURNAL J1 Date
Account Titles and Explanation
Ref.
Debit
Credit
May 4 GST Recoverable.....................................Merchandise Inventory ...........................
Accounts Payable............................
114 120 201
49.00 700.00
749.00
6 Merchandise Inventory ...........................Cash..................................................
120 101
055.00 055.00
8 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold ................................. Merchandise Inventory ...................
112 401 214 215
505 120
936.00
600.00
800.00 56.00 80.00
600.00
9 Accounts Payable ...................................Merchandise Inventory ...................
GST Recoverable ($45 X 7%).........
201 120 114
048.15 045.00 3.15
14 GST Recoverable ($400 x 7%) ................Merchandise Inventory ...........................
Cash..................................................
114 120 101
28.00 400.00
428.00
16 GST Recoverable.....................................Merchandise Inventory ...........................
Accounts Payable............................
114 120 201
42.00 600.00
642.00
18 Merchandise Inventory ...........................Cash..................................................
120 101
075.00 075.00
21 Cash .........................................................Merchandise Inventory ...................GST Recoverable.............................
101 120 114
058.85 055.00 3.85
5-88
*PROBLEM 5-10B (Continued) (a) (Continued)
J2 Date
Account Titles and Explanation
Ref.
Debit
Credit
May 23
Cash .........................................................
Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold................................. Merchandise Inventory ...................
101 401 214 215
505 120
1,053.00
675.00
900.00 63.00 90.00
675.00
25 Cash .........................................................Accounts Receivable ......................
101 112
400.00 400.00
27 GST Payable ............................................PST Payable.............................................Sales Returns and Allowances ..............
Accounts Receivable ......................
Merchandise Inventory .......................... Cost of Goods Sold .........................
214 215 412 112
120 505
2.45 3.50 35.00
25.00
040.95
25.00
29 Accounts Payable ($749.00 - $ 48.15)....Cash..................................................
201 101
700.85 700.85
30 Accounts Receivable ..............................Sales .................................................GST Payable.....................................PST Payable .....................................
Cost of Goods Sold................................. Merchandise Inventory ...................
112 401 214 215
505 120
1,755.00
1,125.00
1,500.00 105.00 150.00
1,125.00 31 Cash .........................................................
Accounts Receivable ......................101 112
800.00 800.00
5-89
*PROBLEM 5-10B (Continued) (b) Cash No. 101 Date
Explanation
Ref.
Debit
Credit
Balance
May 1 6 14 18 21 23 25 29 31
Balance
J1 J1 J1 J1 J2 J2 J2 J2
058.85 1,053.00
400.00
800.00
055.00 428.00 075.00
700.85
3,000.00 2,945.00 2,517.00 2,442.00 2,500.85 3,553,85 3,953.85 3,253.00 4,053.00
Accounts Receivable No. 112 Date
Explanation
Ref.
Debit
Credit
Balance
May 8 25 27 30 31
J1 J2 J2 J2 J2
936.00
1,755.00
400.00 0440.95
800.00
936.00 536.00 495.05
2,250.05 1,450.05
GST Recoverable No. 114 Date
Explanation
Ref.
Debit
Credit
Balance
May 4 9 14 16 21
J1
J1 J1 J1 J1
49.00
28.00 42.00
3.15
3.85
49.00 45.85 73.85 115.85 112.00
5-90
*PROBLEM 5-10B (Continued) (b) (Continued) Merchandise Inventory No. 120 Date
Explanation
Ref.
Debit
Credit
Balance
May 1 4 6 8 9 14 16 18 21 23 27 30
Balance
J1 J1 J1 J1 J1 J1 J1 J1 J2 J2 J2
700.00 55.00
400.00 600.00
75.00
25.00
600.00 45.00
55.00 675.00
1,125.00
1,850.002,550.00 2,605.00 2,005.00 1,960.00 2,360.00 2,960.00 3,035.00 2,980.00 2,305.00 2,330.00 1,205.00
Accounts Payable No. 201 Date
Explanation
Ref.
