CHAPTER 5

BE5.4 (LO 2, 3) On August 24, Pocras Corporation purchased

inventory on account from Wydell Inc. The selling price of the
goods is $32,000 and the cost of goods sold is $14,400. Both
companies use perpetual inventory systems. Record the above
transactions on the books of both companies.
BRIEF EXERCISE 5.4
Pocras Corporation (Buyer):
Aug. 24 Inventory ......................................................................... 32,000
Accounts Payable........................................................ 32,000

Wydell Inc. (Seller):

Aug. 24 Accounts Receivable......................................................... 32,000
Sales............................................................................. 32,000

24 Cost of Goods Sold............................................................ 14,400

Inventory..................................................................... 14,400

LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BE5.8 (LO 4) Saguenay Limited reports the following information:

sales $1,070,000; cost of goods sold $658,000; administrative
expenses $160,000; selling expenses $110,000; other income
$26,000; other expenses $35,000; and income tax expense $27,000.
Assuming Saguenay uses a multiple-step statement of income,
calculate the following: (a) gross profit, (b) income from
operations, (c) income before income tax, and (d) net income.

BRIEF EXERCISE 5.8

a. Sales ..................................................................................
$1,070,000
Less: Cost of goods sold....................................................
658,000
Gross profit........................................................................... $
412,000

b. Gross profit...........................................................................
$412,000
Less: Administrative expenses.......................................... $160,000
Selling expenses....................................................... 110,000
270,000
 Income from operations.......................................................
$142,000

c. Income from operations.......................................................

$142,000
Add: Other income............................................................ $26,000
Less: Other expenses......................................................... (35,000) _
(9,000)
Income before income tax....................................................
$133,000

d. Income before income tax....................................................

$133,000
Less: Income tax expense..................................................
27,000
Net income ..........................................................................
$106,000

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BE5.9 (LO 4) Explain where each of the following items would appear on (a) a single-step
statement of income and (b) a multiple-step statement of income: depreciation expense,
cost of goods sold, freight out, income tax expense, interest expense, interest income,
rent income, salaries expense, and sales.

BRIEF EXERCISE 5.9

As the name suggests, numerous steps are required in determining net income in a
multiple-step statement.
a. b.
Item Single-Step Multiple-Step

Depreciation expense Expenses Operating expenses

Cost of goods sold Expenses Cost of goods sold
Freight out Expenses Operating expenses
Income tax expense Income tax expense Income tax expense
Interest expenseExpenses Other income and expenses
Interest income Revenues Other income and expenses
Rent income Revenues Other income and expenses
Salaries expenseExpenses Operating expenses
Sales Revenues Sales

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
*BE5.16 (LO 6) Bassing Corp. uses a periodic inventory system and reports the
following information: sales $1,708,000; purchases $880,000; purchase returns
and allowances $13,000; purchase discounts $14,000; freight in $16,000; freight
out $37,000; beginning inventory $96,000; and ending inventory $82,000.
Assuming Bassing uses a multiple-step statement of income, calculate (a) net
purchases, (b) cost of goods purchased, (c) cost of goods sold, and (d) gross
profit.

*BRIEF EXERCISE 5.16

a. Purchases................................................................................ $880,000
Less: Purchase returns and allowances................................ $13,000
Purchase discounts...................................................... 14,000 27,000
Net purchases.......................................................................... $853,000

b. Net purchases.......................................................................... $853,000

Add: Freight in..................................................................... 16,000
Cost of goods purchased......................................................... $869,000

c. Beginning inventory............................................................... $ 96,000

Add: Cost of goods purchased............................................. 869,000
Cost of goods available for sale.............................................. 965,000
Less: Ending inventory........................................................ 82,000
Cost of goods sold.................................................................. $883,000

d. Sales ....................................................................................
$1,708,000
Less: Cost of goods sold......................................................... 883,000
Gross profit............................................................................. $825,000
LO 6 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
*BE5.19 (LO 7) Edson Ltd. reports under ASPE and has the following account balances:
Sales $935,000, Cost of Goods Sold $380,000, Salaries Expense $220,000, Sales
Discounts $7,000, Depreciation Expense $20,000, Sales Returns $8,000, Interest
Expense $10,000, and Income Tax Expense $87,000. Prepare a multiple-step statement
of income for this company with a December 31, 2021, year end.

