Fundamental Accounting Principles John Wild 24e - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Fundamental Accounting Principles, 24e (Wild) Chapter 5 Accounting for Merchandising Operations 1) Merchandise inventory refers to products that a company owns and plans to sell to customers. …
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Fundamental Accounting Principles John Wild 24e – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Fundamental Accounting Principles, 24e (Wild)
Chapter 5 Accounting for Merchandising Operations
1) Merchandise inventory refers to products that a company owns and plans to sell to customers.
Answer: TRUE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
2) A service company earns net income by buying and selling merchandise.
Answer: FALSE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
3) Gross profit is also called gross margin.
Answer: TRUE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
4) Cost of goods sold is also called cost of sales.
Answer: TRUE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
5) A wholesaler buys products from manufacturers or other wholesalers and sells them to consumers.
Answer: FALSE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
6) A retailer buys products from manufacturers and sells them to wholesalers.
Answer: FALSE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
7) Cost of goods sold represents the expense of buying and preparing merchandise for sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
8) A company had sales of $350,000 and cost of goods sold of $200,000. Its gross profit equals $150,000.
Answer: TRUE
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
9) A company had net sales of $545,000 and cost of goods sold of $345,000. Its gross margin equals $890,000.
Answer: FALSE
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
10) A company had a gross profit of $300,000 based on sales of $400,000. Its cost of goods sold equals $700,000.
Answer: FALSE
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
11) A merchandising company’s operating cycle begins with the purchase of merchandise and ends with the collection of cash from the sale.
Answer: TRUE
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
12) Merchandise inventory is reported in the long-term assets section of the balance sheet.
Answer: FALSE
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
13) Cash sales shorten the operating cycle for a merchandiser; credit sales lengthen operating cycles.
Answer: TRUE
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
14) Cost of goods sold is an expense, and is reported on the income statement.
Answer: TRUE
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
15) A periodic inventory system requires updating of the inventory account only at the beginning of an accounting period.
Answer: FALSE
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
16) A perpetual inventory system continually updates accounting records for merchandising transactions.
Answer: TRUE
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
17) Beginning inventory plus net purchases equals merchandise available for sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
18) The acid-test ratio is also called the quick ratio.
Answer: TRUE
Difficulty: 1 Easy
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
19) Quick assets include cash and cash equivalents, inventory, and current receivables.
Answer: FALSE
Difficulty: 1 Easy
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
20) The acid-test ratio is defined as current assets divided by current liabilities.
Answer: FALSE
Difficulty: 1 Easy
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
21) A company with an acid-test ratio of 4.1 is unlikely to face near-term liquidity problems.
Answer: TRUE
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
22) Successful use of a just-in-time inventory system can narrow the gap between the acid-test and the current ratio.
Answer: TRUE
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
23) A company’s quick assets are $147,000 and its current liabilities are $143,000. This company’s acid-test ratio is 1.03.
Answer: TRUE
Explanation: Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio − $147,000/$143,000 = 1.03
Difficulty: 3 Hard
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
24) A company’s current ratio is 1.2 and its quick ratio is 0.25. This company is probably an excellent credit risk because the ratios reveal no indication of liquidity problems.
Answer: FALSE
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
25) The gross margin ratio is defined as gross margin divided by net sales.
Answer: TRUE
Difficulty: 1 Easy
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
26) The profit margin ratio is the same as the gross profit ratio.
Answer: FALSE
Difficulty: 1 Easy
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
27) A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company’s gross margin ratio equals 24.5%.
Answer: TRUE
Explanation: Gross Margin Ratio = (Sales – Cost of Goods Sold)/Sales
Gross Margin Ratio = ($340,500 – $257,000)/$340,500 = 24.5%
Difficulty: 3 Hard
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
28) The Merchandise Inventory account balance at the beginning of the current period is equal to the amount of ending Merchandise Inventory from the previous period.
Answer: TRUE
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
29) Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
30) Purchase returns refer to merchandise a buyer purchases but then returns to the seller.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
31) Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
Answer: FALSE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
32) Purchase allowances refer to a price reduction (allowance) granted to a buyer of defective or unacceptable merchandise.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
33) Under the perpetual inventory system, the cost of merchandise purchased is recorded in the Merchandise Inventory account.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
34) Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
35) Sellers always offer a discount to buyers for prompt payment toward purchases made on credit.
Answer: FALSE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
36) Purchase discounts are the same as trade discounts.
Answer: FALSE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
37) If a company sells merchandise with credit terms 2/10 n/60, the credit period is 10 days and the discount period is 60 days.
Answer: FALSE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
38) The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
39) If goods are shipped FOB destination, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
40) If goods are shipped FOB shipping point, the seller does not record revenue from the sale until the goods arrive at their destination because the transaction is not complete until that point.
Answer: FALSE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
41) A buyer using a perpetual inventory system records the costs of shipping merchandise it purchases in a Delivery Expense account.
Answer: FALSE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
42) A buyer of $5,000 in merchandise inventory does not take advantage of a supplier’s credit terms of 2/10, n/30, and instead pays the invoice in full at the end of 30 days. The buyer will pay $4,900.
Answer: FALSE
Explanation: Payment not made in discount period so full invoice of $5,000 is paid
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
43) FOB shipping point means that the buyer accepts ownership when the goods arrive at the buyer’s place of business.
Answer: FALSE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
44) Each sales transaction for a seller that uses a perpetual inventory system involves recognizing both revenue and cost of merchandise sold.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
45) Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
46) Sales Discounts is added to the Sales account when computing a company’s net sales.
Answer: FALSE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
47) Sales discounts has a normal debit balance because it decreases Sales, which has a normal
credit balance.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
48) Under a perpetual inventory system, when a credit customer returns non-defective merchandise to the seller, the seller debits Sales Returns and Allowances and credits Accounts Receivable and also debits Merchandise Inventory and credits Cost of Goods Sold.
Answer: TRUE
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
49) The perpetual system requires that each sale of merchandise has two entries: the revenue side and the cost side.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
50) A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment.
Answer: FALSE
Explanation: $20/$1,000 = 2% discount
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
51) Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000.
Answer: TRUE
Explanation: $350,000 − $323,000 = $27,000
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
52) A perpetual inventory system is able to directly measure and monitor inventory shrinkage and there is no need for a physical count of inventory.
Answer: FALSE
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
53) Sales Discounts and Sales Returns and Allowances are contra revenue accounts that are debited to close the accounts during the closing process.
Answer: FALSE
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
54) Cost of Goods Sold is debited to close the account during the closing process.
Answer: FALSE
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
55) In a perpetual inventory system, the Merchandise Inventory account must be closed at the end of the accounting period.
Answer: FALSE
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
56) The adjusting entry to reflect inventory shrinkage is a debit to Income Summary and a credit to Inventory Shrinkage Expense.
Answer: FALSE
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
57) A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
58) Operating expenses are classified into two categories: selling expenses and cost of goods sold.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
59) A merchandiser’s classified balance sheet reports merchandise inventory as a current asset.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
60) Expenses related to accounting, human resource management, and financial management are known as selling expenses.
Answer: FALSE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
61) When a company has no reportable non-operating activities, its income from operations is simply labeled net income.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
62) A single-step income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.
Answer: TRUE
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
63) Under a periodic inventory system, purchases, purchases returns and allowances, purchase discounts, and transportation-in transactions are recorded in the Merchandise Inventory account.
Answer: FALSE
Difficulty: 1 Easy
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
64) The periodic inventory system requires updating the inventory account only at the end of the period.
Answer: TRUE
Difficulty: 1 Easy
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
65) In a periodic inventory system, cost of goods sold is recorded as each sale occurs.
Answer: FALSE
Difficulty: 1 Easy
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
66) Under both the periodic and perpetual inventory systems, the temporary account Purchases Returns and Allowances is used to accumulate the cost of all returns and allowances for a period.
Answer: FALSE
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases; Periodic Inventory System
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
67) Delivery expense is reported as part of general and administrative expense in the seller’s income statement.
Answer: FALSE
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
68) New revenue recognition rules require that sellers report sales net of expected sales discounts.
Answer: TRUE
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
69) Under new revenue recognition rules, the gross method requires a period-end adjusting entry to estimate future sales discounts.
Answer: TRUE
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
70) Inventory Returns Estimated, which reflects an adjustment to inventory for expected future returns, is a liability account reported in the balance sheet, usually under Current Liabilities.
Answer: FALSE
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
71) Inventory Returns Estimated is a current asset account used in a period-end adjusting entry to reflect the inventory estimated to be returned in the future.
Answer: TRUE
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
72) Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.
Answer: FALSE
Explanation: $2,000 × 0.98 = $1,960
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
73) When purchases are recorded at net amounts, any discounts lost as a result of late payments are reported as an expense.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
74) The net method records the invoice at its net amount (net of any cash discount).
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
75) Either the gross method or net method may be used to record sales with cash discounts, but the net method requires a period-end adjusting entry to estimate expected future sales discounts taken.
Answer: FALSE
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method; Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.; 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
76) Under the net method of recording purchases, the Discounts Lost account is used when the purchaser fails to take a discount offered by the seller.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
77) A merchandiser:
Answer: A
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
78) Cost of goods sold:
Answer: B
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
79) A company has sales of $695,000 and cost of goods sold of $278,000. Its gross profit equals:
Answer: D
Explanation: Gross Profit = Sales − Cost of Goods Sold
Gross Profit = $695,000 − $278,000 = $417,000
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
80) A company has sales of $375,000 and its gross profit is $157,500. Its cost of goods sold equals:
Answer: D
Explanation: Gross Profit = Sales − Cost of Goods Sold
Cost of Goods Sold = $375,000 − $157,500 = $217,500
Difficulty: 3 Hard
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
81) Which of the following statements regarding gross profit is not true?
Answer: C
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
82) Which of the following statements regarding merchandise inventory is not true?
Answer: D
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
83) Which of the following statements regarding the operating cycle of a merchandising company is not true?
Answer: B
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
84) Merchandise inventory:
Answer: B
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
85) The operating cycle for a merchandiser that sells only for cash moves from:
Answer: A
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
86) The current period’s ending inventory is:
Answer: A
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
87) Beginning inventory plus net purchases is:
Answer: B
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
88) The acid-test ratio:
Answer: A
Difficulty: 1 Easy
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
89) Quick assets are defined as:
Answer: B
Difficulty: 1 Easy
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
90) KLM Corporation’s quick assets are $5,888,000, its current assets are $11,700,000 and its current liabilities are $8,000,000. Its acid-test ratio equals:
Answer: C
Explanation: Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $5,888,000/$8,000,000 = 0.74
Difficulty: 3 Hard
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
91) A company’s current assets are $17,980, its quick assets are $11,420 and its current liabilities are $12,190. Its quick ratio equals:
Answer: A
Explanation: Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $11,420/$12,190 = 0.94
Difficulty: 3 Hard
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
92) Liquidity problems are likely to exist when a company’s acid-test ratio:
Answer: D
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
93) The acid-test ratio differs from the current ratio in that:
Answer: B
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
94) Using the following year-end information for Calvin’s Clothing, calculate the current ratio and acid-test ratio for the business:
| Cash | $ | 52,000 |
| Short-term investments | 12,000 | |
| Accounts receivable | 54,000 | |
| Inventory | 325,000 | |
| Prepaid expenses | 17,500 | |
| Accounts payable | 106,500 | |
| Other current payables | 25,000 |
Answer: D
Explanation: Current Ratio = Current Assets/Current Liabilities
Current Ratio = $460,500/$131,500 = 3.50
Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $118,000/$131,500 = 0.90
Difficulty: 3 Hard
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
95) The gross margin ratio:
Answer: B
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
96) A company’s gross profit (or gross margin) was $83,750 and its net sales were $347,800. Its gross margin ratio is:
Answer: B
Explanation: Gross Margin Ratio = Gross Profit/Net Sales
Gross Margin Ratio = $83,750/$347,800 = 24.1%
Difficulty: 3 Hard
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
97) A company’s net sales were $676,600, its cost of goods sold was $236,810 and its net income was $33,750. Its gross margin ratio equals:
Answer: D
Explanation: Gross Margin Ratio = (Net Sales − Cost of Goods Sold)/Net Sales
Gross Margin Ratio = ($676,600 − $236,810)/$676,600 = 65%
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
98) A company had net sales of $752,000 and cost of goods sold of $543,000. Its net income was $17,530. The company’s gross margin ratio equals:
Answer: C
Explanation: Gross Margin Ratio = (Net Sales − Cost of Goods Sold)/Net Sales
Gross Margin Ratio = ($752,000 − $543,000)/$752,000 = 27.8%
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
99) Mega Skateboard Supplier had net sales of $2.8 million, its cost of goods sold was $1.6 million, and its net income was $0.9 million. Its gross margin ratio equals:
Answer: C
Explanation: Gross Margin Ratio = (Net Sales – Cost of Goods Sold)/Net Sales
Gross Margin Ratio = ($2.8 – $1.6)/$2.8 = 43%
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
100) The credit terms 2/10, n/30 are interpreted as:
Answer: A
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
101) A trade discount is:
Answer: B
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
102) Jasper Company is a wholesaler that buys merchandise in large quantities. Its supplier’s catalog indicates a list price of $500 per unit on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper’s total purchase price per unit will be:
Answer: C
Explanation: Trade discount = $500 * 30% = $150
Total purchase price per unit = $500 − $150 + $7 = $357
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
103) Fragment Company is a wholesaler that sells merchandise in large quantities. Its catalog indicates a list price of $300 per unit on a particular product and a 40% trade discount is offered for quantity purchases of 50 units or more. The cost of shipping the merchandise is $7 per unit under terms FOB shipping point. If a customer purchases 100 units of this product, what is the amount of sales revenue that Fragment will record from this sale?
