PROBLEM SET B

Problem 5-1B (40 minutes)

May 2 Merchandise Inventory..................................... 6,600

Accounts Payable—Pearl......................... 6,600
Purchased goods on credit, terms 3/15, n/30.

4 Accounts Receivable—Miller........................... 1,000

Sales.......................................................... 1,000
Sold goods on credit, terms 3/10, n/60.

4 Cost of Goods Sold.......................................... 550

Merchandise Inventory............................. 550
To record cost of the May 4 sale.

5 Merchandise Inventory..................................... 120

Cash........................................................... 120
Paid freight on incoming goods.

9 Cash.................................................................. 2,300
Sales.......................................................... 2,300
Sold goods for cash.

9 Cost of Goods Sold.......................................... 1,900

Merchandise Inventory............................. 1,900
To record cost of the May 9 sale.

10 Merchandise Inventory..................................... 2,500

Accounts Payable—Verte......................... 2,500
Purchased goods on credit, terms 3/15, n/60.

12 Accounts Payable—Verte................................ 500

Merchandise Inventory............................. 500
Received credit memo from returning
goods to supplier.

14 Cash.................................................................. 970
Sales Discounts*.............................................. 30
Accounts Receivable—Miller.................... 1,000
Collected receivable within discount
period. *$1,000 x 3%
Problem 5-1B (Concluded)

May 17 Accounts Payable—Pearl................................ 6,600

Merchandise Inventory *........................... 198
Cash........................................................... 6,402
Paid payable in discount period (*6,600 x 3%).

20 Accounts Receivable—Stephen..................... 1,200

Sales.......................................................... 1,200
Sold goods on credit, terms 3/15, n/60.

20 Cost of Goods Sold......................................... 800

Merchandise Inventory............................. 800
To record cost of the May 20 sale.

22 Sales Returns and Allowances....................... 100

Accounts Receivable—Stephen............... 100
Issued credit memo for allowances
on goods sold to customers.

25 Accounts Payable—Verte............................... 2,000

Merchandise Inventory *........................... 60
Cash........................................................... 1,940
Paid payable in discount period
[($2,500 - $500) x 3%].

30 Cash................................................................. 1,067
Sales Discounts............................................... 33
Accounts Receivable—Stephen............... 1,100
Collected receivable within discount
period. ($1,200 - $100) x 3%

31 Accounts Receivable—Miller.......................... 7,100

Sales.......................................................... 7,100
Sold goods on credit, terms 3/10, n/60.

31 Cost of Goods Sold......................................... 5,400

Merchandise Inventory............................. 5,400
To record cost of the May 31 sale.
Problem 5-2B (40 minutes)

July 3 Merchandise Inventory................................... 4,100

Accounts Payable—Magar...................... 4,100
Purchased goods on credit, terms 1/10, n/30.

4 Accounts Payable—Magar.............................. 500

Cash.......................................................... 500
Paid freight for Magar Corp.

7 Accounts Receivable—Konop........................ 2,870

Sales......................................................... 2,870
Sold goods on credit, terms 2/10, n/60.

7 Cost of Goods Sold......................................... 2,049

Merchandise Inventory............................ 2,049
To record cost of the July 7 sale.

10 Merchandise Inventory................................... 3,640

Accounts Payable—Payak...................... 3,640
Purchased goods on credit, terms 1/10, n/45.

11 Delivery Expense............................................. 120

Cash.......................................................... 120
Paid shipping charges on July 7 sale.

12 Sales Returns and Allowances....................... 470

Accounts Receivable—Konop................ 470
Customer returned merchandise.

12 Merchandise Inventory................................... 341

Cost of Goods Sold.................................. 341
Returned goods to inventory.

14 Accounts Payable—Payak.............................. 500

Merchandise Inventory............................ 500
Received a credit memorandum
for July 10 purchase.
Problem 5-2B (Concluded)

July 17 Cash................................................................. 2,352

Sales Discounts*............................................. 48
Accounts Receivable—Konop................ 2,400
Collected receivable within discount
period. *($2,870 - $470) x 2%

20 Accounts Payable—Payak*............................ 3,140

Merchandise Inventory**......................... 29
Cash.......................................................... 3,111
Paid payable within discount period.
* $3,400 + $240 - $500 = $3,140
**($3,400 - $500) x 1% = $29

21 Accounts Receivable—Vescio....................... 2,460

Sales......................................................... 2,460
Sold goods on credit, terms 1/10, n/30.

21 Cost of Goods Sold......................................... 1,707

Merchandise Inventory............................ 1,707
To record cost of the July 21 sale.

24 Sales Returns and Allowances....................... 360

Accounts Receivable—Vescio................ 360
Issued credit memo.