Debit
Credit
Balance
May 4 9 16 29
J1 J1 J1 J2
48.15
700.85
749.00
642.00
749.00 700.85 1,342.85 642.00
GST Payable No. 214 Date
Explanation
Ref.
Debit
Credit
Balance
May 8 23 27 30
J1 J2 J2 J2
2.45
56.00 63.00
105.00
56.00 119.00 116.55 221.55
5-91
*PROBLEM 5-10B (Continued) (b) (Continued) PST Payable No. 215 Date
Explanation
Ref.
Debit
Credit
Balance
May 8 23 27 30
J1 J2 J2 J2
3.50
80.00 90.00
150.00
80.00 170.00 166.50 316.50
J. Nejedly, Capital No. 301 Date
Explanation
Ref.
Debit
Credit
Balance
May 1
Balance
4,850.00
Sales No. 401 Date
Explanation
Ref.
Debit
Credit
Balance
May 8 23 30
J1 J2 J2
800.00 900.00
1,500.00
800.00
1,700.00 3,200.00
Sales Returns and Allowances No. 412 Date
Explanation
Ref.
Debit
Credit
Balance
May 27
J2
035.00
0,035.00
Cost of Goods Sold No. 505 Date
Explanation
Ref.
Debit
Credit
Balance
May 8 23 27 30
J1 J2 J2 J2
600.00 675.00
1,125.00
25.00
0,600.00 1,275.00 1,250.00 2,375.00
5-92
*PROBLEM 5-10B (Continued) (c)
JANA'S TENNIS SHOP Trial Balance May 31, 2003
Debit
Credit
Cash...........................................................Accounts Receivable................................GST Recoverable ......................................Merchandise Inventory.............................Accounts Payable.....................................GST Payable..............................................PST Payable ..............................................J. Nejedly, Capital .....................................Sales ..........................................................Sales Returns and Allowances................Cost of Goods Sold ..................................
$4,053.00
1,450.05 112.00 1,205.00
35.00 2,375.00 $9,230.05
$ 642.00 221.55 316.50 4,850.00 03,200.00
00000000 $9,230.05
(d)
JANA'S TENNIS SHOP Income Statement (Partial) For the Month Ended May 31, 2003
Sales revenues Sales....................................................................................... $3,200 Less: Sales returns and allowances................................... 35 Net sales................................................................................. 3,165
Cost of goods sold ....................................................................... 2,375 Gross profit ................................................................................... 790
5-93
*PROBLEM 5-11B
(a) BRENNAN FASHION CENTRE
Work Sheet For the Year Ended November 30, 2003
Account Titles
Trial Balance
Adjustments
Adj. Trial Balance
Income Statement
Balance Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash Accounts Receivable Merchandise Inventory Store Supplies Land Building Accumulated Amortization Delivery Equipment Accumulated Amortization Mortgage Payable Accounts Payable Sales Taxes Payable L. Brennan, Capital L. Brennan, Drawings Sales Sales Returns and Allow. Cost of Goods Sold Salaries Expense Advertising Expense Utilities Expense Repair Expense Delivery Expense Rent Expense
Totals Supplies Expense Amort. Expense—Bldg. Amort. Expense—Equip. Interest Expense Interest Payable Property Tax Expense Property Tax Payable
Totals Net Loss
Totals
16,700 40,700 48,000
5,500 60,000 85,000
48,000
12,000
4,200 497,500 140,000 26,400 14,000 12,100 16,700
24,000 1,050,800
17,000
16,000 51,000 48,500
7,000 161,000
750,300
00000000 0,01,050,800
(4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 5,000
000000 26,250
(4) 3,000 (1) 2,000 (2) 4,250 (2) 8,000 (3) 4,000 (5) 05,000 26,250
16,700 40,700 45,000
3,500 60,000 85,000
48,000
12,000
4,200 500,500 140,000 26,400 14,000 12,100 16,700 24,000
2,000 4,250 8,000 4,000
0, 5,000
00000000 1,072,050
21,250
24,000 51,000 48,500
7,000 161,000
750,300
4,000
0,005,000 1,072,050
4,200 500,500 140,000 26,400 14,000 12,100 16,700 24,000
2,000 4,250 8,000 4,000
5,000
00000 0 761,150 00 0000 761,150
750,300
0
0000000 750,300 010,850 761,150
16,700 40,700 45,000
3,500 60,000 85,000
48,000
12,000
0000000 310,900
00010,850 321,750
21,250
24,000 51,000 48,500
7,000 161,000
4,000
005,000 321,750
0000000 321,750
5-94
*PROBLEM 5-11B (Continued) Key: (1) Supplies expense; (2) Amortization expense—building & equipment; (3) Interest payable; (4) Inventory adjustment; (5) Property tax payable
5-95
