Accounting Volume 1 Canadian 9th Edition By Charles T. Horngren - Test Bank

Accounting Volume 1 Canadian 9th Edition By Charles T. Horngren – Test Bank

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Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)

Chapter 5 Merchandising Operations and the Accounting Cycle

Objective 5-1

1) Inventory includes all goods that the company owns and expects to use in normal operations.

Answer: FALSE

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

2) Sales revenue and Net sales are synonymous terms.

Answer: FALSE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

3) Cost of goods sold is an operating expense.

Answer: FALSE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

4) Gross margin is equal to net sales plus cost of goods sold.

Answer: FALSE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

5) Inventory is a current liability on the balance sheet.

Answer: FALSE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

6) Net sales is equal to sales revenue plus sales returns and minus sales discounts.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

7) Gross margin minus expenses equals gross profit.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

8) Sales revenue minus sales returns and allowances and sales discounts equals:

A) gross margin.
B) income from operations.
C) cost of goods sold.
D) net sales.

Answer: D

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

Table 5-4

The following data is for the Atlantis Merchandising, which uses a periodic inventory system:

Sales revenue	$600,000
Interest revenue	12,000
Freight in	42,000
Beginning inventory	77,000
Purchase discounts	19,000
Sales returns and allowances	33,000
Operating expenses	77,000
Interest expense	9,000
Ending inventory	81,000
Purchases	415,000
Sales discounts	35,000
Omar Atlantis, Withdrawals	71,000
Purchase returns and allowances	39,000

9) Refer to Table 5-4. Net sales for Atlantis Merchandising are:

A) $532,000
B) $600,000
C) $567,000
D) $565,000

Answer: A

Explanation: A)

Sales $600,000

Returns & allowances 33,000

Discounts 35,000

Net sales $532,000

Cost of goods sold:

Beg. inventory $77,000

Net purchases (415-19-39) 357,000

Freight-in 42,000

Available $476,000

End. inventory 81,000

Cost of goods sold 395,000

Gross margin $137,000

Operating expenses 77,000

Operating income $60,000

Other income and expenses:

Interest income $12,000

Interest expense 9,000 3,000

Net income $63,000

Diff: 2

Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill: Application

Objective: 5-1 Use sales and gross margin to evaluate a company

Table 5-5

The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:

Salary payable	$1,100
Sales revenue	480,000
Interest revenue	3,000
Freight in	20,000
Beginning inventory	35,000
Sales discounts	18,000
Purchases of inventory	240,000
Purchase returns and allowances	35,000
Purchase discounts	10,000
Sales returns and allowances	35,000
Ending inventory	80,000
Operating expenses	85,000
Interest expense	7,000
Owner withdrawals	12,000

10) Refer to Table 5-5. The net sales for Speedy Boat Company are:

A) $427,000
B) $445,000
C) $480,000
D) $462,000

Answer: A

Explanation: A)

Sales $480,000

Returns & allowances 35,000

Discounts 18,000

Net sales $427,000

Cost of goods sold:

Beg. inventory $35,000

Net purchases (240-35-10) 195,000

Freight-in 20,000

Available $250,000

End. inventory 80,000

Cost of goods sold 170,000

Gross margin $257,000

Operating expenses 85,000

Operating income $172,000

Other income and expenses:

Interest revenue $3,000

Interest expense 7,000 (4,000)

Net income $168,000

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-1 Use sales and gross margin to evaluate a company

11) What is the difference between a sales return and a sales allowance?

A) A sales return reduces the amount receivable from the customer, but an allowance does not.
B) A sales return involves an adjustment to Inventory, but a sales allowance does not.
C) A sales return requires a debit to Sales returns and allowances, but a sales allowance does not.
D) A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

Match the following.

A) gross margin
B) sales returns and allowances
C) inventory

12) The excess of sales revenue over cost of goods sold

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

13) All goods that a business owns and expects to sell in the normal course of operation

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

14) A contra account to Sales Revenue

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-1 Use sales and gross margin to evaluate a company

Answers: 12) A 13) C 14) B

15) Define gross margin and operating income. Explain how they are used in evaluating a company.

Answer: Gross margin is the excess of sales revenue over the cost of the goods sold. It helps measure a business’s success. A sufficiently high gross margin is vital to success. Gross margin must be high enough to cover the operating expenses of the firm in order to result in operating income for the period. Operating income is gross margin minus operating expenses plus any other operating revenues. There must be sufficient operating income to cover other expenses of the period to end up with a net income instead of a net loss.

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-1 Use sales and gross margin to evaluate a company

Objective 5-2

1) The entry to record the purchase of inventory on account in a perpetual inventory system includes a debit to the Purchases account.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

2) Purchase returns of merchandise decrease the liability to a creditor.

Answer: TRUE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

3) In a purchase discount, the larger the quantity of merchandise purchased, the lower the price per item.

Answer: FALSE

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

4) Credit terms of 1/15 n/30 means the purchaser can deduct 1% of the invoice price if paid within 15 days.

Answer: TRUE

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

5) Quantity discounts offered by suppliers for large shipments of inventory are always recorded separately.

Answer: FALSE

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

6) FOB shipping point means that the title to the goods passes to the purchaser upon receipt of the goods and the seller is responsible for the cost of the freight.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

7) Sales discounts is a contra account and has a normal credit balance.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

8) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a perpetual inventory system.

Answer: TRUE

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

9) A seller requesting payment will send the purchaser a purchase order.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

10) The entry to record the return of $250 of inventory to a supplier under the perpetual inventory system is recorded with a debit to:

A) Accounts Payable and a credit to Purchases Discounts.
B) Purchases Returns and Allowances and a credit to Accounts Payable.
C) Accounts Payable and a credit to Inventory.
D) Inventory and a credit to Accounts Payable.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

11) Using a perpetual inventory system, the entry to record the purchase of merchandise on account involves a:

A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) credit to Cash.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

12) Credit terms of 1/10 n/30 indicates that the buyer is:

A) allowed a 10% discount if payment is made within 30 days.
B) allowed a 1% discount if payment is made within 10 days.
C) allowed a 1% discount if payment is made within 30 days.
D) allowed a 30% discount if payment is made within 10 days.

Answer: B

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

13) Which of the following credit terms allows for a cash discount?

A) n/30
B) n/eom
C) n/60
D) 1/10 n/30

Answer: D

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

14) A merchandiser purchases inventory on account under a perpetual inventory system with terms of 2/10 n/30. The merchandiser would:

A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) debit Purchases Discounts on date of purchase if the discount is not taken.

Answer: A

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

15) A company makes a purchase of $2,000 of inventory, subject to credit terms of 3/10 n/45 and returns $500 of inventory prior to payment. What is the amount of the payment assuming payment is made within the discount period?

A) $1,500
B) $1,455
C) $1,440
D) $1,560

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Analysis

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

16) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit:

A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Receivable and credit Inventory.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

17) When a discount is taken for prompt payment under a perpetual inventory system, the purchaser would credit:

A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

18) A purchase return or allowance under a perpetual inventory system is credited to:

A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

19) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a perpetual inventory system would record payment of the freight with a debit to:

A) Inventory and credit to Cash for $200.
B) Accounts Payable and credit to Inventory for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

20) When the seller accepts a return of goods from the purchaser originally sold on account, the seller’s journal entry would include a debit to:

A) Sales Discounts and credit to Cash.
B) Sales Returns and Allowances and credit to Accounts Receivable.
C) Sales Returns and Allowances and credit to Sales Discounts.
D) Sales Revenue and credit to Cash.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

21) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a perpetual inventory system would include a:

A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

22) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a perpetual inventory system would include a credit to:

A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

23) Green Company purchased $3,600 of merchandise on account, terms 2/10 n/30. If payment was made after the expiration of the discount period and a perpetual inventory system is used, the entry to record the payment would include a:

A) credit to Inventory of $3,600.
B) credit to Cash of $3,528.
C) credit to Cash of $3,600.
D) debit to Accounts Payable of $3,528.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

24) The seller is responsible for the shipping costs when the shipping terms are:

A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

25) The buyer is responsible for the shipping costs when the shipping terms are:

A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

26) When the buyer pays the freight costs, the entry to record the payment under a perpetual inventory system would include a debit to:

A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

27) When the seller is liable for the shipping costs, the payment for the freight in the seller’s accounts is recorded with a debit to:

A) Delivery Expense or Freight Out.
B) Freight In.
C) Inventory.
D) Cash.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

28) Under a perpetual inventory system, the entry to record the cost of goods sold would include a debit to:

A) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the cost of the inventory.
D) Inventory and a credit to Cost of Goods Sold for the cost of the inventory.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

29) Under a perpetual inventory system, the entry to record a sale on account would include a debit to:

A) Accounts Receivable and a credit to Sales Revenue for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
D) Accounts Receivable and a credit to Sales Revenue for the cost of the inventory.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

30) The entry to record the sale of merchandise for cash includes a:

A) debit to Accounts Receivable.
B) credit to Sales Discounts.
C) debit to Sales Revenue.
D) credit to Sales Revenue.

Answer: D

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

31) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:

A) debit to Inventory.
B) credit to Accounts Payable.
C) debit to Sales Revenue.
D) debit to Cost of Goods Sold.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

32) To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:

A) credit to Inventory.
B) debit to Accounts Payable.
C) debit to Sales Revenue.
D) credit to Cost of Goods Sold.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

33) The entries to record a $5,000 cash sale under a perpetual inventory system, when the cost of the merchandise is $3,200, include a:

A) debit to Inventory for $5,000.
B) debit to Sales Revenue for $5,000.
C) credit to Cost of Goods Sold for $3,200.
D) debit to Cost of Goods Sold for $3,200.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

34) The entries to record a $4,500 sale on account under a perpetual inventory system, when the cost of the merchandise is $3,000, include a:

A) debit to Inventory for $3,000.
B) credit to Sales Revenue for $3,000.
C) debit to Sales Revenue for $4,500.
D) credit to Inventory for $3,000.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

35) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:

A) debit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.