30 Cash................................................................. 2,079
Sales Discounts*............................................. 21
Accounts Receivable—Vescio................ 2,100
Collected receivable within discount
period. *($2,460 - $360) x 1%

31 Accounts Payable—Magar.............................. 3,600

Cash.......................................................... 3,600
Paid payable. ($4,100 - $500 = $3,600)
Problem 5-3B (60 minutes)

Part 1

Adjustment (a)
Oct. 31 Store Supplies Expense................................... 3,650
Store Supplies........................................... 3,650
To record store supplies expense
($5,300 - $1,650).

Adjustment (b)
Oct. 31 Insurance Expense........................................... 1,300
Prepaid Insurance..................................... 1,300
To record expired insurance.

Adjustment (c)
Oct. 31 Depreciation Expense—Store Equip............... 1,990
Accumulated Deprec.—Store Equip........ 1,990
To record depreciation expense.

Adjustment (d)
Oct. 31 Cost of Goods Sold.......................................... 1,400
Merchandise Inventory............................. 1,400
To adjust inventory for shrinkage
($13,000 - $11,600).
Problem 5-3B (Continued)

Part 2 Multiple-step income statement

GIACCIO PRODUCTS COMPANY
Income Statement
For Year Ended October 31, 2009
Sales........................................................................ $116,250
Less: Sales discounts........................................... $ 1,950
Sales returns and allowances..................... 2,300 4,250
Net sales.................................................................. 112,000
Cost of goods sold *............................................... 40,400
Gross profit............................................................. 71,600
Expenses
Selling expenses
Depreciation expense—Store equipment.......... 1,990
Sales salaries expense**.................................... 13,000
Rent expense—Selling space**.......................... 7,000
Store supplies expense...................................... 3,650
Advertising expense........................................... 9,800
Total selling expenses........................................ 35,440
General and administrative expenses
Insurance expense............................................. 1,300
Office salaries expense**................................... 13,000
Rent expense—Office space**........................... 7,000
Total general and administrative expenses...... 21,300
Total expenses....................................................... 56,740
Net income.............................................................. $ 14,860
* $40,400 = $39,000 + $1,400 (shrinkage)
** Salaries and rent expenses are equally divided between selling activities and the general and
administrative activities.

Part 3 Single-step income statement

GIACCIO PRODUCTS COMPANY
Income Statement
For Year Ended October 31, 2009
Net sales.................................................................. $112,000
Expenses
Cost of goods sold............................................ $40,400
Selling expenses................................................ 35,440*
General and administrative expense................ 21,300*
Total expenses................................................... 97,140
Net income.............................................................. $ 14,860
* From part 2
Problem 5-3B (Concluded)
Part 4
Current assets
Cash ......................................................................... $ 30,150
Merchandise inventory ........................................... 11,600
Store supplies ......................................................... 1,650
Prepaid insurance ................................................... 1,400*
Total current assets................................................. $ 44,800
Current liabilities........................................................ $ 15,000
Current ratio ($44,800 / $15,000).................................... 2.99
*$2,700 - $1,300 = $1,400

Quick assets (Cash)................................................... $ 30,150

Current liabilities........................................................ $ 15,000
Acid-test ratio ($30,150 / $15,000).................................. 2.01

Net Sales..................................................................... $112,000

Cost of goods sold..................................................... 40,400
Gross margin.............................................................. $ 71,600
Gross margin ratio ($71,600 / $112,000)......................... 63.9%

Problem 5-4B (40 minutes)

1. Net sales
Sales.......................................................................... $235,980
Less: Sales discounts............................................. (3,610)
Sales returns and allowances....................... (15,574)
Net sales.................................................................... $216,796

2. Cost of merchandise purchased

Invoice cost of merchandise purchases................. $101,430
Purchase discounts received.................................. (2,130)
Purchase returns and allowances........................... (4,868)
Costs of transportation-in........................................ 3,900
Total cost of merchandise purchases..................... $ 98,332
Problem 5-4B (Continued)

3. Multiple-step income statement

FRISCO COMPANY
Income Statement
For Year Ended March 31, 2009

Sales........................................................................... $235,980
Less: Sales discounts............................................... $ 3,610
Sales returns and allowances........................ 15,574 19,184
Net sales..................................................................... 216,796
Cost of goods sold *.................................................. 91,673
Gross profit................................................................. 125,123

Expenses
Selling expenses
Sales salaries expense.......................................... 32,329
Rent expense—Selling space................................ 11,091
Store supplies expense......................................... 2,831
Advertising expense.............................................. 20,058
Total selling expenses........................................... 66,309

General and administrative expenses

Office salaries expense.......................................... 29,497
Rent expense—Office space................................. 2,831
Office supplies expense......................................... 943
Total general and administrative expenses.......... 33,271
.......................................................................................
Total expenses........................................................... 99,580
Net income.................................................................. $ 25,543