*PROBLEM 5-11B (Continued) (b)
BRENNAN FASHION CENTRE Income Statement
For the Year Ended November 30, 2003
Sales revenues Sales.............................................................................................. $750,300 Less: Sales returns and allowances .......................................... 4,200
Net sales ....................................................................................... 746,100 Cost of goods sold .............................................................................. 500,500 Gross profit ........................................................................................ 245,600 Operating expenses
Selling expenses Salaries expense ($140,000 X 70%) $98,000 Advertising expense .......................... 26,400 Rent expense ($24,000 x 80%) .......... 19,200 Store supplies expense ..................... 2,000 Delivery expense................................ 0016,700 Utilities expense ($14,000 x 80%) ..... 11,200
Total selling expenses ............... $173,500 Administrative expenses
Salaries expense ($140,000 X 30%) .. $42,000 Repair expense................................... 12,100 Amortization expense—equipment .. 8,000 Property tax expense ......................... 5,000 Rent expense ($24,000 x 20%) .......... 000 4,800 Amortization expense—building ...... 4,250 Utilities expense ($14,000 x 20%) ..... 2,800
Total administrative expenses 78,950 Total operating expenses 0 252,450
Loss from operations .......................................................................... 6,850 Other expenses and losses
Interest expense .......................................................................... 00 04,000 Net loss................................................................................................. $ 10,850
5-96
*PROBLEM 5-11B (Continued) (b) (Continued)
BRENNAN FASHION CENTRE Statement of Owner’s Equity
For the Year Ended November 30, 2003
L. Brennan, Capital, December 1..................................... $161,000 Less: Net loss ................................................................. $10,850 Drawings................................................................ 12,000 22,850 L. Brennan, Capital, November 30 .................................. $138,150
5-97
*PROBLEM 5-11B (Continued) (b) (Continued)
BRENNAN FASHION CENTRE Balance Sheet
November 30, 2003 Assets Current assets Cash .............................................................................................. $ 16,700 Accounts receivable .................................................................... 40,700 Store supplies .............................................................................. 3,500 Merchandise inventory ................................................................ 45,000 Total current assets ............................................................. 105,900 Capital assets Land.......................................................... $60,000 Building.................................................... $85,000 Less: Accumulated amortization........... 21,250 63,750 Equipment................................................ $48,000 Less: Accumulated amortization........... 24,000 24,000 147,750 Total assets ........................................................................... $253,650 Liabilities and Owner’s Equity Current liabilities Accounts payable ........................................................................ $ 48,500 Sales taxes payable ..................................................................... 7,000 Property tax payable.................................................................... 5,000 Interest payable............................................................................ 4,000 Current portion of mortgage payable......................................... 30,000 Total current liabilities......................................................... 94,500 Long-term liabilities Mortgage payable......................................................................... 21,000 Total liabilities ...................................................................... 115,500 Owner’s Equity L. Brennan, Capital ...................................................................... 138,150 Total liabilities and owner’s equity..................................... $253,650