Answer: D

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

36) Under a perpetual inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:

A) credit to Accounts Receivable for $210.
B) credit to Sales Returns and Allowances for $210.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.

Answer: D

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

37) Eastern Outfitters sold $2,500 of inventory to a customer on account, terms 3/15 n/40. Freight terms were FOB shipping point and freight charges totalled $150. The entry to record the sale would include a:

A) credit to Accounts Receivable for $2,350.
B) debit to Sales Revenue for $2,500.
C) credit to Sales Revenue for $2,500.
D) debit Accounts Receivable for $2,650.

Answer: C

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

38) A merchandiser received payment in full within the discount period on a $5,000 sales invoice, terms 2/15 n/30. The journal entry would include a:

A) debit to Cash for $5,000.
B) credit to Accounts Receivable for $5,000.
C) credit to Accounts Receivable for $5,900.
D) credit to Sales Discounts for $100.

Answer: B

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

39) A merchandiser received payment in full after the expiration of the discount period on a $3,000 sales invoice, terms 3/15 n/30. The journal entry would include a:

A) debit to Cash for $2,910.
B) credit to Accounts Receivable for $2,910.
C) debit to Sales Discount of $90.
D) debit to Cash for $3,000.

Answer: D

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

40) Under a perpetual inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:

A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $1,200.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.

Answer: A

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

41) Under a perpetual inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:

A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $1,500.
D) Inventory of $1,500.

Answer: D

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

42) Which of the following is true about freight in?

A) Freight in is added to the cost of merchandise inventory.
B) Freight in is a selling expense.
C) Freight in is an operating expense.
D) Freight in is deducted from Accounts payable.

Answer: A

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

43) Michelin Jewellers completed the following transactions. Michelin Jewellers uses the perpetual inventory system. On April 2, Michelin sold $9,000 of merchandise to a customer on account with terms of 3/15, n/30. Michelin’s cost of the merchandise sold was $5,500. On April 4, the customer reported damaged goods and Michelin granted a $1,000 sales allowance. On April 10, Michelin received payment from the customer. Which of the following entries correctly records the cash receipt on Michelin’s books?

Cash	7,760
Sales discount	240
Accounts receivable		8,000

Accounts receivable	8,000
Sales discount		240
Cash		7,760

Cash	8,000
Accounts receivable		8,000

Cash	7,760
Accounts receivable		7,760

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

Match the following.

A) sales discount

44) Reduction in the amount receivable from a customer, offered by the seller as an incentive for the customer to pay promptly.

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

Answers: 44) A

45) The following data pertain to Corbet Merchandising for the year ended December 31, 2013:

Beginning inventory $190,300

Purchases of inventory on credit during the year 450,000

Cost of goods sold during the year 65% of sales

Sales (75% on credit) during the year 800,000

a) Prepare entries for the following transactions using a perpetual inventory system:

1) Purchase of inventory during 2013

2) Sales during 2013

3) Cost of goods sold during 2013

b) Compute the balance in the inventory account on December 31, 2013.

Answer:

a) General Journal

Date	Accounts	Debit	Credit
1)	Inventory	450,000
	Accounts Payable		450,000
	To record inventory purchases during 2013.

2)	Cash	200,000
	Accounts Receivable	600,000
	Sales Revenue		800,000
	To record cash and credit sales during 2013.

3)	Cost of Goods Sold	520,000
	Inventory		520,000
	To record cost of goods sold during 2013.

b) $190,300 + $450,000 – $520,000 = $120,300

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Analysis

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

46) Details of a purchase invoice, credit terms, and a purchase return are shown below. Assume the credit memo was received and payment made within the discount period.

Cost of merchandise as shown on purchase invoice $9,200

Cost of merchandise returned 3,700

Transportation charges, terms FOB shipping point 500

Credit terms 2/10 n/30

Compute the following:

a) amount of discount
b) amount paid by purchaser, within the discount period, including freight, if applicable
c) amount paid by purchaser if paid after expiration of discount including freight, if applicable

Answer:

a) ($9,200 – $3,700) × 0.02 = $110

b) ($5,500 × 0.98) + $500 = $5,890

c) $5,500 + $500 = $6,000

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Analysis

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

47) Details of purchase invoices including shipping terms, credit terms, and returns appear below. Compute the total amount to be paid in full settlement of each invoice, assuming that credit for returns is granted before the expiration of the discount period and payment is made within the discount period.

Invoice	Freight and Credit Terms	Transportation Charges	Returns and Allowances
a) $2,000	FOB destination, 3/10 n/45	$55	$200
b) $5,500	FOB shipping point, 2/10 n/30	$100	$50
c) $6,700	FOB shipping point, 2/10 n/45	$200	$350
d) $9,300	FOB destination, 2/10 n/60	$150	$550

Answer:

a) ($2,000 – $200) × 0.97 = $1,746

b) [($5,500 – $50) × 0.98] + $100 = $5,441

c) [($6,700 – $350) × 0.98] + $200 = $6,423

d) ($9,300 – $550) × 0.98 = $8,575

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Analysis

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

48) Tobermory Merchandising had the following transactions during May:

May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,

FOB shipping point.

9 Paid transportation cost on the May 5 purchase, $250.

10 Returned $400 of defective merchandise purchased on May 5.

15 Paid for the May 5 purchase, less the return and the discount.

Required:

Assuming the perpetual inventory system is used, prepare the journal entries to record the above transactions.

Answer:

General Journal

Date	Accounts	Debit	Credit
May 5	Inventory	2,700
	Accounts Payable		2,700
	Purchased merchandise on account, 3/15 n/6.0

9	Inventory	250
	Cash		250
	Paid transportation cost on May 5 purchase.e.

10	Accounts Payable	400
	Inventory		400
	Returned defective merchandise purchased on May 5.

15	Accounts Payable	2,300
	Cash		2,231
	Inventory		69
	Paid for May 5 purchase, less return and discount.

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

49) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a perpetual inventory system.

June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms

were 2/10 n/30, FOB shipping point. Romeo paid the freight bill

amounting to $2,000.

4 Romeo returned $2,500 of the merchandise billed on June 2 because it

was defective.

5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.

The cost of the merchandise sold was $5,100.

10 Romeo paid the invoice dated June 2, less the return and the discount.

15 A customer returned $2,500 of merchandise sold on June 5. The cost of

the returned merchandise was $1,450.

19 Britt received payment on the remaining amount due from the sale of

June 5, less the return and the discount.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Inventory	18,000
	Accounts Payable		18,000
	Inventory	2,000
	Cash		2,000
4	Accounts Payable	2,500
	Inventory		2,500
5	Accounts Receivable	8,000
	Sales Revenue		8,000
	Cost of Goods Sold	5,100
	Inventory		5,100
10	Accounts Payable	15,500
	Cash		15,190
	Inventory		310
15	Sales Returns and Allowances	2,500
	Accounts Receivable		2,500
	Inventory	1,450
	Cost of Goods Sold		1,450
19	Cash	5,335
	Sales Discounts	165
	Accounts Receivable		5,500

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

Table 5-6

The following are transactions for Latest Fashions for the month of June.

June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point

from Trendy Manufacturing. The merchandise had cost Trendy $1,800

June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.

June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.

June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB

shipping point. Cost of the merchandise sold was $4,000.

June 10 Paid Trendy Manufacturing the balance on account.

June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.

June 23 Collected balance owing from New Miss Store.

50) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a perpetual inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Inventory	2,000
	Accounts Payable		2,000
7	Accounts Payable	400
	Inventory		400
8	Inventory	100
	Cash		100
9	Accounts Receivable	5,000
	Sales Revenue		5,000
	Cost of Goods Sold	4,000
	Inventory		4,000
10	Accounts Payable	1,600
	Inventory		16
	Cash		1,584
12	Sales Returns and Allowances	300
	Accounts Receivable		300
23	Cash	4,606
	Sales Discount	94
	Accounts Receivable		4,700

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

51) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a perpetual inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Accounts Receivable	2,000
	Sales Revenue		2,000
	Cost of Goods Sold	1,800
	Inventory		1,800
7	Sales Returns and Allowances	400
	Accounts Receivable		400
10	Cash	1,584
	Sales Discount	16
	Accounts Receivable		1,600

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

52) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a perpetual inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 9	Inventory	5,000
	Accounts Payable		5,000
7	Accounts Payable	300
	Inventory		300
25	Accounts Payable	4,700
	Inventory		94
	Cash		4,606

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

Table 5-9

Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August, 2013:

Aug. 5 Purchased $2,900 of merchandise on account; FOB shipping point, 3/15, n/60.

Aug. 9 Paid transportation costs of $440 for the Aug. 5 purchase.

Aug. 10 Returned $600 of defective merchandise purchased on Aug. 5.

Aug. 15 Paid the amount owing for the merchandise purchased Aug. 5.

53) Record the August journal entries for Reid Art Supply.

Answer:

General Journal

Date	Accounts	Debit	Credit
Aug 5	Inventory	2,900
	Accounts Payable		2,900

9	Inventory	440
	Cash		440

10	Accounts Payable	600
	Inventory		600

15	Accounts Payable	2,300
	Inventory		69
	Cash		2,231

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

54) Sam Levine Merchandising had the following transactions during May:

May 1 Beginning inventory was 20 units valued at $25 per unit.

May 5 Purchased purchased 80 units of merchandise on account for $2,160, terms n/15,

FOB shipping point.

May 9 Paid transportation cost on the May 5 purchase, $240.

May 10 Returned two units of defective merchandise purchased on May 5.

May 11 Sold 30 units for $50 per unit on account.

May 15 Paid for the May 5 purchase, less the return.

May 20 Sold 10 units for $50 per unit on account.

Required:

Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.

Answer:

Requirement 1: Perpetual Inventory Method

Date	Account Name	Debit	Credit
May 5	Inventory	2,160
	Accounts Payable		2,160

May 9	Inventory	240
	Cash		240

May 10	Accounts Payable	54
	Inventory		54

May 11	Accounts Receivable (30 × $50)	1,500
	Sales		1,500
	Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))	800
	Inventory		800

May 15	Accounts Payable ($2,160 – $54)	2,106
	Cash		2,106

May 20	Accounts receivable	500
	Sales		500

	Cost of Goods Sold (10 × $30)	300
	Inventory		300

Requirement 2: Periodic Inventory Method

Date	Account Name	Debit	Credit
May 5	Purchases	2,160
	Accounts Payable		2,160

May 9	Frieght-in	240
	Cash		240

May 10	Accounts Payable	54
	Purchase Returns		54

May 11	Accounts Receivable	1,500
	Sales		1,500

May 15	Accounts Payable	2,160
	Cash		2,160

May 20	Accounts Receivable	500
	Sales		500

Diff: 3

Learning Outcome: A-09 Explain and apply inventory costing methods

Skill: Application

Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system

Objective 5-3

1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a perpetual inventory system.

Answer: TRUE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

2) In the closing entry process, the sales returns and allowances account is debited.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

3) The adjusting entry required when the inventory counted is greater than the balance in the inventory account has a credit to Cost of Goods Sold.

Answer: TRUE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

4) In a perpetual inventory system, the closing entries include a credit to the Inventory account in an amount that equals the ending inventory, and a debit to the Inventory account in an amount that equals the beginning inventory.

Answer: FALSE

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

5) Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would include a:

A) credit to Miscellaneous Expense.
B) credit to Cost of Goods Sold.
C) credit to Inventory.
D) debit to Miscellaneous Expense.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

6) Which accounts are affected in the closing process under a perpetual inventory system?

A) Gross Margin and Cost of Goods Sold.
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts.
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts.
D) Operating Expenses, Sales Revenue, and Purchases.

Answer: B

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

7) Under a perpetual inventory system, which accounts would be closed to Income Summary with credits?

A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue

Answer: B

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

8) A company’s ledger shows an Inventory balance of $20,000 and a physical count of the inventory shows $19,000. Which of the following entries is needed to record the shrinkage?

Cost of goods sold	1,000
Shrinkage expense		1,000

Inventory	1,000
Cost of goods sold		1,000

Cost of goods sold	1,000
Inventory		1,000

Cash	1,000
Inventory		1,000

Answer: C

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

9) An adjusted trial balance is shown below.

	Debit	Credit
Cash	$12,600
Accounts receivable	2,400
Prepaid rent	800
Inventory	28,000
Accounts payable		$4,200
Salary payable		1,000
Notes payable		800
Capital		13,800
Withdrawals	1,000
Sales revenue		96,000
Sales returns and allowances	1,600
Sales discounts	400
Cost of goods sold	25,000
Salary expense	21,000
Rent expense	14,000
Amortization expense	8,500
Supplies expense	500
Total	$115,800	$115,800

What will the final balance in Capital be after the closing entries?

A) $37,800
B) $12,700
C) $24,000
D) $36,800

Answer: A

Explanation: A) Calculations: $13,800 – $1,000 + $96,000 – $71,000 = $37,800

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

10) State whether the following accounts are:

a) closed with a debit
b) closed with a credit
c) not closed

1) cost of goods sold ________

2) sales returns and allowances ________

3) salary expense ________

4) inventory (assume perpetual inventory system) ________

5) amortization expense ________

6) accumulated amortization ________

7) accounts receivable ________

8) sales discounts ________

9) interest expense ________

10) sales revenue ________

Answer: 1) b

2) b

3) b

4) c

5) b

6) c

7) c

8) b

9) b

10) a

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

11) Following is a random list of some of the accounts and their balances on December 31, 2013, for Copperfield Merchandising. Copperfield uses a perpetual inventory system and all account balances are normal.

Inventory $ 67,000

Sales revenue 470,000

Interest revenue 28,000

Salary expense 46,000

Sales returns & allowances 30,000

Interest expense 13,000

Delivery expense 15,000

Sales discounts 25,000

Insurance expense 8,000

P.Copperfield, Capital 50,000

Utilities expense 29,000

Amortization expense 20,000

P Copperfield, Withdrawals 25,000

Cost of goods sold 259,000

Accounts payable 56,000

Accounts receivable 78,000

Cash 29,000

A physical count on December 31, 2013, reveals $65,000 of inventory on hand.

a) Prepare the entry to adjust the inventory account on December 31, 2013.
b) Prepare the closing entries on December 31, 2013.

Answer:

General Journal

Date	Accounts	Debit	Credit
a)
Dec. 31	Cost of Goods Sold	2,000
	Inventory		2,000
b)
Dec. 31	Sales Revenue	470,000
	Interest Revenue	28,000
	Income Summary		498,000
31	Income Summary	447,000
	Sales Ret. and Allow.		30,000
	Sales Discounts		25,000
	Cost of Goods Sold		261,000
	Salary Expense		46,000
	Utilities Expense		29,000
	Amortization Expense		20,000
	Delivery Expense		15,000
	Interest Expense		13,000
	Insurance Expense		8,000
31	Income Summary	51,000
	P.Copperfield, Capital		51,000
31	P.Copperfield, Capital	25,000
	P.Copperfield, Withdrawals		25,000

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

12) Underwater Adventures has the following account balances on August 31, 2014:

Accounts payable $8,800

Accounts receivable 9,600

Accumulated amortization – equipment 30,300

Cash 2,200

Cost of goods sold 341,500

Jacobson, capital 190,700

Jacobson, withdrawals 44,000

Equipment 88,000

Interest earned 2,000

Inventory 71,500

Operating expenses 175,500

Sales discounts 3,100

Sales returns and allowances 14,400

Sales revenue 520,600

Supplies 7,100

Unearned sales revenue 4,500

The following information as at August 31, 2014 was also available:

A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.

Required:

Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.

Answer: General Journal

Date	Accounts	Debit	Credit
Aug 31	Supplies expense	5,900
	Supplies		5,900

31	Cost of goods sold	5,100
	Inventory		5,100

31	Amortization expense, equipment	11,000
	Accumulated amort., equip.		11,000

31	Unearned sales revenue	1,000
	Sales revenue		1,000

Underwater Adventures

Balance Sheet

August 31, 2014

Assets

Current assets:

Cash $2,200

Accounts receivable 9,600

Supplies 1,200

Inventory 66,400

Total current assets $79,400

Property, plant and equipment:

Equipment $88,000

Less: accumulated amortization 41,300 46,700

Total assets $126,100

Liabilities and Owner’s Equity

Current liabilities:

Accounts payable $8,800

Unearned sales revenue 3,500

Total current liabilities $12,300

Jacobson capital 113,800

Total liabilities and owner’s equity $126,100

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

Table 5-10

The December 31, 2014 adjusted trial balance for Camptown Company is shown below.

	Debit	Credit
Cash	$12,600
Accounts receivable	2,400
Prepaid rent	800
Inventory	28,000
Accounts payable		$4,200
Salary payable		1,000
Notes payable		800
Capital		13,800
Drawing	1,000
Sales revenue		96,000
Sales returns and allowances	1,600
Sales discounts	400
Cost of goods sold	25,000
Salary expense	21,000
Rent expense	22,500
Supplies expense	500
Total	$115,800	$115,800

13) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.

Answer:

Camptown Company

Income Statement

For the Year Ended December 31, 2014

Revenues:

Sales revenue $ 96,000

Less: Sales discounts $ 400

Sales returns and allowances 1,600 2,000

Net sales revenue $ 94,000

Expenses:

Cost of goods sold $ 25,000

Salary expense 21,000

Rent expense 22,500

Supplies expense 500

Total expenses 69,000

Net income $ 25,000

General Journal

Date	Accounts	Debit	Credit
Dec 31	Sales revenue	96,000
	Income summary		96,000

31	Income summary	71,000
	Sales discounts		400
	Sales returns and allowances		1,600
	Cost of goods sold		25,000
	Salary expense		21,000
	Rent expense		22,500
	Supplies expense		500

31	Income summary	25,000
	Capital		25,000

31	Capital	1,000
	Drawing		1,000

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory system

Objective 5-4

1) Operating expenses are divided into manufacturing expenses and selling expenses on the income statement.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

2) The multi-step income statement format shows subtotals to highlight significant relationships.

Answer: TRUE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

3) Gross margin minus operating expenses equals income from operations on a multi-step income statement.

Answer: TRUE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

4) A single-step format of the income statement will always have fewer sub-totals than the multi-step income statement format.

Answer: TRUE

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

5) The income from operations is presented on both the multi-step and single-step income statements.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

6) The major revenue of a merchandiser is ________ while the major expense(s) is (are) ________.

A) sales revenue, cost of goods sold
B) gross margin, operating expenses
C) income from operations, cost of goods sold
D) sales revenue, operating expenses

Answer: A

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

7) Inventory held by a business is a(n) ________ and when sold becomes a(n) ________.

