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CHAPTER 6
ACCOUNTING FOR MERCHANDISING BUSINESSES
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Chapter 6Accountin !or Merchan"i#in Bu#ine##e#
TRUE/FALSE
1. One of the most important differences between a service business and a retail business is inwhat is sold.
ANS: T DIF: O!": #1
. In a merchandise business$ sales minus operatin% e&penses e'uals net income.
ANS: F DIF: O!": #1
(. )nder a periodic inventor* s*stem$ the merchandise on hand at the end of the *ear isdetermined b* a ph*sical count of the inventor*.
ANS: T DIF: O!": #
+. In the periodic inventor* s*stem$ purchases of merchandise for resale are debited to the,urchases account.
ANS: T DIF: O!": #
-. )nder the periodic inventor* s*stem$ the cost of %oods sold is e'ual to the be%innin%merchandise inventor* plus the cost of %oods purchased plus the endin% merchandiseinventor*.
ANS: F DIF: ( O!": #
. In a perpetual inventor* s*stem$ the /erchandise Inventor* account is onl* used to reflectthe be%innin% inventor*.
ANS: F DIF: O!": #
0. In a periodic inventor* s*stem$ the cost of %oods purchased includes the cost oftransportationin.
ANS: T DIF: O!": #
2. As we compare a merchandise business to a service business$ the financial statement thatchan%es the most is the !alance Sheet.
ANS: F DIF: O!": #
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3hapter 4Accountin% for /erchandisin% !usinesses
5. 6hen a merchandisin% business is compared to a service business$ the financial statementthat is notaffected b* that chan%e is the Statement of Owner7s 8'uit*.
ANS: T DIF: O!": #
1#. The endin% merchandise inventor* for ##- is the same as the be%innin% merchandiseinventor* for ##.
ANS: T DIF: O!": #
11. In a multistep income statement the dollar amount for income from operations is alwa*s thesame as net income.
ANS: F DIF: O!": #
1. Net sales is e'ual to sales minus cost of merchandise sold.
ANS: F DIF: O!": #
1(. 9ross profit minus sellin% e&penses e'uals net income.
ANS: F DIF: O!": #
1+. The form of the balance sheet in which assets$ liabilities$ and owner7s e'uit* are presented ina downward se'uence is called the report form.
ANS: T DIF: 1 O!": #
1-. On the income statement in the sin%lestep form$ the total of all e&penses is deducted fromthe total of all revenues.
ANS: T DIF: 1 O!": #
1. The sin%lestep income statement is easier to prepare$ but a criticism of this format is that%ross profit and income from operations are not readil* available.
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10. Income that cannot be associated definitel* with operations$ such as a %ain from the sale of afi&ed asset$ is listed as Other Income on the multiplestep income statement.
ANS: T DIF: 1 O!": #
12. )nder the perpetual inventor* s*stem$ when a sale is made$ both the retail and cost valuesare recorded.
ANS: T DIF: O!": #(
1+
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3hapter 4Accountin% for /erchandisin% !usinesses
15. )nder the perpetual inventor* s*stem$ the cost of merchandise sold is recorded when salesare made.
ANS: T DIF: 1 O!": #(
#. If pa*ment is due b* the end of the month in which the sale is made$ the invoice terms aree&pressed as n(#.
ANS: F DIF: O!": #(
1. 6hen merchandise that was sold is returned$ a credit to sales returns and allowances ismade.
ANS: F DIF: O!": #(
. In a perpetual inventor* s*stem$ when merchandise is returned to the seller$ 3ost of/erchandise Sold is one of the accounts debited to record the transaction.
ANS: T DIF: O!": #(
(. Sales ;eturns and Allowances is a contrarevenue account.
ANS: T DIF: 1 O!": #(
+. Sales Discounts is a revenue account with a credit balance.
ANS: F DIF: O!": #(
-. Sales to customers who use ban< credit cards$ such as /aster3ard and =ISA$ are %enerall*treated as credit sales.
ANS: F DIF: O!": #(
. Sales to customers who use nonban< credit cards$ such as American 8&press$ are %enerall*treated as credit sales.
ANS: T DIF: 1 O!": #(
0. ;etailers record all credit card sales as char%e sales.
ANS: F DIF: ( O!": #(
2. The service fee that credit card companies char%e retailers varies and is the primar* reasonwh* some businesses do not accept all credit cards.
ANS: T DIF: O!": #(
1+(
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3hapter 4Accountin% for /erchandisin% !usinesses
5. The document issued b* the seller that informs the bu*er of the details of sales returns iscalled a debit memorandum.
ANS: F DIF: O!": #(
(#. A seller ma* %rant a bu*er a reduction in sellin% price and this is called a sales allowance.