*BRIEF EXERCISE 5.19

EDSON LTD.
Statement of Income (Multiple-Step)
Year Ended December 31, 2021

Sales....................................................................................................................... $935,000
Less: Sales returns..................................................................... $8,000
Sales discounts................................................................. 7,000
15,000
Net sales................................................................................................................. 920,000
Cost of goods sold................................................................................................. 380,000
Gross profit............................................................................................................ 540,000
Operating expenses
Salaries expense..................................................................... $220,000
Depreciation expense............................................................. 20,000
Total operating expenses........................................................................... 240,000
Income from operations......................................................................................... 300,000
Other income and expenses
Interest expense............................................................................................... 10,000
Income before income tax..................................................................................... 290,000
Income tax expense............................................................................................... 87,000
Net income............................................................................................................. $203,000

(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from
operations)

LO 7 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
E5.2 (LO 2, 3) Listed below are selected examples of transactions related to the
purchase and sale of inventory from the perspective of the seller or the buyer as
indicated. Assume a perpetual inventory system is in use.
1. Buyer: Purchase of $3,500 of inventory for cash.
2. Buyer: Return of $750 of inventory to seller for credit on account.
3. Buyer: Purchase of $4,000 of inventory on account, terms 2/10, n/45.
4. Buyer: Payment of $400 cash for freight on purchase of inventory (FOB
shipping point).
5. Buyer: Payment of amount owed for purchase of $3,500 of inventory,
terms 2/10, n/30, paid within discount period.
6. Seller: Sale of inventory on account, terms n/30. Selling price $10,000;
cost $4,000. Management expects a return rate of 7.69%.
7. Seller: Return of damaged inventory from buyer for cash. Selling price
$550; cost $220. All of the goods were discarded because they are not
resaleable.
8. Seller: Payment of $600 cash for freight on sale of inventory (FOB
destination).
9. Seller: Return of unwanted inventory from buyer for credit on account.
Selling price $400; cost $160. Goods restored to inventory for future
resale.
10. Seller: Receipt of payment ($8,000) from customer on account, terms
n/30.
Instructions
For each of the above transactions, indicate (a) the basic type (asset, liability,
revenue, or expense) of each account to be debited and credited; (b) the specific
name(s) of the account(s) to debit and credit (for example, Inventory);
and (c) whether each account is increased (+) or decreased (−) and by what
amount. The first one has been done for you as an example.
Account Debited Account Credited
(a) (b) (c) (a) (b) (c)
Basic Type of Specific Basic Type of Specific
Account Account Amount Account Account Amount
1 Asset Inventory +$3,500 Asset Cash –$3,500
.

EXERCISE 5.2
Account Debited Account Credited
Item a. b. c. a. b. c.
1. Asset Inventory +$3,500 Asset Cash –$3,500
2. Liability Accounts Payable –$750 Asset Inventory –$750
3. Asset Inventory +$4,000 Liability Accounts +$4,000
 Payable
4. Asset Inventory +$400 Asset Cash –$400
5. Liability Accounts Payable –$3,500 Asset Cash –$3,430
Asset Inventory –$70
6. Asset Accounts +$10,000 Revenue Sales +$9,231
Receivable
Liability Refund +$769
Expense Cost of Goods Sold Liability
Estimated +$3,692 Asset Inventory –$4,000
Asset Inventory Returns +$308
7. Liability Refund +$550 Asset Cash –$550
Liability Asset Estimated
Expense Cost of Goods Sold +$220 Inventory –$220
Returns
8. Expense Freight Out +$600 Asset Cash –$600
9. Liability Refund +$400 Asset Accounts –$400
Liability Receivable
Asset Inventory +$160 Asset Estimated –$160
Inventory
Returns
10. Asset Cash +$8,000 Asset Accounts –$8,000
Receivable
LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
E5.3 (LO 2, 3) On September 1, the beginning of its fiscal year, Campus Office
Supply Ltd. had an inventory of 100 calculators at a cost of $20 each. The
company uses a perpetual inventory system. During September, the following
transactions occurred:
Sept 2 Purchased 750 calculators for $20 each from Digital Corp. on account, terms
. n/30.
10 Returned 10 calculators to Digital for $200 credit because they did not meet
specifications.
11 Sold 260 calculators for $30 each to Campus Book Store, terms n/30.
Management estimates returns of 4% based on prior experience.
14 Granted credit of $300 to Campus Book Store for the return of 10 calculators
that were not ordered. The calculators were restored to inventory.
29 Paid Digital the amount owing.
30 Received payment in full from the Campus Book Store.
Instructions
1. Record the September transactions.
2. Create T accounts for the Inventory and Cost of Goods Sold accounts. Enter the
opening balances and post the September transactions.
3. Determine the ending balances of inventory and cost of goods sold in both dollars
and quantities.