A) liability, withdrawal
B) asset, expense
C) liability, asset
D) asset, contra asset

Answer: B

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Table 5-1

Sales revenue	$480,000
Cost of goods sold	300,000
Sales discounts	20,000
Sales returns and allowances	15,000
Operating expenses	85,000
Interest revenue	5,000

8) Referring to Table 5-1, what is gross margin?

A) $145,000
B) $105,000
C) $140,000
D) $90,000

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

9) Referring to Table 5-1, what is net sales revenue?

A) $400,000
B) $445,000
C) $415,000
D) $455,000

Answer: B

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

10) Referring to Table 5-1, what is the income from operations?

A) $20,000
B) $55,000
C) $60,000
D) $190,000

Answer: C

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

11) Referring to Table 5-1, what is the net income?

A) $60,000
B) $65,000
C) $55,000
D) $180,000

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Table 5-2

Sales revenue	$382,000
Net sales revenue	$360,000
Gross margin	255,000
Operating expenses	132,000
Interest expense	30,000
Interest revenue	60,000

12) Referring to Table 5-2, if sales discounts amount to $15,000, the balance in Sales Returns and Allowances must be:

A) $7,000.
B) $29,000.
C) $22,000.
D) $8,000.

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

13) Referring to Table 5-2, what is the operating income or operating loss?

A) operating income of $123,000
B) operating loss of $177,000
C) operating loss of $27,000
D) operating income of $27,000

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

14) Referring to Table 5-2, cost of goods sold is:

A) $105,000.
B) $78,000.
C) $100,000.
D) $27,000.

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

15) Referring to Table 5-2, what is the net income or net loss?

A) net loss of $3,000
B) net income of $30,000
C) net loss of $30,000
D) net income of $153,000

Answer: D

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

16) Expenses other than cost of goods sold, that are incurred in the entity’s major line of business are called:

A) merchandising expenses.
B) servicing expenses.
C) other expenses.
D) operating expenses.

Answer: D

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Match the following.

A) income from operations
B) operating expenses
C) other revenue
D) single-step income statement
E) cost of goods sold

17) Expenses, other than cost of goods sold, that are incurred in the entity’s major line of business

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

18) Gross margin minus operating expenses

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

19) The largest single expense of most merchandising businesses

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

20) A format that groups all revenues together and then lists and deducts all expenses together without drawing any subtotals

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

21) Revenue that originates outside the main operations of a business

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Answers: 17) B 18) A 19) E 20) D 21) C

22) Given the following worksheet with the trial balance already entered, and the related adjustment information, complete the worksheet.

All Star Merchandising

Accounting Work Sheet

For the Year Ended December 31, 2014

Account Trial Adjustments Inc. Balance

Balance Statement Sheet

	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
Cash	15
Accounts Rec.	9
Inventory	30
Prepaid Rent	4
Furniture	18
Accumulated Amortization- Furniture		7
Accounts Payable		19
Salary Payable		0
Unearned Service Revenue		9
A.J. Star, Capital		40
A.J. Star, Withdrawals	7
Sales Revenue		65
Sales Discounts	4
Sales Returns and Allowances	2
Cost of Goods Sold	30
Salary Expense	14
Rent Expense	0
Utilities Expense	7
Amortization Expense- Furniture
	140	140
Net Income

Additional information:

a) Prepaid rent expired, $3
b) Amortization on furniture, $2
c) Unearned sales revenue earned during the period, $4
d) Accrued salaries, $5
e) Physical count of ending inventory, $33

Answer: All Star Merchandising

Accounting Work Sheet

For the Year Ended December 31, 2014

Account Trial Adjustments Inc. Balance

Balance Statement Sheet

	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.	Dr.	Cr.
Cash	15						15
Accounts Rec.	9						9
Inventory	30		3				33
Prepaid Rent	4			3			1
Furniture	18						18
Accumulated Amortization- Furniture		7		2				9
Accounts Payable		19						19
Salary Payable		0		5				5
Unearned Service Revenue		9	4					5
A.J. Star, Capital		40						40
A.J. Star, Withdrawals	7						7
Sales Revenue		65		4		69
Sales Discounts	4				4
Sales Returns and Allowances	2				2
Cost of Goods Sold	30			3	27
Salary Expense	14		5		19
Rent Expense	0		3		3
Utilities Expense	7				7
Amortization Expense- Furniture	0		2		2
	140	140	17	17	64	69	83	78
Net Income					5			5
					69	69	83	83

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

23) Following is a random list of accounts with normal balances for the Lexis Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.

Lexis, Capital $159,000

Land 80,000

Sales discounts 18,000

Supplies expense 9,000

Interest revenue 14,000

Mortgage payable 80,000

Cash 22,000

Accounts receivable 34,000

Unearned service revenue 11,000

Salary expense 23,000

Accounts payable 36,000

Accumulated amort.-building 17,000

Equipment 46,000

Prepaid insurance 8,000

Interest expense 6,000

Lexis, Withdrawals 15,000

Sales revenue 285,000

Interest receivable 5,000

Inventory 28,000

Accumulated amort.-equipment 12,000

Insurance expense 21,000

Salary payable 6,000

Supplies 4,000

Cost of goods sold 156,000

Sales returns & allowances 13,000

Amortization expense-building 8,000

Amortization expense-equipment 8,000

Interest payable 14,000

Utilities expense 8,000

Delivery expense 7,000

Building 115,000

Prepare a multi-step income statement for Lexis Merchandising for the year ended December 31, 2013.

Answer: Lexis Merchandising

Income Statement

For the Year Ended December 31, 2013

Sales revenue $285,000

Less: Sales discounts $18,000

Sales returns & allowances 13,000 31,000

Net sales revenue $254,000

Cost of goods sold 156,000

Gross margin $ 98,000

Operating expenses:

Salary expense 23,000

Insurance expense 21,000

Amortization expense-building 8,000

Amortization expense-equipment 8,000

Supplies expense 9,000

Utilities expense 8,000

Delivery expense 7,000 84,000

Operating income 14,000

Other revenue and (expense):

Interest revenue 14,000

Interest expense 6,000 8,000

Net income $22,000

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

24) Following is a random list of accounts with normal balances for the Sisco Merchandising as of December 31, 2013. All adjusting entries have been made. Closing entries have not been made.

Sisco, Capital $159,000

Land 80,000

Sales discounts 18,000

Supplies expense 9,000

Interest revenue 14,000

Mortgage payable 80,000

Cash 22,000

Accounts receivable 34,000

Unearned service revenue 11,000

Salary expense 23,000

Accounts payable 36,000

Accumulated amort.-building 17,000

Equipment 46,000

Prepaid insurance 8,000

Interest expense 6,000

Sisco, Withdrawals 15,000

Sales revenue 285,000

Interest receivable 5,000

Inventory 28,000

Accumulated amort.-equipment 12,000

Insurance expense 21,000

Salary payable 6,000

Supplies 4,000

Cost of goods sold 156,000

Sales returns & allowances 13,000

Amortization expense-building 8,000

Amortization expense-equipment 8,000

Interest payable 14,000

Utilities expense 8,000

Delivery expense 7,000

Building 115,000

Prepare a single-step income statement for Sisco Merchandising for the year ended December 31, 2013.

Answer:

Sisco Merchandising

Income Statement

For the Year Ended December 31, 2013

Revenues:

Net sales (net of sales discounts, $18,000, and

sales returns and allowances, $13,000) $254,000

Interest revenue 14,000

Total revenue 268,000

Expenses:

Cost of goods sold 156,000

Salary expense 23,000

Insurance expense 21,000

Supplies expense 9,000

Amortization expense-building 8,000

Amortization expense-equipment 8,000

Utilities expense 8,000

Delivery expense 7,000

Interest expense 6,000

Total expenses 246,000

Net income $ 22,000

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

25) Please refer to the following trial balance.

	Debit	Credit
Cash	$5,000
Accounts receivable	14,000
Inventory	20,000
Supplies	5,000
Land	100,000
Accounts payable		$3,000
Notes payable		25,000
Capital		90,000
Drawing	1,000
Sales revenues		160,000
Sales returns and allowances	2,000
Sales discounts	3,000
Cost of goods sold	80,000
Salary expense	5,000
Utility expense	23,000
Rent expense	18,000
Interest expense	2,000
Totals	$278,000	$278,000

Please prepare a multi-step income statement:

Answer:

Sales revenues		$160,000
Less: Sales returns and allowances	$2,000
Sales discounts	3,000	5,000
Net sales revenue		$155,000
Cost of goods sold		80,000
Gross profit		$75,000
Operating expenses
Salary expense	$5,000
Utility expense	23,000
Rent expense	18,000	46,000
Operating income		$29,000
Other revenue and (expense)
Interest expense		(2,000)
Net income		$27,000

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

26) Describe single-step and multi-step formats for income statements.

Answer: A single-step income statement only has two sections, one for revenues and the other for expenses; and, a single income amount for net income. A multi-step income statement has subtotals for gross margin and income from operations. The multi-step format is the most widely used format.

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

27) Underwater Adventures has the following account balances on August 31, 2014:

Accounts payable $8,800

Accounts receivable 9,600

Accumulated amortization – equipment 30,300

Cash 2,200

Cost of goods sold 341,500

Jacobson, capital 190,700

Jacobson, withdrawals 44,000

Equipment 88,000

Interest earned 2,000

Inventory 71,500

Operating expenses 175,500

Sales discounts 3,100

Sales returns and allowances 14,400

Sales revenue 520,600

Supplies 7,100

Unearned sales revenue 4,500

The following information as at August 31, 2014 was also available:

A physical count of items showed $1,200 of supplies on hand.
An inventory count showed inventory on hand of $66,400.
The equipment has an estimated useful life of eight years and is expected to have no salvage value.
Unearned sales revenue of $1,000 was earned.

Required:

Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
Prepare a classified balance sheet based on adjusted account balances.

Answer: General Journal

Date	Accounts	Debit	Credit
Aug 31	Supplies expense	5,900
	Supplies		5,900

31	Cost of goods sold	5,100
	Inventory		5,100

31	Amortization expense, equipment	11,000
	Accumulated amort., equip.		11,000

31	Unearned sales revenue	1,000
	Sales revenue		1,000

Underwater Adventures

Balance Sheet

August 31, 2014

Assets

Current assets:

Cash $ 2,200

Accounts receivable 9,600

Supplies 1,200

Inventory 66,400

Total current assets $79,400

Property, plant and equipment:

Equipment $ 88,000

Less: accumulated amortization 41,300 46,700

Total assets $126,100

Liabilities and Owner’s Equity

Current liabilities:

Accounts payable $ 8,800

Unearned sales revenue 3,500

Total current liabilities $ 12,300

Jacobson capital 113,800

Total liabilities and owner’s equity $ 126,100

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Table 5-10

The December 31, 2014 adjusted trial balance for Camptown Company is shown below.

	Debit	Credit
Cash	$12,600
Accounts receivable	2,400
Prepaid rent	800
Inventory	28,000
Accounts payable		$4,200
Salary payable		1,000
Notes payable		800
Capital		13,800
Drawing	1,000
Sales revenue		96,000
Sales returns and allowances	1,600
Sales discounts	400
Cost of goods sold	25,000
Salary expense	21,000
Rent expense	22,500
Supplies expense	500
Total	$115,800	$115,800

28) Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.

Answer: Camptown Company

Income Statement

For the Year Ended December 31, 2014

Revenues:

Sales revenue $96,000

Less: Sales discounts $400

Sales returns and allowances 1,600 2,000

Net sales revenue $94,000

Expenses:

Cost of goods sold $25,000

Salary expense 21,000

Rent expense 22,500

Supplies expense 500

Total expenses 69,000

Net income $ 25,000

General Journal

Date	Accounts	Debit	Credit
Dec 31	Sales revenue	96,000
	Income summary		96,000

31	Income summary	71,000
	Sales discounts		400
	Sales returns and allowances		1,600
	Cost of goods sold		25,000
	Salary expense		21,000
	Rent expense		22,500
	Supplies expense		500

31	Income summary	25,000
	Capital		25,000

31	Capital	1,000
	Drawing		1,000

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-4 Prepare a merchandiser’s financial statements under the perpetual inventory system

Objective 5-5

1) The gross margin percentage is determined by dividing the gross margin by the net sales revenue.

Answer: TRUE

Diff: 1

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

2) The faster the sale of inventory and the collection of cash, the higher the profits will be for a business.

Answer: TRUE

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Comprehension

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

3) There is no such thing as too high an inventory turnover ratio.

Answer: FALSE

Diff: 1

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

4) Inventory turnover does not affect profitability but does affect the amount of inventory on the shelf.

Answer: FALSE

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Comprehension

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

5) The gross margin percentage is calculated as:

A) gross margin minus net sales revenue.
B) gross margin divided by net sales revenue.
C) gross margin plus net sales revenue.
D) gross margin times net sales revenue.

Answer: B

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

6) Inventory turnover indicates how:

A) quickly inventory is received from the supplier after the order is placed.
B) many days it takes the inventory to travel between the seller’s warehouse and the buyer’s warehouse.
C) rapidly inventory is sold.
D) many days it takes from the time an order is received to the day it is shipped.

Answer: C

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Comprehension

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

7) Inventory turnover is calculated as:

A) cost of goods sold divided by average inventory.
B) cost of goods sold minus average inventory.
C) cost of goods sold times average inventory.
D) average inventory divided by cost of goods sold.

Answer: A

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

8) Please refer to the following trial balance.

	Debit	Credit
Cash	$5,000
Accounts receivable	14,000
Inventory	20,000
Supplies	5,000
Land	100,000
Accounts payable		$3,000
Notes payable		25,000
Capital		90,000
Withdrawals	1,000
Sales revenues		160,000
Sales returns and allowances	2,000
Sales discounts	3,000
Cost of goods sold	80,000
Salary expense	5,000
Utility expense	23,000
Rent expense	18,000
Interest expense	2,000
Totals	$278,000	$278,000

How much is the gross profit percentage?

A) 50.0%
B) 51.6%
C) 46.8%
D) 48.4%

Answer: D

Explanation: D) Calculations: $155,000 – $80,000 = $75,000/$155,000 = 48.4%

Diff: 3

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Application

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

9) Alpha Company had $45,000 in beginning inventory and $80,000 in ending inventory. Cost of goods sold for the period was $25,000. The inventory turnover is:

A) 0.56.
B) 0.3125.
C) 0.4.
D) 4.0.

Answer: C

Explanation: C) Calculations: $25,000/(($45,000 + $80,000)/2)

Diff: 2

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Application

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

Match the following.

A) gross margin percentage
B) inventory turnover

10) Gross margin divided by net sales revenue

Diff: 1

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

11) Ratio of cost of goods sold to average inventory

Diff: 1

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Knowledge

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

Answers: 10) A 11) B

Table 5-5

The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:

Salary payable	$1,100
Sales revenue	480,000
Interest revenue	3,000
Freight in	20,000
Beginning inventory	35,000
Sales discounts	18,000
Purchases of inventory	240,000
Purchase returns and allowances	35,000
Purchase discounts	10,000
Sales returns and allowances	35,000
Ending inventory	80,000
Operating expenses	85,000
Interest expense	7,000
Owner withdrawals	12,000

12) Based on the information in Table 5-5 provide the following:

Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.

Answer:

Multi-step income statement

Speedy Boat Company

Income Statement

For the Period Ending December 31, 2013

Sales $480,000

Returns & allowances 35,000

Discounts 18,000

Net sales $427,000

Cost of goods sold:

Beg. inventory $35,000

Net purchases (240-35-10) 195,000

Freight-in 20,000

Available $250,000

End. inventory 80,000

Cost of goods sold 170,000

Gross margin $257,000

Operating expenses 85,000

Operating income $172,000

Other income and expenses:

Interest revenue $3,000

Interest expense 7,000 (4,000)

Net income $168,000

Ratios

Gross margin percentage = ($257,000/$427,000) = 60%

Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times

Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.

Diff: 3

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Application

Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

Objective 5-6

1) The preparation of the income statement for a merchandising company that is following international financial reporting standards (IFRS) is not significantly different from the approach used by companies following accounting standards for private enterprises (ASPE).

Answer: TRUE

Diff: 2

Learning Outcome: A-18 Compare and contrast IFRS and ASPE

Skill: Knowledge

Objective: 5-6 Describe the merchandising operations effects of IFRS

2) What are two key criteria that merchandisers who report under international financial reporting standards (IFRS) must follow?

A) Revenue-recognition criteria and time-allotment assumption
B) Revenue-recognition criteria and matching objective
C) Revenue-recognition criteria and economic-period assumption
D) Revenue-recognition criteria and time-concern assumption

Answer: B

Diff: 2

Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework

Skill: Knowledge

Objective: 5-6 Describe the merchandising operations effects of IFRS

Match the following.

A) statement of comprehensive income
B) income statement

3) The name of the statement that presents revenues and expenses under IFRS

Diff: 1

Learning Outcome: A-18 Compare and contrast IFRS and ASPE

Skill: Knowledge

Objective: 5-6 Describe the merchandising operations effects of IFRS

Answers: 3) A

Objective 5-A1

1) The entry to record the purchase of inventory on account in a periodic inventory system includes a debit to the Purchases account.

Answer: TRUE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

2) When the seller accepts a return of undamaged goods from the purchaser, the seller’s journal entries would include two entries, if they are using a periodic inventory system.

Answer: FALSE

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

3) In a periodic inventory system, purchases of inventory are debited to an account entitled Purchases.

Answer: TRUE

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

4) In a periodic inventory system, purchase returns and allowances and purchase discounts are considered contra liability accounts.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

5) Purchase discounts normally have a credit balance.

Answer: TRUE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

6) Using a periodic inventory system, the entry to record the purchase of merchandise on account involves a:

A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) debit to Purchases.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

7) A merchandiser purchases inventory on account under a periodic inventory system with terms of 2/10 n/30. The merchandiser would:

A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) credit Purchases Discounts on date of purchase if the discount is not taken.

Answer: C

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

8) If a purchaser returns goods purchased on account to the supplier under a periodic inventory system, the purchaser would debit:

A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Payable and credit Purchase Returns.

Answer: D

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

9) When a discount is taken for prompt payment under a periodic inventory system, the purchaser would credit:

A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

10) A purchase return or allowance under a periodic inventory system is credited to:

A) Accounts Payable.
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

11) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a periodic inventory system would record payment of the freight with a debit to:

A) Inventory and credit to Cash for $200.
B) Freight In and a credit to Cash for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

12) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a periodic inventory system would include a:

A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

13) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a periodic inventory system would include a credit to:

A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

14) When the buyer pays the freight costs, the entry to record the payment under a periodic inventory system would include a debit to:

A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

15) When goods are shipped FOB destination and a periodic inventory system is used, the buyer would:

A) debit Freight In for the amount of the transportation charges.
B) debit Delivery Expense for the amount of the transportation charges.
C) make no journal entry for the transportation charges.
D) debit Inventory for the amount of the transportation charges.

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

16) To update the inventory records for the sale of merchandise on account under a periodic inventory system, the entry would include:

A) a credit to Inventory.
B) a debit to Accounts Payable.
C) no entry as inventory records are not updated at the time of sale.
D) a debit to Cost of Goods Sold.

Answer: C

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

17) The entries to record a $5,000 cash sale under a periodic inventory system, when the cost of the merchandise is $3,200, include a:

A) debit to Inventory for $5,000.
B) credit to Sales Revenue for $5,000.
C) debit to Cost of Goods Sold for $3,200.
D) debit to Accounts Receivable for $5,000.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

18) Under a periodic inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:

A) credit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.

Answer: A

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

19) Under a periodic inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:

A) credit to Accounts Receivable for $210.
B) debit to Sales Returns and Allowances for $360.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.

Answer: B

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

20) Under a periodic inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:

A) debit to Inventory of $1,200.
B) debit to Sales Returns and Allowances of $2,600.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.

Answer: B

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

21) Under a periodic inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:

A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $3,400.
D) Inventory of $1,500.

Answer: C

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

22) In a periodic inventory system, the entry to record the purchase of merchandise on account would include a:

A) debit to Accounts Payable.
B) debit to Inventory.
C) credit to Cash.
D) debit to Purchases.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

23) In a periodic inventory system, when a company returns merchandise previously purchased on account, the entry to record the return would include a:

A) debit to Inventory.
B) credit to Purchase Returns and Allowances.
C) debit to Sales Returns and Allowances.
D) credit to Accounts Payable.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

24) In a periodic inventory system, the entry to record the taking of a cash discount for the purchase of merchandise would include a:

A) credit to Purchase Discounts
B) credit to Inventory
C) debit to Purchase Discounts
D) credit to Purchase Returns and Allowances.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

25) In a periodic inventory system, the entry to record the payment of shipping costs by the company buying the merchandise when the terms are FOB shipping point would include a:

A) debit to Freight In.
B) debit to Delivery Expense.
C) credit to Cost of Goods Sold.
D) credit to Freight Out.

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

26) In a periodic inventory system, the entry to record the sale of $2,000 of merchandise on account with a cost of $1,400 would include a:

A) credit to Accounts Receivable for $1,400.
B) debit to Accounts Receivable for $2,000.
C) debit to Cost of Goods Sold for $2,000.
D) credit to Inventory for $1,400.

Answer: B

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

27) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. Avery paid the supplier on February 9. Which of the following journal entries properly records this payment transaction?

Accounts Payable	9,700
Cash		9,700

Accounts Payable	9,700
Purchase Discounts	300
Purchases		10,000

Accounts Payable	10,000
Cash		9,700
Purchase Discounts		300

Accounts Payable	10,000
Cash		10,000

Answer: C

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

28) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account. The terms were 3/10, n/30. The purchase was made on February 1. On February 2, Avery returned $400 of damaged goods to the supplier and was granted an allowance. How should Avery properly record the allowance?

Accounts Payable	400
Purchase Returns and Allowances		400

Accounts Payable	9,600
Purchase Discounts	400
Purchases		10,000

Accounts Payable	10,000
Cash		9,600
Purchase Returns and Allowances		400

Accounts Payable	400
Cash		400

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

29) Tobermory Merchandising had the following transactions during May:

May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,

FOB shipping point.

9 Paid transportation cost on the May 5 purchase, $250.

10 Returned $400 of defective merchandise purchased on May 5.

15 Paid for the May 5 purchase, less the return and the discount.

Required: Assuming the periodic inventory system is used, prepare the journal entries to record the above transactions.

Answer:

General Journal

Date	Accounts	Debit	Credit
May 5	Purchases	2,700
	Accounts Payable		2,700
	Purchased merchandise, terms 3/15 n/60.
9	Freight In	250
	Cash		250
	Paid transportation cost on May 5 purchase.
10	Accounts Payable	400
	Purchase Returns and Allowances		400
	Returned merchandise purchased May 5.
15	Accounts Payable	2,300
	Cash		2,231
	Purchase Discounts		69
	Paid for May 5 purchase less return and discount.

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

30) Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a periodic inventory system.

June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms

were 2/10 n/30, FOB shipping point. Romeo paid the freight bill

amounting to $2,000.

4 Romeo returned $2,500 of the merchandise billed on June 2 because it

was defective.

5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.

10 Romeo paid the invoice dated June 2, less the return and the discount.

15 A customer returned $2,500 of merchandise sold on June 5.

19 Britt received payment on the remaining amount due from the sale of

June 5, less the return and the discount.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Purchases	18,000
	Accounts Payable		18,000
	Freight In	2,000
	Cash		2,000
4	Accounts Payable	2,500
	Purchase Returns and Allowances		2,500
5	Accounts Receivable	8,000
	Sales Revenue		8,000
10	Accounts Payable	15,500
	Cash		15,190
	Purchase Discounts		310
15	Sales Returns and Allowances	2,500
	Accounts Receivable		2,500
19	Cash	5,335
	Sales Discounts	165
	Accounts Receivable		5,500

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

Table 5-6

The following are transactions for Latest Fashions for the month of June.

June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point

from Trendy Manufacturing. The merchandise had cost Trendy $1,800

June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.

June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.

June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB

shipping point. Cost of the merchandise sold was $4,000.

June 10 Paid Trendy Manufacturing the balance on account.

June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.

June 23 Collected balance owing from New Miss Store.

31) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming that Latest Fashions uses a periodic inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Purchases	2,000
	Accounts Payable		2,000
7	Accounts Payable	400
	Purchase Returns and Allowances		400
8	Freight In	100
	Cash		100
9	Accounts Receivable	5,000
	Sales Revenue		5,000
10	Accounts Payable	1,600
	Purchase Discounts		16
	Cash		1,584
12	Sales Returns and Allowances	300
	Accounts Receivable		300
25	Cash	4,606
	Sales Discount	94
	Accounts Receivable		4,700

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

32) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed, assuming that Trendy uses a periodic inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 2	Accounts Receivable	2,000
	Sales Revenue		2,000
7	Sales Returns and Allowances	400
	Accounts Receivable		400
10	Cash	1,584
	Sales Discount	16
	Accounts Receivable		1,600

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

33) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming that New Miss Store uses a periodic inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 9	Purchases	5,000
	Accounts Payable		5,000
7	Accounts Payable	300
	Purchase Returns and Allowances		300
25	Accounts Payable	4,700
	Purchase Discounts		94
	Cash		4,606

Diff: 3

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

34) Sam Levine Merchandising had the following transactions during May:

May 1 Beginning inventory was 20 units valued at $25 per unit.

May 5 Purchased 80 units of merchandise on account for $2,160, terms n/15,

FOB shipping point.

May 9 Paid transportation cost on the May 5 purchase, $240.

May 10 Returned two units of defective merchandise purchased on May 5.

May 11 Sold 30 units for $50 per unit on account.

May 15 Paid for the May 5 purchase, less the return.

May 20 Sold 10 units for $50 per unit on account.

Required:

Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record the above transactions.
Assuming weighted-average and that the periodic inventory system is used, prepare the journal entries to record the above transactions.

Answer:

Requirement 1: Perpetual Inventory Method

Date	Account Name	Debit	Credit
May 5	Inventory	2,160
	Accounts Payable		2,160

May 9	Inventory	240
	Cash		240

May 10	Accounts Payable	54
	Inventory		54

May 11	Accounts Receivable (30 × $50)	1,500
	Sales		1,500
	Cost of Goods Sold (20 × $25) + (10 × ($27 + $3))	800
	Inventory		800

May 15	Accounts Payable ($2,160 – $54)	2,106
	Cash		2,106

May 20	Accounts receivable	500
	Sales		500

	Cost of Goods Sold (10 × $30)	300
	Inventory		300

Requirement 2: Periodic Inventory Method

Date	Account Name	Debit	Credit
May 5	Purchases	2,160
	Accounts Payable		2,160

May 9	Frieght-in	240
	Cash		240

May 10	Accounts Payable	54
	Purchase Returns		54

May 11	Accounts Receivable	1,500
	Sales		1,500

May 15	Accounts Payable	2,160
	Cash		2,160

May 20	Accounts Receivable	500
	Sales		500

Diff: 3

Learning Outcome: A-09 Explain and apply inventory costing methods

Skill: Application

Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system

Objective 5-A2

1) In a periodic inventory system, cost of goods sold is determined by subtracting the ending inventory from the cost of goods available for sale.

Answer: TRUE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

2) In a periodic inventory system, beginning inventory plus net purchases minus freight in equals cost of goods sold.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

3) In a periodic inventory system, the cost of freight-in is part of the cost of goods available for sale.

Answer: TRUE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

Table 5-3

Sales revenue	$750,000
Interest revenue	18,000
Freight in	44,000
Beginning inventory	75,000
Purchases discounts	20,000
Sales returns and allowances	44,000
Operating expenses	99,000
Interest expense	15,000
Ending inventory	72,000
Purchases	415,000
Sales discounts	25,000
William Browning, Withdrawals	61,000
Purchase returns and allowances	36,000

4) Refer to Table 5-3. Net purchases are:

A) $359,000.
B) $415,000.
C) $395,000.
D) $439,000.

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

5) Refer to Table 5-3. The total cost of goods available for sale is:

A) $388,000.
B) $478,000.
C) $470,000.
D) $394,000.

Answer: B

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

6) Refer to Table 5-3. The cost of goods sold is:

A) $470,000.
B) $478,000.
C) $406,000.
D) $351,000.

Answer: C

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

7) Cost of goods sold is $7,400. Beginning inventory is $3,500 and ending inventory is $4,000. If there is no freight in and total purchases were $8,250, what were purchase returns and allowances?

A) $850
B) $500
C) $350
D) $550

Answer: C

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

8) Cost of goods sold is $108,000, beginning inventory is $20,000 and purchases is $100,000. What is ending inventory?

A) $32,000
B) $12,000
C) $128,000
D) $102,000

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

9) Cost of goods sold is $108,000 ,ending inventory is $12,000 and purchases is $100,000. What is beginning inventory?

A) $20,000
B) 32,000
C) $120,000
D) $102,000

Answer: A

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

10) Purchases of inventory minus purchase discounts and minus purchase returns and allowances equals:

A) gross purchases.
B) cost of goods available for sale.
C) net purchases.
D) cost of goods sold.

Answer: C

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

11) Beginning inventory plus net purchases and plus freight in equals:

A) net purchases.
B) cost of goods available for sale.
C) cost of goods sold.
D) gross purchases.

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

12) Cost of goods sold plus ending inventory equals:

A) net purchases.
B) cost of goods available for sale.
C) gross margin.
D) gross profit.

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

Table 5-4

The following data is for the Atlantis Merchandising, which uses a periodic inventory system:

Sales revenue	$600,000
Interest revenue	12,000
Freight in	42,000
Beginning inventory	77,000
Purchase discounts	19,000
Sales returns and allowances	33,000
Operating expenses	77,000
Interest expense	9,000
Ending inventory	81,000
Purchases	415,000
Sales discounts	35,000
Omar Atlantis, Withdrawals	71,000
Purchase returns and allowances	39,000

13) Refer to Table 5-4. Net purchases for Atlantis Merchandising are:

A) $415,000.
B) $357,000.
C) $396,000.
D) $376,000.

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

14) Refer to Table 5-4. The total cost of goods available for sale for the Atlantis Merchandising is:

A) $434,000.
B) $408,000.
C) $476,000.
D) $441,000.

Answer: C

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

15) Refer to Table 5-4. The cost of goods sold for Atlantis Merchandising is:

A) $524,000.
B) $489,000.
C) $557,000.
D) $395,000.

Answer: D

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

Table 5-5

The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:

Salary payable	$1,100
Sales revenue	480,000
Interest revenue	3,000
Freight in	20,000
Beginning inventory	35,000
Sales discounts	18,000
Purchases of inventory	240,000
Purchase returns and allowances	35,000
Purchase discounts	10,000
Sales returns and allowances	35,000
Ending inventory	80,000
Operating expenses	85,000
Interest expense	7,000
Owner withdrawals	12,000

16) Refer to Table 5-5. The net purchases for Speedy Boat Company are:

A) $230,000.
B) $195,000.
C) $240,000.
D) $205,000.

Answer: B

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

17) Refer to Table 5-5. Cost of goods available for sale for Speedy Boat Company is:

A) $155,000.
B) $225,000.
C) $230,000.
D) $250,000.

Answer: D

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

18) Refer to Table 5-5. Cost of goods sold for Speedy Boat Company is:

A) $170,000.
B) $180,000.
C) $330,000.
D) $220,000.

Answer: A

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

19) In a periodic system, inventory balances and the cost of goods sold for the current period are determined:

A) at the time of sale.
B) on a frequent basis.
C) on the first day of each year.
D) when a physical inventory count is taken.

Answer: D

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

20) The following refers to periodic inventory:

Net sales	$198,000
Purchases	92,000
Purchases returns and allowances	1,800
Purchases discounts	1,250
Freight in	1,590
Beginning merchandise inventory	63,000
Ending merchandise inventory	37,000

Compute cost of goods sold.

A) $116,540
B) $81,460
C) $114,950
D) $53,540

Answer: A

Explanation: A) Calculations: $63,000 + $88,950 + $1,590 – $37,000 = $116,540

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

21) Fill in the missing amounts for each case in the table presented below:

	A	B	C	D
Beginning inventory	$6,000	$7,200		$9,100
Net purchase		9,000	32,700	32,000
Freight in	500		950	1,200
Cost of goods avail. for sale	50,000	17,250	45,600
Ending inventory		5,375	14,850
Cost of goods sold	32,600			14,800

Answer:

	A	B	C	D
Beginning inventory	$ 6,000	$ 7,200	$11,950	$ 9,100
Net purchase	43,500	9,000	32,700	32,000
Freight in	500	1,050	950	1,200
Cost of goods avail. for sale	50,000	17,250	45,600	42,300
Ending inventory	17,400	5,375	14,850	27,500
Cost of goods sold	32,600	11,875	30,750	14,800

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

22) The following items were taken from the records of Slow Boat Company, which uses a periodic inventory system:

Salary payable $1,100

Sales revenue 480,000

Freight in 20,000

Beginning inventory 35,000

Purchases of inventory 240,000

Purchase returns and allowances 35,000

Purchase discounts 10,000

Sales returns and allowances 35,000

Ending inventory 80,000

Operating expenses 85,000

Prepare the cost of goods sold section for the Slow Boat Company’s income statement.

Answer: Beginning inventory $35,000

Purchases of inventory $240,000

Purchase returns and allowances 35,000)

Purchase discounts (10,000)

Net purchases 195,000

Freight in 20,000

Cost of goods available for sale $250,000

Ending inventory (80,000)

Cost of goods sold 170,000

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system

Objective 5-A3

1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a periodic inventory system.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

2) In a periodic inventory system, the closing entries include a debit to the Inventory account in an amount that equals the ending inventory, and a credit to the Inventory account in an amount that equals the beginning inventory.

Answer: TRUE

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

3) Which accounts are affected in the closing process under a periodic inventory system?

A) Gross Margin and Cost of Goods Sold
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts
D) operating expenses, Sales Revenue, and Purchases

Answer: D

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

4) Under a periodic inventory system, which accounts would be closed to income summary with credits?

A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Purchases
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue

Answer: B

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

Table 5-3

Sales revenue	$750,000
Interest revenue	18,000
Freight in	44,000
Beginning inventory	75,000
Purchases discounts	20,000
Sales returns and allowances	44,000
Operating expenses	99,000
Interest expense	15,000
Ending inventory	72,000
Purchases	415,000
Sales discounts	25,000
William Browning, Withdrawals	61,000
Purchase returns and allowances	36,000

5) Refer to Table 5-3. Net sales is:

A) $681,000.
B) $750,000.
C) $725,000.
D) $706,000.

Answer: A

Explanation: A)

Sales	$750,000
Less: Returns & allowances	44,000
Discounts	25,000
Net sales	$681,000
Cost of goods sold:
Beg. inventory	$75,000
Net purchases (415-20-36)	359,000
Freight-in	44,000
Available	$478,000
End. inventory	(72,000)
Cost of goods sold	406,000
Gross margin	$275,000
Operating expenses	99,000
Operating income	$176,000
Other income and expenses:
Interest revenue	$18,000
Interest expense	15,000
Total other income and expenses	3,000
Net income	$179,000

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

6) In a periodic inventory system, the closing process includes crediting the following accounts to bring their balances to zero:

A) Cost of Goods Sold and Freight In.
B) Purchases and Freight In.
C) Purchase Discounts and Sales Discounts.
D) Purchase Returns and Allowances and Purchase Discounts.

Answer: B

Diff: 2

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

7) In a periodic inventory system, the closing process includes:

A) debiting Purchases.
B) crediting Purchase Returns and Allowances.
C) debiting Sales Discounts.
D) debiting Inventory for the ending balance.

Answer: D

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

Match the following.

A) Cost of Goods Sold

8) The account used to offset the adjustment to inventory to the actual amount on hand

Diff: 1

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Knowledge

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

Answers: 8) A

9) Following is a random list of some of the accounts and their December 31, 2014, balances for Carmen & Company. Carmen & Company uses a periodic inventory system and all account balances are normal.

Purchases $320,000

Sales revenue 460,000

Interest revenue 23,000

Salary expense 45,000

Freight in 17,000

Purchase discounts 31,000

Sales returns and allowances 35,000

Interest expense 18,000

Delivery expense 24,000

Sales discounts 27,000

Insurance expense 16,000

Purchase returns and allowances 46,000

B.J. Carmen, Capital 30,000

Utilities expense 14,000

Amortization expense-equipment 10,000

B.J. Carmen, Withdrawals 15,000

The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.

Prepare the closing entries for Carmen & Company.

Answer: General Journal

Date	Accounts	Debit	Credit

Dec. 31	Sales Revenue	460,000
	Interest Revenue	23,000
	Purchase Discounts	31,000
	Purchase Returns & Allowances	46,000
	Income Summary		560,000

31	Income Summary	526,000
	Sales Ret. and Allow		35,000
	Sales Discounts		27,000
	Purchases		320,000
	Salary Expense		45,000
	Freight in		17,000
	Interest expense		18,000
	Delivery Expense		24,000
	Insurance Expense		16,000
	Utilities Expense		14,000
	Amortization Exp- equip		10,000


31	Income Summary	58,000
	Inventory (beg bal)		58,000

31	Inventory (end bal)	65,000
	Income Summary		65,000

31	Income Summary	41,000
	B.J. Carmen, Capital		41,000

31	B.J. Carmen, Capital	15,000
	B.J. Carmen, Withdrawals		15,000

Diff: 3

Learning Outcome: A-05 Define and record adjusting and closing entries

Skill: Application

Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory system

Objective 5-A4

1) The caption “Net sales” in a multi-step income statement is different if a business uses the periodic instead of the perpetual inventory system.

Answer: FALSE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

2) Net purchases caption on the multi-step income statement is calculated by subtracting purchase discounts and purchase returns and allowances from purchases.

