SM 05

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 5
MERCHANDISING OPERATIONS
LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies.
2. Prepare entries for purchases under a perpetual inventory system.
3. Prepare entries for sales under a perpetual inventory system.
4. Prepare a single-step and a multiple-step income statement.
5. Calculate the gross profit margin and profit margin.
6. Account and report inventory in a periodic inventory system (Appendix 5A).
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND

BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 6. 2 C 11. 2,3 C 16. 4 K 21. 5 C
2. 1 C 7. 2 AP 12. 3 C 17. 4 C 22. 5 C
3. 1 C 8. 2,3 C 13. 3 C 18. 4 C 23. 6 C
4. 1 C 9. 2,3 C 14. 3 C 19. 4 C 24. 6 C
5. 1 C 10. 2,3 C 15. 4 C 20. 5 C 25. 6 C
Brief Exercises
1. 1 C 5. 2 AP 9. 4 C 13. 6 AP
2. 1 AN 6. 3 AP 10. 4,5 AN 14. 6 AP
3. 2 AP 7. 4 AP 11. 5 AN 15. 6 AP
4. 2,3 AP 8. 4 C 12. 6 AP 16. 6 AP
Exercises
1. 1 C 5. 2 AP 9. 4 AP 13. 5 AN 17. 6 AN
2. 2,3 AN 6. 2 AN 10. 4,5 AN 14. 6 AP
3. 2,3 AP 7. 2,3,5 AP 11. 4,5 AN 15. 2,3,6 AP
4. 2 AP 8. 4 C 12. 4,6 AN 16. 6 AN
Problems: Set A and B
1. 1 AN 4. 2,3 AP 7. 4 AP 10. 5 AN 13. 6 AP
2. 1,2,3 AN 5. 2,3,4 AP 8. 5 AN 11. 1,6 AN 14. 5,6 AP
3. 2,3 AP 6. 4 AN 9. 4,5 AN 12. 6 AP 15. 6 AP
Accounting Cycle Review
1. 2,3,4 AP
Cases
1. 1,4,5 AN 3. 4,5 E 5. 2 C
2. 5 AN 4. 2,3,5 E 6. 4,5 AN
Solutions Manual 5-1 Chapter 5

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. (a) The operating cycle is the time it takes to go from cash to cash in
producing revenues.
(b) The normal operating cycle for a merchandising company is likely to be

longer than that of a service company because, in a merchandising
company, inventory must first be purchased and sold, and then the
receivables must be collected whereas, in a service company, the services
only need to be provided (not purchased first and then stored until sold)
and then the receivables must be collected.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. (a) The income measurement process of a merchandising company is the

same as the service company in that net income is arrived at by deducting
expenses from revenues.
(b) The income measurement process of a merchandising company differs

from that of a service company in that its revenue is derived from sales
revenue, not service revenue. In addition, cost of goods sold is deducted
from sales revenue to determine gross profit, before operating and other
expenses, similar to both types of companies, are deducted (or other
revenues are added).
3. The company needs to compare the cost of the detailed record keeping
required in a perpetual inventory system to the benefits of having the additional
information about the inventory. One of the benefits of a perpetual inventory
system is the ability to answer questions from customers about merchandise
availability. In a used clothing business, this may not be of much benefit unless
each inventory item is unique. Another benefit is the monitoring of inventory
quantities in order to avoid running out of stock. Again, this may not be of benefit
since the company does not order recurring or similar merchandise, and may
not have a supplier to order from. But if the company is selling used clothing on
consignment, it will need to track each item in order to determine which
consignor to pay when an item is sold.

3. (continued)
The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system
requires more record keeping and therefore is more expensive to use. For
example, a perpetual inventory system usually requires an investment in a
point-of-sale system that is integrated with the inventory system.
4. A physical count is an important control feature. By using a perpetual inventory

system, a company knows what should be on hand. Performing a physical
count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock.
5. The key distinction between a periodic inventory system and a perpetual

inventory system is whether or not information on inventory and cost of goods
sold (units and dollars) are always (perpetually) available or only known when
inventory counts are conducted (periodically). Because information on the cost
of goods sold is only known after an inventory count has been carried out under
the periodic system, no entry is made for the cost of goods sold at the time of
each sale. Instead, cost of goods sold is a residual number, determined by
subtracting ending inventory (as determined by the inventory account) from cost
of goods available for sale. This means that any goods not included in ending
inventory are assumed to have been sold. In order to arrive at the cost of goods
available for sale, separate accounts are set up in the general ledger to keep
track of the purchases, freight-in, purchase returns and allowances, and
purchase discounts. Under the periodic inventory system, management is not
able to look up in the general ledger accounts for the balance of inventory at a
particular point in time. In order to arrive at the inventory value, a physical count
of the inventory must be performed.

6. The reason for recording the purchase of merchandise for resale in a separate
account is to enable a company to determine its cost of goods sold and gross
profit. This information is useful in managing costs and setting prices.
7. (a) The value of the purchase discount to Butler’s Roofing is $480 ($48,000 ×
1%).
(b) Failing to take advantage of the discount terms is like paying the supplier
an extra $480 in order to settle a $47,520 invoice 20 days later. This works
out to 1.01% [$480 ÷ $47,520] every 20 days. On an annual basis this
amounts to 18.4% [($480 ÷ $47,520 × (365 ÷ 20)]. Butler’s should take
advantage of the cash discount offered.
LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance
8. (a) Lebel Ltée should record the sale as revenue in June, when it is sold to a
customer. When the merchandise was purchased in April, it should be
recorded as an asset, inventory. It should be recorded as cost of goods
sold (an expense) in June when the inventory is sold and the revenue is
recognized. This is necessary in order to match the cost with the related
revenue
(b) Lebel’s customer should recognize the purchase in June, when the
inventory is received.
LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

9. (a) FOB shipping point means that the goods are placed free on board by the
seller at the point of shipping. The buyer pays the freight costs from the
point of shipping to the buyer’s destination because title passes at
shipping point. FOB destination means the goods are delivered by the
seller to their destination, where the title passes. The seller pays for
shipping to the buyer’s destination.
(b) FOB shipping point will result in a debit to the Inventory account by the
buyer because title has transferred at shipping point and the inventory is
now owned by the buyer. FOB destination will result in a debit to Freight
Out by the seller because they are paying for the freight.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10. In a perpetual inventory system, purchase returns are credited to Inventory

because the items purchased have been returned to the vendor and are no
longer available to be sold to customers. Sales returns are not debited directly
to the Sales account because this would not provide information about the
goods returned. This information can be useful in making decisions. Debiting
returns directly to sales may also cause problems in comparing sales for
different periods.
11. (a) A quantity discount gives a reduction in the price according to the volume
of the purchase. A purchase discount is offered by a seller to a buyer for
early payment of an invoice. When the buyer pays the invoice within the
discount period, the amount of the discount decreases the Inventory
account. A sales discount is the same as a purchase discount but from the
seller’s point of view.
(b) Quantity discounts are not recorded or accounted for separately but
become part of the recorded sales price. Buyers record purchase
discounts taken as a credit to Inventory under the perpetual system or to
Purchase Discounts when using the periodic system. The seller records a
sales discount as a debit to the Sales Discounts account, which is a contra
revenue account to Sales, when the invoice is paid within the discount
period.

12. Contra accounts are used to reduce the account they are contra to, such as
accumulated depreciation reducing equipment. A debit (decrease) recorded
directly to Sales would make it more difficult for management to determine the
percentage of total sales that ends up being lost through sales returns and
allowances, so a contra revenue account (sales returns and allowances) is
used. Another example of a contra revenue account is sales discounts. This
account keeps track of the costs incurred for discounts taken by customers for
paying early, in accordance with the discount terms offered. The contra revenue
accounts reduce sales to net sales, reported on the income statement.
13. If the merchandise is not resaleable, it cannot be included in inventory since it

cannot be resold and it has no value. The cost remains in cost of goods sold
since it is a cost of doing business. If the merchandise is resaleable, it still has
value to the company. In this case, the cost of the merchandise is debited to
inventory again and cost of goods sold is credited.
14. The sales taxes are collected on behalf of the federal and provincial
governments, and must be periodically remitted to these authorities. Sales
taxes that are collected from selling a product or service are not recorded as
revenue, instead they are recorded as a liability until they are paid to the
government.