ANS: T DIF: O!": #(
(1. The effect of a sales return and allowance is a reduction in sales revenue and a decrease incash or accounts receivable.
ANS: T DIF: 1 O!": #(
(. /erchandise Inventor* normall* has a debit balance.
ANS: T DIF: 1 O!": #+
((. A bu*er who ac'uires merchandise under credit terms of 11#$ n(# has $% da*s after theinvoice date to ta
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3hapter 4Accountin% for /erchandisin% !usinesses
(5. 6hen a lar%e 'uantit* of merchandise is purchased$ a reduction allowed on the sale price iscalled a trade discount.
ANS: T DIF: 1 O!": #-
+#. A deduction allowed to wholesalers and retailers from the price of merchandise listed incatalo%s is called cash discounts.
ANS: F DIF: O!": #-
+1. Sellers and bu*ers are re'uired to record trade discounts.
ANS: F DIF: O!": #-
+. If the ownership of merchandise passes to the bu*er when the seller delivers themerchandise for shipment$ the terms are stated as FO! destination.
ANS: F DIF: 1 O!": #-
+(. A sale of >## on account$ sub?ect to a sales ta& of -@$ would be recorded as an accountreceivable of >##.
ANS: F DIF: O!": #-
++. 6hen merchandise is sold for >-## plus -@ sales ta&$ the Sales account should be creditedfor >--.
ANS: F DIF: O!": #-
+-. The abbreviation FO! stands for Free On !oard.
ANS: T DIF: 1 O!": #-
+. /erchandise is sold for >+$-##$ terms FO! destination$ 1#$ n(#$ with prepaidtransportation costs of >-#. If >2## of the merchandise is returned prior to pa*ment andthe invoice is paid within the discount period$ the amount of the sales discount is >05.
ANS: F DIF: ( O!": #-
+0. If the bu*er bears the transportation costs related to a purchase$ the terms are said to be FO!destination.
ANS: F DIF: 1 O!": #-
1+-
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3hapter 4Accountin% for /erchandisin% !usinesses
+2. 6hen the terms of sale are FO! shippin% point$ the bu*er should pa* the transportationchar%es.
ANS: T DIF: O!": #-
+5. If merchandise costin% >$-##$ terms FO! destination$ 1#$ n(#$ with prepaidtransportation costs of >1##$ is paid within 1# da*s$ the amount of the purchases discount is>-#.
ANS: T DIF: ( O!": #-
-#. 3omparin% the merchandise entries for the seller and the bu*er$ the seller is re'uired torecord more entries for the same transactions than the bu*er.
ANS: T DIF: O!": #
-1. The chart of accounts for a merchandise business would include an account calledTransportationOut.
ANS: T DIF: 1 O!": #0
-. In comparin% a retail business to a service business$ the accountin% c*cle is basicall* thesame.
ANS: T DIF: 1 O!": #2
-(. The ad?ustin% entr* to record inventor* shrin
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3hapter 4Accountin% for /erchandisin% !usinesses
-0. The wor
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3hapter 4Accountin% for /erchandisin% !usinesses
-. A compan* usin% the periodic inventor* s*stem has the followin% account balances:/erchandise Inventor* at the be%innin% of the *ear$ >+$###C TransportationIn$ >+-#C,urchases$ >1$###C ,urchases ;eturns and Allowances$ >$(##C ,urchases Discounts$ >#.The cost of merchandise purchased is e'ual toa. >1($5(#b. >5$5(#c. >5$+25d. >1+-#
ANS: ! DIF: + O!": #
. A compan*$ usin% the periodic inventor* s*stem$ has merchandise inventor* costin% >1+#on hand at the be%innin% of the period. Durin% the period$ merchandise costin% >+## ispurchased. At *earend$ merchandise inventor* costin% >12# is on hand. The cost ofmerchandise sold for the *ear isa. >0#b. >--#c. >(#d. none of the above
ANS: 3 DIF: + O!": #
0. 8&penses that are incurred directl* or entirel* in connection with the sale of merchandise areclassified asa. sellin% e&pensesb. %eneral e&pensesc. other e&pensesd. administrative e&penses
ANS: A DIF: 1 O!": #
2. Office salaries$ depreciation of office e'uipment$ and office supplies are e&les of whatt*pe of e&penseBa. sellin% e&penseb. miscellaneous e&pensec. administrative e&pensed. other e&pense
ANS: 3 DIF: 1 O!": #
5. The form of income statement that derives its name from the fact that the total of alle&penses is deducted from the total of all revenues is called a
a. multiplestep statementb. revenue statementc. reportform statementd. sin%lestep statement
ANS: D DIF: 1 O!": #
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3hapter 4Accountin% for /erchandisin% !usinesses
1#. /ultiplestep income statements showa. %ross profit but not income from operationsb. neither %ross profit nor income from operationsc. both %ross profit and income from operationsd. income from operations but not %ross profit