5-98
*PROBLEM 5-11B (Continued) (c) Nov. 30 Store Supplies Expense ................... 2,000 Store Supplies ............................ 2,000 Amortization Expense–Building ...... 4,250 Accum. Amortiz.–Building......... 4,250 Amortization Expense–Equipment.. 8,000 Accum. Amortiz.–Equipment..... 8,000 Cost of Goods Sold........................... 3,000 Inventory ..................................... 3,000 Interest Expense ............................... 4,000 Interest payable .......................... 4,000 Property Tax Expense ...................... 5,000 Property Tax Payable ................. 5,000 (d) Nov. 30 Sales.................................................. 750,300 L. Brennan, Capital.................... 750,300 L. Brennan, Capital .......................... 761,150 Cost of Goods Sold ................... 500,500 Salaries Expense ....................... 140,000 Advertising Expense ................. 26,400 Utilities Expense........................ 14,000 Repair Expense.......................... 12,100 Delivery Expense....................... 16,700 Rent Expense............................. 24,000 Amortization Expense–Building 4,250 Amortization Expense–Equipment 8,000 Interest Expense........................ 4,000 Property Tax Expense............... 5,000 Supplies Expense...................... 2,000 Sales Returns and Allowances 4,200 L. Brennan, Capital .......................... 12,000 L. Brennan, Drawings................ 12,000
5-99
*PROBLEM 5-11B (Continued) (e)
BRENNAN FASHION CENTRE Post-Closing Trial Balance
November 30, 2003
Debit
Credit
Cash .............................................................. $ 16,700 Accounts Receivable ................................... 40,700 Merchandise Inventory ................................ 45,000 Store Supplies .............................................. 3,500 Land............................................................... 60,000 Building ........................................................ 85,000 Accumulated Amortization—Building........ $ 21,250 Equipment..................................................... 48,000 Accumulated Amortization—Equipment.... 24,000 Mortgage Payable ........................................ 51,000 Accounts Payable ........................................ 48,500 Property Tax Payable................................... 5,000 Sales Taxes Payable .................................... 7,000 Interest Payable............................................ 4,000 L. Brennan, Capital ...................................... 00 00000 138,150
Totals $298,900 $298,900
5-100
BYP 5-1 FINANCIAL REPORTING PROBLEM
(a) The Second Cup is involved in merchandising―selling at the retail
level through its corporate-owned stores, and at the wholesale level to its franchise operators and third parties (other companies). It is also involved in the production (roasting and blending) of coffees, and is therefore to some extent a manufacturer.
(b) Systemwide sales include retail sales of all corporate-owned and
franchised stores (based on sales information reported by store operators) and product sales to third parties. Total revenues include revenues from sales in corporate stores, franchise revenues (fees and royalties) from store operators, and product sales to third parties (refer to Note 2).
(c) 100% of revenue in 2000 was generated by operations in Canada. (d) No information is provided on the cost of goods sold, gross profit, or
regular operating expenses. After reporting Total Revenue, the next item reported on the income statement is "Earnings before Interest, Taxes, Depreciation, Amortization, and Unusual Items". The missing information would contain the Cost of Goods Sold, Gross Profit, and Operating Expenses.
(e) For competitive reasons, The Second Cup does not want to disclose
detailed information regarding its operations―such as that referred to in part (d) above. Additionally, the company feels that this information is not very meaningful when presented on a consolidated (combined) basis with the results of other companies.