EXERCISE 5.3
a.
Sept. 2 Inventory (750 × $20)........................................................... 15,000
Accounts Payable........................................................... 15,000

10 Accounts Payable (10 × $20)............................................... 200

Inventory........................................................................ 200

11 Accounts Receivable (260 × $30)........................................ 7,800

Refund Liability ($7,800 × 4%)..................................... 312
Sales................................................................................ 7,488

Cost of Goods Sold .............................................................. 4,992

Estimated Inventory Returns ($5,200 × 4%)........................ 208
Inventory (260 × $20)..................................................... 5,200

14 Refund Liability (10 × $30).................................................. 300

Accounts Receivable...................................................... 300

Inventory (10 × $20)............................................................. 200

Estimated Inventory Returns.......................................... 200

29 Accounts Payable ($15,000 – $200)..................................... 14,800

Cash................................................................................ 14,800
30 Cash...................................................................................... 7,500
Accounts Receivable ($7,800 - $300)............................ 7,500
EXERCISE 5.3 (CONTINUED)
b.
Inventory
Sept. 1 Bal. 2,000 Sept.10 200
2 15,000 11 5,200
14 200
Sept. 30 Bal. 11,800

Cost of Goods Sold

Sept. 11 4,992

Sept. 30 Bal. 4,992

c.

Ending Inventory:
Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 = 590

Cost of calculators at September 30: 590 × $20 = $11,800

Cost of Goods Sold:

Number of calculators sold in September: 260 – 10 = 250

Cost of calculators sold in September: 260 x $20 = $5,200 less 4% $208 = $4,992

LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
E5.7 (LO 2, 3, 4) The following merchandise transactions occurred in
December. Both companies use a perpetual inventory system.
Dec 3 Pictou Ltd. sold goods to Thames Corp. for $68,000, terms n/15, FOB shipping
. point. The inventory had cost Pictou $36,000. Pictou’s management expected a
return rate of 3% based on prior experience.
7 Shipping costs of $900 were paid by the appropriate company.
8 Thames returned unwanted merchandise to Pictou. The returned merchandise
has a sales price of $2,100, and a cost of $1,150. It was restored to inventory.
1 Pictou received the balance due from Thames.
1
Instructions
1. Record the above transactions in the books of Pictou.
2. Record the above transactions in the books of Thames.
3. Calculate the gross profit earned by Pictou on the above transactions.

EXERCISE 5.7

a. Dec. 3 Accounts Receivable................................................... 68,000

Refund Liability ($68,000 x 3%).......................... 2,040
Sales....................................................................... 65,960

3 Cost of Goods Sold...................................................... 34,920

Estimated Inventory Returns ($36,000 x 3%)............. 1,080
Inventory............................................................... 36,000

7 No entry necessary.

8 Refund Liability.......................................................... 2,100

Accounts Receivable............................................. 2,100

Inventory..................................................................... 1,150
Estimated Inventory Returns................................. 1,150

11 Cash............................................................................. 65,900
Accounts Receivable ($68,000 – $2,100)............. 65,900

b. Dec. 3 Inventory..................................................................... 68,000

Accounts Payable.................................................. 68,000

7 Inventory..................................................................... 900
Cash....................................................................... 900

8 Accounts Payable........................................................ 2,100

Inventory............................................................... 2,100
 11 Accounts Payable ($68,000 – $2,100)......................... 65,900
Cash....................................................................... 65,900

c. Sales...............................................................................................
$65,960
Cost of goods sold.........................................................................
34,920
Gross profit....................................................................................
$31,040

LO 2,3,4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

E5.13 (LO 4, 5) Montmorency Ltée reported the following condensed statement of

income data (in thousands) for the year ended August 31, 2021:
Administrative expenses $ 670
Cost of goods sold 4,030
 Income tax expense 560
Sales $7,090
Interest expense 270
Selling expenses 260
Instructions
1. Prepare a multiple-step statement of income.
2. Are the expenses classified by nature or function in the list of accounts above?
3. Calculate the gross profit margin and profit margin.

EXERCISE 5.13

a.
MONTMORENCY LTÉE
Statement of Income (Multiple-step)
Year Ended August 31, 2021

Sales ...................................................................................................................
$7,090,000
Cost of goods sold.................................................................................................
4,030,000
Gross profit............................................................................................................ 3,060,000
Operating expenses
Administrative expenses........................................................ $670,000
Selling expenses..................................................................... 260,000
Total operating expenses...........................................................................
930,000
Income from operations......................................................................................... 2,130,000
Other income and expenses
Interest expense..............................................................................................
270,000
Income before income tax..................................................................................... 1,860,000
Income tax expense...............................................................................................
560,000
Net income.............................................................................................................
$1,300,000

(Revenues – Cost of goods sold – Operating expenses = Income from operations)

b. Expenses are classified by function (cost of goods sold, administrative, selling).

c. Gross profit margin $3,060,000 ÷ $7,090,000 = 43.2%

Profit margin $1,300,000 ÷ $7,090,000 = 18.3%

LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance