SOLUTIONS TO EXERCISES SET B EXERCISE 5-1B 1 False. Measuring net income for a merchandiser is conceptually the same as measuring net income for a service company. 2. True. 3. False. For a merchandiser, the primary source of revenues is the sale of inventory. 4. False. Interest is an example of an other expense. 5. False. The operating cycle of a merchandising company differs from that that of a service company. The operating cycle of a merchandising company is ordinarily longer. 6. True. 7. True. 8. False. A perpetual inventory system provides better control over inventories than a periodic system. EXERCISE 5-2B (a) (1) April 5 Merchandise Inventory... 20,000 Accounts Payable... 20,000 (2) April 6 Merchandise Inventory... 700 Cash... 700 (3) April 7 Equipment... 29,000 Accounts Payable... 29,000 (4) April 8 Accounts Payable... 3,000 Merchandise Inventory... 3,000 (5) April 15 Accounts Payable... 17,000 ($20,000 $3,000) Merchandise Inventory... 340 ($17,000 X 2%) Cash ($17,000 $340)... 16,660 (b) May 4 Accounts Payable... 17,000 Cash... 17,000 2008 For Instructor Use Only 5-1
EXERCISE 5-3B Sept. 6 Merchandise Inventory (70 X $20)... 1,400 Cash... 1,400 9 Merchandise Inventory... 68 Cash... 68 10 Accounts Payable... 40 Merchandise Inventory... 40 12 Accounts Receivable (40 X $34)... 1,360 Sales... 1,360 Cost of Goods Sold (40 X $18)... 720 Merchandise Inventory... 720 14 Sales Returns and Allowances... 34 Accounts Receivable... 34 Merchandise Inventory... 18 Cost of Goods Sold... 18 20 Accounts Receivable (30 X $35)... 1,050 Sales... 1,050 Cost of Goods Sold (30 X $21)... 630 Merchandise Inventory... 630 EXERCISE 5-4B (a) June 10 Merchandise Inventory... 9,000 Accounts Payable... 9,000 11 Merchandise Inventory... 500 Cash... 500 12 Accounts Payable... 700 Merchandise Inventory... 700 19 Accounts Payable ($9,000 $700)... 8,300 Merchandise Inventory... 166 ($8,300 X 2%) Cash ($8,300 $166)... 8,134 2008 For Instructor Use Only 5-2
EXERCISE 5-4B (Continued) (b) June 10 Accounts Receivable... 9,000 Sales... 9,000 Cost of Goods Sold... 5,400 Merchandise Inventory... 5,400 12 Sales Returns and Allowances... 700 Accounts Receivable... 700 Merchandise Inventory... 300 Cost of Goods Sold... 300 19 Cash ($8,300 $166)... 8,134 Sales Discounts ($8,300 X 2%)... 166 Accounts Receivable... 8,300 ($9,000 $700) EXERCISE 5-5B (a) 1. Dec. 3 Accounts Receivable... 400,000 Sales... 400,000 Cost of Goods Sold... 240,000 Merchandise Inventory... 240,000 2. Dec. 8 Sales Returns and Allowances... 20,000 Accounts Receivable... 20,000 3. Dec. 13 Cash ($380,000 $7,600)... 372,400 Sales Discounts ($380,000 X 2%)... 7,600 Accounts Receivable... 380,000 ($400,000 $20,000) (b) Cash... 380,000 Accounts Receivable... 380,000 ($400,000 $20,000) 2008 For Instructor Use Only 5-3
EXERCISE 5-6B (a) CONTRERAS COMPANY Income Statement (Partial) For the Year Ended October 31, 2008 Sales revenues Sales... $950,000 Less: Sales returns and allowances... $31,000 Sales discounts... 18,000 49,000 Net sales... $901,000 Note: Freight-out is a selling expense. (b) (1) Oct. 31 Sales... 950,000 Income Summary... 950,000 (2) 31 Income Summary... 49,000 Sales Returns and Allowances... 31,000 Sales Discounts... 18,000 EXERCISE 5-7B (a) Cost of Goods Sold... 1,200 Merchandise Inventory... 1,200 (b) Sales... 165,000 Income Summary... 165,000 Income Summary... 140,200 Cost of Goods Sold... 91,200 Operating Expenses... 44,000 Sales Returns and Allowances... 3,000 Sales Discounts... 2,000 Income Summary ($165,000 $140,200)... 24,800 Retained Earnings... 24,800 2008 For Instructor Use Only 5-4
EXERCISE 5-8B (a) Cost of Goods Sold... 1,400 Merchandise Inventory... 1,400 (b) Sales... 550,000 Income Summary... 550,000 Income Summary... 515,400 Cost of goods sold ($327,000 + $1,400)... 328,400 Freight-out... 11,000 Insurance expense... 18,000 Rent expense... 29,000 Salary expense... 95,000 Sales discounts... 15,000 Sales returns and allowances... 19,000 Income Summary ($550,000 $515,400)... 34,600 Retained Earnings... 34,600 2008 For Instructor Use Only 5-5
EXERCISE 5-9B (a) DUTHIE COMPANY Income Statement For the Year Ended December 31, 2008 Net sales... $1,620,000 Cost of goods sold... 902,000 Gross profit... 718,000 Operating expenses Selling expenses... $343,000 Administrative expenses... 304,000 Total operating expenses... 647,000 Income from operations... 71,000 Other revenues and gains Interest revenue... 20,000 Other expenses and losses Interest expense... $49,000 Loss on sale of equipment... 7,000 56,000 36,000 Net income... $ 35,000 (b) DUTHIE COMPANY Income Statement For the Year Ended December 31, 2008 Revenues Net sales... $1,620,000 Interest revenue... 20,000 Total revenues... 1,640,000 Expenses Cost of goods sold... $902,000 Selling expenses... 343,000 Administrative expenses... 304,000 Interest expense... 49,000 Loss on sale of equipment... 7,000 Total expenses... 1,605,000 Net income... $ 35,000 2008 For Instructor Use Only 5-6
EXERCISE 5-10B 1. Sales Returns and Allowances... 205 Sales... 205 2. Equipment... 300 Accounts Payable... 300 Cash... 300 Merchandise Inventory... 300 3. Sales Discounts... 130 Sales Returns and Allowances... 130 4. Merchandise Inventory... 30 Cash... 270 Freight-out... 300 EXERCISE 5-11B (a) $1,000,000 $650,000 = $350,000. (b) $350,000/$1,000,000 = 35%. The gross profit rate is generally considered to be more useful than the gross profit amount. The rate expresses a more meaningful (qualitative) relationship between net sales and gross profit. The gross profit rate tells how many cents of each sales dollar go to gross profit. The trend of the gross profit rate is closely watched by financial statement users, and is compared with rates of competitors and with industry averages. Such comparisons provide information about the effectiveness of a company s purchasing function and the soundness of its pricing policies. (c) Income from operations is $150,000 ($350,000 $200,000), and net income is $140,000 ($150,000 $10,000). (d) The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Both income statements report the same revenues and expenses, but in different order. Therefore, net income in Jones single-step income statement is also $140,000. (e) Merchandise inventory is reported as a current asset immediately below accounts receivable. 2008 For Instructor Use Only 5-7
EXERCISE 5-12B (a) (*missing amount) a. Sales... $ 210,000) *Sales returns... (10,000) Net sales... $ 200,000) b. Net sales... $ 200,000) Cost of goods sold... (,000) *Gross profit... $ 80,000) c. Gross profit... $ 80,000) Operating expenses... (50,000) *Net income... $ 30,000) d. *Sales... $ 100,000) Sales returns... (5,000) Net sales... $ 95,000) e. Net sales... $ 95,000) *Cost of goods sold... 53,000) Gross profit... $ 42,000) f. Gross profit... $ 42,000) *Operating expenses... 22,000) Net income... $ 20,000) ) (b) Viet Company Gross profit Net sales = $80,000 $200,000 = 40% Naise Company Gross profit Net sales = $42,000 $95,000 = 44.2% 2008 For Instructor Use Only 5-8
EXERCISE 5-13B Inventory, September 1, 2007... $ 35,000 Purchases... $300,000 Less: Purchase returns and allowances... 4,000 Net Purchases... 296,000 Add: Freight-in... 8,500 Cost of goods purchased... 304,500 Cost of goods available for sale... 339,500 Inventory, August 31, 2008... 45,000 Cost of goods sold... $294,500 EXERCISE 5-14B (a) Sales... $600,000 Less: Sales returns and allowances... $ 12,000 Sales discounts... 7,000 19,000 Net sales... 581,000 Cost of goods sold Inventory, January 1... 35,000 Purchases... $360,000 Less: Purch. rets. and alls.... (3,000) Purch. discounts... (8,000) 349,000 Add: Freight-in... 6,000 Cost of goods available for sale... 390,000 Inventory, December 31... (41,000) Cost of goods sold... 349,000 Gross profit... $232,000 (b) Gross profit $232,000 Operating expenses = Net income $,000. Operating expenses = $112,000. EXERCISE 5-15B (a) $1,950 ($2,000 $50) (b) $2,020 ($1,950 + 70) (c) $1,920 ($2,220 $300) (d) $40 ($1,100 $1,060) (e) $60 ($1, $1,060) (f) $130 ($1,220 $1,090) (g) $3,250 ($150 + $3,100) (h) $150 ($3,250 $3,100) (i) $3,750 ($500 + $3,250) (j) $1,090 ($12,200 $11,110 from (I)) (k) $700 ($11,200 $10,500) (l) $11,110 ($10,500 + $610) 2008 For Instructor Use Only 5-9
*EXERCISE 5-16B (a) 1. April 5 Purchases... 25,000 Accounts Payable... 25,000 2. April 6 Freight-in... 800 Cash... 800 3. April 7 Equipment... 37,000 Accounts Payable... 37,000 4. April 8 Accounts Payable... 3,000 Purchase Returns and Allowances... 3,000 5. April 15 Accounts Payable... 22,000 ($25,000 $3,000) Purchase Discounts... 440 ($22,000 X 2%) Cash ($22,000 $440)... 21,560 (b) May 4 Accounts Payable... 22,000 ($25,000 $3,000) Cash... 22,000 *EXERCISE 5-17B (a) 1. April 5 Purchases... 35,000 Accounts Payable... 35,000 2. April 6 Freight-in... 1,000 Cash... 1,000 3. April 7 Equipment... 41,000 Accounts Payable... 41,000 4. April 8 Accounts Payable... 5,000 Purchase Returns and Allowances... 5,000 2008 For Instructor Use Only 5-10
*EXERCISE 5-17B (Continued) 5. April 15 Accounts Payable... 30,000 ($35,000 $5,000) Purchase Discounts... 600 ($30,000 X 2%) Cash ($30,000 $600)... 29,400 (b) May 4 Accounts Payable... 30,000 ($35,000 $5,000) Cash... 30,000 *EXERCISE 5-18B Accounts Cash Merchandise Inventory Sales Sales Returns and Allowances Sales Discounts Cost of Goods Sold Adjusted Trial Balance Income Statement Balance Sheet Debit Credit Debit Credit Debit Credit 11,000 93,000 12,000 13,000 370,000 550,000 12,000 13,000 370,000 550,000 11,000 93,000 *EXERCISE 5-19B SMITH COMPANY Worksheet For the Month Ended June 30, 2008 Accounts Trial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 4,500 4,500 4,500 Accounts Receivable 5,000 5,000 5,000 Merchandise Inventory 24,000 24,000 24,000 Accounts Payable 2,500 2,700 5,200 5,200 Common Stock 8,000 8,000 8,000 Sales 90,000 90,000 90,000 Cost of Goods Sold 42,000 42,000 42,000 Operating Expenses 25,000 2,700 27,700 27,700 Totals 100,500 100,500 2,700 2,700 103,200 103,200 69,700 90,000 33,500 13,200 Net Income 20,300 20,300 Totals 90,000 90,000 33,500 33,500 2008 For Instructor Use Only 5-11