*Cost of goods sold (alternative computation):

Merchandise inventory, March 31, 2008.................................. $ 27,841
Total cost of merchandise purchases (from part 2)............... 98,332
Goods available for sale........................................................... 126,173
Merchandise inventory, March 31, 2009.................................. 34,500
Cost of goods sold................................................................... $ 91,673
Problem 5-4B (Concluded)
4. Single-step income statement
FRISCO COMPANY
Income Statement
For Year Ended March 31, 2009

Net sales............................................................................. $216,796

Expenses
Cost of goods sold........................................................ $91,673
Selling expenses............................................................ 66,309
General and administrative expenses.......................... 33,271
Total expenses............................................................... 191,253
Net income......................................................................... $ 25,543

Problem 5-5B (30 minutes)

Part 1
Closing entries

March 31 Sales ................................................................. 235,980

Income Summary......................................... 235,980
To close temporary accounts with credit balances.

March 31 Income Summary............................................. 210,437

Sales Discounts .......................................... 3,610
Sales Returns and Allowances .................. 15,574
Cost of Goods Sold..................................... 91,673
Sales Salaries Expense............................... 32,329
Rent Expense, Selling Space...................... 11,091
Store Supplies Expense.............................. 2,831
Advertising Expense................................... 20,058
Office Salaries Expense.............................. 29,497
Rent Expense, Office Space........................ 2,831
Office Supplies Expense............................. 943
To close temporary accounts with debit balances.

March 31 Income Summary............................................. 25,543

N. Frisco, Capital......................................... 25,543
To close the Income Summary account.

March 31 N. Frisco, Capital.............................................. 8,000

N. Frisco, Withdrawals................................ 8,000
To close the withdrawals account.
Problem 5-5B (Concluded)
Part 2
The first step is to determine the amount of purchases that were subject to
a discount during the year:
Invoice cost of merchandise purchases.......................... $101,430
Purchase returns and allowances.................................... (4,868)
Total cost of merchandise purchases payable................ $ 96,562

This amount is used to determine the maximum discount, which is then

compared to the actual discount:
Maximum discount available (3% x $96,562) ....................$ 2,897
Purchase discounts received............................................. (2,130)
Purchase discounts missed...............................................$ 767

As a percent of available discounts ($767/$2,897)................ 26.5%

This analysis suggests that about 27% of available discounts have been
missed. As a result, it would appear that cash is not being well managed.
Management should try to identify a better system for ensuring that all
favorable discounts are taken. It is possible that the discounts not taken
are actually not favorable to the company.

Part 3
First, we compute this year’s sales returns and allowances rate:
Sales................................................................................... $235,980
Sales returns and allowances .......................................... $ 15,574
Percent of returns and allowances to sales..................... 6.6%

This calculation shows that the company’s customers are returning or

requiring allowances on items at a higher rate than the 5% rate observed in
prior years. It appears that management should investigate the situation to
see why there are more dissatisfied customers this year than in prior years.
Problem 5-6BB (50 minutes)
GIACCIO PRODUCTS COMPANY
Work Sheet
For Year Ended October 31, 2009
Unadjusted Adjusted Income
Trial Balance Adjustments . Trial Balance Statement Balance Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash................................... 30,150 30,150 30,150
Merchandise inventory.......... 13,000 (d 1,400 11,600 11,600
)
Store supplies...................... 5,300 (a 3,650 1,650 1,650
)
Prepaid insurance................. 2,700 (b 1,300 1,400 1,400
)
Store equipment................... 42,900 42,900 42,900
Accum. depreciation—Store eq. 19,900 (c 1,990 21,890 21,890
)
Accounts payable................. 15,000 15,000 15,000
G. Giaccio, Capital................. 38,000 38,000 38,000
G. Giaccio, Withdrawals......... 2,050 2,050 2,050
Sales................................... 116,250 116,250 116,250
Sales discounts.................... 1,950 1,950 1,950
Sales returns and allowances. 2,300 2,300 2,300
Cost of goods sold................ 39,000 (d 1,400 40,400 40,400
)
Depreciation expense—Store 0 (c 1,990 1,990 1,990
eq........................................ )
Salaries expense.................. 26,000 26,000 26,000
Insurance expense................ 0 (b 1,300 1,300 1,300
)
Rent expense....................... 14,000 14,000 14,000
Store supplies expense......... 0 (a 3,650 3,650 3,650
)
Advertising expense............. 9,800 ______ _____ _____ 9,800 ______ 9,800 ______ ______ ______
Totals.................................. 189,150 189,150 8,340 8,340 191,140 191,140 101,390 116,250 89,750 74,890
Net income.......................... 14,86 ______ ______ 14,860
0
Totals.................................. 116,250 116,250 89,750 89,750