15. In a single-step income statement, all data are classified into two categories:
(1) revenues and (2) expenses. It is referred to as a single-step income
statement because only a single step—subtracting expenses from revenues—
is needed to determine income before income tax. A multiple-step income
statement requires several steps to determine income before income tax. First,
cost of goods sold is deducted from net sales to determine gross profit.
Operating expenses are then deducted to calculate income from operations.
Finally, other revenues and expenses are added or deducted to determine
income before income tax. The deduction of income tax to calculate net income
(loss) is the same under both formats. In addition, both formats produce the
same profit amount for the period.
16. North West Company uses a multiple-step income statement.
LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting
17. (a) When classifying expenses by their nature, they are reported in
accordance with their natural classification (for example, salaries,
deprecation, and so on). When classifying expenses by their function, they
are reported according to the activity (business function) for which they
were incurred (for example, cost of goods sold, administrative, selling).
(b) It does not matter whether a single-step or multiple-step income statement

is prepared, expenses must be classified either by nature or by function.
18. Because the Overwaitea is a private enterprise, it can follow Accounting

Standards for Private Enterprises (ASPE). Companies following ASPE can
classify their expenses in whatever manner is useful to them. Loblaws, which
follows IFRS, must classify its expenses by their nature or their function.

19. Interest expense is a non-operating expense because it relates to how a

company’s operations are financed, not to the company’s main operations.
20. The difference between gross profit margin and profit margin is that the gross
profit margin measures the amount by which the selling price exceeds the cost
of goods sold while the profit margin measures the extent to which sales cover
all expenses (including the cost of goods sold).
21. Factors affecting a company’s gross profit margin include the selling price and
the cost of the merchandise. Recall that gross profit = net sales  cost of goods
sold. Selling products with a higher price or “mark-up” or selling products with
a lower cost would result in an increased gross profit margin. Selling products
with a lower price (perhaps due to increased competition that results in lower
selling prices) or selling products with a higher cost (perhaps due to price
increases from suppliers and shippers) would result in a lower gross profit
margin.
22. High gross profit Low gross profit

Computer services and Low-price retail companies
such as
software companies Walmart
Pharmaceutical manufacturers Grocery stores
Luxury goods retailers Forestry and wood products

*23.
(a) (b)
Accounts Added/Deducted Normal Balance
Purchase Returns and Allowances Deducted Credit
Purchase Discounts Deducted Credit
Freight In Added Debit
*24. Periodic System

Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased
(Purchases – Purchase Discounts – Purchase Returns and Allowances +
Freight In) – Ending Inventory
Ending inventory and cost of goods sold for the period are calculated at the end
of the period.
Perpetual System
Cost of Goods Sold = the cost of the item(s) sold
Cost of goods sold is calculated at the time of each sale and recorded as an
increase (debit) to the Cost of Goods Sold account and a decrease (credit) to
the Inventory account.

*25. The calculation of cost of goods sold is shown in detail in the income statement
of a company using the periodic system. In a perpetual system, it is one line
and amount only.
Periodic System
Cost of Goods Sold =
1. Add the cost of goods purchased (where the cost of goods purchased is
equal to purchases less purchases discounts, and purchases returns and
allowances plus freight in) to the cost of goods on hand at the beginning of
the period (beginning inventory). The result is the cost of goods available for
sale.
2. Subtract the cost of goods on hand at the end of the period (ending inventory)
from the cost of goods available for sale. The result is the cost of goods sold.
Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as
previously determined and recorded for all sales.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5-1
(a) The company with the most efficient operating cycle is Company A as it uses
the fewest number of days in its cycle to obtain cash.
(b) The company which is most likely a service company is Company A as it does
not have to manufacture or deliver inventory and consequently takes the fewest
number of days to obtain cash. Company C, with the highest number of days in
its operating cycle, is likely the manufacturing company, and the merchandising
company would be in the middle (Company B), with neither the highest nor the
lowest number of days in its operating cycle.
BRIEF EXERCISE 5-2

(a) [1] Income before tax = $100 – $65 = $35
[2] Net income = $35 (from [1]) – $9 = $26
[3] Cost of goods sold = $100 – $60 = $40
[4] Operating expenses = $60 – $35 = $25
[5] Income tax expense = $35 – $26 = $9
(b) Company A is the service company, since it has no cost of goods sold.
Company B is the merchandising company, since it has cost of goods sold.
LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-3

Inventory
Beginning Balance 55,000
Purchases 220,000
26,000 Purchase returns
9,700 Purchase discounts
Freight in 2,700
218,000 Cost of goods sold

Ending Balance 24,000
Although not required, the following are the journal entries of the transactions.
Purchases Inventory .................................................................. 220,000

Accounts Payable ............................................... 220,000
Purchase Accounts Payable .................................................... 26,000

Returns Inventory ............................................................. 26,000
Purchase Accounts Payable ($220,000 – $26,000) ................. 194,000

Discounts Inventory ($194,000 × 5%) ................................. 9,700
Cash ................................................................... 184,300
Freight In Inventory .................................................................. 2,700

Cost of Cost of Goods Sold .................................................. 218,000

Sales Inventory ............................................................. 218,000
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-4

Pocras Corporation (Buyer):
Aug. 24 Inventory ................................................................. 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
BRIEF EXERCISE 5-5

Jan. 2 Inventory ................................................................. 45,000
5 No entry necessary – Freight costs paid by Fundy Corp.
6 Accounts Payable .................................................... 6,000

Inventory ............................................................. 6,000
11 Accounts Payable ($45,000 - $6,000) ...................... 39,000

Inventory ($39,000 × 2%) ................................... 780
Cash ................................................................... 38,220
LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-6
Jan. 2 Accounts Receivable ................................................ 45,000

Sales ................................................................... 45,000
2 Cost of Goods Sold .................................................. 25,200

Inventory ............................................................. 25,200
5 Freight Out ............................................................... 900

Cash ................................................................... 900
6 Sales Returns and Allowances................................. 6,000

Accounts Receivable .......................................... 6,000
6 Inventory .................................................................. 3,360

Cost of Goods Sold ............................................. 3,360
11 Cash ......................................................................... 38,220

Sales Discounts ($39,000 × 2%) .............................. 780
Accounts Receivable ($45,000 - $6,000) ............ 39,000

BRIEF EXERCISE 5-7
(a) Sales .................................................................... $1,110,000

Less: Sales returns and allowances ................... $22,000
Sales discounts ......................................... 18,000 40,000
Net sales .............................................................. $1,070,000
(b) Net sales ..................................................................... $1,070,000

Less: Cost of goods sold ........................................... 658,000
Gross profit ................................................................. $ 412,000
(c) Gross profit ................................................................. $412,000

Less: Administrative expenses .................................. $160,000
Selling expenses .............................................. 110,000 270,000
Income from operations .............................................. $142,000
(d) Income from operations .............................................. $142,000

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

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

BRIEF EXERCISE 5-8

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 expense Expenses Other revenues and expenses
Interest revenue Revenues Other revenues and expenses
Rent revenue Revenues Other revenues and expenses
Salaries expense Expenses Operating expenses
Sales Revenues Sales revenue
Sales discounts Revenues Sales revenue
Sales returns and allowances Revenues Sales revenue
BRIEF EXERCISE 5-9
(a) The company is using a multiple-step form of income statement.
(b) The company is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5-10
(a)
2018 2017
Sales $250,000 $200,000
Cost of goods sold 137,500 114,000
Gross profit 112,500 86,000
Operating expenses 50,000 40,000
Income from operations 62,500 46,000
Other revenues ______ 10,000
Income before income taxes 62,500 56,000
Income tax expense 20,000 15,000
Net income $42,500 $41,000
(b)
2018 2017
Gross profit $112,500 $86,000

margin = 45.0% = 43.0%
$250,000 $200,000
Profit
$42,500 = 17.0% $41,000 = 20.5%
margin
$250,000 $200,000
(c) Modder Corporation’s gross profit margin increased in 2018 indicating an

increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2018, the company’s profit margin dropped. The
decrease in profit margin is caused by the other revenues in 2017 that were not
available in 2018. Operating expenses were 20% of sales in both years.
LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and
Finance

BRIEF EXERCISE 5-11
(a)
($ in millions) 2015 2014
Gross profit $12,279.6 – $7,747.1 $12,462.9 – $8,033.2

margin = 36.9% = 35.5%
$12,279.6 $12,462.9
Profit $735.9 $639.3

= 6.0% = 5.1%
margin $12,279.6 $12,462.9
(b) Canadian Tire Corporation’s gross profit margin increased in 2015. Although
sales dropped 1.5%, [($12,279.6 - $12,462.9) ÷ $12,462.9] cost of goods sold
dropped 3.6% [($7,747.1 - $8,033.2) ÷ $8,033.2] which lead to the increased
gross profit margin. The profit margin also increased in 2015, but not as much.
Operating expenses or interest or income tax expense must have increased as
a percentage of sales.
LO 5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and
Finance
*BRIEF EXERCISE 5-12
Jan. 2 Purchases ................................................................ 45,000

5 No entry necessary - Freight costs paid by Fundy Corp.
6 Accounts Payable .................................................... 6,000

Purchase Returns and Allowances ..................... 6,000
11 Accounts Payable ($45,000 - $6,000) ...................... 39,000

Purchase Discounts ($39,000 × 2%) .................. 780
Cash ................................................................... 38,220


Jan. 2 Accounts Receivable ................................................ 45,000
Sales ................................................................... 45,000
2 No cost of goods sold entry at time of sale
5 Freight Out ............................................................... 900

Cash ................................................................... 900

Accounts Receivable .......................................... 6,000
6 No cost of goods sold entry at the time of sale
11 Cash ......................................................................... 38,220

Sales Discounts ($39,000 × 2%) .............................. 780
Accounts Receivable ($45,000 - $6,000) ............ 39,000


(a) Sales ............................................................................. $1,860,000
Less: Sales returns and allowances ............................ $124,000
Sales discounts .................................................. 28,000 152,000
Net Sales ...................................................................... $1,708,000
(b) Purchases ..................................................................... $880,000

Less: Purchase returns and allowances ...................... $13,000
Purchase discounts ............................................ 14,000 27,000
Net purchases ............................................................... $853,000
(c) Net purchases ............................................................... $853,000

Add: Freight in ............................................................ 16,000
Cost of goods purchased .............................................. $869,000
(d) 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
(e) Net sales ....................................................................... $1,708,000

Less: Cost of goods sold ............................................... 883,000
Gross profit ................................................................... $825,000


(a) Cost of goods sold
Beginning inventory ...........................................
$105,000
Purchases .......................................................... $195,000
Less: Purchase returns and allowances ............ $ 6,600
Purchase discounts .................................. 20,400 27,000
Net purchases .................................................... 168,000
Add: Freight In ................................................... 5,250
Cost of goods purchased ................................... 173,250
Cost of goods available for sale ......................... 278,250
Ending inventory ................................................ 120,000
Cost of goods sold ............................................. $158,250
(b) There would be no difference in the remainder of the income statement for
Halifax Limited whether the periodic or perpetual inventory systems were used.
Purchases – Purchase returns and allowances – Purchase discounts + Freight-in =

Cost of goods purchased
(Beginning inventory+ Cost of goods purchased – Ending inventory = Cost of goods

sold)


Dec. 31 Inventory (ending) .................................................... 68,000
Cost of Goods Sold .................................................. 401,000*
Purchase Discounts ................................................. 6,000
Inventory (beginning) .......................................... 75,000
Purchases ........................................................... 388,000
Freight In............................................................. 12,000
* Cost of goods sold = Beginning inventory + Purchases  Purchase

discounts  Purchase returns and allowances + Freight in – Ending
inventory
Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 –
$68,000 = $401,000

SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) Toys “R” Us, Inc. is a merchandiser (retailer), Fasken Martineau LLP is a
service company, and Atlantic Grocery Distributors Ltd. is a merchandiser
(wholesaler).
(b) The operating cycle of these three businesses will be different. The longest
operating cycle will be experienced by the retailer, as the sales of merchandise
will be the slowest. The organization with the shortest operating cycle will be
the service firm that does not sell inventory. The third company, the distributing
wholesaler, will have an operating cycle between that of the retailer and the law
firm because its inventory is more likely to sell faster and the law firm has no
inventory to sell.

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 –$750 Asset Inventory –$750
Payable
3. Asset Inventory +$4,000 Liability Accounts +$4,000
Payable
4. Asset Inventory +$400 Asset Cash –$400
5. Liability Accounts –$3,500 Asset Cash –$3,430
Payable Asset Inventory –$70
6. Asset Accounts +$10,000 Revenue Sales +$10,000
Receivable
Expense Cost of Goods +$4,000 Asset Inventory –$4,000

Sold
7. Contra Sales Returns +$750 Asset Cash –$750
Sales and Allowances
8. Expense Freight Out +$600 Asset Cash –$600

9. Contra Sales Returns +$1,000 Asset Accounts –$1,000
Sales and Allowances Receivable
Asset Inventory +$400 Expense Cost of –$400

Goods
Sold
10. Asset Cash +$6,000 Asset Accounts –$6,000
Receivable
LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

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

Sales ..................................................................... 7,800
Cost of Goods Sold (260 × $20) ................................. 5,200

Inventory................................................................ 5,200
14 Sales Returns and Allowances (10 × $30) .................. 300

Accounts Receivable ............................................. 300
Inventory (10 × $20).................................................... 200

Cost of Goods Sold ............................................... 200
21 Accounts Receivable (300 × $30) ............................... 9,000

Sales ..................................................................... 9,000
Cost of Goods Sold (300 × $20) ................................. 6,000

Inventory................................................................ 6,000
29 Accounts Payable ($15,000 – $200) ........................... 14,800

Cash ...................................................................... 14,800
30 Cash ($9,000 – $90) ................................................... 8,910

Sales Discounts ($9,000 × 1%)................................... 90
Accounts Receivable ............................................. 9,000

EXERCISE 5-3 (CONTINUED)

(b)
Inventory
Sept. 1 Bal. 2,000 Sept.10 200
2 15,000 11 5,200
14 200 21 6,000
Sept. 30 Bal. 5,800
Cost of Goods Sold

Sept. 11 5,200 Sept. 14 200
21 6,000
Sept. 30 Bal. 11,000
(c)
Ending Inventory:
Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 – 300 = 290
Cost of calculators at September 30: 290 × $20 = $5,800
Cost of Goods Sold:

Number of calculators sold in September: 260 – 10 + 300 = 550
Cost of calculators sold in September: 550 x $20 = $11,000
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5-4
(a) April 3 Inventory........................................................ 28,000
Accounts Payable .................................... 28,000
6 Inventory........................................................ 700
Cash......................................................... 700
7 Supplies......................................................... 5,000
Accounts Payable .................................... 5,000
8 Accounts Payable .......................................... 3,500

Inventory .................................................. 3,500
30 Accounts Payable ($28,000 – $3,500) .......... 24,500

Cash ........................................................ 24,500
(b) April 12 Accounts Payable ($28,000 – $3,500) .......... 24,500

Cash ($24,500 – $245) ............................ 24,255
Inventory ($24,500 × 1%) ......................... 245

EXERCISE 5-5
(a) April 3 Accounts Receivable ..................................... 28,000

Sales ........................................................ 28,000
Cost of Goods Sold ....................................... 19,000

Inventory .................................................. 19,000
6 No entry necessary - Freight costs paid by Olaf.
7 No entry necessary.
8 Sales Returns and Allowances ...................... 3,500