5-101
BYP 5-2 FINANCIAL REPORTING PROBLEM
(a) 1. Sales returns and allowances........................Sales 2. Freight out .......................................................Front-line expenses (b) Gross profit margin
2000 = 41% ($127,824 ÷ $314,547) 1999 = 40% ($114,238 ÷ $283,401) Inventory turnover 2000 = 2.4 times [$186,723 ÷ ($76,982 + $81,468) ÷ 2] 1999 = 2.5 times [$169,163 ÷ ($60,108 + $76,982) ÷ 2] Days sales in inventory 2000 = 152 days (365 days ÷ 2.4) 1999 = 146 days (365 days ÷ 2.5)
Mark’s Work Wearhouse’s gross margin is slightly below its forecast in both years 2000 (41% compared to a forecasted range of 41.1% - 41.2%) and in 1999 (40% compared to a forecasted range of 40.6% - 40.7%). This, however, is an insignificant difference. It’s inventory turnover is slightly better than that forecasted in 1999 and is on target as forecasted in 2000 (forecasted goal of 2.1 - 2.4 times over the two years). Even though it’s inventory turnover (and days sales in inventory) are within forecast, the company’s sales, gross margin, and net earnings are still slightly below that forecasted. The difference is not substantial, though, and not likely to be of significant concern.
5-102
BYP 5-3 GLOBAL FOCUS
(a)
Carrefour (in billions of euros)
Wal-Mart (in billions of US
dollars)
Gross profit margin (€51.9 - €40.8)
€51.9 = 21.4%
($165.0 - $129.7) $165.0 = 21.4%
Inventory turnover €40.8 ÷ €4.6
=8.9 times $129.7 ÷ $18.4
= 7.0 times Days sales in
inventory 365 days ÷ 8.9
= 41 days 365 days ÷ 7.0
= 52 days Based on these ratios, it would appear the companies achieve the
same markup from the gross profit margin. However, Carrefour appears to be more efficient in controlling its inventory. It is selling its inventory more often than Wal-Mart (its inventory turns over 8.9 times a year compared to Wal-Mart’s 7 times a year) and correspondingly has less stock on hand (41 days compared to Wal-Mart’s 52 days). In spite of less stock on hand, it is able to maintain the same gross profit margin of Wal-Mart, which means its operating costs are likely lower because of reduced carrying costs.
(b) Current ratio €12.3 ÷ €10.1
= 1.22:1 $24.4 ÷ $25.8
= 0.95:1 Both companies report low current ratios. This is not surprising since
in recent years most large companies have tried to reduce costs and limit the amount of current assets that they hold.
(c) Ratios improve our ability to compare these two companies that report
financial information using different currencies. However, other factors can still reduce our ability to compare them. The two companies might classify items quite differently. Also, different accounting standards in the two countries might result in dramatically different results under the same circumstances.
5-103
BYP 5-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page [www.wiley.com/canada/weygandt2].
5-104
BYP 5-5 COLLABORATIVE LEARNING ACTIVITY
(a) 1. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales [$700,000 + ($700,000 X 6%)] ........ $742,000 Cost of goods sold ($742,000 X 75%)* ......... 556,500 Gross profit ($742,000 X 25%)** .................... 185,500 Operating expenses Selling expenses .................................... $100,000 Administrative expenses ....................... 25,000 Total operating expenses............... 125,000 Net income...................................................... $ 60,500 **Alternatively: Net sales, $742,000 – Gross profit, $185,500 **25% = ($154,000 ÷ $700,000) + 3%
2. FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales.......................................................... $700,000 Cost of goods sold......................................... 546,000 Gross profit..................................................... 154,000 Operating expenses Selling expenses .................................... $72,000* Administrative expenses ....................... 25,000* 97,000 Net income...................................................... $ 57,000
*$100,000 – $30,000 – ($30,000 X 40%) + ($700,000 X 2%) = $72,000
5-105
BYP 5-5 (Continued)
(b) Kathy’s proposed changes will increase net income by $31,500. John’s proposed changes will reduce operating expenses by $28,000 and result in a corresponding increase in net income. Thus, if the choice is between Kathy’s plan and John’s plan, Kathy’s plan should be adopted. While John’s plan will increase net income, it may also have an adverse effect on sales personnel. Under John’s plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 – ($30,000 + $14,000)].