SOLUTIONS TO PROBLEMS PROBLEM 5-1C (a) June 1 Merchandise Inventory (200 X $6)... 1,200 Accounts Payable... 1,200 3 Accounts Receivable (240 X $10)... 2,400 Sales... 2,400 Cost of Goods Sold (240 X $6)... 1,440 Merchandise Inventory... 1,440 6 Accounts Payable (20 X $6)... Merchandise Inventory... 9 Accounts Payable ($1,200 $)... 1,080.00 Merchandise Inventory... 21.60 ($1,080 X.02) Cash... 1,058.40 15 Cash... 2,400 Accounts Receivable... 2,400 17 Accounts Receivable (180 X $10)... 1,800 Sales... 1,800 Cost of Goods Sold (180 X $6)... 1,080 Merchandise Inventory... 1,080 20 Merchandise Inventory (250 X $6)... 1,500 Accounts Payable... 1,500 24 Cash... 1,764 Sales Discounts ($1,800 X.02)... 36 Accounts Receivable... 1,800 26 Accounts Payable... 1,500 Merchandise Inventory... 30 ($1,500 X.02) Cash... 1,470 2008 For Instructor Use Only 5-12
PROBLEM 5-1C (Continued) June 28 Accounts Receivable (130 X $10)... 1,300 Sales... 1,300 Cost of Goods Sold (130 X $6)... 780 Merchandise Inventory... 780 30 Sales Returns and Allowances... (12 X $10) Accounts Receivable... Merchandise Inventory (12 X $6)... 72 Cost of Goods Sold... 72 2008 For Instructor Use Only 5-13
PROBLEM 5-2C (a) General Journal Date Account Titles and Explanation Ref. Debit Credit May 1 Merchandise Inventory... 4,200 Accounts Payable... 201 4,200 2 Accounts Receivable... Sales... 112 401 2,100 2,100 Cost of Goods Sold... Merchandise Inventory... 505 1,300 1,300 5 Accounts Payable... Merchandise Inventory... 201 300 300 9 Cash ($2,100 $21)... Sales Discounts ($2,100 X 1%)... Accounts Receivable... 101 414 112 2,079 21 2,100 10 Accounts Payable ($4,200 $300)... Merchandise Inventory... ($3,900 X 2%) Cash... 201 101 3,900 78 3,822 11 Supplies... Cash... 126 101 400 400 12 Merchandise Inventory... Cash... 101 1,400 1,400 15 Cash... Merchandise Inventory... 101 150 150 17 Merchandise Inventory... Accounts Payable... 201 1,300 1,300 19 Merchandise Inventory... Cash... 101 130 130 2008 For Instructor Use Only 5-14
PROBLEM 5-2C (Continued) General Journal Date Account Titles and Explanation Ref. Debit Credit May 24 Cash... Sales... 101 401 3,200 3,200 Cost of Goods Sold... Merchandise Inventory... 505 2,000 2,000 25 Merchandise Inventory... Accounts Payable... 201 550 550 27 Accounts Payable... Merchandise Inventory... ($1,300 X 2%) Cash... 201 101 1,300 26 1,274 29 Sales Returns and Allowances... Cash... 412 101 60 60 Merchandise Inventory... Cost of Goods Sold... 505 10 10 31 Accounts Receivable... Sales... 112 401 900 900 Cost of Goods Sold... Merchandise Inventory... 505 560 560 2008 For Instructor Use Only 5-15
PROBLEM 5-2C (Continued) (b) Cash No. 101 May 1 Balance 5,000 9 2,079 7,079 10 11 12 3,822 400 1,400 3,257 2,857 1,457 15 150 1,607 19 130 1,477 24 3,200 4,677 27 29 1,274 60 3,403 3,343 Accounts Receivable No. 112 May 2 2,100 2,100 9 2,100 0 31 900 900 Merchandise Inventory No. May 1 4,200 4,200 2 5 10 1,300 300 78 2,900 2,600 2,522 12 1,400 3,922 15 150 3,772 17 19 1,300 130 5,072 5,202 24 2,000 3,202 25 550 3,752 27 26 3,726 29 10 3,736 31 560 3,176 2008 For Instructor Use Only 5-16
PROBLEM 5-2C (Continued) Supplies No. 126 May 11 400 400 Accounts Payable No. 201 May 1 4,200 4,200 5 10 300 3,900 3,900 0 17 25 1,300 550 1,300 1,850 27 1,300 550 Common Stock No. 311 May 1 Balance 5,000 Sales No. 401 May 2 24 31 2,100 3,200 900 2,100 5,300 6,200 Sales Returns and Allowances No. 412 May 29 60 60 Sales Discounts No. 414 May 9 21 21 2008 For Instructor Use Only 5-17
PROBLEM 5-2C (Continued) Cost of Goods Sold No. 505 May 2 24 1,300 2,000 1,300 3,300 29 10 3,290 31 560 3,850 (c) NEWMAN HARDWARE STORE Income Statement (Partial) For the Month Ended May 31, 2008 Sales revenues Sales... $6,200 Less: Sales returns and allowances... $60 Sales discounts... 21 81 Net sales... 6,119 Cost of goods sold... 3,850 Gross profit... $2,269 2008 For Instructor Use Only 5-18
PROBLEM 5-3C (a) TARP DEPARTMENT STORE Income Statement For the Year Ended November 30, 2008 Sales revenues Sales... $680,000 Less: Sales returns & allowances... 8,000 Net sales... 672,000 Cost of goods sold... 507,000 Gross profit... 165,000 Operating expenses Selling expenses Salaries expense... $72,000 ($96,000 X 75%) Sales commissions expense... 11,200 Depreciation expense store equipment... 8,000 Delivery expense... 6,500 Depreciation expense delivery equipment... 5,000 Insurance expense... 3,500 ($7,000 X 50%) Total selling expenses... $106,200 Administrative expenses Salaries expense... 24,000 ($96,000 X 25%) Rent expense... 15,000 Utilities expense... 8,500 Insurance expense... 3,500 ($7,000 X 50%) Property tax expense... 2,800 Total admin. expenses... 53,800 Total oper. expenses... 160,000 Income from operations... 5,000 Other revenues and gains Interest revenue... 8,000 Other expenses and losses Interest expense... 6,400 1,600 Net income... $ 6,600 2008 For Instructor Use Only 5-19
PROBLEM 5-3C (Continued) TARP DEPARTMENT STORE Retained Earnings Statement For the Year Ended November 30, 2008 Retained earnings, December 1, 2007... $21,700 Add: Net income... 6,600 28,300 Less: Dividends... 10,000 Retained earnings, November 30, 2008... $18,300 TARP DEPARTMENT STORE Balance Sheet November 30, 2008 Assets Current assets Cash... $ 6,000 Accounts receivable... 30,500 Merchandise inventory... 29,000 Prepaid insurance... 3,500 Total current assets... $ 69,000 Property, plant, and equipment Store equipment... $100,000 Less: Accumulated depreciation store equipment... 32,000 68,000 Delivery equipment... 46,000 Less: Accumulated depreciation delivery equipment... 15,000 31,000 99,000 Total assets... $168,000 2008 For Instructor Use Only 5-20
PROBLEM 5-3C (Continued) TARP DEPARTMENT STORE Balance Sheet (Continued) November 30, 2008 Liabilities and Stockholders Equity Current liabilities Accounts payable... $25,200 Sales commissions payable... 4,700 Property taxes payable... 2,800 Total current liabilities... $ 32,700 Long-term liabilities Notes payable due 2011... 37,000 Total liabilities... 69,700 Stockholders equity Common stock... $80,000 Retained earnings... 18,300 98,300 Total liabilities and stockholders equity... $168,000 (b) Nov. 30 Depr. Expense Delivery Equip.... 5,000 Accumulated Depreciation Delivery Equipment... 5,000 Depr. Expense Store Equip.... 8,000 Accumulated Depreciation Store Equipment... 8,000 Insurance Expense... 7,000 Prepaid Insurance... 7,000 Property Tax Expense... 2,800 Property Taxes Payable... 2,800 Sales Commissions Expense... 4,700 Sales Commissions Payable... 4,700 2008 For Instructor Use Only 5-21
PROBLEM 5-3C (Continued) (c) Nov. 30 Sales... 680,000 Interest Revenue... 8,000 Income Summary... 688,000 30 Income Summary... 681,400 Sales Returns and Allowances... 8,000 Cost of Goods Sold... 507,000 Salaries Expense... 96,000 Depreciation Expense Delivery Equipment... 5,000 Delivery Expense... 6,500 Sales Commissions Expense... 11,200 Depreciation Expense Store Equipment... 8,000 Insurance Expense... 7,000 Rent Expense... 15,000 Property Tax Expense... 2,800 Utilities Expense... 8,500 Interest Expense... 6,400 30 Income Summary... 6,600 Retained Earnings... 6,600 30 Retained Earnings... 10,000 Dividends... 10,000 2008 For Instructor Use Only 5-22
PROBLEM 5-4C (a) General Journal Date Account Titles and Explanation Ref. Debit Credit Apr. 5 Merchandise Inventory... 1,200 Accounts Payable... 201 1,200 7 Merchandise Inventory... Cash... 101 50 50 9 Accounts Payable... Merchandise Inventory... 201 100 100 10 Accounts Receivable... Sales... 112 401 900 900 Cost of Goods Sold... Merchandise Inventory... 505 540 540 12 Merchandise Inventory... Accounts Payable... 201 670 670 14 Accounts Payable ($1,200 $100)... Merchandise Inventory... ($1,100 X 2%) Cash... 201 101 1,100 22 1,078 17 Accounts Payable... Merchandise Inventory... 201 70 70 20 Accounts Receivable... Sales... 112 401 560 560 Cost of Goods Sold... Merchandise Inventory... 505 340 340 21 Accounts Payable ($670 $70)... Merchandise Inventory... ($600 X 1%) Cash... 201 101 600 6 594 2008 For Instructor Use Only 5-23
PROBLEM 5-4C (Continued) Date Account Titles and Explanation Ref. Debit Credit Apr. 27 Sales Returns and Allowances... 412 30 Accounts Receivable... 112 30 30 Cash... Accounts Receivable... 101 112 800 800 (b) Cash No. 101 Apr. 1 Balance 1,800 7 14 21 50 1,078 594 1,750 672 78 30 800 878 Accounts Receivable No. 112 Apr. 10 20 900 560 900 1,460 27 30 30 800 1,430 630 Merchandise Inventory No. Apr. 1 Balance 2,500 5 7 1,200 50 3,700 3,750 9 10 100 540 3,650 3,110 12 670 3,780 14 17 20 21 22 70 340 6 3,758 3,688 3,348 3,342 2008 For Instructor Use Only 5-24
PROBLEM 5-4C (Continued) Accounts Payable No. 201 Apr. 5 9 12 14 17 21 100 1,100 70 600 1,200 670 1,200 1,100 1,770 670 600 0 Common Stock No. 311 Apr. 1 Balance 4,300 Sales No. 401 Apr. 10 20 900 560 900 1,460 Sales Returns and Allowances No. 412 Apr. 27 30 30 Cost of Goods Sold No. 505 Apr. 10 20 540 340 540 880 2008 For Instructor Use Only 5-25
PROBLEM 5-4C (Continued) (c) CALEB S DISCORAMA Trial Balance April 30, 2008 Cash... Accounts Receivable... Merchandise Inventory... Common Stock... Sales... Sales Returns and Allowances... Cost of Goods Sold... Debit $ 878 630 3,342 30 880 $5,760 Credit $4,300 1,460 $5,760 2008 For Instructor Use Only 5-26
PROBLEM 5-5C DUCKWORTH DEPARTMENT STORE Income Statement (Partial) For the Year Ended November 30, 2008 Sales revenues Sales... $810,000 Less: Sales returns and allowances... 18,000 Net sales... 792,000 Cost of goods sold Inventory, Dec. 1, 2007... $ 40,000 Purchases... $585,000 Less: Purchase returns and allowances... $2,700 Purchase discounts... 6,300 9,000 Net purchases... 576,000 Add: Freight-in... 4,500 Cost of goods purchased... 580,500 Cost of goods available for sale... 620,500 Inventory, Nov. 30, 2008... 32,600 Cost of goods sold... 587,900 Gross profit... $204,100 2008 For Instructor Use Only 5-27
PROBLEM 5-6C (1) (a) Cost of goods sold = Sales Gross profit = $53,300 $38,300 = $15,000 (b) (c) Net income = Gross profit Operating expenses = $38,300 $34,900 = $3,400 Merchandise inventory = 2005 Inventory + Purchases CGS = $7,200 + $14,200 $15,000 = $6,400 (d) Cash payments to suppliers = 2005 Accounts payable + Purchases 2006 Accounts payable = $3,200 + $14,200 $3,600 = $13,800 (e) (f) (g) Sales = Cost of goods sold + Gross profit = $13,800 + $33,800 = $47,600 Operating expenses = Gross profit Net income = $33,800 $2,500 = $31,300 2006 Inventory + Purchases 2007 Inventory = CGS Purchases = CGS 2006 Inventory + 2007 Inventory = $13,800 $6,400 [from (c)] + $8,100 = $15,500 (h) Cash payments to suppliers = 2006 Accounts payable + Purchases 2007 Accounts Payable = $3,600 + $15,500 [from (g)] $2,500 = $16,600 (i) (j) (k) Gross profit = Sales CGS = $45,200 $14,300 = $30,900 Net income = Gross profit Operating expenses = $30,900 [from (i)] $28,600 = $2,300 2007 Inventory + Purchases 2008 Inventory = CGS Merchandise inventory = 2007 Inventory + Purchases CGS = $8,100 + $13,200 $14,300 = $7,000 (I) Accounts payable = 2007 Accounts payable + Purchases Cash payments = $2,500 + $13,200 $13,600 = $2,100 2008 For Instructor Use Only 5-28