Answer: A
Explanation: Trade discount = $300 * 40% = $120
Total sales price per unit = $300 − $120 = $180
Total sales = $180 * 100 units = $18,000
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
104) The amount recorded for merchandise inventory includes all of the following except:
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
105) A company uses the perpetual inventory system and recorded the following entry:
| Accounts Payable | 2,500 | |
| Merchandise Inventory | 50 | |
| Cash | 2,450 |
This entry reflects a:
Answer: D
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
106) Which of the following is not included on a purchase invoice?
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
107) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 8, it paid the full amount due. The amount of the cash paid on July 8 equals:
Answer: C
Explanation: Cash Paid = ($1,800 − $200) * 0.98 = $1,568
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
108) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The amount of the cash paid on July 28 equals:
Answer: D
Explanation: Cash Paid = ($1,800 − $200) = $1,600
No discount may be taken because the payment was not within 10 days of the purchase.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
109) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, The correct journal entry to record the purchase on July 5 is:
Answer: B
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
110) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is:
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
111) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 28 is:
Answer: E
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
112) A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 12, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the payment on July 12 is:
Answer: C
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
113) A company purchased $4,000 worth of merchandise. Transportation costs were an additional $350. The company returned $275 worth of merchandise and then paid the invoice within the 2% cash discount period. The total cost of this merchandise is:
Answer: D
Explanation: Cash Paid = [($4,000 – $275) * 0.98] + $350 = $4,000.50
No discount may be taken on the transportation costs.
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
114) A buyer of $7,000 in merchandise inventory failed to take advantage of the vendor’s credit terms of 2/15, n/45, and instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the buyer lost the discount of:
Answer: E
Explanation: $7,000 * 0.02 = $140
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
115) Sales returns:
Answer: A
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
116) Which of the following statements regarding sales returns and allowances is not true?
Answer: B
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
117) A debit to Sales Returns and Allowances and a credit to Accounts Receivable:
Answer: B
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
118) Sales less sales discounts, less sales returns and allowances equals:
Answer: C
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
119) Garza Company had sales of $135,000, sales discounts of $2,000, and sales returns of $3,200. Garza Company’s net sales equals:
Answer: B
Explanation: Net Sales = $135,000 − $2,000 − $3,200 = $129,800
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
120) On May 1, Shilling Company sold merchandise in the amount of $5,800 to Anders, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Shilling uses the perpetual inventory system and the gross method. The journal entry or entries that Shilling will make on May 1 is (are):
A)
| Sales | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Sales | 5,800 | |
| Accounts receivable | 5,800 | |
| Cost of goods sold | 4,000 | |
| Merchandise Inventory | 4,000 |
C)
| Accounts receivable | 5,800 | |
| Sales | 5,800 |
D)
| Accounts receivable | 5,800 | |
| Sales | 5,800 | |
| Cost of goods sold | 4,000 | |
| Merchandise Inventory | 4,000 |
E)
| Accounts receivable | 4,000 | |
| Sales | 4,000 |
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
121) On May 1, Anders Company purchased merchandise in the amount of $5,800 from Shilling, with credit terms of 2/10, n/30. Anders uses the perpetual inventory system and the gross method. The journal entry that Anders will make on May 1 is:
A)
| Sales | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Merchandise Inventory | 5,800 | |
| Accounts payable | 5,800 |
C)
| Accounts payable | 5,800 | |
| Sales | 5,800 |
D)
| Merchandise Inventory | 5,800 | |
| Cash | 5,800 |
E)
| Purchases | 5,800 | |
| Accounts payable | 5,800 |
Answer: B
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
122) On February 3, Smart Company sold merchandise in the amount of $5,800 to Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart uses the perpetual inventory system and the gross method. Truman pays the invoice on February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:
A)
| Cash | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Cash | 4,000 | |
| Accounts receivable | 4,000 |
C)
| Cash | 3,920 | |
| Sales discounts | 80 | |
| Accounts receivable | 4,000 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Sales discounts | 116 | |
| Accounts receivable | 5,800 |
Answer: E
Explanation: Sales Discounts = $5,800 * 0.02 = $116
Cash = $5,800 – $116 = $5,684
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
123) On July 1, Ferguson Company sold merchandise in the amount of $5,800 to Tracey Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ferguson uses the perpetual inventory system and the gross method. On July 5, Tracey returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ferguson must make on July 5 is (are):
A)
| Sales returns and allowances | 500 | |
| Accounts receivable | 500 | |
| Merchandise inventory | 350 | |
| Cost of goods sold | 350 |
B)
| Sales returns and allowances | 500 | |
| Accounts receivable | 500 |
C)
| Accounts receivable | 500 | |
| Sales returns and allowances | 500 |
D)
| Accounts receivable | 500 | |
| Sales returns and allowances | 500 | |
| Cost of goods sold | 350 | |
| Merchandise inventory | 350 |
E)
| Sales returns and allowances | 350 | |
| Accounts receivable | 350 |
Answer: A
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
124) Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:
Answer: A
Explanation: Cash Paid = ($9,750 − $1,500) * 0.99 = $8,167.50
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
125) Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The amount of the cash paid on August 26 equals:
Answer: D
Explanation: Cash Paid = ($9,750 − $1,500) = $8,250
No discount may be taken because the payment was not within 10 days of the purchase.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
126) Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
127) Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The correct journal entry to record the merchandise return on August 11 is:
Answer: B
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
128) Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the payment on August 16 is:
Answer: C
Explanation: Cash Paid = ($9,750 − $1,500) * 0.99 = $8,167.50
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
129) A company records the following journal entry: debit Cash $1,470, debit Sales Discounts $30, and credit Accounts Receivable $1,500. This means that a customer has taken what percentage cash discount for early payment?
Answer: B
Explanation: Discount = $30/$1,500 = 2%
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
130) Which of the following statements regarding inventory shrinkage is not true?
Answer: C
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
131) Frisco Company’s Merchandise Inventory account at year-end has a balance of $62,115, but a physical count reveals that only $61,900 of inventory exists. The adjusting entry to record this $215 of inventory shrinkage is:
A)
| Merchandise Inventory | 215 | |
| Inventory shrinkage expense | 215 |
B)
| Purchases discounts | 215 | |
| Cost of goods sold | 215 |
C)
| Cost of goods sold | 215 | |
| Purchases discounts | 215 |
D)
| Inventory shrinkage expense | 215 | |
| Cost of goods sold | 215 |
E)
| Cost of goods sold | 215 | |
| Merchandise Inventory | 215 |
Answer: E
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
132) Which of the following accounts would be closed at the end of the accounting period with a debit?
Answer: E
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
133) An income statement that includes cost of goods sold as another expense and shows only one subtotal for total expenses is a:
Answer: B
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
134) Expenses that support the overall operations of a business and include the expenses relating to accounting, human resource management, and financial management are called:
Answer: D
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
135) Prentice Company had cash sales of $94,275, credit sales of $83,450, sales returns and allowances of $1,700, and sales discounts of $3,475. Prentice’s net sales for this period equal:
Answer: B
Explanation: Net Sales = $94,275 + $83,450 − $1,700 − $3,475 = $172,550
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
136) Multiple-step income statements:
Answer: B
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
137) Expenses to promote sales by displaying and advertising merchandise, make sales, and deliver goods to customers are known as:
Answer: C
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
138) A company has net sales of $752,000 and cost of goods sold of $543,000. Its net income is $17,530. The company’s gross margin and operating expenses, respectively, are:
Answer: A
Explanation: Gross Margin = Net Sales − Cost of Goods Sold; $752,000 − $543,000 = $209,000
Operating Expenses = Gross Margin − Net Income; $209,000 − $17,530 = $191,470
Difficulty: 3 Hard
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
139) Which of the following accounts is used in the periodic inventory system but not used in the perpetual inventory system?
Answer: E
Difficulty: 1 Easy
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
140) When preparing an unadjusted trial balance using a periodic inventory system, the amount shown for Merchandise Inventory is:
Answer: B
Difficulty: 2 Medium
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
141) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. The journal entry or entries that Vander will make on September 12 is (are):
A)
| Sales | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Sales | 5,800 | |
| Accounts receivable | 5,800 | |
| Cost of goods sold | 4,000 | |
| Merchandise Inventory | 4,000 |
C)
| Accounts receivable | 5,800 | |
| Sales | 5,800 |
D)
| Accounts receivable | 5,800 | |
| Sales | 5,800 | |
| Cost of goods sold | 4,000 | |
| Merchandise Inventory | 4,000 |
E)
| Accounts receivable | 4,000 | |
| Sales | 4,000 |
Answer: C
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
142) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for purchases. The journal entry that Jepson will make on September 12 is:
A)
| Purchases | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Purchases | 4,000 | |
| Accounts receivable | 4,000 |
C)
| Purchases | 5,800 | |
| Accounts payable | 5,800 |
D)
| Merchandise inventory | 5,800 | |
| Accounts payable | 5,800 |
E)
| Accounts payable | 4,000 | |
| Merchandise inventory | 4,000 |
Answer: C
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
143) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:
A)
| Cash | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Cash | 4,000 | |
| Accounts receivable | 4,000 |
C)
| Cash | 3,920 | |
| Sales discounts | 80 | |
| Accounts receivable | 4,000 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Sales discounts | 116 | |
| Accounts receivable | 5,800 |
Answer: E
Explanation: Sales Discounts = $5,800 * 0.02 = $116
Cash = $5,800 − $116 = $5,684
Difficulty: 2 Medium
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
144) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Jepson uses the periodic inventory system and the gross method of accounting for purchases. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Jepson makes on September 18 is:
A)
| Purchases | 5,684 | |
| Cash | 5,684 |
B)
| Accounts payable | 5,800 | |
| Merchandise inventory | 116 | |
| Cash | 5,684 |
C)
| Accounts payable | 5,800 | |
| Purchases discounts | 116 | |
| Cash | 5,684 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Purchases discounts | 116 | |
| Accounts payable | 5,800 |
Answer: C
Explanation: Purchases Discounts = $5,800 * 0.02 = $116
Cash = $5,800 – $116 = $5,684
Difficulty: 2 Medium
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
145) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Vander must make on September 14 is (are):
A)
| Sales returns and allowances | 500 | |
| Accounts receivable | 500 | |
| Merchandise inventory | 350 | |
| Cost of goods sold | 350 |
B)
| Sales returns and allowances | 500 | |
| Accounts receivable | 500 |
C)
| Accounts receivable | 500 | |
| Sales returns and allowances | 500 |
D)
| Accounts receivable | 500 | |
| Sales returns and allowances | 500 | |
| Cost of goods sold | 350 | |
| Merchandise inventory | 350 |
E)
| Sales returns and allowances | 350 | |
| Accounts receivable | 350 |
Answer: B
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
146) On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Vander uses the periodic inventory system and the gross method of accounting for sales. On September 14, Jepson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Jepson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Vander makes on September 18 is:
A)
| Cash | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Cash | 4,000 | |
| Accounts receivable | 4,000 |
C)
| Cash | 5,194 | |
| Sales discounts | 106 | |
| Accounts receivable | 5,300 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Sales discounts | 116 | |
| Accounts receivable | 5,800 |
Answer: C
Explanation: Accounts Receivable = $5,800 − $500 = $5,300
Sales Discounts = $5,300 * 0.02 = $106
Cash = $5,300 − $106 = $5,194
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
147) Cushman Company had $800,000 in net sales, $350,000 in gross profit, and $200,000 in operating expenses. Cost of goods sold equals:
Answer: B
Explanation: Cost of Goods Sold = Net Sales − Gross Profit; $800,000 − $350,000 = $450,000
Difficulty: 3 Hard
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
148) Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals:
Answer: C
Explanation: Gross Profit (Margin) = $800,000 − $12,000 − $18,000 − $380,000 = $390,000
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
149) Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Net income equals:
Answer: D
Explanation: Net Income = $800,000 − $12,000 − $18,000 − $380,000 − $275,000 = $115,000
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
150) A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45. On June 20, it returned $800 of that merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it was entitled to. The cash paid on June 24 equals:
Answer: A
Explanation: Cash Paid = ($10,000 − $800) * 0.97 = $8,924
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
151) A company purchased $10,000 of merchandise on June 15 with terms of 3/10, n/45, and FOB shipping point. The freight charge, $500, was added to the invoice amount. On June 20, it returned $800 of that merchandise. On June 24, it paid the balance owed for the merchandise taking any discount it is entitled to. The cash paid on June 24 equals:
Answer: E
Explanation: Cash Paid = $10,000 − $800 = $9,200 * 0.97 = $8,924 + $500 = $9,424
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
152) A company’s current assets are $23,420, its quick assets are $13,890 and its current liabilities are $12,220. Its acid-test ratio equals:
Answer: C
Explanation: Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $13,890/$12,220 = 1.14
Difficulty: 2 Medium
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
153) Using the following year-end information for Bauman, LLC, calculate the current ratio and acid-test ratio:
| Cash | $ | 48,000 | |
| Short-term investments | 12,000 | ||
| Accounts receivable | 45,000 | ||
| Inventory | 225,000 | ||
| Prepaid expenses | 12,500 | ||
| Accounts payable | 86,500 | ||
| Other current payables | 22,000 | ||
Answer: B
Explanation: Current Ratio = Current Assets/Current Liabilities
Current Ratio = $342,500/$108,500 = 3.16
Acid-Test Ratio = Quick Assets/Current Liabilities
Acid-Test Ratio = $105,000/$108,500 = 0.97
Difficulty: 3 Hard
Topic: Acid-Test Ratios
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
154) A company’s net sales are $775,420, its costs of goods sold are $413,890, and its net income is $117,220. Its gross margin ratio equals:
Answer: A
Explanation: Gross Margin Ratio = (Net Sales − Cost of Goods Sold)/Net Sales
Gross Margin Ratio = ($775,420 − $413,890)/$775,420 = 46.6%
Difficulty: 3 Hard
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
155) Which of the following statements related to the multiple-step income statement is not true?