ANS: 3 DIF: O!": #
11. 6hen the three sections of a balance sheet are presented on a pa%e in a downward se'uence$it is called thea. account formb. comparative formc. horiontal formd. report form
ANS: D DIF: 1 O!": #
1. The statement of owner7s e'uit* showsa. onl* net income$ be%innin% and endin% capital
b. onl* total assets$ be%innin% and endin% capitalc. onl* net income$ be%innin% capital$ and withdrawalsd. all the chan%es in the owner7s capital as a result of net income$ net loss$ additional
investments$ and withdrawals
ANS: D DIF: ( O!": #
1(. /erchandise inventor* is classified on the balance sheet as aa. 3urrent iabilit*b. 3urrent Assetc. on%Term Assetd. on%Term iabilit*
ANS: ! DIF: 1 O!": #
1+. 6hich account is not classified as a sellin% e&penseBa. Sales Salariesb. TransportationOutc. Sales Discountsd. Advertisin% 8&pense
ANS: 3 DIF: O!": #
1-. The primar* difference between a periodic and perpetual inventor* s*stem is that aa. periodic s*stem determines the inventor* on hand onl* at the end of the accountin%
periodb. periodic s*stem
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3hapter 4Accountin% for /erchandisin% !usinesses
1. The inventor* s*stem emplo*in% accountin% records that continuousl* disclose the amountof inventor* is calleda. retailb. periodicc. ph*sicald. perpetual
ANS: D DIF: 1 O!": #
10. 6hen the perpetual inventor* s*stem is used$ the inventor* sold is shown on the incomestatement asa. cost of merchandise soldb. purchasesc. purchases returns and allowancesd. net purchases
ANS: A DIF: 1 O!": #
12. 6hen comparin% a retail business to a service business$ the financial statement that chan%es
the most is thea. !alance Sheetb. Income Statementc. Statement of Owner7s 8'uit*d. Statement of 3ash Flow
ANS: ! DIF: O!": #
15. 6hen comparin% a retail business to a service business$ the financial statement that chan%esthe least is thea. !alance Sheetb. Income Statement
c. Statement of Owner7s 8'uit*d. Statement of 3ash Flow
ANS: 3 DIF: O!": #
#. )sin% a perpetual inventor* s*stem$ the entr* to record the sale of merchandise on accountincludes aa. debit to Salesb. debit to /erchandise Inventor*c. credit to /erchandise Inventor*d. credit to Accounts ;eceivable
ANS: 3 DIF: O!": #(
1-#
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3hapter 4Accountin% for /erchandisin% !usinesses
1. 6hich of the followin% accounts has a normal debit balanceBa. Accounts ,a*ableb. Sales ;eturns and Allowancesc. Salesd. Interest ;evenue
ANS: ! DIF: O!": #(
. /erchandise is ordered on November 1C the merchandise is shipped b* the seller and theinvoice is prepared$ dated$ and mailed b* the seller on November 1-C the merchandise isreceived b* the bu*er on November 10C the entr* is made in the bu*er7s accounts onNovember 12. The credit period be%ins with what dateBa. November 1b. November 1-c. November 10d. November 12
ANS: ! DIF: ( O!": #(
(. )sin% a perpetual inventor* s*stem$ the entr* to record the return from a customer ofmerchandise sold on account includes aa. credit to Sales ;eturns and Allowancesb. debit to /erchandise Inventor*c. credit to /erchandise Inventor*d. debit to 3ost of /erchandise Sold
ANS: ! DIF: O!": #(
+. If merchandise sold on account is returned to the seller$ the seller ma* inform the customerof the details b* issuin% aa. sales invoice
b. purchase invoicec. credit memorandumd. debit memorandum
ANS: 3 DIF: O!": #(
-. The arran%ements between bu*er and seller as to when pa*ments for merchandise are to bemade are calleda. credit termsb. net cashc. cash on demand
d. %ross cashANS: A DIF: 1 O!": #(
1-1
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3hapter 4Accountin% for /erchandisin% !usinesses
. In credit terms of 11#$ n(#$ the E1E represents thea. number of da*s in the discount periodb. full amount of the invoicec. number of da*s when the entire amount is dued. percent of the cash discount
ANS: D DIF: 1 O!": #(
0. /erchandise with a sales price of >-## is sold on account with term 1#$ n(#. The ?ournalentr* to record the sale would include aa. debit to 3ash for >-##b. Debit to Sales Discounts for >1#c. 3redit to Sales for >-##d. Debit to Accounts ;eceivable for >>+5#
ANS: 3 DIF: O!": #(
2. /erchandise sub?ect to terms 11#$ n(#$ FO! shippin% point$ is sold on account to acustomer for >1-$###. The seller paid transportation costs of >1$### and issued a credit
memorandum for >-$### prior to pa*ment. 6hat is the amount of the cash discountallowableBa. >1#b. >1-#c. >1+#d. >1##
ANS: D DIF: ( O!": #(
5. 6hich of the followin% accounts has a normal credit balanceBa. Sales ;eturns and Allowancesb. Sales
c. /erchandise Inventor*d. Transportation Out
ANS: ! DIF: 1 O!": #(
(#. The entr* to record the return of merchandise from a customer would include aa. debit to Salesb. credit to Salesc. debit to Sales ;eturns and Allowancesd. credit to Sales returns and Allowances
ANS: 3 DIF: O!": #(
1-
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3hapter 4Accountin% for /erchandisin% !usinesses
(1. Sales to customers who use ban< credit cards such as /aster3ard and =isa are usuall*recorded b* aa. debit to !an< 3redit 3ard Sales$ debit to 3redit 3ard 8&pense$ and a credit to Salesb. debit to 3ash and a credit to Salesc. debit to 3ash$ credit to 3redit 3ard 8&pense$ and a credit to Salesd. debit to Sales$ debit to 3redit 3ard 8&pense$ and a credit to 3ash
ANS: ! DIF: ( O!": #(
(. Sales to customers who use ban< credit cards$ such as /aster3ard and =isa$ are %enerall*treated asa. sales on accountb. sales returnsc. cash salesd. sales when the credit card compan* remits the cash
ANS: 3 DIF: 1 O!": #(
((. 6hen a bu*er returns merchandise purchased for cash$ the bu*er ma* record the transaction
usin% the followin% entr*a. debit /erchandise Inventor*C credit 3ashb. debit 3ashC credit /erchandise Inventor*c. debit 3ashC credit Sales ;eturns and Allowancesd. debit Sales ;eturns and AllowancesC credit 3ash
ANS: ! DIF: ( O!": #+
(+. 6hen merchandise is returned$ the bu*er would credita. /erchandise Inventor*b. ,urchases ;eturns and Allowancesc. Accounts ,a*able
d. aG or bG dependin% on the inventor* s*stem used.
ANS: D DIF: #( O!": #+
(-. 6hen purchases of merchandise are made for cash$ the transaction ma* be recorded with thefollowin% entr*a. debit 3ashC credit /erchandise Inventor*b. debit /erchandise Inventor*C credit 3ashc. debit /erchandise Inventor*C credit 3ash Discountsd. debit /erchandise Inventor*C credit ,urchases
ANS: ! DIF: ( O!": #+
1-(
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3hapter 4Accountin% for /erchandisin% !usinesses
(. )sin% a perpetual inventor* s*stem$ the entr* to record the purchase of >(#$### ofmerchandise on account would include aa. debit to Salesb. debit to /erchandise Inventor*c. credit to /erchandise Inventor*d. credit to Sales
ANS: ! DIF: O!": #+
(0. )sin% a perpetual inventor* s*stem$ the entr* to record the return of merchandise purchasedon account includes aa. debit to 3ost of 9oods Soldb. credit to Accounts ,a*ablec. credit to /erchandise Inventor*d. credit to Sales
ANS: 3 DIF: O!": #+
(2. In recordin% the cost of merchandise sold for cash$ based on data available from perpetual
inventor* records$ the ?ournal entr* isa. debit 3ost of /erchandise SoldC credit Salesb. debit 3ost of /erchandise SoldC credit /erchandise Inventor*c. debit /erchandise Inventor*C credit 3ost of /erchandise Soldd. debit Accounts ;eceivableC credit /erchandise Inventor*
ANS: ! DIF: ( O!": #+
(5. The amount of the total cash paid to the seller for merchandise purchased would normall*includea. onl* the list priceb. onl* the sales ta&
c. the list price plus the sales ta&d. the list price less the sales ta&
ANS: 3 DIF: O!": #-
+#. A retailer purchases merchandise with a catalo% list price of >1#$###. The retailer receives a-@ trade discount and credit terms of 1#$ n(#. 6hat amount should the retailer debit tothe /erchandise Inventor* accountBa. >0$-##b. >1#$###c. >5$2##
d. >0$(-#ANS: A DIF: O!": #-
1-+
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3hapter 4Accountin% for /erchandisin% !usinesses
+1. A sales invoice included the followin% information: merchandise price$ >+$###Ctransportation$ >(##C terms 11#$ neom$ FO! shippin% point. Assumin% that a credit formerchandise returned of >## is %ranted prior to pa*ment$ that the transportation is prepaidb* the seller$ and that the invoice is paid within the discount period$ what is the amount ofcash received b* the sellerBa. >($(b. >($+##
c. >($d. >($5-#
ANS: 3 DIF: ( O!": #-
+. 6hich of the followin% accounts usuall* has a debit balanceBa. ,urchase Discountsb. Sales ta& ,a*ablec. Allowance for Doubtful Accountsd. TransportationIn
ANS: D DIF: 1 O!": #-
+(. /erchandise is sold for cash. The sellin% price of the merchandise is >$### and the sale issub?ect to a -@ state sales ta&. The ?ournal entr* to record the sale would includea. A debit to 3ash for >$###.b. A credit to Sales for >$1##.c. A credit to Sales Ta& ,a*able for >1##.d. None of the above.