Accounts Receivable................................ 3,500
Inventory........................................................ 2,300
Cost of Goods Sold .................................. 2,300
30 Cash .............................................................. 24,500

Accounts Receivable ($28,000 – $3,500) 24,500
(b) April 12 Cash ($28,000  $3,500 – $245) ................... 24,255

Sales Discounts [($28,000 – $3,500) × 1%] .. 245
Accounts Receivable ($28,000 – $3,500) 24,500

EXERCISE 5-6
Boyle should choose to borrow cash at 8% 10 days from the date of the invoice. The
amount borrowed could be as little as the amount of the invoice less the purchase
discount. This is the amount needed to settle the payment 10 days from the date of
the invoice and earn the purchase discount of 1%. The loan can then be repaid after
20 days, which would be the date the invoice would have been paid if the loan had not
been obtained. The relevant period is 20 days because this is the amount of time a
loan would be outstanding in order to make the choice to pay within the discount
period.
Converting a 1% discount for 20 days equals an annualized interest rate of 18.25%

calculated as follows (1% × 365 ÷ 20) = 18.25%. Paying 8% to the bank to receive
18.25% from the supplier is the more favourable procedure to follow.
LO 2 BT: AP Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

EXERCISE 5-7
(a) Dec. 3 Accounts Receivable .......................................... 68,000

Sales ............................................................. 68,000
3 Cost of Goods Sold ............................................. 36,000

Inventory........................................................ 36,000
8 Sales Returns and Allowances ........................... 2,100

Accounts Receivable ..................................... 2,100
Inventory ............................................................. 1,150

Cost of Goods Sold ....................................... 1,150
11 Cash ($65,900 – $1,318) .................................... 64,582

Sales Discounts [($68,000 – $2,100) × 2%]........ 1,318
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

Inventory [($68,000 - $2,100) × 2%] .............. 1,318
Cash ($65,900 – $1,318) ............................... 64,582

(c) Sales ................................................................................... $68,000

Less: Sales returns and allowances ................................... $2,100
Sales discounts ........................................................ 1,318 3,418
Net sales ............................................................................. 64,582
Cost of goods sold ($36,000 – $1,150) ............................... 34,850
Gross profit ......................................................................... $29,732
LO 2,3,5 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5-8
Account Statement Classification
Accounts payable Statement of financial position Current liabilities

Accounts receivable Statement of financial position Current assets
Accumulated depreciation Statement of financial position Property, plant, and
equipment (contra
account)
Administrative expenses Income statement Operating expenses
Buildings Statement of financial position Property, plant, and
equipment
Cash Statement of financial position Current assets
Common shares Statement of financial position Shareholders’ equity
Equipment Statement of financial position Property, plant, and
equipment
Income tax expense Income statement Income tax expenses
Interest expense Income statement Other revenues and
expenses
Interest payable Statement of financial position Current liabilities
Inventory Statement of financial position Current assets
Land Statement of financial position Property, plant, and
equipment
Mortgage payable Statement of financial position Non-current liabilities
Prepaid insurance Statement of financial position Current assets
Property tax payable Statement of financial position Current liabilities
Salaries payable Statement of financial position Current liabilities
Sales Income statement Revenue
Sales discounts Income statement Revenue (contra
account)
Sales returns and allowances Income statement Revenue (contra
account)
Unearned revenue Statement of financial position Current liabilities
LO 4 BT: C Difficulty: S Time: 20 min. AACSB: Analytic CPA:cpa-t001 CM: Reporting

EXERCISE 5-9
(a)
BLUE DOOR CORPORATION
Income Statement (Single-Step)
Year Ended December 31, 2018
Revenues
Sales ......................................................................... $2,650,000
Less: Sales returns and allowances ............ $41,000
Sales discounts .................................. 19,500 60,500
Net sales ................................................................... 2,589,500
Interest revenue ....................................................... 30,000
Rent revenue ............................................................ 24,000 $2,643,500
Expenses
Cost of goods sold .................................................... $1,172,000
Salaries expense ....................................................... 705,000
Depreciation expense................................................ 125,000
Interest expense ........................................................ 62,000
Advertising expense .................................................. 55,000
Freight out ................................................................. 25,000
Insurance expense .................................................... 23,000
............................................................................. 2,167,000
Income before income tax .............................................. ............................. 476,500
Income tax expense ..................................................................................... 70,000
Net income ................................................................................................... $ 406,500


(b)
BLUE DOOR CORPORATION
Income Statement (Multiple-Step)
Sales ........................................................................................................ $2,650,000

Less: Sales returns and allowances ................................. $41,000
Sales discounts ....................................................... 19,500 60,500
Net sales................................................................................................... 2,589,500
Cost of goods sold .................................................................................... 1,172,000
Gross profit ............................................................................................... 1,417,500
Operating expenses
Salaries expense .......................................................... $705,000
Depreciation expense................................................... 125,000
Advertising expense ..................................................... 55,000
Freight out .................................................................... 25,000
Insurance expense ....................................................... 23,000
Total operating expenses ............................................................... 933,000
Income from operations ............................................................................ 484,500
Other revenues and expenses
Interest revenue .......................................................... $30,000
Rent revenue................................................................ 24,000
Interest expense ........................................................... (62,000) (8,000)
Income before income tax ........................................................................ 476,500
Income tax expense ................................................................................. 70,000
Net income ............................................................................................... $ 406,500
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from
operations)
(c) Blue Door Corporation is classifying its expenses by nature, such as salaries,
depreciation, and advertising. There is no classification of expenses into
administrative or selling as would be the case if classifying expenses by
functional areas. For smaller companies such as this one, the difference
between classification of items on the income statement by function or nature
is not significant.

EXERCISE 5-10
(a) Young Ltd.
Sales ....................................................................................... $99,000

*Less: Sales returns and allowances [1] ................................. 10,000
Net sales ................................................................................. $89,000
Net sales ................................................................................. $89,000

Less: Cost of goods sold ......................................................... 58,750
*Gross profit [2] ....................................................................... $30,250
Gross profit.............................................................................. $30,250

Less: Operating expenses ...................................................... 19,500
*Income from operations [3] .................................................... $10,750
Income from operations .......................................................... $10,750

Add: Other revenues ............................................................... 750
*Income before income tax [4]................................................. $11,500
Income before income tax ....................................................... $11,500

Less: Income tax expense ...................................................... 2,300
*Net income [5]........................................................................ $ 9,200
Rioux Ltée
*Sales [6] ................................................................................. $105,000

Less: Sales returns and allowances ........................................ 5,000
Net sales ................................................................................. $100,000
Net sales ................................................................................. $100,000

*Less: Cost of goods sold [7]................................................... 60,000
Gross profit.............................................................................. $ 40,000
Gross profit.............................................................................. $40,000

*Less: Operating expenses [8] ................................................ 22,000

(a) (continued)

Less: Other expenses ............................................................. 2,000
*Income before income tax [9]................................................. $16,000
Income before income tax ....................................................... $16,000

*Less: Income tax expense [10] .............................................. 3,200
Net income .............................................................................. $12,800
* Indicates missing amount
(b) Young Rioux
Gross profit margin $30,250 ÷ $89,000 = 34.0% $40,000 ÷ $100,000 = 40.0%
Profit margin $9,200 ÷ $89,000 = 10.3% $12,800 ÷ $100,000 = 12.8%
LO 4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

EXERCISE 5-11
(a) Marchant Ltd.
Sales ..................................................................................... $1,460,000

Less: Sales returns and allowances ..................................... 28,000
*Net sales [1] ......................................................................... $1,432,000
Net sales ............................................................................... $1,432,000

Less: Cost of goods sold ....................................................... 657,000
*Gross profit [2] ..................................................................... $ 775,000
Gross profit............................................................................ $775,000

Less: Operating expenses .................................................... 580,000
*Income from operations [3] .................................................. $195,000
Income from operations ........................................................ $195,000

Add: Other revenues ............................................................. 3,600
*Income before income tax [4]............................................... $198,600
Income before income tax ..................................................... $198,600

Less: Income tax expense .................................................... 38 600
*Net income [5]...................................................................... $160,000
Dueck Ltd.
*Sales [6] ............................................................................... $2,178,000

Less: Sales returns and allowances ...................................... 48,000
Net sales ............................................................................... $2,130,000
Net sales ............................................................................... $2,130,000

*Less: Cost of goods sold [7]................................................. 1,172,000
Gross profit............................................................................ $ 958,000
Gross profit............................................................................ $958,000

*Less: Operating expenses [8] .............................................. 648,000

(a) (continued)

Less: Other expenses ........................................................... _ 4,100
*Income before income tax [9]............................................... $305,900
Income before income tax ..................................................... $305,900

*Less: Income tax expense [10] ............................................ 55,000
Net income ............................................................................ $250,900
* Indicates missing amount
(b) Marchant Dueck
Gross profit margin $775,000 ÷ $1,432,000 = 54.1% $958,000 ÷ $2,130,000 = 45.0%
Profit margin $160,000 ÷ $1,432,000 = 11.2% $250,900 ÷ $2,130,000 = 11.8%
Finance

EXERCISE 5-12
(a)
MONTMORENCY LTÉE
Income Statement (Multiple-step)
Year Ended August 31, 2018
Sales ............................................................................... $7,200,000

Less: Sales discounts ....................................................... 110,000
Net 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
Interest expense .................................................................................. 270,000
Income before income tax ........................................................................ 1,860,000
Income tax expense ................................................................................. 560,000
Net income ............................................................................................... $1,300,000
(Revenues – Contra 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%
Finance

EXERCISE 5-13
(in USD millions)
(a) Gross profit margin

2016: ($39,528 – $30,334) ÷ $39,528 = 23.3%
2015: ($40,339 – $31,292) ÷ $40,339 = 22.4%
2014: ($40,611 – $31,212) ÷ $40,611 = 23.1%
Profit margin (using net income)

2016: $807 ÷ $39,528 = 2.0%
2015: $1,246 ÷ $40,339 = 3.1%
2014: $695 ÷ $40,611 = 1.7%
(b) The gross profit margin has been holding steady, with a slight deterioration in
2015. The trend is the opposite for the profit margin, where the results of 2015
exceeded those of 2014 and 2016.
(c) Profit margin (using income from operations)

2016: $1,375 ÷ $39,528 = 3.5%
2015: $1,450 ÷ $40,339 = 3.6%
2014: $1,144 ÷ $40,611 = 2.8%
The profit margin using income from operations has followed the same trend in
2014 and 2016 when compared to profit margin. On the other hand, profit
margin using net income increased dramatically in 2015 while profit margin
using income from operations increased only slightly for the same year. The
major elements that are in the calculation of the profit margin ratio but are not
in the profit margin using income from operations are other revenues and
expenses, and income tax expense. In 2015, there must have been a significant
other revenue, or possibly a gain that caused a substantial increase in profit
margin compared to the year before and after 2015.
LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

*EXERCISE 5-14
Olaf Corp. (Buyer)
(a) Apr. 3 Purchases ................................................................... 28,000

6 Freight In..................................................................... 700

Cash ...................................................................... 700
7 Supplies ...................................................................... 5,000

8 Accounts Payable ....................................................... 3,500

Purchase Returns and Allowances ........................ 3,500
30 Accounts Payable ($28,000 – $3,500) ........................ 24,500

Cash ..................................................................... 24,500
(b) Apr. 12 Accounts Payable ($28,000 – $3,500) ........................ 24,500

Cash ($24,500 – $245) .......................................... 24,255
Purchase Discounts ($24,500 × 1%) ..................... 245
DeVito Ltd. (Seller)
(a) Apr. 3 Accounts Receivable .................................................. 28,000

Sales ..................................................................... 28,000
8 Sales Returns and Allowances ................................... 3,500

30 Cash .......................................................................... 24,500

Accounts Receivable ($28,000 – $3,500) .............. 24,500
(b) Apr. 12 Cash ($24,500 – $245) ............................................... 24,255

Sales Discounts [($28,000 – $3,500) × 1%]................ 245
Accounts Receivable ($28,000 – $3,500) .............. 24,500

*EXERCISE 5-15
(a) Duvall Ltd. (Seller)
(1) Perpetual Inventory System

June 10 Accounts Receivable ........................................ 5,000
Sales ........................................................... 5,000
Cost of Goods Sold ........................................... 3,000

Inventory...................................................... 3,000
11 No entry
12 Sales Returns and Allowances ......................... 500

Accounts Receivable ................................... 500
19 Cash ($4,500 – $45) ......................................... 4,455

Sales Discounts ($4,500 × 1%) ........................ 45
Accounts Receivable ($5,000 – $500) ......... 4,500
(2) Periodic Inventory System

June 10 Accounts Receivable ........................................ 5,000
Sales ........................................................... 5,000
11 No entry
12 Sales Returns and Allowances ......................... 500

Accounts Receivable ................................... 500
19 Cash ($4,500 – $45) ......................................... 4,455

Sales Discounts ($4,500 × 1%) ........................ 45
Accounts Receivable ($5,000 – $500) ......... 4,500

*EXERCISE 5-15 (CONTINUED)

(b) Pele Ltd. (Buyer)
(1) Perpetual Inventory System

June 10 Inventory ............................................................. 5,000
11 Inventory (freight) ................................................ 250

Cash .............................................................. 250
12 Accounts Payable ............................................... 500

Inventory (returns) ......................................... 500
19 Accounts Payable ($5,000 – $500) ..................... 4,500

Inventory ($4,500 × 1%) ................................ 45
Cash ($4,500 – $45) ...................................... 4,455
(2) Periodic Inventory System

June 10 Purchases ......................................................... 5,000
Accounts Payable ........................................ 5,000
11 Freight In........................................................... 250

Cash ............................................................ 250
12 Accounts Payable ............................................. 500

Purchase Returns and Allowances .............. 500
19 Accounts Payable ($5,000 – $500) ................... 4,500

Purchase Discounts ($4,500 × 1%) ............. 45
Cash ($4,500 – $45) .................................... 4,455

*EXERCISE 5-16
[1] $1,420 = ($1,500 – $50 – $30) [10] $7,560 = ($7,210 + $150 + $200)
[2] $1,550 = ($1,420 + $130) [11] $590 = ($7,800 – $7,210)
[3] $1,750 = ($1,550 + $200) [12] $8,800 = ($1,000 + $7,800)
[4] $270 = ($1,750 – $1,480) [13] $7,550 = ($8,800 [12]) – $1,250)
[5] $270 = [4] (same as ending, Yr 1) [14] $1,250 = given (same as ending, Yr 1)
[6] $1,950 = ($100 + $50 + $1,800) [15] $8,050 = ($8,550 – $400 – $100)
[7] $230 = ($2,030 [8] – $1,800) [16] $8,600 = ($8,050 [15] + $550)
[8] $2,030 = ($2,300 – $270 [5]) [17] $9,850 = ($1,250 [14] + $8,600 [16])
[9] $1,950 = ($2,300 – $350) [18] $8,350 = ($9,850 [17] – $1,500)

*EXERCISE 5-17
(a)
LIVELY LIMITED
Income Statement
Year Ended February 28, 2018
Sales revenue
Sales $435,500
Less: Sales discounts $27,300
Sales returns and allowances 15,600 42,900
Net sales 392,600
Cost of goods sold
Inventory, beginning $ 54,600
Purchases $273,000
Less: Purchase discounts 39,000
Purchase returns and allowances 20,800
Net purchases 213,200
Add: Freight in 8,450
Cost of goods purchased 221,650
Cost of goods available for sale 276,250
Less: Inventory, ending 79,300
Cost of goods sold 196,950
Gross profit 195,650
Operating expenses
Administrative expenses $120,900
Selling expenses 9,100
Total operating expenses 130,000
Income from operations 65,650
Interest expense 7,800
Income before income tax 57,850
Income tax expense 9,300
Net income $ 48,550
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)


(b)
Feb. 28 Inventory (ending) .................................................... 79,300

Cost of Goods Sold .................................................. 196,950
Purchase Returns and Allowances .......................... 20,800
Purchases ........................................................... 273,000
Freight In............................................................. 8,450

SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a) A company’s operating cycle is the average time it takes to go from cash to
cash in producing revenues. The operating cycle for a merchandising company
covers the period of time between when you purchase your inventory, to when
you sell it, and to when you eventually collect the accounts receivable from a
sale.
The hair salon is having problems paying for its products because it purchases
a two-month supply, paying for it immediately, with cash flow from the current
month’s operations. There is an insufficient cash float available to purchase two
months of supply at one time, and to pay immediately rather than taking
advantage of the 30-day payment period.
The hair salon’s inventory is contributing to the problem of reduced cash flow
and gross profit because some items have been in stock for a long period of
time. This further extends the operating cycle for those items.
(b) The physical inventory count comparison with the perpetual inventory record
has flagged discrepancies. There is an issue concerning the way in which the
perpetual record is being maintained and updated because staff members
sometimes forget to scan the products that they use on customers. There may
also be a possibility that goods are being stolen by customers or employees.
Accounting errors could also be the source of the discrepancy, in which case
the company’s procedures should be reviewed, and if necessary, internal
controls should be strengthened. Possible solutions could be having the system
require that items be scanned before a product sale can be rung in. In addition,
the procedures taken to perform the physical inventory count should be
reviewed to determine if the count is the source of the discrepancies. The count
should be performed more frequently, not necessarily for all inventory items but
particularly for those items that had discrepancies from the count performed at
the end of six months. The results of the more frequent counts should be
monitored to see if the discrepancies with the perpetual inventory records are
diminishing.

PROBLEM 5-1A (CONTINUED)
(b) (continued)
The hair salon should use the perpetual inventory system to help determine
which inventory items are out-of-stock and which items are taking a long time
to sell. By managing what inventory is purchased, fewer markdowns of the
selling price will be required, and sales should increase as there will be less
chance for a stock-out. Finally, the full 30 days should be taken on the terms
with your supplier, in order to have more cash on hand when needed.
(c) For control reasons, a physical inventory count must always be taken at least
once a year, and ideally more often under the perpetual inventory system. By
using a perpetual inventory system, a company knows what inventory should
be on hand. Performing a physical count and checking it to the perpetual
records is necessary to detect any errors in record keeping and/or shortages in
stock. The staff may be forgetting to scan intentionally. Enforcing the scanning
procedure will strengthen internal control over cash receipts. If staff can avoid
scanning product, they may also attempt to avoid recording a cash sale
altogether, pocketing the extra cash. This theft would lead to unrecorded
revenues and would reduce the gross profit performance of the salon.
LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5-2A
(a) Phantom Book Warehouse Ltd. is a wholesaler. Its suppliers are publishers and
its customers are book stores.
(b)
June 1 Inventory (180 × $16) ............................................... 2,880
3 Accounts Receivable (220 × $25) ............................ 5,500

Sales ............................................................. 5,500
Cost of Goods Sold (220 × $17)............................... 3,740

Inventory........................................................ 3,740
5 Accounts Payable .................................................... 160

Inventory (10 × $16) ...................................... 160
8 Accounts Receivable (80 × $22) .............................. 1,760

Sales ............................................................. 1,760
Cost of Goods Sold (80 × $17)................................. 1,360

Inventory........................................................ 1,360
9 Sales Returns and Allowances................................. 264

Accounts Receivable (12 × $22).................... 264
11 Inventory (130 × $15) ............................................... 1,950

12 Cash ($5,500 – $110) .............................................. 5,390

Sales Discounts ($5,500 × 2%) ................................ 110
Accounts Receivable .................................... 5,500
17 Cash ($1,496 – $30) ................................................ 1,466

Sales Discounts ($1,496 × 2%) ................................ 30
Accounts Receivable ($1,760 – $264) .......... 1,496


(b) (continued)
June 22 Accounts Receivable (125 × $25) ............................ 3,125

Sales ................................................................ 3,125
Cost of Goods Sold (125 × $17)............................... 2,125

Inventory .......................................................... 2,125
25 Sales Returns and Allowances................................. 375

Accounts Receivable (15 × $25) ...................... 375
Inventory (15 × $17) ................................................. 255

Cost of Goods Sold .......................................... 255
29 Accounts Payable ($2,880 – $160) .......................... 2,720

Cash................................................................. 2,720
(c)
Inventory
May 31* 4,500 June 3 3,740
7 720
June
1 2,880 5 160
11 1,950 8 1,360
25 255 22 2,125
June 30 Bal. 2,200
* (250 × $18)
(d) Books on hand at June 30 = 250 + 180 – 220 – 10 – 80 + 130 – 125 + 15 = 140
Average cost per book

= $2,200  140 = $16
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5-3A
(a)
Sept. 2 Equipment ............................................................ 65,000
Accounts Payable ...................................... 65,000
4 Supplies ............................................................... 4,000

Cash .......................................................... 4,000
6 Inventory .............................................................. 65,000

Accounts Payable ......................................
65,000
7 Inventory .............................................................. 1,600
Cash .......................................................... 1,600
8 Accounts Payable ................................................ 5,000

Inventory.................................................... 5,000
9 Accounts Receivable ............................................ 20,000

Sales ......................................................... 20,000
Cost of Goods Sold .............................................. 15,000

Inventory.................................................... 15,000
10 Freight Out ........................................................... 375

Cash .......................................................... 375
17 Cash ($20,000 – $400) .......................................... 19,600

Sales Discounts ($20,000 × 2%) ............................ 400
Accounts Receivable ................................... 20,000
20 Accounts Payable ($65,000 – $5,000) ................... 60,000

Cash ($60,000 – $600) ................................ 59,400
Inventory ($60,000 × 1%) ............................ 600

(a) (continued)
Sept. 21 Inventory ................................................................ 6,000

Cash ............................................................ 6,000
22 Accounts Receivable .............................................. 27,000

Sales ........................................................... 27,000
Cost of Goods Sold ................................................ 20,000

Inventory...................................................... 20,000
28 Sales Returns and Allowances............................... 10,000

Inventory ................................................................ 7,500

Cost of Goods Sold ..................................... 7,500
(b)
Oct. 3 Accounts Payable ($65,000 – $5,000) ................... 60,000

Cash ........................................................... 60,000
The cost of missing this purchase discount is the amount recorded as a reduction to
the Inventory account when the payment was made within the discount period.
($60,000 × 1%) = $600. Expressing this in terms of an annual interest rate, it would be
the equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use of the money
for 15 days.
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5-4A
(a)
April 3 Inventory .................................................................. 3,200

Accounts Payable ........................................... 3,200
5 Inventory .................................................................. 286

Cash ............................................................... 286
7 Accounts Receivable ............................................... 9,750

Sales ............................................................... 9,750
Cost of Goods Sold.................................................. 5,850

Inventory ......................................................... 5,850

Inventory ......................................................... 320
11 Accounts Payable ($3,200 – $320) .......................... 2,880

Inventory ($2,880 × 1%) ................................. 29
Cash ($2,880 – $29) ....................................... 2,851
14 Cash ........................................................................ 4,150

Accounts Receivable ...................................... 4,150
16 Inventory .................................................................. 1,300


Inventory ......................................................... 100

Sales ............................................................... 11,100

Inventory ......................................................... 6,200

24 Accounts Payable ($1,300 – $100).......................... 1,200
Inventory ($1,200 × 2%) ................................. 24
Cash ($1,200 – $24) ....................................... 1,176
25 Cash ........................................................................ 4,375


27 Sales Returns and Allowances ................................ 85

Accounts Receivable ...................................... 85
(b)
Cash Accounts Payable
Apr. 1 Bal. 4,200 Apr. 5 286 Apr. 9 320 Apr. 3 3,200
Apr. 14 4,150 Apr. 11 2,851 Apr. 11 2,880 Apr. 16 1,300
Apr. 25 4,375 Apr. 24 1,176 Apr. 17 100
Apr. 30 Bal. 8,412 Apr. 24 1,200
Apr. 30 Bal. 0
Accounts Receivable
Apr. 7 9,750 Apr. 14 4,150 Sales
Apr. 20 11,100 Apr. 25 4,375 Apr. 7 9,750
Apr. 27 85 Apr. 20 11,100
Apr. 30 Bal. 12,240 Apr. 30 Bal. 20,850
Inventory Sales Returns and Allowances

Apr. 1 Bal. 19,500 Apr. 7 5,850 Apr. 27 85
Apr. 3 3,200 Apr. 9 320 Apr. 30 Bal. 85
Apr. 5 286 Apr. 11 29
Apr. 16 1,300 Apr. 17 100 Cost of Goods Sold
Apr. 20 6,200 Apr. 7 5,850
Apr. 24 24 Apr. 20 6,200
Apr. 30 Bal. 11,763 Apr. 30 Bal. 12,050
Common Shares Retained Earnings

Apr. 1 Bal. 12,000 Apr. 1 Bal. 11,700
Apr. 30 Bal. 12,000 Apr. 30 Bal. 11,700
(c)
IN THE PINES GOLF SHOP
Trial Balance
April 30, 2018
Debit Credit
Cash .................................................................................. $ 8,412
Accounts receivable .......................................................... 12,240
Inventory ........................................................................... 11,763
Accounts payable ..............................................................
Common shares ................................................................ $12,000
Retained earnings ............................................................. 11,700
Sales ................................................................................. 20,850
Sales returns and allowances ........................................... 85
Cost of goods sold ............................................................ 12,050 00 0 00
$44,550 $44,550
(Total debit account balances = Total credit account balances)


PROBLEM 5-5A
(a)
May 1 Inventory ......................................................... 5,800
Accounts Payable .................................. 5,800
3 Inventory ......................................................... 145

Cash....................................................... 145
4 Accounts Receivable....................................... 3,500

Sales ...................................................... 3,500
Cost of Goods Sold ......................................... 2,100

Inventory ................................................ 2,100
7 Freight Out ...................................................... 90

Cash....................................................... 90
8 Accounts Payable ........................................... 200

Inventory ................................................ 200
9 Accounts Payable ($5,800 – $200) ................. 5,600

Inventory ($5,600 × 1%) ......................... 56
Cash....................................................... 5,544
11 Supplies .......................................................... 400

Cash....................................................... 400
14 Cash ($3,500 – $70) ....................................... 3,430

Sales Discounts ($3,500 × 2%) ....................... 70
Accounts Receivable.............................. 3,500
15 Cash ............................................................... 1,000

Accounts Receivable.............................. 1,000
18 Inventory ......................................................... 2,000

(a) (continued)
May 21 No entry required (freight paid by Harlow)
22 Cash ............................................................... 6,500

Sales ...................................................... 6,500


Inventory ................................................ 3,900
29 Sales Returns and Allowances ....................... 100

Cash....................................................... 100
Inventory ......................................................... 60
Cost of Goods Sold ................................ 60
31 Cost of Goods Sold ......................................... 149

Inventory ................................................ 149
($5,249* – $5,100 = $149 shortage)
* Unadjusted balance in Inventory account: $3,500 + $5,800 + $145 – $2,100 – $200 – $56 +
$2,000 – $3,900 + $60 = $5,249


(b)
Cash
May 1 Bal. 7,000 May 3 145 Sales
May 14 3,430 May 7 90 May 4 3,500
May 15 1,000 May 9 5,544 May 22 6,500
May 22 6,500 May 11 400 May 31 Bal. 10,000
May 29 100
May31 Bal. 11,651 Sales Returns and Allowances
May 29 100
Accounts Receivable May 31 Bal. 100
May 1 Bal. 1,500 May 14 3,500
May 4 3,500 May 15 1,000 Sales Discounts
May 31 Bal. 500 May 14 70
May 31 Bal. 70
Inventory
May 1 Bal. 3,500 May 4 2,100 Freight Out
May 1 5,800 May 8 200 May 7 90
May 3 145 May 9 56 May 31 Bal. 90
May 18 2,000 May 22 3,900
May 29 60 May 31 149 Cost of Goods Sold
May 31 Bal. 5,100 May 4 2,100 May 29 60
May 22 3,900
Supplies May 31 149
May 11 400 May 31 Bal. 6,089
May 31 Bal. 400
Retained Earnings
Common Shares May 1 Bal. 4,000
May 1 Bal. 8,000 May 31 Bal. 4,000
May 31 Bal. 8,000
Accounts Payable
May 8 200 May 1 5,800
May 9 5,600 May 18 2,000
May 31 Bal. 2,000


(c)
EAGLE HARDWARE STORE LTD.
Income Statement (Partial)
Month Ended May 31, 2018
Sales .......................................................................... $10,000

Less: Sales returns and allowances ............................ $100
Sales discounts ................................................. 70 170
Net sales ...................................................................... 9,830
Cost of goods sold ....................................................... 6,089
Gross profit .................................................................. $ 3,741
(d)
EAGLE HARDWARE STORE LTD.
Statement of Financial Position (Partial)
May 31, 2018
Assets
Current assets
Cash .................................................................. $11,651
Accounts receivable .......................................... 500
Inventory............................................................ 5,100
Supplies............................................................. 400
Total current assets ................................ $17,651

PROBLEM 5-6A
(a)
CLUB CANADA WHOLESALE INC.

Income Statement (Single-step)
Revenues
Sales ........................................................................................ $1,099,200
Less: Sales returns and allowances ...................... $23,560
Sales discounts ........................................... 14,265 37,825
Net sales ................................................................................. 1,061,375
Interest revenue ...................................................................... 2,400 $1,063,775
Expenses
Cost of goods sold................................................................... $806,240
Administrative expenses ......................................................... 88,515
Selling expenses ..................................................................... 42,100
Interest expense ...................................................................... 12,350 949,205
Income before income tax........................................................... 114,570
Income tax expense .................................................................... 17,200
Net income.................................................................................. $ 97,370


(b)
CLUB CANADA WHOLESALE INC.
Sales ..................................................................................... $1,099,200

Less: Sales returns and allowances ............................... $23,560
Sales discounts ..................................................... 14,265 37,825
Net sales ........................................................................... 1,061,375
Cost of goods sold .................................................................. 806,240
Gross profit ............................................................................. 255,135
Operating expenses
Selling expenses .......................................................... 42,100
Total operating expenses ........................................ 0 130,615
Income from operations .......................................................... 124,520
Interest revenue ................................................................ $(2,400)
Interest expense ................................................................ 12,350 9,950
Income before income tax....................................................... 114,570
Income tax expense ................................................................ 17,200
Net income.............................................................................. $ 97,370
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)
(Income from operations + Other revenues – Other expenses = Income before income taxes)
(c) Both income statements result in the same amount of net income. The multiple-step
income statement provides the user with more information than does the single-step
income statement. The multiple-step income statement provides information on gross
profit and income from operations, which is not included on the single-step income
statement.
(d) Club Canada Wholesale Inc. is classifying its expenses by their function. They are
reported according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).