Answer: D
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Global; FN Reporting
156) A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made within the discount period, what is the net cost of the merchandise?
Answer: E
Explanation: Cost of Merchandise = $20,000 * 0.65 = $13,000; $13,000 * 0.98 = $12,740
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
157) A company has net sales of $825,000 and cost of goods sold of $547,000. Its net income is $98,500. The company’s gross margin and operating expenses, respectively, are:
Answer: B
Explanation: Gross Margin = Net Sales − Cost of Goods Sold; $825,000 − $547,000 = $278,000
Operating Expenses = Gross Margin − Net Income; $278,000 − $98,500 = $179,500
Difficulty: 3 Hard
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
158) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. The journal entry or entries that Klein will make on March 12 is (are):
A)
| Sales | 7,800 | |
| Accounts receivable | 7,800 |
B)
| Sales | 7,800 | |
| Accounts receivable | 7,800 | |
| Cost of goods sold | 4,500 | |
| Merchandise Inventory | 4,500 |
C)
| Accounts receivable | 7,800 | |
| Sales | 7,800 |
D)
| Accounts receivable | 7,800 | |
| Sales | 7,800 | |
| Cost of goods sold | 4,500 | |
| Merchandise Inventory | 4,500 |
E)
| Accounts receivable | 4,500 | |
| Sales | 4,500 |
Answer: D
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
159) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. Babson pays the invoice on March 17, and takes the appropriate discount. The journal entry that Klein makes on March 17 is:
A)
| Cash | 7,800 | |
| Accounts receivable | 7,800 |
B)
| Cash | 4,500 | |
| Accounts receivable | 4,500 |
C)
| Cash | 7,644 | |
| Sales discounts | 156 | |
| Accounts receivable | 7,800 |
D)
| Cash | 7,644 | |
| Accounts receivable | 7,644 |
E)
| Cash | 4,410 | |
| Sales discounts | 90 | |
| Accounts receivable | 4,500 |
Answer: C
Explanation: Sales Discounts = $7,800 * 0.02 = $156
Cash = $7,800 − $156 = $7,644
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
160) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry or entries that Klein must make on March 15 is (are):
A)
| Sales returns and allowances | 600 | |
| Accounts receivable | 600 | |
| Merchandise inventory | 350 | |
| Cost of goods sold | 350 |
B)
| Sales returns and allowances | 600 | |
| Accounts receivable | 600 |
C)
| Accounts receivable | 600 | |
| Sales returns and allowances | 600 |
D)
| Accounts receivable | 600 | |
| Sales returns and allowances | 600 | |
| Cost of goods sold | 350 | |
| Merchandise inventory | 350 |
E)
| Sales returns and allowances | 350 | |
| Accounts receivable | 350 |
Answer: A
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
161) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The amount that Klein receives from Babson on March 20 is:
Answer: D
Explanation: Accounts Receivable = $7,800 − $600 = $7,200
Sales Discounts = $7,200 * 0.02 = $144
Cash = $7,200 − $144 = $7,056
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
162) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the gross method of accounting for sales. On March 15, Babson returns some of the merchandise. The selling price of the merchandise is $600 and the cost of the merchandise returned is $350. Babson pays the invoice on March 20, and takes the appropriate discount. The journal entry that Klein makes on March 20 is:
A)
| Cash | 7,800 | |
| Accounts receivable | 7,800 |
B)
| Cash | 4,500 | |
| Accounts receivable | 4,500 |
C)
| Cash | 7,056 | |
| Sales discounts | 144 | |
| Accounts receivable | 7,200 |
D)
| Cash | 7,056 | |
| Accounts receivable | 7,056 |
E)
| Cash | 7,644 | |
| Sales discounts | 156 | |
| Accounts receivable | 7,800 |
Answer: C
Explanation: Accounts Receivable = $7,800 − $600 = $7,200
Sales Discounts = $7,200 * 0.02 = $144
Cash = $7,200 − $144 = $7,056
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
163) Zenith Company’s Merchandise Inventory account at year-end has a balance of $91,820, but a physical count reveals that only $90,450 of inventory exists. The adjusting entry to record this $1,370 of inventory shrinkage is:
A)
| Merchandise inventory | 1,370 | |
| Inventory shrinkage expense | 1,370 |
B)
| Purchases discounts | 1,370 | |
| Cost of goods sold | 1,370 |
C)
| Cost of goods sold | 1,370 | |
| Merchandise inventory | 1,370 |
D)
| Inventory shrinkage expense | 1,370 | |
| Cost of goods sold | 1,370 |
E)
| Cost of goods sold | 90,450 | |
| Merchandise inventory | 90,450 |
Answer: C
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
164) Which of the following statements regarding sales returns and allowances is not true?
Answer: B
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
165) In its first year of business, Borden Corporation had sales of $2,000,000 and cost of goods sold of $1,200,000. Borden expects returns in the following year to equal 8% of sales. The adjusting entry or entries to record the expected sales returns is (are):
A)
| Accounts Receivable | 2,000,000 | |
| Sales | 2,000,000 |
B)
| Sales returns and allowances | 160,000 | |
| Sales | 160,000 | |
| Cost of Goods Sold | 96,000 | |
| Inventory Returns Estimated | 96,000 |
C)
| Sales | 2,000,000 | |
| Sales Refund Payable | 160,000 | |
| Accounts receivable | 1,840,000 |
D)
| Sales Refund Payable | 160,000 | |
| Accounts receivable | 160,000 |
E)
| Sales Returns and Allowances | 160,000 | |
| Sales Refund Payable | 160,000 | |
| Inventory Returns Estimated | 96,000 | |
| Cost of goods sold | 96,000 |
Answer: E
Explanation: Sales Refund Payable = $2,000,000 × 0.08 = $160,000
Inventory Returns Estimated = $1,200,000 × 0.08 = $96,000
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
166) In the current year, Borden Corporation had sales of $2,000,000 and cost of goods sold of $1,200,000. Borden expects returns in the following year to equal 8% of sales. The unadjusted balance in Inventory Returns Estimated is a debit of $6,000, and the unadjusted balance in Sales Refund Payable is a credit of $10,000. The adjusting entry or entries to record the expected sales returns is (are):
A)
| Accounts Receivable | 2,000,000 | |
| Sales | 2,000,000 |
B)
| Sales returns and allowances | 150,000 | |
| Sales | 150,000 | |
| Cost of Goods Sold | 90,000 | |
| Inventory Returns Estimated | 90,000 |
C)
| Sales | 2,000,000 | |
| Sales Refund Payable | 160,000 | |
| Accounts receivable | 1,840,000 |
D)
| Sales Refund Payable | 150,0000 | |
| Accounts receivable | 150,000 |
E)
| Sales Returns and Allowances | 150,000 | |
| Sales Refund Payable | 150,000 | |
| Inventory Returns Estimated | 90,000 | |
| Cost of goods sold | 90,000 |
Answer: E
Explanation: Sales Refund Payable = $2,000,000 × 0.08 = $160,000 − $10,000 = $150,000
Inventory Returns Estimated = $1,200,000 × 0.08 = $96,000 − $6,000 = $90,000
Difficulty: 3 Hard
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
167) Netherland Corporation has the following unadjusted balances: Accounts Receivable, $80,000 (debit), and Allowance for Sales Discounts $300 (credit). Of the receivables, $50,000 of them are within the 2% discount period, and Netherland expects buyers to take $1,000 in future-period discounts ($50,000 × 2%) arising from this period’s sales. The adjusting entry or entries to estimate sales discounts is (are):
A)
| Accounts Receivable | 80,000 | |
| Sales | 80,000 |
B)
| Sales Discounts | 50,000 | |
| Sales | 50,000 | |
| Cost of Goods Sold | 1,000 | |
| Inventory Returns Estimated | 1,000 |
C)
| Sales Discounts | 700 | |
| Allowance for Sales Discounts | 700 |
D)
| Sales Discounts | 1,000 | |
| Accounts receivable | 1,000 |
E)
| Sales Discounts | 1,000 | |
| Allowance for Sales Discounts | 1,000 |
Answer: C
Explanation: Allowance for Sales Discounts = $50,000 × 0.02 = $1,000 − $300 = $700
Difficulty: 3 Hard
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
168) An expense resulting from failing to take advantage of cash discounts when using the net method of recording purchases is called:
Answer: D
Difficulty: 1 Easy
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
169) A company that uses the net method of recording purchases and a perpetual inventory system purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. The correct journal entry to record the payment on July 28 is:
Answer: E
Explanation: Purchase, net of discount = $1,800 × 0.98 = $1,764
Purchase return, net of discount = $200 × 0.98 = $196
Debit to Accounts Payable = $1,764 − 196 = $1,568
No discount may be taken because the payment is made after the discount period.