ANS: 3 DIF: O!": #-
++. If the bu*er is to pa* the transportation costs of deliverin% merchandise$ deliver* terms arestated as
a. FO! shippin% pointb. FO! destinationc. FO! n(#d. FO! bu*er
ANS: A DIF: 1 O!": #-
+-. If the seller is to pa* the transportation costs of deliverin% merchandise$ the deliver* termsare stated asa. FO! shippin% pointb. FO! destination
c. FO! n(#d. FO! seller
ANS: ! DIF: 1 O!": #-
1--
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3hapter 4Accountin% for /erchandisin% !usinesses
+. If title to merchandise purchases passes to the bu*er when the %oods are shipped from theseller$ the terms area. n(#b. FO! shippin% pointc. FO! destinationd. consi%ned
ANS: ! DIF: 1 O!": #-
+0. /erchandise with an invoice price of >+### is purchased on "une sub?ect to terms of 1#$n(#$ FO! destination. Transportation costs paid b* the seller totaled >1-#. 6hat is thecost of the merchandise if paid on "une 1$ assumin% the discount is ta+$1-#b. >+$#0#c. >+$#0d. >($5#
ANS: D DIF: ( O!": #-
+2. 6hen %oods are shipped FO! destination and the seller pa*s the transportation char%es$ thebu*era. ?ournalies a reduction for the cost of the merchandise.b. ?ournalies a reimbursement to the seller.c. does not ta
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3hapter 4Accountin% for /erchandisin% !usinesses
-#. H sold merchandise on account FO! shippin% point$ 1#$ net (#$ for >1#$###. H prepaidthe >## shippin% char%e. )sin% the perpetual inventor* method$ which of the followin%entries will ma1#$###C Transportation In$ credit >##C 3ash$ credit
>5$2##b. Accounts ,a*ableH$ debit >1#$##C /erchandise Inventor*$ credit >##C 3ash$
credit >1#$###
c. Accounts ,a*ableH$ debit >1#$###C Transportation In$ debit >##C 3ash$ credit>1#$##d. Accounts ,a*ableH$ debit >1#$##C /erchandise Inventor*$ debit >##C 3ash$
credit >1#$+##
ANS: ! DIF: ( O!": #-
-1. A chart of accounts for a merchandisin% business usuall*a. is the same as the chart of accounts for a service businessb. re'uires more accounts than does the chart of accounts for a service businessc. is standardied b* the FAS! for all merchandisin% businessesd. does nothave a 3ost of 9oods Sold account if a perpetual inventor* s*stem is used
ANS: ! DIF: O!": #0
-. A net sales to asset ratio of 1.- meansa. assets are one and onehalf times as lar%e as salesb. that for ever* >1.-# of sales$ there is >1.## in assetsc. that for ever* >1.-# of assets$ there is >1.## of salesd. assets are bein% poorl* utilied
ANS: ! DIF: ( O!": #5
-(. The net sales to assets ratio measures a compan*7s
a. wor
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3hapter 4Accountin% for /erchandisin% !usinesses
--. 6hich of the followin% accounts should be closed to Income Summar* at the end of thefiscal *earBa. /erchandise Inventor*b. Accumulated Depreciationc. Drawin%d. 3ost of /erchandise Sold
ANS: D DIF: 1 O!": Ap
PROBLEM
1. The followin% data for the current *ear ended "une (# were e&tracted from the accountin%records of ;oe 3o.:
3ost of merchandise sold >-$###Operatin% e&penses 0-$###Sales +2-$###
,repare a multiplestep income statement for the *ear ended "une (#$ ##-.
ANS:
;oe 3o.Income Statement
For the ear 8nded "une (#$ ##-
Sales >+2-$###3ost of merchandise sold -$###9ross profit >#$###Operatin% e&penses 0-$###Net income >12-$###
JJJJJJJJ
DIF: 1 O!": #
. Selected data from the led%er of 6illis 3o. after ad?ustment at "une (#$ ##- the end of thefiscal *ear$ are listed as follows:
Accounts ;eceivable > (5$1# Office 8'uipment > 2$0##AccumulatedDepreciation
#$-+# ,repaid Insurance +$2#
Administrative8&penses
5#$### Note ,a*able 00$0-#
9re% 6illis$ 3apital 0-$### Salaries ,a*able ($##3ost of /erchandiseSold
--$### Sales netG 5##$###
9re% 6illis$ Drawin% +#$### Sellin% 8&penses 11#$###Interest ;evenue 1#$### Supplies ($1-
1-2
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3hapter 4Accountin% for /erchandisin% !usinesses
,repare an income statement$ usin% the sin%lestep form$ and a statement of owner7s e'uit*.
ANS:
6illis 3o.Income Statement
For the ear 8nded "une (#$ ##-
;evenues: Net sales >5##$### Interest revenue 1#$### Total revenues >51#$###8&penses: 3ost of merchandise sold >--$### Sellin% e&penses 11#$### Administrative e&penses 5#$### Total e&penses 2--$###Net income > --$###
JJJJJJJJ
6illis 3o.Statement of Owner7s 8'uit*
For the ear 8nded "une (#$ ##-
9re% 6illis$ capital$ "ul* 1$ ##+ >0-$###Net income for the *ear >--$###ess withdrawals +#$###Increase in owner7s e'uit* 1-$###9re% 6illis$ capital$ "une (#$ ##- >5#$###
JJJJJJJ
DIF: ( O!": #
1-5
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3hapter 4Accountin% for /erchandisin% !usinesses
(. ,repare aG a sin%lestep income statement$ bG a statement of owner7s e'uit*$ and cG abalance sheet in report form from the followin% data for ;ussell 3o.$ ta +0$## Accounts ;eceivable +$(## Accumulated Depreciation Office 8'uipment $0-# Accumulated Depreciation Store 8'uipment $1## Administrative 8&penses 0-$-## Al ;ussell$ 3apital 1+1$0-# 3ash (5$0## 3ost of /erchandise Sold -+-$### Al ;ussell$ Drawin% +$### Interest 8&pense 5$### /erchandise Inventor* 5($-# Note ,a*able$ Due ## -#$### Office 8'uipment +5$0-# ,repaid Insurance $-## ;ent ;evenue 0$-## Salaries ,a*able ($0## Sales netG 2#$-## Sellin% 8&penses 1#1$-## Store 8'uipment 1-$### Supplies +$###
ANS:aG
;ussell 3o.Income Statement
For the ear 8nded December (1$ ##-
;evenues: Net sales >2#$-## ;ent revenue 0$-## Total revenues >22$###8&penses: 3ost of merchandise sold >-+-$### Sellin% e&penses 1#1$-## Administrative e&penses 0-$-## Interest e&pense 5$### Total e&penses 0(1$###Net income > 50$###
JJJJJJJJ
1#
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3hapter 4Accountin% for /erchandisin% !usinesses
bG
;ussell 3o.Statement of Owner7s 8'uit*
For the ear 8nded December (1$ ##-
Al ;ussell$ capital$ "anuar* 1$ ##- >1+1$0-#
Net income for *ear >50$###ess withdrawals +$###Increase in owner7s e'uit* --$###Al ;ussell$ capital$ December (1$ ##- >15$0-#
JJJJJJJJ
cG
;ussell 3o.!alance Sheet
December (1$ ##-
Assets3urrent assets: 3ash >(5$0## Accounts receivable +$(## /erchandise inventor* 5($-# ,repaid insurance $-## Supplies +$### Total current assets >#0$0-#,ropert*$ plant$ and e'uipment: Store e'uipment >1-$###
ess Accumulated depreciation $1## >$5## Office e'uipment > +5$0-# ess Accumulated depreciation $0-# 0$### Total propert*$ plant$ and e'uipment
25$5##
Total assets >50$-#JJJJJJJJ
iabilities3urrent liabilities: Accounts pa*able >+0$## Salaries pa*able ($0## Total current liabilities > -#$5##on%term liabilities: Note pa*able due ##G -#$### Total liabilities >1##$5##
Owner7s 8'uit*
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3hapter 4Accountin% for /erchandisin% !usinesses
Al ;ussell$ capital 15$0-# Total liabilities and owner7s e'uit*
>50$-#
JJJJJJJJ
DIF: ( O!": #
+. )sin% the perpetual inventor* method$ ?ournalie the entries for the followin% selectedtransactions:aG Sold merchandise on account$ for >1#$###. The cost of the merchandise
sold was >+$-##.bG Sold merchandise to customers who used /aster3ard and =ISA$ >2$-##.