PROBLEM 5-6C (Continued) (2) A decline in sales does not necessarily mean that profitability declined. Profitability is affected by sales, cost of goods sold, and operating expenses. If cost of goods sold or operating expenses decline more than sales, profitability can increase even when sales decline. However, in this particular case, sales declined with insufficient offsetting cost savings to improve profitability. Therefore, profitability declined for Howit Inc. Gross profit rate $38,300 $53,300 = 72% 2006 2007 2008 $33,800 $47,600 = 71% $30,900 $45,200 = 68% Profit margin ratio $3,400 $53,300 = 6.4% $2,500 $47,600 = 5.3% $2,300 $45,200 = 5.1% 2008 For Instructor Use Only 5-29
*PROBLEM 5-7C (a) General Journal Date Account Titles and Explanation Debit Credit Apr. 5 Purchases... 1,200 Accounts Payable... 1,200 7 Freight-in... Cash... 9 Accounts Payable... Purchase Returns and Allowances... 10 Accounts Receivable... Sales... 12 Purchases... Accounts Payable... 14 Accounts Payable ($1,200 $100)... Purchase Discounts ($1,100 X 2%)... Cash ($1,100 $22)... 17 Accounts Payable... Purchase Returns and Allowances... 20 Accounts Receivable... Sales... 21 Accounts Payable ($340 $40)... Purchase Discounts... ($300 X 1%) Cash ($300 $3)... 27 Sales Returns and Allowances... Accounts Receivable... 30 Cash... Accounts Receivable... 50 100 600 340 1,100 40 600 300 35 650 50 100 600 340 22 1,078 40 600 3 297 35 650 2008 For Instructor Use Only 5-30
*PROBLEM 5-7C (Continued) (b) Cash 4/1 Bal. 3,000 4/30 650 4/7 50 4/14 1,078 4/21 297 Common Stock 4/1 Bal. 7,000 4/30 Bal. 7,000 4/30 Bal. 2,225 Sales 4/10 600 Accounts Receivable 4/20 600 4/10 600 4/27 35 4/30 Bal. 1,200 4/20 600 4/30 650 4/30 Bal. 515 Sales Returns and Allowances 4/27 35 Merchandise Inventory 4/30 Bal. 35 4/1 Bal. 4,000 4/30 Bal. 4,000 Purchases 4/5 1,200 4/12 340 4/30 Bal. 1,540 Accounts Payable 4/9 100 4/5 1,200 4/14 1,100 4/12 340 4/17 40 Freight-in 4/21 300 4/7 50 4/30 Bal. 0 4/30 Bal. 50 Purchase Returns and Allowances 4/9 100 4/17 40 4/30 Bal. 140 Purchase Discounts 4/14 22 4/21 3 4/30 Bal. 25 2008 For Instructor Use Only 5-31
*PROBLEM 5-7C (Continued) (c) FIVE PINES PRO SHOP Trial Balance April 30, 2008 Cash... Accounts Receivable... Merchandise Inventory... Common Stock... Sales... Sales Returns and Allowances... Purchases... Purchase Returns and Allowances... Purchase Discounts... Freight-in... Debit $2,225 515 4,000 35 1,540 50 $8,365 Credit $7,000 1,200 140 25 $8,365 FIVE PINES PRO SHOP Income Statement (Partial) For the Month Ended April 30, 2008 Sales revenues Sales... $1,200 Less: Sales returns and allowances... 35 Net sales... 1,165 Cost of goods sold Inventory, April 1... $4,000 Purchases... $1,540 Less: Purchase returns and allowances... $140 Purchase discounts... 25 165 Net purchases... 1,375 Add: Freight-in... 50 Cost of goods purchased... 1,425 Cost of goods available for sale... 5,425 Inventory, April 30... 4,726 Cost of goods sold... 699 Gross profit... $ 466 2008 For Instructor Use Only 5-32