Difficulty: 3 Hard
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
170) Morgan, Inc. uses a perpetual inventory system and the net method of recording purchases. On May 12, a merchandise purchase of $15,000 was made on credit, 2/10, n/30. The journal entry to record this purchase is:
A)
| Merchandise Inventory | 15,000 | |
| Accounts Payable | 15,000 |
B)
| Accounts Payable | 15,000 | |
| Merchandise Inventory | 15,000 |
C)
| Purchases | 15,000 | |
| Accounts Payable | 15,000 |
D)
| Purchases | 14,700 | |
| Accounts Payable | 14,700 |
E)
| Merchandise Inventory | 14,700 | |
| Accounts Payable | 14,700 |
Answer: E
Explanation: $15,000 × 0.98 = $14,700
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
171) The net method of recording purchases refers to recording:
Answer: A
Difficulty: 1 Easy
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
172) On March 12, Klein Company sold merchandise in the amount of $7,800 to Babson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,500. Klein uses the perpetual inventory system and the net method of accounting for sales. On March 15, Babson returns some of the merchandise, which is not defective. The selling price of the returned merchandise is $600 and the cost of the merchandise returned is $350. The entry or entries that Klein must make on March 15 is (are):
A)
| Sales returns and allowances | 588 | |
| Accounts receivable | 588 | |
| Merchandise inventory | 350 | |
| Cost of goods sold | 350 |
B)
| Sales returns and allowances | 588 | |
| Accounts receivable | 588 | |
| Merchandise inventory | 343 | |
| Cost of goods sold | 343 |
C)
| Accounts receivable | 600 | |
| Sales returns and allowances | 600 |
D)
| Accounts receivable | 600 | |
| Sales returns and allowances | 600 | |
| Cost of Goods Sold | 350 | |
| Merchandise inventory | 350 |
E)
| Sales returns and allowances | 350 | |
| Accounts receivable | 350 |
Answer: A
Explanation: Net return = Sales − discount
$588 = $600 − $12
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
173) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. The journal entry or entries that Ryan will make on September 12 is (are):
A)
| Sales | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Accounts receivable | 5,684 | |
| Sales | 5,684 | |
| Cost of goods sold | 4,000 | |
| Merchandise Inventory | 4,000 |
C)
| Accounts receivable | 5,800 | |
| Sales | 5,800 |
D)
| Accounts receivable | 5,800 | |
| Sales | 5,800 | |
| Cost of Goods Sold | 4,000 | |
| Merchandise inventory | 4,000 |
E)
| Accounts receivable | 5,684 | |
| Sales | 5,684 |
Answer: E
Explanation: Sales Discounts = $5,800 × 0.02 = $116
Accounts receivable = $5,800 − $116 = $5,684
Difficulty: 3 Hard
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
174) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for purchases. The journal entry that Johnson will make on September 12 is:
A)
| Purchases | 5,800 | |
| Accounts payable | 5,800 |
B)
| Purchases | 5,684 | |
| Accounts payable | 5,684 |
C)
| Merchandise inventory | 5,684 | |
| Accounts payable | 5,684 |
D)
| Merchandise inventory | 5,800 | |
| Accounts payable | 5,800 |
E)
| Accounts payable | 4,000 | |
| Merchandise inventory | 4,000 |
Answer: B
Explanation: Purchase Discounts = $5,800 × 0.02 = $116
Accounts Payable = $5,800 − $116 = $5,684
Difficulty: 3 Hard
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
175) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:
A)
| Cash | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Cash | 4,000 | |
| Accounts receivable | 4,000 |
C)
| Cash | 3,920 | |
| Sales discounts | 80 | |
| Accounts receivable | 4,000 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Sales discounts | 116 | |
| Accounts receivable | 5,800 |
Answer: D
Explanation: Sales Discounts = $5,800 × 0.02 = $116
Cash = $5,800 − $116 = $5,684
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
176) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Johnson uses the periodic inventory system and the net method of accounting for purchases. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Johnson makes on September 18 is:
A)
| Purchases | 5,684 | |
| Cash | 5,684 |
B)
| Accounts payable | 4,000 | |
| Merchandise inventory | 80 | |
| Cash | 3,920 |
C)
| Accounts payable | 5,800 | |
| Purchases discounts | 116 | |
| Cash | 5,684 |
D)
| Accounts payable | 5,684 | |
| Cash | 5,684 |
E)
| Cash | 5,684 | |
| Purchases discounts | 116 | |
| Accounts payable | 5,800 |
Answer: D
Explanation: Purchases Discounts = $5,800 × 0.02 = $116
Cash = $5,800 − $116 = $5,684
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Understand
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
177) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the non-defective merchandise, which is restored to inventory. The selling price of the returned merchandise is $500 and the cost of the merchandise returned is $350. The entry or entries that Ryan must make on September 14 is (are):
A)
| Sales returns and allowances | 490 | |
| Accounts receivable | 490 | |
| Merchandise inventory | 350 | |
| Cost of goods sold | 350 |
B)
| Sales returns and allowances | 500 | |
| Accounts receivable | 500 |
C)
| Sales returns and allowances | 490 | |
| Accounts receivable | 490 |
D)
| Sales returns and allowances | 490 | |
| Accounts receivable | 490 | |
| Merchandise inventory | 343 | |
| Cost of goods sold | 343 |
E)
| Sales returns and allowances | 350 | |
| Accounts receivable | 350 |
Answer: C
Explanation: Sales return = $500 * (1 − 0.02) = $490
Sales return = $500 * 0.98 = $490
Difficulty: 3 Hard
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
178) On September 12, Ryan Company sold merchandise in the amount of $5,800 to Johnson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Ryan uses the periodic inventory system and the net method of accounting for sales. On September 14, Johnson returns some of the merchandise. The selling price of the merchandise is $500 and the cost of the merchandise returned is $350. Johnson pays the invoice on September 18, and takes the appropriate discount. The journal entry that Ryan makes on September 18 is:
A)
| Cash | 5,800 | |
| Accounts receivable | 5,800 |
B)
| Cash | 5,194 | |
| Accounts receivable | 5,194 |
C)
| Cash | 5,194 | |
| Sales discounts | 106 | |
| Accounts receivable | 5,300 |
D)
| Cash | 5,684 | |
| Accounts receivable | 5,684 |
E)
| Cash | 5,684 | |
| Sales discounts | 116 | |
| Accounts receivable | 5,800 |
Answer: B
Explanation: Accounts Receivable = ($5,800 × 0.98) − ($500 × 0.98) = $5,194
Difficulty: 3 Hard
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
179) Match the following definitions and terms by placing the letter for the terms A through J in the blank space next to the best definition.
___ 1. A measure of a company’s ability to pay its current liabilities that excludes less liquid current assets such as inventory and prepaid expenses.
___ 2. An income statement format that lists cost of goods sold as another expense and shows only one subtotal for total expenses.
___ 3. The point of ownership transfer from seller to buyer that takes place when the goods arrive at the buyer’s place of business.
___ 4. Products a company owns and intends to sell.
___ 5. The expenses that support a company’s overall operations and include costs related to accounting, human resources and finance.
___ 6. The point of ownership transfer from seller to buyer that takes place when the goods depart the seller’s place of business.
___ 7. Inventory losses that require an adjusting entry to account for losses from theft or deterioration.
___ 8. An income statement format that shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.
___ 9. A given percent deducted from a list price often granted to customers purchasing large quantities of merchandise.
___ 10. The expenses of advertising merchandise, making sales, and delivering goods to customers.
Answer: 1. F; 2. D; 3. E; 4. G; 5. B; 6. C; 7. J; 8. I; 9. A; 10. H
Difficulty: 1 Easy
Topic: Acid-Test Ratio; Reporting Inventory for a Merchandiser; Accounting for Merchandise Purchases; Adjusting and Closing Entries for Merchandisers; Financial Statement Formats
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.; 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P3 Prepare adjustments and close accounts for a merchandising company.; 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
180) Match the following terms with the appropriate definition.
__ 1. An inventory accounting method that updates accounting records for each purchase and each sale of inventory.
__ 2. An inventory accounting method that updates the accounting records for purchases and sales of inventory only at the end of a period.
__ 3. The time period in which reduced payment can be made by the buyer because of a cash discount offered by a seller of goods on credit.
__ 4. The loss of inventory from theft and deterioration.
__ 5. A cash discount granted, from the view of the purchaser intended to encourage buyers to pay amounts owed earlier.
__ 6. Price reduction granted by the seller to a buyer of defective or unacceptable merchandise.
__ 7. A cash discount granted from the view of the seller, indicated in the credit terms on the invoice.
__ 8. The calculation of net sales minus cost of goods sold.
__ 9. The description of the amounts and timing of payments from a buyer to a seller for a purchase.
__ 10. The amount of time allowed before full payment is due.
Answer: 1. H; 2. G; 3. E; 4. A; 5. J; 6. D; 7. I; 8. F; 9. C; 10. B
Difficulty: 1 Easy
Topic: Merchandising Activities; Accounting for Merchandise Purchases; Accounting for Merchandise Sales; Financial Statement Formats; Periodic Inventory System
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.; 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.; 05-P4 Define and prepare multiple-step and single-step income statements.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
181) Identify and explain the key components of a merchandiser’s net income.
Answer: The basic components of income begin with net sales. Cost of goods sold is subtracted from net sales to determine gross profit (also called gross margin). Operating expenses are then subtracted from gross margin to determine net income.
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
182) Describe the difference between wholesalers and retailers.
Answer: A wholesaler buys products from manufacturers or other wholesalers and sells to retailers or other wholesalers. A retailer buys products from manufacturers or wholesalers and sells them to consumers.
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
183) Define inventory for a merchandising company and describe how inventory is valued and reported.
Answer: Merchandise inventory refers to products a company owns and intends to sell. Its costs include all necessary expenses to buy the goods, ship them to the store, and make them ready for sale. Merchandise inventory is a current asset on a merchandiser’s balance sheet.
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
184) What are the steps of the operating cycle for a merchandiser with credit sales?
Answer: The steps are: (1) cash purchases of merchandise; (2) inventory for sale; (3) credit sales (4) accounts receivable; (5) cash collection.
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
185) Describe the difference between the periodic and perpetual inventory accounting systems.
Answer: A periodic inventory system updates the accounting records for merchandise transactions only at the end of a period. A perpetual inventory system continually updates accounting records for merchandise transactions–specifically for those records of inventory available for sale and inventory sold. The perpetual inventory system is increasing in popularity due to technological advances and competitive pressures because it gives managers immediate access to detailed information on sales and inventory levels that a periodic system does not.
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
186) Explain the way in which costs flow through the merchandise inventory account to a merchandiser’s income statement.
Answer: Beginning inventory plus the net cost of purchases is the merchandise available for sale. As inventory is sold, its cost is recorded in cost of goods sold on the income statement. What remains is the ending inventory on the balance sheet. A period’s ending inventory becomes the next period’s beginning inventory.
Difficulty: 2 Medium
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
187) What is the acid-test ratio? How does it measure a company’s liquidity?
Answer: The acid-test ratio is a measure of a merchandiser’s ability to pay its current liabilities. It is calculated by dividing quick assets (cash, current receivables, and short-term investments) by current liabilities. It excludes those current assets that are less liquid, such as inventory and prepaid expenses that take longer to be converted to cash. As a rule of thumb, an acid test ratio less than 1 means that current liabilities exceed quick assets and the company may face near-term liquidity problems.
Difficulty: 2 Medium
Topic: Acid-Test Ratio
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
188) What is gross margin ratio? How is it used as an indicator of profitability?
Answer: The gross margin ratio computes the relationship between a company’s gross profit and sales. It is calculated by dividing gross margin (net sales less cost of goods sold) by net sales. The gross margin ratio measures a firm’s profitability in selling its inventory. The gross margin must be large enough to cover operating expenses and provide sufficient net income to the owner(s). Without sufficient gross margin, a merchandiser will likely fail.
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
189) Describe the differences between FOB shipping point and FOB destination.
Answer: If goods are shipped FOB shipping point, ownership transfers to the buyer when the goods depart the seller’s place of business, and the seller records revenue at that time. The buyer is then responsible for paying shipping costs and bearing the risk of damage or loss while goods are in transit. If goods are shipped FOB destination, ownership of the goods transfers to the buyer when the goods arrive at the buyer’s place of business. The seller is responsible for paying shipping costs and bears the risk of damage or loss in transit. The seller does not record revenue until the goods arrive at the destination because the transaction is not complete before that point.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
190) Describe the recording process (including costs) for the types of transactions involved in purchasing merchandise inventory when a perpetual inventory system is used.
Answer: The cost of merchandise purchased for resale, net of trade discounts, is added (debited) to the Merchandise Inventory account. Purchases discounts for early payment on credit and purchases returns and allowances are subtracted (credited) from Merchandise Inventory. Transportation-in costs are also added (debited) to Merchandise Inventory because they are a necessary cost of acquiring the merchandise.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
191) Describe the recording process (including costs) for the types of transactions associated with sales of merchandise inventory using a perpetual inventory system.
Answer: Sales of goods are recorded at list price less any trade discounts as a credit to the Sales account. At the same time, the cost of items sold is transferred from Merchandise Inventory to Cost of Goods Sold. Refunds or credits for returned merchandise are recorded (debited) to Sales Returns and Allowances. When cash discounts from the sales price are taken, the seller records (debits) the amount of the discounts to Sales Discounts. These accounting processes are recorded each time sales transactions occur. In this way, merchandise inventory, cost of sales, sales and receivables (or cash) reflect sales transactions on a timely basis.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
192) What is inventory shrinkage? How do managers account for shrinkage?
Answer: Inventory shrinkage is the loss of merchandise inventory due to theft or deterioration or similar occurrences. It is computed by comparing a physical count of the inventory with recorded amounts. A physical count is usually performed at least once annually and an adjusting entry is prepared to account for any differences. Inventory shrinkage is typically added (debited) to the cost of goods sold and deducted (credited) from Merchandise Inventory.
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
193) How do closing entries for a merchandising company that uses the perpetual inventory system differ from the closing entries for a service company?
Answer: Closing entries are similar for service and merchandising companies using a perpetual inventory system, but merchandising companies have some temporary accounts that must be closed that service companies do not. Generally, revenue for merchandising companies is called Sales rather than Fees Earned. It is closed with a debit, as are other revenues. Merchandising companies have Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold that all have debit balances and must be closed with credits.
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
194) Explain the difference between the single-step and multiple-step income statements.
Answer: A single-step income statement format includes cost of goods sold as another expense, and shows only one subtotal for total expenses. The calculation of net income is simply total revenues minus total expenses. A multiple-step income statement format shows detailed computation of net sales and other costs and expenses, and reports subtotals for various classes of items.
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
195) Distinguish between selling expenses and general and administrative expenses.
Answer: Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers. General and administrative expenses support a company’s overall operations and include expenses related to accounting, human resource management, and financial management. Some expenses can relate to both areas and are allocated between them.
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
196) Describe the difference(s) between the periodic and the perpetual inventory accounting systems.
Answer: Under a perpetual system each purchase, purchase return and allowance, purchase discount, and cost for transportation-in is recorded in the merchandise inventory account. Under a periodic system, a separate temporary account is set up for each of these items. Because inventory is updated for each purchase and sale of merchandise, the perpetual inventory system yields more timely information for managers to better monitor and control inventory costs and levels.
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales; Periodic Inventory System
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.; 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
197) Describe why tracking inventory activities are necessary for a merchandising company.
Answer: Tracking merchandise activities are necessary to set prices and to manage discounts, allowances and returns for both sales and purchases. A perpetual inventory system enables a business to stock the right type and amounts of merchandise and to avoid the costs of being out-of-stock and carrying excess inventory. Most merchandisers and retailers understand the importance of managing inventory costs to get the most profit and in calculating working capital.
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
198) Discuss the period-end adjusting entries that are required in the new revenue recognition standards for estimating sales discounts and sales returns and allowances.
Answer: Sellers are required to estimate both expected sales discounts and expected sales returns and allowances in the period of sale by making two adjusting entries. The entry to adjust for expected sales discounts is to debit Sales Discounts and credit Allowance for Sales Discounts. Allowance for Sales Discounts is a contra-asset account that is reported on the balance sheet as a reduction to Accounts Receivable. The adjusting entry, for the revenue side of sales returns and allowances, is to debit Sales Returns and Allowances and credit Sales Refund Payable for the expected amount to be refunded to customers. The adjusting entry for the cost side is to debit Inventory Returns Estimated and credit Cost of Goods Sold for the cost of expected returns.
Difficulty: 3 Hard
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Understand
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Measurement
199) Farmen Company had net sales of $600,000 and cost of goods sold of $450,000. Calculate Farmen’s gross profit.
Answer: Gross Profit = Sales – Cost of Goods Sold; $600,000 – $450,000 = $150,000
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
200) National Storage Company had sales of $1,000,000, sales discounts of $2,500, sales returns and allowances of $15,000, and cost of goods sold of $525,000. Calculate National’s gross profit.
Answer: Gross Profit = Sales – Sales Discounts – Sales Returns and Allowances – Cost of Goods Sold
$1,000,000 – $2,500 – $15,000 – $525,000= $457,500
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
201) Harley’s Antique Shop had net sales of $772,000. The gross profit was $415,000. Calculate Harley’s cost of goods sold.
Answer: Cost of Goods Sold = Net Sales – Gross Profit; $772,000 – $415,000 = $357,000
Difficulty: 2 Medium
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
202) Fill in the blanks (a) through (g) for the Morrison Company for each of the income statements for years 1, 2, and 3.
| Morrison Company
Income Statements For the years ended December 31 |
|||
| Year 1 | Year 2 | Year 3 | |
| Sales | $7,500 | $10,000 | (f) |
| Cost of goods sold | |||
| Merchandise inventory (beginning) | (a) | 375 | 750 |
| Total cost of merchandise purchases | 2,400 | 3,625 | 4,875 |
| Merchandise inventory (ending) | (b) | 750 | 625 |
| Cost of goods sold | 2,770 | (d) | 5,000 |
| Gross profit | (c) | 6,750 | 5,200 |
| Operating expenses | 3,750 | 3,750 | (g) |
| Net income | $ 980 | (e) | $ 2,500 |
Answer:
| Morrison Company
Income Statements For the years ended December 31 |
|||
| Year 1 | Year 2 | Year 3 | |
| Sales | $7,500 | $10,000 | (f) $10,200 |
| Cost of goods sold | |||
| Merchandise inventory (beginning) | (a) 745 | 375 | 750 |
| Total cost of merchandise purchases | 2,400 | 3,625 | 4,875 |
| Merchandise inventory (ending) | (b) 375 | 750 | 625 |
| Cost of goods sold | 2,770 | (d) 3,250 | 5,000 |
| Gross profit | (c) 4,730 | 6,750 | 5,200 |
| Operating expenses | 3,750 | 3,750 | (g) 2,700 |
| Net income | $ 980 | (e) $3,000 | $ 2,500 |
(a) 2,770 + 375 -2400 = 745
(b) 375, the beginning inventory for Year 2 is the ending inventory for Year 1
(c) 980 + 3,750 = 4,730
(d) 10,000 – 6,750 = 3,250
(e) 6,750 – 3,750 = 3,000
(f) 5,000 + 5,200 = 10,200
(g) 5,200 – 2,500 = 2,700
Difficulty: 3 Hard
Topic: Merchandising Activities ; Financial Statement Formats
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.; 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
203) Fill in the blanks (a) through (g) for the Corman Company for each of the income statements for years 1 and 2
| Corman Company
Income Statements For the years ended December 31 |
||
| Year 1 | Year 2 | |
| Sales | $10,000 | (e) |
| Cost of goods sold | ||
| Merchandise inventory (beginning) | 375 | 750 |
| Total cost of merchandise purchases | 3,625 | 4,875 |
| Merchandise inventory (ending) | 750 | (d) |
| Cost of goods sold | (a) | 5,000 |
| Gross profit | 6,750 | 5,200 |
| Operating expenses | 3,750 | (c) |
| Net income | (b) | $ 2,500 |
Answer:
| Corman Company
Income Statements For the years ended December 31 |
|||
| Year 1 | Year 2 | ||
| Sales | $10,000 | (e) $10,200 | |
| Cost of goods sold | |||
| Merchandise inventory (beginning) | 375 | 750 | |
| Total cost of merchandise purchases | 3,625 | 4,875 | |
| Merchandise inventory (ending) | 750 | (d) 625 | |
| Cost of goods sold | (a) 3,250 | 5,000 | |
| Gross profit | 6,750 | 5,200 | |
| Operating expenses | 3,750 | (c) 2,700 | |
| Net income | (b) $3,000 | $ 2,500 | |
(a) Merchandise inventory, beginning + purchases – Merchandise inventory, ending = Cost of goods sold; $375 + $3,625 – $750 = $3,250
(b) Gross profit – Operating expenses = Net Income; $6,750 -$3,750 = $3,000
(c) Gross profit – Net income = Operating expenses; $5,200 – $2,500 = $2,700
(d) Merchandise inventory, beginning + Purchases – Cost of goods sold= Merchandise inventory, ending; $750 + 4,875 – $5,000 = $625
(e) Cost of goods sold + Gross profit = Sales; $5,200 + $5,000 = $10,200
Difficulty: 3 Hard
Topic: Merchandising Activities ; Financial Statement Formats
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.; 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
204) The following information is available for Flanders and its two main competitors in the industry, Sanders and Anders:
| Flanders | Sanders | Anders | |
| Cash | $ 9,800 | $10,500 | $26,500 |
| Short-term investments | 6,400 | 8,200 | 12,500 |
| Accounts receivable | 12,500 | 8,500 | 14,350 |
| Merchandise inventory | 30,150 | 40,000 | 40,150 |
| Prepaid expense | 900 | 6,750 | 2,450 |
| Accounts payable | 19,400 | 13,750 | 26,800 |
| Salaries payable | 1,200 | 3,500 | 6,250 |
| Other current payables | 600 | 1,200 | 2,150 |
The industry standard for the current ratio is 1.8 and the industry standard for the acid-test ratio is 1.
Required:
Answer: Part 1
Flanders Sanders Anders
Cash $ 9,800 $10,500 $26,500
Short-term investments 6,400 8,200 12,500
Accounts receivable 12,500 8,500 14,350
Merchandise inventory 30,150 40,000 40,150
Prepaid expense 900 6,750 2,450
Total current assets $59,750 $73,950 $95,950
Accounts payable $19,400 $13,750 $26,800
Salaries payable 1,200 3,500 6,250
Other current payables 600 1,200 2,150
Total current liabilities $21,200 $18,450 $35,200
Flanders Sanders Anders
Current ratio:
$59,750/21,200 = 2.82
$73,950/$18,450 = 4.01
$95,950/$35,200 = 2.73
Flanders Sanders Anders
Cash………………………………… $ 9,800 $10,500 $26,500
Short-term investments…………… 6,400 8,200 12,500
Accounts receivable………………… 12,500 8,500 14,350
Total quick assets………………… $28,700 $27,200 $53,350
Flanders Sanders Anders
Acid-test ratio:
$28,700/$21,200 = 1.35
$27,200/$18,450 = 1.47
$53,350/$35,200 = 1.52
Part 2: Rank order:
Current ratio Acid-test ratio
Sanders 4.01 Anders 1.52
Flanders 2.82 Sanders 1.47
Anders 2.73 Flanders 1.35
Industry average 1.80 Industry average 1.00
Part 3: Flanders’ current ratio lags behind Sanders’ but is ahead of both Anders and the industry average. Flanders’ acid test ratio is behind both Anders and Sanders but is ahead of the industry average. Overall, Flanders appears reasonably strong on liquidity.
Difficulty: 3 Hard
Topic: Acid-Test Ratio
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
205) The following information refers to Percy’s Records and its competitors in the music store business.
| Current Ratio | Quick Ratio | |
| Percy’s Records | 2.0 | 0.95 |
| Jewel CDs | 1.5 | 1.00 |
| Rudy’s Raps | 1.8 | 1.20 |
| Marvin’s Jazz | 1.9 | 0.80 |
| Industry Average | 2.0 | 1.00 |
Required:
Comment on the relative liquidity positions of these companies.
Answer: Both Jewel CDs and Rudy’s Raps have acceptable levels of liquidity. However, even though Percy’s Records and Marvin’s Jazz have acceptable current ratios, their quick ratios indicate a potential liquidity problem. We should attempt to collect additional information to support or refute the evidence of a potential liquidity problem.
Difficulty: 3 Hard
Topic: Acid-Test Ratio
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Critical Thinking; FN Risk Analysis
206) A company reported the following year-end information:
| Cash | $ 52,000 |
| Short-term investments | 12,000 |
| Accounts receivable | 54,000 |
| Inventory | 325,000 |
| Prepaid expenses | 17,500 |
| Accounts payable | 106,500 |
| Other current payables | 25,000 |
Required:
Answer:
2.
Quick assets: Cash………………………… $ 52,000
Short-term investments……… 12,000
Accounts receivable………… 54,000
Total quick assets…………… $118,000
Current liabilities: Accounts payable…………… $106,500
Other current payables………… 25,000
$131,500
Quick assets $118,000 = 0.90
Current liabilities $131,500
Difficulty: 3 Hard
Topic: Acid-Test Ratio
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Critical Thinking; FN Risk Analysis
207) Calculate the gross margin ratio for each of the following separate cases A through C:
| A | B | C | |
| Net sales | $145,000 | $623,500 | $37,800 |
| Cost of goods sold | 83,600 | 269,200 | 13,230 |
Answer: A = ($145,000 – $83,600)/$145,000 = 42.3%
B = ($623,500 – $269,200)/$623,500 = 56.8%
C = ($37,800 – $13,230)/$37,800 = 65%
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
208) A company reported the following information for the month of July:
| Sales | $50,475 |
| Sales discounts | 1,235 |
| Sales returns and allowances | 2,840 |
| Cost of goods sold | 33,975 |
Required: Calculate this company’s gross profit.
Answer:
| Sales | $50,475 |
| Less: Sales discounts | (1,235) |
| Less: Sales returns and allowances | (2,840) |
| Net sales | $46,400 |
| Less: Cost of goods sold | (33,975) |
| Gross profit | $12,425 |
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
209) A company reported the following information for the month of July:
| Net Sales | $57,500 |
| Cost of goods sold | 33,200 |
Required: Calculate this company’s gross margin ratio.
Answer:
| Net sales | $57,500 |
| Less: Cost of goods sold | (33,200) |
| Gross profit | $24,300 |
| Gross margin ratio (24,300/57,500) | 42.3% |
Difficulty: 3 Hard
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Risk Analysis
210) The following information is for Barrel and its competitor Crate.
| Barrel | Crate | |||
| Year 1 | Year 2 | Year 1 | Year 2 | |
| Net sales | $347,850 | $365,418 | $579,750 | $664,395 |
| Cost of sales | 121,747 | 146,167 | 318,862 | 312,265 |
Required:
Answer:
Barrel Crate
Year 1 Year 2 Year 1 Year 2
Net sales $347,850 $365,418 $579,750 $664,395
Cost of sales 121,747 146,167 318,862 312,265
Gross Margin $226,103 $219,251 $260,888 $352,130
Barrel Crate
Year 1 Year 2 Year 1 Year 2
Gross profit $226,103 = 65% $219,251 = 60% $260,888 = 45% $352,130 = 53%
ratio $347,850 $365,418 $579,750 $664,395
Difficulty: 3 Hard
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Critical Thinking; FN Risk Analysis
211) A company that uses the perpetual inventory system and the gross method of accounting for purchases purchased $8,500 of merchandise on March 25 with credit terms of 2/10, n/30. The invoice was paid in full on April 4. Prepare the journal entries to record the transactions on March 25 and April 4.
Answer: March 25 Merchandise Inventory…………… 8,500
Accounts Payable………… 8,500
April 4 Accounts Payable…………………… 8,500
Merchandise Inventory……… 170
Cash………………………… 8,330
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
212) Sabor Company uses a perpetual inventory system and the gross method of accounting for purchases. Sabor purchased $17,800 of merchandise on April 7 with credit terms of 1/10, n/30. Merchandise with a cost of $1,800 was damaged and returned to the seller on April 10. On April 16 the company paid the amount due. Prepare the journal entries to record the transactions on all three dates.
Answer: April 7 Merchandise Inventory……………… 17,800
Accounts Payable……………… 17,800
April 10 Accounts Payable…………………… 1,800
Merchandise Inventory……….. 1,800
April 16 Accounts Payable…………………… 16,000
Merchandise Inventory……… 160
Cash…………………………… 15,840
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
213) Tahoe Ski Company uses the perpetual inventory system and the gross method of accounting for purchases. The company had the following transactions during January:
January 6: Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30.
January 8: Returned $200 worth of defective units and received full credit.
January 15: Paid the amount due, less the returned items.
Prepare journal entries to record each of the preceding transactions.
Answer: January 6: Merchandise Inventory…………….. 4,000
Accounts Payable…………… 4,000
January 8: Accounts Payable…………………. 200
Merchandise Inventory……. 200
January 15: Accounts Payable…………………. 3,800
Merchandise Inventory…….. 76
Cash………………………… 3,724
Difficulty: 2 Medium
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
214) Serene Spa Sales uses the perpetual inventory system and the gross method of accounting for purchases and sales, and had the following transactions during August.
| Aug 1
|
Sold merchandise on credit for $5,000, terms 3/10, n/30. The items sold had a cost of $3,500. |
| 3 | Purchased merchandise for cash, $2,720. |
| 4 | Purchased merchandise on credit for $2,600, terms 1/20, n/30. |
| 5
|
Customer returns $3,000 of merchandise purchased July 20. The returned items had a cost of $2,010. The returned items are restored to inventory and the customer’s Accounts Receivable is credited. |
| 10 | Received payment for merchandise sold August 1. |
| 15
|
Granted an allowance from the seller for the return of defective merchandise purchased on August 4 for $600. |
| 18
|
Paid freight charges of $200 for merchandise ordered last month. (FOB shipping point) |
| 23
|
Paid for the merchandise purchased August 4 less the portion that was returned. |
| 24
|
Sold merchandise on credit for $7,000, terms 2/10, n/30. The items had a cost of $4,900. |
| 31 | Received payment for merchandise sold on August 24. |
Required:
Prepare the general journal entries to record these transactions.
Answer:
| Aug | 1 | Accounts Receivable | 5,000 | |
| Sales | 5,000 | |||
| Cost of goods sold | 3,500 | |||
| Merchandise Inventory | 3,500 | |||
| 3 | Merchandise Inventory | 2,720 | ||
| Cash | 2,720 | |||
| 4 | Merchandise Inventory | 2,600 | ||
| Accounts Payable | 2,600 | |||
| 5 | Sales Returns and Allowances | 3,000 | ||
| Accounts Receivable | 3,000 | |||
| Merchandise Inventory | 2,010 | |||
| Cost of goods sold | 2,010 | |||
| 10 | Cash | 4,850 | ||
| Sales Discounts | 150 | |||
| Accounts Receivable | 5,000 | |||
| 15 | Accounts Payable | 600 | ||
| Merchandise Inventory | 600 | |||
| 18 | Merchandise Inventory | 200 | ||
| Cash | 200 | |||
| 23 | Accounts Payable ($2,600 – $600) | 2,000 | ||
| Merchandise Inventory ($2,000 × .01) | 20 | |||
| Cash | 1,980 | |||
| 24 | Accounts Receivable | 7,000 | ||
| Sales | 7,000 | |||
| Cost of goods sold | 4,900 | |||
| Merchandise Inventory | 4,900 | |||
| 31 | Cash | 6,860 | ||
| Sales Discounts | 140 | |||
| Accounts Receivable | 7,000 |
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
215) Craig’s Snowboards uses the perpetual inventory system and the gross method of accounting for sales, and had the following sales transactions during June:
| June 2
|
Sold merchandise to General Sports Store on credit for $4,800, terms 1/15, n/60. The items sold had a cost of $2,700. |
| June 4
|
General Sports Store returned merchandise that had a selling price of $200. The cost of the merchandise returned was $110. |
| June 13
|
General Sports Store paid for the merchandise sold on June 2 less the return, taking any appropriate discount earned. |
Prepare the journal entries that Craig’s Snowboards must make to record these transactions.
Answer:
| June 2 | Accounts receivable | 4,800 | |
| Sales | 4,800 | ||
| Cost of goods sold | 2,700 | ||
| Merchandise inventory | 2,700 | ||
| June 4 | Sales returns and allowances | 200 | |
| Accounts receivable | 200 | ||
| Merchandise inventory | 110 | ||
| Cost of goods sold | 110 | ||
| June 13 | Cash | 4,554 | |
| Sales discounts | 46 | ||
| Accounts receivable | 4,600 |
Difficulty: 2 Medium
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
216) Forrest’s Cycle Shop uses a perpetual inventory accounting system and the gross method of accounting for sales had the following transactions during the month of July:
| July 3
|
Sold merchandise to a customer on credit for $600, terms 2/10, n30. The cost of the merchandise sold was $350. |
| July 4
|
Sold merchandise to a customer for cash of $425. The cost of the merchandise was $250. |
| July 6
|
Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost of the merchandise sold was $750. |
| July 8
|
The customer from July 3 returned merchandise with a selling price of $100. The cost of the merchandise returned was $55. |
| July 15
|
The customer from July 6 paid the full amount due, less any appropriate discounts earned. |
| July 31
|
The customer from July 3 paid the full amount due, less any appropriate discounts earned. |
Answer: July 3 Accounts receivable…………………………… 600
Sales………………………………………. 600
Cost of goods sold…………………………….. 350
Merchandise inventory……………………. 350
July 4 Cash………………………………………… 425
Sales……………………………………….. 425
Cost of goods sold…………………………….. 250
Merchandise inventory……………………. 250
July 6 Accounts receivable………………………….. 1,300
Sales………………………………………. 1,300
Cost of goods sold……………………………. 750
Merchandise inventory……………………. 750
July 8 Sales returns and allowances…………………. 100
Accounts receivable………………………. 100
Merchandise inventory………………………… 55
Cost of goods sold………………………… 55
July 15 Cash……………………………………………. 1,274
Sales discounts…………………………………. 26
Accounts receivable……………………….. 1,300
Calculation: Discount = $1,300 * .02 = $26
July 31 Cash…………………………………………… 500
Accounts receivable………………………. 500
Difficulty: 3 Hard
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
217) Following is the year-end adjusted trial balance for Fred’s Corner Grocery for the current year:
| Fred’s Corner Grocery
Adjusted Trial Balance December 31 |
|||||
| Dr. | Cr. | ||||
| Cash…………………………………………………… | $ 67,500 | ||||
| Accounts receivable…………………………………… | 46,000 | ||||
| Merchandise inventory………………………………… | 60,000 | ||||
| Store supplies…………………………………………. | 800 | ||||
| Accounts payable……………………………………… | $ 16,000 | ||||
| Salaries payable……………………………………….. | 850 | ||||
| F. Brewster, Capital…………………………………….. | 125,630 | ||||
| F. Brewster, Withdrawals………………………………. | 45,000 | ||||
| Sales…………………………………………………….. | 550,000 | ||||
| Sales returns & allowances…………………………… | 4,500 | ||||
| Sales discounts………………………………………… | 4,250 | ||||
| Cost of goods sold..……………………………………. | 382,450 | ||||
| Sales salaries expense………………………………… | 44,000 | ||||
| Advertising expense……………………………………. | 8,150 | ||||
| Store salaries expense………………………………… | 24,325 | ||||
| Store supplies expense……………………………….. | 450 | ||||
| Interest expense………………………………………… | 5,055 | ||||
| Totals…………………………………………………….. | $692,480 | $692,480 | |||
Prepare the closing entries at December 31 for the current year.
Answer:
| Dec | 31 | Sales | 550,000 | |
| Income Summary………………… |
550,000
|
|||
| 31 | Income Summary…………………………………… | 473,180 | ||
| Sales Returns and Allowances………… | 4,500 | |||
| Sales Discounts……………………………….. | 4,250 | |||
| Cost of goods sold…………………………… | 382,450 | |||
| Sales Salaries Expense…………………….. | 44,000 | |||
| Advertising Expense……………………….. | 8,150 | |||
| Store Salaries Expense…………………….. | 24,325 | |||
| Store Supplies Expense……………………. | 450 | |||
| Interest Expense………………………………….. | 5,055
|
|||
| 31 | Income Summary………………………………… | 76,820 | ||
| F. Brewster, Capital………………………… | 76,820
|
|||
| 31 | F. Brewster, Capital…………………………….. | 45,000 | ||
| F. Brewster, Withdrawals………………… | 45,000 |
Difficulty: 3 Hard
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
218) The year-end adjusted trial balance of Gordon Produce for the current year, is shown below:
| GORDON PRODUCE
Adjusted Trial Balance December 31 |
||
| Debit | Credit | |
| Cash | $ 1,500 | |
| Store supplies | 500 | |
| Merchandise inventory | 11,000 | |
| Store equipment | 18,000 | |
| Accum. depr.–store equipment | $ 3,000 | |
| Accounts payable | 6,000 | |
| J. Gordon, Capital | 50,000 | |
| J. Gordon, Withdrawals | 22,000 | |
| Sales | 60,500 | |
| Cost of goods sold | 48,000 | |
| Depreciation expense–Store equipment | 1,000 | |
| Store supplies expense | 1,500 | |
| Salaries expense | 14,000 | |
| Rent expense | 2,000 | |
| $119,500 | $119,500 | |
Prepare closing entries at December 31 for the current year.
Answer:
| Dec. 31 | Sales | 60,500 | |
| Income Summary | 60,500 | ||
| 31 | Income Summary | 66,500 | |
| Cost of goods sold | 48,000 | ||
| Salaries Expense | 14,000 | ||
| Rent Expense | 2,000 | ||
| Store Supplies Expense | 1,500 | ||
| Depreciation Expense–Store Equip. | 1,000
|
||
| 31 | J. Gordon, Capital | 6,000 | |
| Income Summary | 6,000 | ||
| J. Gordon, Capital | 22,000 | ||
| J. Gordon, Withdrawals | 22,000 |
Difficulty: 3 Hard
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
219) From the adjusted trial balance for Brookstone Art Supplies given below, prepare a multiple-step income statement in good form.
| Brookstone Art Supplies
Adjusted Trial Balance December 31 |
||
| Debit | Credit | |
| Cash | $9,400 | |
| Accounts receivable | 25,000 | |
| Merchandise inventory | 36,000 | |
| Office supplies | 900 | |
| Store equipment | 75,000 | |
| Accumulated depreciation–store equipment | $22,000 | |
| Office equipment | 60,000 | |
| Accumulated depreciation–office equipment | 15,000 | |
| Accounts payable | 42,000 | |
| Notes payable | 10,000 | |
| A. Brookstone, Capital | 110,700 | |
| A. Brookstone, Withdrawals | 48,000 | |
| Sales | 325,000 | |
| Sales discounts | 6,000 | |
| Sales returns and allowances | 16,500 | |
| Cost of goods sold | 195,000 | |
| Selling expenses | 32,500 | |
| General and administrative expenses | 19,800 | |
| Interest expense | 600 | |
| Totals | $524,700 | $524,700 |
Answer:
| Brookstone Art Supplies
Income Statement For the year ended December 31 |
||
| Sales | $325,000 | |
| Less: Sales discounts | $ 6,000 | |
| Sales returns and allowance | 16,500 | 22,500 |
| Net sales | $302,500 | |
| Cost of goods sold | 195,000 | |
| Gross profit | 107,500 | |
| Operating expenses | ||
| Selling expenses | 32,500 | |
| General and administrative expenses | 19,800 | |
| Total operating expenses | 52,300 | |
| Income from operations | 55,200 | |
| Other expenses | ||
| Interest expense | 600 | |
| Net income | $ 54,600 | |
Difficulty: 3 Hard
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking; Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
220) From the adjusted trial balance for Fabricated Products Company given below, prepare the necessary closing entries.