(c) FEDCO DEPARTMENT STORE Projected Income Statement For the Year Ended December 31, 2003 Net sales .............................................................. $742,000 Cost of goods sold ............................................. 556,500 Gross profit ......................................................... 185,500 Operating expenses Selling expenses ......................................... $72,840* Administrative expenses ............................ 25,000* Total operating expenses ................... 97,840 Net income........................................................... $ 87,660 *$72,000 + 2% X ($742,000 – $700,000) = $72,840
If both plans are implemented, net income will be $58,660 ($87,660 – $29,000) higher than the 2001 results. This is an increase of over 200%. Given the size of the increase, John’s plan to compensate sales personnel might be modified so that they would not have to take a pay cut. For example, if sales commissions were 3%, the compensation cut would be reduced to $7,740 [$60,000 – ($30,000 – ($742,000 X 3%))].
5-106
BYP 5-6 COMMUNICATION ACTIVITY
MEMORANDUM
TO: PRESIDENT, THE GREAT CANADIAN SNOWBOARD COMPANY FROM: SUBJECT: REVENUE RECOGNITION DATE:
As you know, the financial statements for The Great Canadian Snowboarding Company are prepared in accordance with generally accepted accounting principles. One of these principles is the revenue recognition principle, which provides that revenues should be recognized when they are earned. Typically, sales revenues are earned when the goods are transferred from the buyer to the seller. At this point, the sales transaction is completed and the sales price is established. Thus, in the typical situation, revenue on the snowboard ordered by Dexter is earned at event No. 7, when Dexter picks up the snowboard. The circumstances pertaining to this sale may seem to you to be atypical because Dexter has ordered a specific kind of snowboard. From an accounting standpoint, this would be true only if you could not reasonably expect to sell this snowboard to another customer. In such case, it would be proper under generally accepted accounting principles to recognize sales revenue when you have completed the snowboard for Dexter. Whether Dexter makes a down payment with the purchase order is irrelevant in recognizing sales revenue because at this time, you have not done anything to earn the revenue. A down payment may be an indication of Dexter’s “good faith.” However, its effect on your financial statements is limited entirely to recognizing the down payment as unearned revenue. If you have further questions about the accounting for this sale, please let me know.
5-107
BYP 5-7 ETHICS CASE
(a) Rita Pelzer, as a new employee, is placed in a position of responsibility
and is pressured by her supervisor to continue delaying payments to creditors. Delaying payment is not an unethical practice. Companies can pay their bills late, but they do risk incurring interest charges or impairing their credit ratings. What is unethical is lying and blaming the late payment on the mail room or post office in order to avoid interest charges or affecting the company’s credit rating.
Rita’s dilemma is to decide whether to (1) delay payments and place
inappropriate blame for these late payments on the mail room and / or post office, or (2) risk offending her boss and possibly lose the job she just assumed.
(b) The stakeholders (affected parties) are: Rita Pelzer, the assistant controller. Jamie Caterino, the controller. Yorkshire Stores, the company. Creditors of Yorkshire Stores (suppliers). Mail room / post office employees (those assigned the blame). (c) Rita’s alternatives: 1. Tell the controller (her boss) that she will prepare and mail
creditors’ cheques to take advantage of the full credit period but will not delay mailing the cheques beyond their due dates. This may offend her boss and may jeopardize her continued employment.
2. Tell the controller (her boss) that she will be happy to delay the
payment four days but will not blame others for this delay when asked. This is contrary to current practice and may also offend her boss and jeopardize her continued employment.
3. Join the team and continue the practice of delaying payments and
lay blame on others for the delay.
5-108
BYP 5-7 (Continued) (c) (Continued) 4. Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to Jamie. The company may not condone this practice. Rita definitely has a choice, but probably not without consequence. To continue the practice of lying is definitely unethical. If Rita submits to this request, she may be asked to perform other unethical tasks. If Rita stands her ground and refuses to participate in this unethical practice, she probably won’t be asked to do other unethical things—if she isn’t fired. Maybe nobody has ever challenged Jamie’s unethical behaviour and his reaction may be one of respect rather than anger and retribution. Being ethically compromised is no way to start a new job.