Answer: TRUE

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

3) Inventory and cost of goods sold for a business using the periodic inventory system appear on the:

A) balance sheet and statement of owner’s equity, respectively
B) statement of owner’s equity and income statement, respectively
C) balance sheet and income statement, respectively
D) income statement and cash flow statement, respectively

Answer: C

Diff: 2

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Table 5-3

Sales revenue	$750,000
Interest revenue	18,000
Freight in	44,000
Beginning inventory	75,000
Purchases discounts	20,000
Sales returns and allowances	44,000
Operating expenses	99,000
Interest expense	15,000
Ending inventory	72,000
Purchases	415,000
Sales discounts	25,000
William Browning, Withdrawals	61,000
Purchase returns and allowances	36,000

4) Refer to Table 5-3. Operating income is:

A) $161,000
B) $214,000
C) $179,000
D) $176,000

Answer: D

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

5) Refer to Table 5-3. Net income is:

A) $161,000
B) $214,000
C) $179,000
D) $176,000

Answer: C

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Table 5-4

The following data is for the Atlantis Merchandising, which uses a periodic inventory system:

Sales revenue	$600,000
Interest revenue	12,000
Freight in	42,000
Beginning inventory	77,000
Purchase discounts	19,000
Sales returns and allowances	33,000
Operating expenses	77,000
Interest expense	9,000
Ending inventory	81,000
Purchases	415,000
Sales discounts	35,000
Omar Atlantis, Withdrawals	71,000
Purchase returns and allowances	39,000

6) Refer to Table 5-4. The operating income for Atlantis Merchandising is:

A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.

Answer: D

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

7) Refer to Table 5-4. The net income for Atlantis Merchandising is:

A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.

Answer: B

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Table 5-5

The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:

Salary payable	$1,100
Sales revenue	480,000
Interest revenue	3,000
Freight in	20,000
Beginning inventory	35,000
Sales discounts	18,000
Purchases of inventory	240,000
Purchase returns and allowances	35,000
Purchase discounts	10,000
Sales returns and allowances	35,000
Ending inventory	80,000
Operating expenses	85,000
Interest expense	7,000
Owner withdrawals	12,000

8) Refer to Table 5-5. The operating income for Speedy Boat Company is:

A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.

Answer: B

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

9) Refer to Table 5-5. The net income for Speedy Boat Company is:

A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.

Answer: C

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Match the following.

A) net purchases

10) Purchases minus purchase discounts and minus purchase returns and allowances

Diff: 1

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Knowledge

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Answers: 10) A

11) Following is a random list of some of the accounts and their December 31, 2014, balances for Milita Merchandising. Milita Merchandising uses a periodic inventory system and all account balances are normal.

Purchases $330,000

Sales revenue 470,000

Interest revenue 23,000

Salary expense 45,000

Freight in 17,000

Purchase discounts 31,000

Sales returns and allowances 40,000

Interest expense 18,000

Delivery expense 24,000

Sales discounts 27,000

Insurance expense 16,000

Purchase returns and allowances 49,000

Milita, Capital 35,000

Utilities expense 14,000

Amortization expense-equipment 10,000

Milita, Withdrawals 18,000

The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.

Calculate the following for Milita Merchandising:

Net sales revenue $__________

Net purchases $__________

Cost of goods available for sale $__________

Cost of goods sold $__________

Gross margin $__________

Operating income $__________

Net income $__________

Answer: Net sales revenue

($470,000 – $40,000 – $27,000) = $403,000

Net purchases

($330,000 – $31,000 – $49,000) = $250,000

Cost of goods available for sale

($58,000 + $250,000 + $17,000) = $325,000

Cost of goods sold

($325,000 – $65,000) = $260,000

Gross margin

($403,000 – $260,000) = $143,000

Operating income

($143,000 – $45,000 – $24,000 – $16,000 – $14,000 – $10,000) = $34,000

Net income

($34,000 + $23,000 – $18,000) = $39,000

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Analysis

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Table 5-5

The following items were taken from the December 31, 2013 records of Speedy Boat Company, which uses a periodic inventory system:

Salary payable	$1,100
Sales revenue	480,000
Interest revenue	3,000
Freight in	20,000
Beginning inventory	35,000
Sales discounts	18,000
Purchases of inventory	240,000
Purchase returns and allowances	35,000
Purchase discounts	10,000
Sales returns and allowances	35,000
Ending inventory	80,000
Operating expenses	85,000
Interest expense	7,000
Owner withdrawals	12,000

12) Based on the information in Table 5-5 provide the following:

Multi-step income statement
Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on the effect that an increasing inventory turnover has on a business.

Answer:

Multi-step income statement

Speedy Boat Company

Income Statement

For the Period Ending December 31, 2013

Sales $480,000

Returns & allowances 35,000

Discounts 18,000

Net sales $427,000

Cost of goods sold:

Beg. inventory $35,000

Net purchases (240-35-10) 195,000

Freight-in 20,000

Available $250,000

End. inventory 80,000

Cost of goods sold 170,000

Gross margin $257,000

Operating expenses 85,000

Operating income $172,000

Other income and expenses:

Interest revenue $3,000

Interest expense 7,000 (4,000)

Net income $168,000

Ratios

Gross margin percentage = ($257,000/$427,000) = 60%

Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times

Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for shelf space and warehousing, reduces the need for trade credit.

Diff: 3

Learning Outcome: A-16 Define and use the different types of financial statement analysis tools

Skill: Application

Objective: 5-A4 Prepare a merchandiser’s financial statements under the periodic inventory system

Objective 5-B1

1) Describe the difference between a perpetual inventory system and a periodic inventory system.

Answer: The perpetual inventory system is used by businesses that sell expensive products or that have fairly sophisticated computer systems. This system keeps track of the inventory as it is both bought and sold, constantly updating the inventory account to current levels. This system offers management more control over inventory but requires a tremendous amount of record keeping. The sale of inventory requires not just one but two entries to record the transaction. One entry to record the sales price in the revenue account and another to record the cost in the cost of goods sold account.

The periodic inventory system is used by businesses that sell relatively inexpensive goods without the aid of sophisticated computers. This system does not keep track of the daily buying and selling of merchandise at cost. The only way to determine the cost of goods sold is to take a physical count of the merchandise on hand and to assume that if it is not on hand, it has been sold. This system does not offer as much control over inventory, but is much easier to account for on a daily basis.

Diff: 3

Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements

Skill: Comprehension

Objective: 5-B1 Compare the perpetual and periodic inventory systems

Objective 5-C1

1) Goods and services taxes add an extra cost to the value of inventory.

Answer: FALSE

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Comprehension

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

2) Benny’s Shoes and Feet Stuff operates in a province where HST is applicable at a rate of 12%. Last week he purchased $5,000 of shoe inventory on credit. Which of the following journal entries correctly records this transaction if Benny’s Shoes and Feet Stuff uses a periodic inventory system?

Purchases	5,000
HST Recoverable	600
Accounts Payable		5,600

Purchases	5,000
HST Payable	600
Accounts Payable		5,600

Inventory	5,000
HST Recoverable	600
Accounts Payable		5,600

Inventory	5,000
HST Payable	600
Accounts Payable		5,600

Answer: A

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

Match the following.

A) HST Payable
B) HST Recoverable

3) The tax account debited when goods are purchased

Diff: 1

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Knowledge

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

Answers: 3) B

Table 5-7

Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are transactions for the month of May.

May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale

$1,000 plus applicable GST.

10 Returned defective merchandise to Stranhern, $300 plus applicable GST.

12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.

FOB shipping point. Cost of the merchandise sold was $2,500.

28 Collected balance on account from Dainty Store.

30 Paid balance on account to Stranhern.

4) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a perpetual inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
May 8	Inventory	1,000
	GST Recoverable	50
	Accounts Payable		1,050
10	Accounts Payable	315
	GST Recoverable		15
	Inventory		300
12	Accounts Receivable	3,150
	GST Payable		150
	Sales Revenue		3,000
	Cost of Goods Sold	2,500
	Inventory		2,500
28	Cash	3,150
	Accounts Receivable		3,150
30	Accounts Payable	735
	Cash		735

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

5) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May, assuming that Marvelous Merchandising uses a periodic inventory system.

Answer:

General Journal

Date	Accounts	Debit	Credit
May 8	Purchases	1,000
	GST Recoverable	50
	Accounts Payable		1,050
10	Accounts Payable	315
	GST Recoverable		15
	Purchase Returns and Allowances		300
12	Accounts Receivable	3,150
	GST Payable		150
	Sales Revenue		3,000


28	Cash	3,150
	Accounts Receivable		3,150
30	Accounts Payable	735
	Cash		735

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

Table 5-8

May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale,

$1,000 plus applicable GST.

10 Returned defective merchandise to Stranhern, $300 plus applicable GST.

12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.

FOB shipping point. Cost of the merchandise sold was $2,500.

28 Collected balance on account from Dainty Store.

30 Paid balance on account to Stranhern.

General Journal

Date	Accounts	Debit	Credit
May 8	Inventory	1,000
	GST Recoverable	50
	Accounts Payable		1,050
10	Accounts Payable	315
	GST Recoverable		15
	Inventory		300
12	Accounts Receivable	3,150
	GST Payable		150
	Sales Revenue		3,000
	Cost of Goods Sold	2,500
	Inventory		2,500
28	Cash	3,150
	Accounts Receivable		3,150
30	Accounts Payable	735
	Cash		735

6) Refer to Table 5-8. Prepare the remittance payment of GST on June 15, based on the assumption that the only transactions for May are those listed in Table 5-8.

Answer:

General Journal

Date	Accounts	Debit	Credit
June 15	GST Payable	150
	GST Recoverable		35
	Cash		115

Diff: 2

Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements

Skill: Application

Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST

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Accounting Volume 1 Canadian 9th Edition By Charles T. Horngren - Test Bank

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