| Fabricated Products Company
Adjusted Trial Balance December 31 |
||
| Debit | Credit | |
| Cash | $19,400 | |
| Accounts receivable | 25,000 | |
| Merchandise inventory | 26,000 | |
| Office supplies | 1,900 | |
| Store equipment | 84,000 | |
| Accumulated depreciation–store equipment | $22,000 | |
| Office equipment | 40,000 | |
| Accumulated depreciation–office equipment | 15,000 | |
| Accounts payable | 12,000 | |
| Notes payable | 40,000 | |
| P. Card, Capital | 110,700 | |
| P. Card, Withdrawals | 28,000 | |
| Sales | 245,000 | |
| Sales discounts | 6,000 | |
| Sales returns and allowances | 16,500 | |
| Cost of goods sold | 145,000 | |
| Sales salaries expense | 32,500 | |
| Depreciation expense–store equipment | 11,000 | |
| Depreciation expense–office equipment | 7,500 | |
| Office supplies expense | 1,300 | |
| Interest expense | 600 | |
| Totals | $444,700 | $444,700 |
Answer:
| Dec. 31 | Sales | 245,000 | |
| Income Summary | 245,000 | ||
| Dec. 31 | Income Summary | 220,400 | |
| Sales discounts | 6,000 | ||
| Sales returns and allowances | 16,500 | ||
| Cost of goods sold | 145,000 | ||
| Sales salaries expense | 32,500 | ||
| Depreciation expense–store equipment | 11,000 | ||
| Depreciation expense–office equipment | 7,500 | ||
| Office supplies expense | 1,300 | ||
| Interest expense | 600 | ||
| Dec. 31 | Income Summary | 24,600 | |
| P. Card, Capital | 24,600 | ||
| Dec. 31 | P. Card, Capital | 28,000 | |
| P. Card, Withdrawals | 28,000 |
Difficulty: 3 Hard
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
221) Johnnycake Restaurant uses a periodic inventory system and the gross method of accounting for purchases. Prepare general journal entries to record the following transactions for Johnnycake:
| Aug. 10
|
Johnnycake purchased merchandise on credit from Foster Foods for $9,000, terms 2/10, n/30, FOB destination. Transportation costs of $350 were paid by Foster. |
| 12 | Johnnycake returned $600 of merchandise from the August 10 purchase. |
| 19 | Johnnycake paid Foster for the August 10 purchase. |
Answer:
| Aug. 10 | Purchases ……………………………………. | 9,000 | |
| Accounts Payable……………………….… | 9,000 | ||
| 12 | Accounts Payable…………………………..… | 600 | |
| Purchases Returns and Allowances… | 600 | ||
| 19 | Accounts Payable……………………………… | 8,400 | |
| Cash……………………………………….. | 8,232 | ||
| Purchases Discounts ($8,400 x .02)…………. | 168 |
Difficulty: 2 Medium
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
222) Austin’s Pub Supply uses the periodic inventory system and the gross method of accounting for sales. The company had the following sales transactions during August:
| August 2
|
Sold merchandise to Jo’s Pub and Grub on credit for $3,750, terms 2/15, n/60. The items sold had a cost of $1,200. |
| August 4
|
Jo’s Pub and Grub returned merchandise that had a selling price of $300. The cost of the merchandise returned was $110. |
| August 13
|
Jo’s Pub and Grub paid for the merchandise sold on August 2, taking any appropriate discount earned. |
Prepare the journal entries that Austin’s Pub Supply must make to record these transactions.
Answer:
| Aug. 2 | Accounts receivable | 3,750 | |
| Sales | 3,750 | ||
| Aug. 4 | Sales returns and allowances | 300 | |
| Accounts receivable | 300 | ||
| Aug. 13 | Cash | 3,381 | |
| Sales discounts | 69 | ||
| Accounts receivable | 3,450 |
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
223) Preston Office Furniture uses the periodic inventory system and the gross method of accounting for sales. It had the following transactions during the month of May:
| May 3
|
Sold merchandise to a customer on credit for $600, terms 2/10, n/30. The cost of the merchandise sold was $350. |
| May 4
|
Sold merchandise to a customer for cash of $425. The cost of the merchandise was $250. |
| May 6
|
Sold merchandise to a customer on credit for $1,300, terms 2/10, n/30. The cost of the merchandise sold was $750. |
| May 8
|
The customer from May 3 returned merchandise with a selling price of $100. The cost of the merchandise returned was $55. |
| May 15
|
The customer from May 6 paid the full amount due, less any appropriate discounts earned. |
| May 31
|
The customer from May 3 paid the full amount due, less any appropriate discounts earned. |
The customer from May 3 paid the full amount due, less any appropriate discounts earned.
Prepare the required journal entries that Preston Office Furniture must make to record these transactions.
Answer:
| May 3 | Accounts receivable…………………….… | 600 | |
| Sales…………………………………… | 600 | ||
| May 4 | Cash…………………………………….…. | 425 | |
| Sales………………………………….… | 425 | ||
| May 6 | Accounts Receivable………………….… | 1,300 | |
| Sales…………………………….…….. | 1,300 | ||
| May 8 | Sales returns and allowances……………… | 100 | |
| Accounts receivable………………….… | 100 | ||
| May 15 | Cash………………………………………. | 1,274 | |
| Sales Discounts…………….…………….. | 26 | ||
| Accounts receivable…………………… | 1,300 | ||
| Calculation: Discount = $1,300 * .02 = $26 | |||
| May 31 | Cash……………………………………… | 500 | |
| Accounts receivable…………………… | 500 |
Difficulty: 3 Hard
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
224) At its fiscal year-end of June 30, Kendall Wholesale’s general ledger shows the following selected account balances. Kendall Wholesale uses the perpetual inventory system.
| Merchandise Inventory | $60,000 |
| Sales | 940,000 |
| Sales discounts | 16,000 |
| Sales returns and allowances | 8,000 |
| Cost of goods sold | 456,000 |
A physical count of its June 30 year-end inventory discloses that the cost of the merchandise inventory still available is $58,160. Prepare the entry to record any inventory shrinkage.
Answer: June 30 Cost of goods sold………………………………….. 1,840
Merchandise Inventory……………………………….. 1,840
Difficulty: 2 Medium
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
225) Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.
| May 1
|
Purchased merchandise from Craft Company for $7,800 under credit terms of 1/10, n/30, FOB shipping point, invoice dated May 1. |
| May 2
|
Purchased merchandise from Bow Company for $10,600 under credit terms 2/05, n/20, FOB destination. |
| May 3
|
Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice dated May 3. The merchandise had cost $3,000. |
| May 4 | Paid $300 cash for the freight charges on the May 1 purchase of merchandise. |
| May 5
|
Granted an $800 allowance from Craft Company for the return of part of the merchandise purchased on May 1. |
| May 6 | Paid Bow Company the balance due within the discount period. |
| May 8
|
Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice dated May 8. The merchandise had a cost of $1,500. |
| May 11 | Paid Craft Company the balance due within the discount period. |
| May 13 | Received the balance due from Sting Company within the discount period. |
| May 14
|
Granted a credit of $300 to Skeet Company for an allowance on defective merchandise. |
| May 17 | Received the balance due from Skeet Company within the discount period. |
Answer:
| May 1 | Merchandise Inventory | 7,800 | |
| Accounts Payable-Craft Co. | 7,800
|
||
| May 2 | Merchandise Inventory | 10,600 | |
| Accounts Payable-Bow Co. | 10,600
|
||
| May 3 | Accounts receivable-Sting Co. | 5,600 | |
| Sales | 5,600 | ||
| Cost of goods sold | 3,000 | ||
| Merchandise inventory | 3,000
|
||
| May 4 | Merchandise Inventory | 300 | |
| Cash | 300
|
||
| May 5 | Accounts payable-Craft Co. | 800 | |
| Merchandise inventory | 800
|
||
| May 6 | Accounts payable-Bow Co. | 10,600 | |
| Merchandise inventory ($10,600 * .02) | 212 | ||
| Cash ($10,600 – $212) | 10,388
|
||
| May 8 | Accounts receivable-Skeet Co. | 3,300 | |
| Sales | 3,300 | ||
| Cost of goods sold | 1,500 | ||
| Merchandise inventory | 1,500
|
||
| May 11 | Accounts payable-Craft Co. ($7,800 – $800) | 7,000 | |
| Merchandise inventory ($7,000 * .01) | 70 | ||
| Cash ($7,000 – $70) | 6,930
|
||
| May 13 | Cash ($5,600 * .98) | 5,488 | |
| Sales Discounts ($5,600 * .02) | 112 | ||
| Accounts receivable–Sting Co. | 5,600
|
||
| May 14 | Sales returns and allowances | 300 | |
| Accounts receivable–Skeet Co. | 300
|
||
| May 17 | Cash (($3,300 – $300)* .98) | 2,940 | |
| Sales discounts ($3,000 * .02) | 60 | ||
| Accounts receivable–Skeet ($3,300 – 300) | 3,000 |
Difficulty: 3 Hard
Topic: Accounting for Merchandising Purchases ; Accounting for Merchandising Sales
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
226) Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.
| May 1
|
Purchased merchandise from Craft Company for $7,800 under credit terms of 1/10, n/30, FOB shipping point, invoice dated May 1. |
| May 2
|
Purchased merchandise from Bow Company for $10,600 under credit terms 2/05, n/20, FOB destination. |
| May 4
|
Paid $300 cash for the freight charges on the May 1 purchase of merchandise. |
| May 5
|
Granted an $800 allowance from Craft Company for the return of part of the merchandise purchased on May 1. |
| May 6 | Paid Bow Company the balance due within the discount period. |
| May 11 | Paid Craft Company the balance due within the discount period. |
Answer:
| May 1 | Merchandise Inventory | 7,800 | |
| Accounts Payable-Craft Co. | 7,800
|
||
| May 2 | Merchandise Inventory | 10,600 | |
| Accounts Payable-Bow Co. | 10,600
|
||
| May 4 | Merchandise Inventory | 300 | |
| Cash | 300
|
||
| May 5 | Accounts payable-Craft Co. | 800 | |
| Merchandise inventory | 800
|
||
| May 6 | Accounts payable-Bow Co. | 10,600 | |
| Merchandise inventory ($10,600 * .02) | 212 | ||
| Cash ($10,600 – $212) | 10,388
|
||
| May 11 | Accounts payable-Craft Co. ($7,800 – $800) | 7,000 | |
| Merchandise inventory ($7,000 * .01) | 70 | ||
| Cash ($7,000 – $70) | 6,930 |
Difficulty: 2 Medium
Topic: Accounting for Merchandising Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
227) Prepare journal entries to record the following merchandising transactions of Margin Company, which applies the perpetual inventory system and the gross method of recording invoices. Margin Company offers all of its credit customers credit terms of 2/10, n/30.
| May 3
|
Sold merchandise to Sting Company for $5,600, FOB shipping point, invoice dated May 3. The merchandise had cost $3,000. |
| May 8
|
Sold merchandise to Skeet Company for $3,300, FOB shipping point, invoice dated May 8. The merchandise had a cost of $1,500. |
| May 13 | Received the balance due from Sting Company within the discount period. |
| May 14
|
Granted a $300 allowance to Skeet Company for an allowance on defective merchandise. |
| May 17
|
Received the balance due from Skeet Company within the discount period. |
Answer:
| May 3 | Accounts receivable-Sting Co. | 5,600 | |
| Sales | 5,600 | ||
| Cost of goods sold | 3,000 | ||
| Merchandise inventory | 3,000 | ||
| May 8 | Accounts receivable-Skeet Co. | 3,300 | |
| Sales | 3,300 | ||
| Cost of goods sold | 1,500 | ||
| Merchandise inventory | 1,500 | ||
| May 13 | Cash ($5,600 * .98) | 5,488 | |
| Sales Discounts ($5,600 * .02) | 112 | ||
| Accounts receivable-Sting Co. | 5,600 | ||
| May 14 | Sales returns and allowances | 300 | |
| Accounts receivable-Skeet Co. | 300 | ||
| May 17 | Cash (($3,300 – $300)* .98) | 2,940 | |
| Sales discounts ($3,000 * .02) | 60 | ||
| Accounts receivable–Skeet ($3,300 – 300) | 3,000 |
Difficulty: 2 Medium
Topic: Accounting for Merchandising Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
228) From the adjusted trial balance given below for the Grayson Company, prepare a multiple-step income statement in good form. Salaries expense and building depreciation expense should be equally divided between selling activities and the general and administrative activities.
| Grayson Company
Adjusted Trial Balance December 31 |
||
| Debit | Credit | |
| Cash | $ 19,500 | |
| Accounts receivable | 27,000 | |
| Merchandise inventory | 38,000 | |
| Office supplies | 1,200 | |
| Store equipment | 80,000 | |
| Accumulated depreciation–store equipment | $ 25,000 | |
| Building | 260,000 | |
| Accumulated depreciation–building | 121,600 | |
| Accounts payable | 28,500 | |
| Salaries payable | 10,000 | |
| N. Grayson, Capital | 169,900 | |
| N. Grayson, Withdrawals | 45,000 | |
| Sales | 450,000 | |
| Sales discounts | 8,000 | |
| Sales returns and allowances | 24,500 | |
| Cost of goods sold | 210,000 | |
| Salaries expense | 38,000 | |
| Depreciation expense–store equipment | 16,000 | |
| Depreciation expense–building | 24,000 | |
| Advertising expense | 12,300 | |
| Office supplies expense | 3,500 | |
| Gain on disposal of store equipment | 3,000 | |
| Interest expense | 1,000 | |
| Totals | $808,000 | $808,000 |
Answer:
| Grayson Company
Income Statement For the year ended December 31 |
||
| Sales | $450,000 | |
| Less: Sales discounts | $ 8,000 | |
| Sales returns and allowances | 24,500 | 32,500 |
| Net sales | $417,500 | |
| Cost of goods sold | 210,000 | |
| Gross profit | 207,500 | |
| Operating expenses | ||
| Selling expenses | ||
| Sales salaries expense | $ 19,000 | |
| Depreciation expense–store equipment | 16,000 | |
| Depreciation expense–building | 12,000 | |
| Advertising expense | 12,300 | |
| Total selling expenses | 59,300 | |
| General and administrative expenses | ||
| Salaries expense | $ 19,000 | |
| Depreciation expense–building | 12,000 | |
| Office supplies expense | 3,500 | |
| Total general and administrative expenses | 34,500 | |
| Total operating expenses | 93,800 | |
| Income from operations | 113,700 | |
| Other revenues and gains (expenses and losses) | ||
| Gain on disposal of store equipment | 3,000 | |
| Interest expense | (1,000) | 2,000 |
| Net income | $ 115,700 | |
Difficulty: 3 Hard
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Reporting
229) Vincent Company purchased merchandise from Liu Company with an invoice price of $300,000 and credit terms of 2/10, n/30. Liu Company’s cost for the merchandise was $200,000. Vincent Company paid within the discount period. Assume that both buyer and seller use a perpetual inventory system and the gross method of recording invoices.