The cost of the merchandise sold was >+$1##.cG Sold merchandise to customers who used American 8&press$ >($-##. The
cost of the merchandise sold was >1$##.dG ,aid an invoice from First National !an< for >--$ representin% a service
fee for processin% /aster3ard and =ISA sales.eG ;eceived >($(- from American 8&press 3ompan* after a >10- collection
fee had been deducted.
ANS:
aG Accounts ;eceivable 1#$### Sales 1#$###
3ost of /erchandise Sold +$-## /erchandise Inventor* +$-##
bG 3ash 2$-## Sales 2$-##
3ost of /erchandise Sold +$1## /erchandise Inventor* +$1##
cG Accounts ;eceivable ($-## Sales ($-##
3ost of /erchandise Sold 1$## /erchandise Inventor* 1$##
dG 3redit 3ard 8&pense -- 3ash --
eG 3ash ($(-3redit 3ard 8&pense 10- Accounts ;eceivable ($-##
DIF: ( O!": #(
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3hapter 4Accountin% for /erchandisin% !usinesses
-. /erchandise with a list price of >($2## and costin% >$### is sold on account$ sub?ect to thefollowin% terms: FO! destination$ 1#$ n(#. The seller prepa*s the transportation costs of>-# debit Transportation Out for the transportation costsG. ,rior to pa*ment for the %oods$the seller issues a credit memorandum for >2## to the customer for merchandise costin%>-## that is returned. The correct amount is received within the discount period.
;ecord the fore%oin% transactions of the seller in the se'uence indicated below.
aG Sold the merchandise$ reco%niin% the sale and cost of merchandise sold.bG ,aid the transportation char%es.cG Issued the credit memorandum.dG ;eceived pa*ment from the customer.
ANS:
aG Accounts ;eceivable ($2## Sales ($2##
3ost of /erchandise Sold $### /erchandise Inventor* $###
bG Transportation Out -# 3ash -#
cG Sales ;eturns and Allowances 2## Accounts ;eceivable 2##
/erchandise Inventor* -## 3ost of /erchandise Sold -##
dG 3ash $5+#Sales Discounts # Accounts ;eceivable ($###
DIF: ( O!": #(
. !ased on the information below$ ?ournalie the entries for the Seller and the !u*er. !othuse a perpetual inventor* s*stem.
aG Seller sells !u*er on account merchandise costin% >## for >+-#$ terms
1#$ net (#$ FO! destination. The transportation char%e is >(-.bG !u*er returns as defective >1-# worth of the >-## merchandise received.The seller7s cost is >2-.
cG !u*er pa*s within the discount period.
1(
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3hapter 4Accountin% for /erchandisin% !usinesses
ANS:aG
Seller !u*er Accounts ;eceivable +-# /erchandise Inventor* +-# Sales +-# Accounts ,a*able +-#
3ost of /erchandiseSold ## NA /erchandise Inventor* ##
Transportation Out (- NA 3ash (-
bG
Sales ;eturns K Allow. 1-#
Accounts ,a*able 1-#
Accounts ;eceivable 1-#
/erchandise Inventor*
1-#
/erchandiseInventor* 2-3ost of /erchandiseSold 2-
cG
3ash 5+ Accounts ,a*able (##SalesDiscounts
/erchandise Inventor*
Accounts ;eceivable
(## 3ash 5+
DIF: ( O!": #($ #+
0. Details of a purchase invoice and related credit memorandum are summaried as follows:
Invoice: 3ost of merchandise listed on purchase invoice >-$-##
,repaid transportation char%e added to invoice 1##Terms$ FO! shippin% point$ 11#$ neom3redit memo: 3ost of merchandise returned >1$-##
Assume that the credit memorandum was received prior to pa*ment and that the invoice ispaid within the discount period. Determine the followin%:
1+
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3hapter 4Accountin% for /erchandisin% !usinesses
aG Amount of the cash discount allowed.bG Amount to be paid b* the purchaser if the discount is ta+$##cG >+$1##
DIF: 1 O!": #+
2. Forrester 3ompan* purchased >1$## of merchandise on account and pa*ment was madewithin the discount period. The credit terms were 1#$n(#. "ournalie Forrester7s purchaseand pa*ment.
ANS:
aG /erchandise Inventor* 1$## Accounts ,a*able 1$##
bG Accounts ,a*able 1$## /erchandise Inventor* + 3ash 110
DIF: 1 O!": #+
5. /erchandise with a list price of >+$0## is purchased on account$ terms FO! shippin% point$11#$ n(#. The seller prepaid transportation costs of >##. ,rior to pa*ment$ >1$-## of the
merchandise is returned. The correct amount is paid within the discount period.
;ecord the fore%oin% transactions of the bu*er in the se'uence indicated below.
aG ,urchased the merchandise.bG ;ecorded receipt of the credit memorandum for merchandise returned.cG ,aid the amount owed.