Answer:
| 1. a. | Merchandise Inventory…………………………… | 300,000 | |
| Accounts Payable…………………………… | 300,000 | ||
| 1. b. | Accounts Payable………………………………… | 300,000 | |
| Merchandise inventory………………..…… | 6,000 | ||
| Cash | 294,000 |
| 2. a. | Accounts Receivable……………………………… | 300,000 | |
| Sales | 300,000 | ||
| Cost of goods sold………………………………… | 200,000 | ||
| Merchandise inventory………………..……. | 200,000 | ||
| 2. b. | Cash……………………………………………….. | 294,000 | |
| Sales discounts…………………………………… | 6,000 | ||
| Accounts receivable………………….……. | 300,000 | ||
| Discount = $300,000 * .02 = $6,000 |
Discount taken $6,000.00
Interest expense ($294,000 *.09 * 20/365) 1,449.86
Amount saved $4,550.14
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Reporting
230) Prepare journal entries to record the following merchandise transactions of Martinez Excavation Equipment, which applies the perpetual inventory system and the gross method of recording invoices.
| May 1
|
Purchased merchandise from Kona Company for $12,700 under credit terms of 2/15, n/45, FOB destination, and invoice dated May 1. |
| 3
|
Sold merchandise to Walton for $8,000 under credit terms of 1/10, n/30, FOB destination, invoice date May 3. The merchandise had cost $5,000. |
| 5 | Paid $350 cash for shipping charges related to the May 3 sale. |
| 6
|
Returned $2,000 of the merchandise purchased on May 1 to Kona Company. |
| 7
|
Walton returned merchandise from the May 3 sale that had cost Martinez $625 and had been sold for $1,000. The merchandise was restored to inventory. |
| 13 | Received the balance due from Walton less the return. |
| 14 | Paid the amount due Kona Company. |
Answer:
| May 1 | Merchandise Inventory…………………………… | 12,700 | |
| Accounts Payable………………………… | 12,700 | ||
| 3 | Accounts receivable…………………………….. | 8,000 | |
| Sales | 8,000 | ||
| Cost of goods sold………………………………. | 5,000 | ||
| Merchandise inventory………………………. | 5,000 | ||
| 5 | Delivery expense…………………………………. | 350 | |
| Cash…………………………………………… | 350 | ||
| 6 | Accounts payable…………………………………. | 2,000 | |
| Merchandise inventory………………………. | 2,000 | ||
| 7 | Sales returns and allowances……………………. | 1,000 | |
| Accounts Receivable………………………. | 1,000 | ||
| Merchandise Inventory………………………….. | 625 | ||
| Cost of goods sold…………………………. | 625 | ||
| 13 | Cash ($8,000 – $1,000) * .99 …………………….. | 6,930 | |
| Sales discounts ($8,000 – $1,000) * .01 ………….. | 70 | ||
| Accounts receivable……………………….. | 7,000 | ||
| 14 | Accounts payable ($12,700 – $2,000) ……………. | 10,700 | |
| Merchandise inventory ($10,700 * .02)…….. | 214 | ||
| Cash ($10,700 – $214)……………………….. | 10,486 |
Difficulty: 3 Hard
Topic: Accounting for Merchandise Purchases; Accounting for Merchandise Sales
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.; 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Reporting
231) In its first month of business, Clausen Corporation reports sales of $1,750,000 and cost of goods sold of $950,000. Clausen estimates that current and future returns and allowances will equal 4% of those sales. Prepare the October 31 adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.
Answer:
| Oct 31 | Sales Returns and Allowances…………………….. | 70,000 | |
| Sales Refund Payable ($1,750,000 × .04)…… | 70,000 | ||
| Oct 31 | Inventory Returns Estimated ($950,000 × .04)…. | 38,000 | |
| Cost of Goods Sold………………..………… | 38,000 |
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
232) Stevenson Corporation reports unadjusted first-year sales of $400,000 and cost of goods sold of $240,000. The company expects future returns and allowances equal to 3% of sales and 3% of cost of sales. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.
Answer:
| Dec. 31 | Sales Returns and Allowances…………………. | 12,000 | |
| Sales Refund Payable ($400,000 × .03)… | 12,000 | ||
| Dec. 31 | Inventory Returns Estimated ($240,000 × .03)… | 7,200 | |
| Cost of Goods Sold………………………. | 7,200 |
Difficulty: 2 Medium
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
233) Martin Corporation allows customers to return merchandise within 60 days of purchase. At year-end, Martin estimates that sales of $20,000, with a cost of $14,000 will be returned in the upcoming year. The unadjusted balance in Inventory Returns Estimated is a debit of $4,000, and the unadjusted balance in Sales Refund Payable is a credit of $2,500. Prepare the adjusting entries necessary to record the revenue side and cost side estimates for returns and allowances.
Answer:
| Dec 31 | Sales Returns and Allowances…………………….. | 17,500 | |
| Sales Refund Payable ($20,000 – $2,500)…… | 17,500 | ||
| Dec 31 | Inventory Returns Estimated ($14,000 – $4,000)…. | 10,000 | |
| Cost of Goods Sold…………………………… | 10,000 |
Difficulty: 3 Hard
Topic: Adjusting Entries under New Revenue Recognition Rules
Learning Objective: 05-P6 Appendix 5B-Prepare adjustments for discounts, returns, and allowances per revenue recognition rules.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
234) Tahoe Ski Company uses the perpetual inventory system and the net method of accounting for purchases. The company had the following transactions during January:
January 6: Purchased $4,000 of inventory. The seller’s credit terms are 2/10, n/30.
January 8: Returned $200 worth of defective units and received full credit.
January 15: Paid the amount due, less the returned items.
Prepare journal entries to record each of the preceding transactions.
Answer: January 6: Merchandise Inventory…………….. 3,920
Accounts Payable…………… 3,920
January 8: Accounts Payable…………………. 196
Merchandise Inventory……. 196
January 15: Accounts Payable…………………. 3,724
Cash………………………… 3,724
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
235) Barbara’s Boats uses the periodic inventory system and the net method of accounting for purchases. The company had the following transactions during January:
January 6: Purchased $10,000 of inventory. The seller’s credit terms are 2/10, n/30.
January 31: Due to an oversight, the invoice was not paid within the discount period. Full payment was made on January 31.
Prepare journal entries to record each of the preceding transactions.
Answer: January 6: Purchases 9,800
Accounts Payable 9,800
January 31: Accounts Payable 9,800
Purchases Discounts Lost 200
Cash 10,000
Difficulty: 2 Medium
Topic: Recording Transactions under the Net Method
Learning Objective: 05-P7 Appendix 5C-Record and compare merchandising transactions using the gross method and net method.
Bloom’s: Apply
AACSB/Accessibility: Analytical Thinking / Keyboard Navigation
AICPA: BB Industry; FN Measurement
236) A ________ buys products from manufacturers and sells to retailers.
Answer: wholesaler
Difficulty: 1 Easy
Topic: Merchandising Activities
Learning Objective: 05-C1 Describe merchandising activities and identify income components for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
237) A ________ company’s operating cycle begins with the purchase of merchandise and ends with the collection of cash from merchandise sales.
Answer: merchandising
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
238) Products that a company owns and intends to sell are called ________.
Answer: Merchandise inventory
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
239) A ________ inventory system updates the accounting record for inventory only at the end of an accounting period.
Answer: periodic
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
240) The ________ inventory system updates accounting records for each purchase and each sale of inventory.
Answer: perpetual
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
241) Beginning inventory plus the net cost of purchases is the ________.
Answer: merchandise available for sale
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
242) A period’s beginning inventory is equal to the prior period’s ________.
Answer: ending inventory
Difficulty: 1 Easy
Topic: Reporting Inventory for a Merchandiser
Learning Objective: 05-C2 Identify and explain the inventory asset and cost flows of a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
243) The liquidity of a company can be measured using the current ratio and the ________, which only includes the most liquid current assets in its calculation.
Answer: acid-test ratio
Difficulty: 2 Medium
Topic: Acid-Test Ratio
Learning Objective: 05-A1 Compute the acid-test ratio and explain its use to assess liquidity.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
244) The gross margin ratio equals net sales less ________ divided by net sales.
Answer: cost of goods sold
Difficulty: 2 Medium
Topic: Gross Margin Ratio
Learning Objective: 05-A2 Compute the gross margin ratio and explain its use to assess profitability.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
245) ________ are the amounts and timing of payment from a buyer to a seller.
Answer: Credit terms
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
246) A ________ is a price reduction granted by the seller to a buyer of defective or unacceptable merchandise.
Answer: purchase allowance
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
247) FOB ________ means the buyer accepts ownership when the goods depart the seller’s place of business. The buyer is responsible for paying shipping costs and bears the risk of damage or loss when goods are in transit.
Answer: shipping point
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
248) FOB ________ means ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business. The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit.
Answer: destination
Difficulty: 1 Easy
Topic: Accounting for Merchandise Purchases
Learning Objective: 05-P1 Analyze and record transactions for merchandise purchases using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
249) Merchandise that customers return to the seller after a sale is referred to as ________.
Answer: sales returns
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
250) Reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price is referred to as ________.
Answer: sales allowances
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
251) The seller might offer a(n) ________ to a buyer that is not satisfied with the goods received.
Answer: allowance
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
252) ________ can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.
Answer: Sales discounts
Difficulty: 1 Easy
Topic: Accounting for Merchandise Sales
Learning Objective: 05-P2 Analyze and record transactions for merchandise sales using a perpetual system.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
253) Inventory shrinkage can be computed by comparing the ________ of inventory with recorded quantities and amounts.
Answer: physical count (or count)
Difficulty: 1 Easy
Topic: Adjusting and Closing Entries for Merchandisers
Learning Objective: 05-P3 Prepare adjustments and close accounts for a merchandising company.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
254) ________ expenses are those costs that support a company’s overall operations and include expenses related to accounting, human resources, and finance.
Answer: General and administrative
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
255) A ________ income statement format shows net sales and reports subtotals for various types of items such as gross profit, income for operations, and net income.
Answer: multiple-step
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
256) A ________ income statement lists cost of goods sold as another expense and shows only one subtotal for total expenses.
Answer: single-step
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
257) Non-operating activities that include interest, dividends and rent revenues, and gains from asset disposals are called ________.
Answer: other revenues and gains
Difficulty: 2 Medium
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
258) Non-operating activities that include interest expense, losses from asset disposals, and casualty losses are reported as ________.
Answer: other expenses and losses
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
259) When a company has no reportable non-operating activities, its income from operations is reported as ________.
Answer: net income
Difficulty: 1 Easy
Topic: Financial Statement Formats
Learning Objective: 05-P4 Define and prepare multiple-step and single-step income statements.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Reporting
260) Under the ________ inventory accounting system, each purchase, purchase return and allowance, purchase discount, and transportation-in transaction is recorded in a separate temporary account.
Answer: periodic
Difficulty: 1 Easy
Topic: Periodic Inventory System
Learning Objective: 05-P5 Appendix 5A-Record and compare merchandising transactions using both periodic and perpetual inventory systems.
Bloom’s: Remember
AACSB/Accessibility: Communication / Keyboard Navigation
AICPA: BB Industry; FN Decision Making
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