1-
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3hapter 4Accountin% for /erchandisin% !usinesses
ANS:
aG /erchandise Inventor* +$5## Accounts ,a*able +$5##
bG Accounts ,a*able 1$-## /erchandise Inventor* 1$-##
cG Accounts ,a*able ($+## /erchandise Inventor* ( 3ash ($(2
DIF: ( O!": #+
1#. Details of invoices for purchases of merchandise are as follows:
;eturns and/erchandise Transportation Terms Allowances
a. >5## >(- FO! shippin% point$ 11#$n(#
>1##
b. -$## FO! destination$ n(# -##c. $-## - FO! shippin% point$ 1#$
n(###
d. 2$### FO! destination$ 11#$n(#
Determine the amount to be paid in full settlement of each of the invoices$ assumin% thatcredit for returns and allowances was received prior to pa*ment and that all invoices werepaid within the discount period.
ANS:
aG >20 >5## >1## >2 L (-GbG >-$1## >-$## >-##GcG >$05 >$-## >## >+ L >-GdG >0$5# >2$### >2#G
DIF: ( O!": #-
11. "ournalie the entries to record the followin% selected transactions:
aG Sold >2## of merchandise on account$ sub?ect to @ sales ta&. The cost ofthe merchandise sold was >+-.
bG ,aid >2( to the state sales ta& department for ta&es collected.
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3hapter 4Accountin% for /erchandisin% !usinesses
ANS:
aG Accounts ;eceivable 2+2 Sales 2## Sales Ta& ,a*able +2
3ost of /erchandise Sold +-
/erchandise Inventor* +-
bG Sales Ta& ,a*able 2( 3ash 2(
DIF: 1 O!": #-
1. )sin% the letter precedin% each account$ arran%e the followin% selected accounts in the orderthe* would normall* appear in a chart of accounts of a compan* that uses a multiplestepincome statement.
aG Accounts ,a*ablebG Accounts ;eceivablecG /erchandise Inventor*dG /iscellaneous Sellin% 8&penseeG Sales DiscountsfG Interest 8&pense%G Income Summar*hG /isc. Admin. 8&penseiG Transportation Out?G Sales ;eturns and Allowances
ANS:bG cG aG %G ?G eG iG dG hG fG
DIF: O!": #0
1(. ,repare a multiplestep income statement for 9oodwin 3o. from the followin% data for the*ear ended December (1$ ##-.
Sales$ >5-$###C cost of merchandise sold$ >-#$###C administrative e&penses$ >(#$###Cinterest e&pense$ >1#$###C rent revenue$ >#$###C sales returns and allowances$ >--$###Csellin% e&penses$ >11#$###.
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3hapter 4Accountin% for /erchandisin% !usinesses
ANS:
9oodwin 3o.Income Statement
For the ear 8nded December (1$ ##-
;evenue from sales: Sales >5-$### ess: Sales returns and allowances --$### Net sales >20#$###3ost of merchandise sold -#$###9ross profit >(1#$###Operatin% e&penses: Sellin% e&penses >11#$### Administrative e&penses (#$### Total operatin% e&penses 1+#$###Income from operations > 10#$###Other income: ;ent revenue > #$###Other e&pense: Interest e&pense 1#$### 1#$###Net income > 12#$###
JJJJJJJJ
DIF: ( O!": #
1+. 3ompute the net sales to asset ratio for ## for the followin% two companies and tell whichcompan* is doin% better. )se avera%e assets in *our computation.
/erchandiser Dra5$### >11$###JJJJJJ JJJJJJJ
/erchandiser Dra1+$###JJJJJJJ
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3hapter 4Accountin% for /erchandisin% !usinesses
/erchandiser 6ells,artial !alance Sheet
December (1$ ##- and ##
##- ##Total assets >2$### >1#$###
JJJJJJ JJJJJJJ
/erchandiser 6ells,artial Income StatementFor the ear 8nded December (1$ ##
Net sales >1+$###JJJJJJJ
ANS:
Dra1+$###M>5$### L >11$###G J 1.+6ells: >1+$###M>2$### L >1#$###G J 1.----
Dra1.+# worth of sales for ever* dollar of assets.6ells has >1.- worth of sales for ever* dollar of assets.6ells is more efficient.
DIF: ( O!": #5
1-. Selected accounts and amounts appear below. "ournalie the closin% entr*$ assumin% aperpetual inventor* s*stem.
/erchandise Inventor* > --$-##3ost of /erchandise Sold -1$-##
ANS:
Income Summar* -1$-## 3ost of /erchandise Sold -1$-##
DIF: 1 O!": App
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3hapter 4Accountin% for /erchandisin% !usinesses
eft blan< intentionall*G