PROBLEM 5-7A
(a)
Dec. 31 Insurance Expense ($3,000 × 11/12) ............................. 2,750

Prepaid Insurance ................................................. 2,750
31 Supplies Expense ........................................................... 2,190

Supplies ($2,940 – $750) ...................................... 2,190
31 Depreciation Expense ..................................................... 10,500

Accumulated Depreciation—Buildings .................. 6,000
Accumulated Depreciation—Equipment ............... 4,500
31 Salaries Expense ............................................................ 750

Salaries Payable .................................................. 750
31 Interest Expense ............................................................. 735

Interest Payable .................................................... 735
31 Unearned Revenue ($4,000 – $975) ............................... 3,025

Sales ..................................................................... 3,025
Cost of Goods Sold ......................................................... 2,000

Inventory ............................................................... 2,000
31 Income Tax Expense ...................................................... 500

Income Tax Payable.............................................. 500
31 Cost of Goods Sold ......................................................... 2,950

Inventory ............................................................... 2,950
($28,750 – $2,000 = $26,750 – $23,800 = $2,950 shortage)


(b) Dec. 31 4,500
Cash Dec. 31 Bal. 22,500
Dec. 31 17,000
Dec.31 Bal. 17,000 Accounts Payable
Dec. 31 33,735
Accounts Receivable Dec.31 Bal. 33,735
Dec. 31 31,700
Dec.31 Bal. 31,700 Unearned Revenue
Dec. 31 3,025 Dec. 31 4,000
Inventory Dec.31 Bal. 975
Dec.31 28,750 Dec. 31 2,000
Dec. 31 2,950 Salaries Payable
Dec. 31 Bal. 23,800 Dec. 31 750
Dec. 31 Bal. 750
Supplies
Dec. 31 2,940 Dec. 31 2,190 Interest Payable
Dec. 31 Bal. 750 Dec. 31 735
Dec. 31 Bal. 735
Prepaid Insurance
Dec. 31 3,000 Dec. 31 2,750 Income Tax Payable
Dec. 31 Bal. 250 Dec. 31 500
Dec. 31 Bal. 500
Land
Dec. 31 30,000 Bank Loan Payable
Dec.31 Bal. 30,000 Dec. 31 147,100
Dec.31 Bal. 147,100
Buildings
Dec. 31 150,000
Dec.31 Bal. 150,000
Accumulated Depreciation—
Buildings
Dec. 31 24,000
Dec. 31 6,000
Dec. 31 Bal.30,000
Equipment
Dec. 31 45,000
Dec.31 Bal. 45,000
Equipment
Dec. 31 18,000


Depreciation Expense
(b) continued) Dec. 31 10,500
Dec. 31 Bal. 10,500
Common Shares
Dec. 31 13,000 Utilities Expense
Dec.31 Bal. 13,000 Dec. 31 5,100
Dec. 31 Bal. 5,100
Retained Earnings
Dec. 31 31,425 Insurance Expense
Dec.31 Bal. 31,425 Dec. 31 2,750
Dec. 31 Bal. 2,750
Dividends Declared
Dec. 31 2,000 Supplies Expense
Dec. 31 Bal. 2,000 Dec. 31 2,190
Dec. 31 Bal. 2,190
Sales
Dec. 31
265,770 Interest Expense
3,025 Dec. 31
Dec. 31 8,090
Dec.31Bal.
268,795 Dec. 31 735
Dec. 31Bal. 8,825
Sales Returns and Allowances
Dec. 31 2,500 Income Tax Expense
Dec. 31 Bal. 2,500 Dec.31 5,500
Dec. 31 500
Sales Discounts Dec.31 Bal. 6,000
Dec. 31 3,275
Dec. 31 Bal. 3,275
Cost of Goods Sold

Dec. 31 171,225
Dec. 31 2,000
Dec. 31 2,950
Dec.31Bal. 176,175
Salaries Expense
Dec. 31 30,950
Dec. 31 750
Dec. 31 Bal. 31,700


(c)
MESA INC.
Adjusted Trial Balance
December 31, 2018
Debit Credit
Cash........................................................................ $ 17,000
Accounts receivable ............................................... 31,700
Inventory ................................................................. 23,800
Supplies .................................................................. 750
Prepaid insurance ................................................... 250
Land ........................................................................ 30,000
Buildings ................................................................. 150,000
Accumulated depreciation—buildings ..................... $ 30,000
Equipment ............................................................... 45,000
Accumulated depreciation—equipment................... 22,500
Accounts payable .................................................... 33,735
Uearned revenue .................................................... 975
Salaries payable ..................................................... 750
Interest payable ...................................................... 735
Income tax payable ................................................. 500
Bank loan payable .................................................. 147,100
Common shares...................................................... 13,000
Retained earnings ................................................... 31,425
Dividends declared ................................................. 2,000
Sales ....................................................................... 268,795
Sales returns and allowances ................................. 2,500
Sales discounts ....................................................... 3,275
Cost of goods sold .................................................. 176,175
Salaries expense .................................................... 31,700
Depreciation expense ............................................. 10,500
Utilities expense ...................................................... 5,100
Insurance expense .................................................. 2,750
Supplies expense .................................................... 2,190
Interest expense ..................................................... 8,825
Income tax expense ................................................ 6,000 0000 000
Totals ..................................................................... $549,515 $549,515


(d)
MESA INC.
Income Statement
Sales revenue
Sales.................................................................. $268,795
Less: Sales returns and allowances ................. $2,500
Sales discounts ....................................... 3,275 5,775
Net sales............................................................ 263,020
Cost of goods sold ...................................................... 176,175
Gross profit ................................................................. 86,845
Operating expenses
Salaries expense ............................................... $31,700
Depreciation expense ........................................ 10,500
Utilities expense ................................................. 5,100
Insurance expense ............................................. 2,750
Supplies expense .............................................. 2,190
Total operating expenses ................................... 52,240
Income from operations .............................................. 34,605
Interest expense ................................................ 8,825
Income before income tax .......................................... 25,780
Income tax expense ................................................... 6,000
Net income ................................................................. $ 19,780
(Income from operations + Other revenues – Other expenses = Income before income tax)


(d) (continued)
MESA INC.
Statement of Changes in Equity
Common Retained Total

Shares Earnings Equity
Balance, January 1 $10,000 $31,425 $41,425

Issued common shares 3,000 3,000
Net income 19,780 19,780
Dividends declared 0000 00 (2,000) (2,000)
Balance, December 31 $13,000 $49,205 $62,205
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

MESA INC.
Statement of Financial Position
December 31, 2015
Assets
Current assets
Cash ................................................................................................ $17,000
Accounts receivable .................................................................. 31,700
Inventory ..................................................................................... 23,800
Supplies ...................................................................................... 750
Prepaid insurance ...................................................................... 250
Total current assets ........................................................... 73,500
Property, plant, and equipment
Land........................................................ $ 30,000
Buildings ................................................. $150,000
Less: Accumulated depreciation ............. 30,000 120,000
Equipment .............................................. $45,000
Less: Accumulated depreciation ............. 22,500 22,500
Total property, plant, and equipment 172,500
Total assets ............................................................................... $246,000


(d) (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable ...................................................................... $ 33,735
Unearned revenue ..................................................................... 975
Salaries payable ........................................................................ 750
Interest payable ......................................................................... 735
Income tax payable ................................................................... 500
Current portion of bank loan payable ......................................... 9,800
Total current liabilities ...................................................... 46,495
Non-current liabilities
Bank loan payable ($147,100 – $9,800) .................................... 137,300
Total liabilities ................................................................... 183,795
Shareholders’ equity
Common shares ..................................................... $13,000
Retained earnings .................................................. 49,205
Total shareholders’ equity .................................................
62,205
Total liabilities and shareholders’ equity .................................... $246,000

PROBLEM 5-8A
(a) Gross profit margin $255,135 ÷ $1,061,375 = 24.0%
Profit margin $97,370 ÷ $1,061,375 = 9.2%
(b)
Net Gross Net
Sales Profit Income
Existing balances $1,061,375 $255,135 $97,370

Increase sales ($1,061,375 × 15%) 159,206
Increase in gross profit 27,000 27,000
Increase in operating expenses (13,500)
Increase in income tax expense (2,700)
Revised amounts $1,220,581 $282,135 $108,170
(c) Revised gross profit margin $282,135 ÷ $1,220,581 = 23.1%
Revised profit margin $108,170 ÷ $1, 220,581 = 8.9%
Both the gross profit margin and the profit margin have decreased, but the
end result is an increase in net income, so the plan has merit.
LO 5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

PROBLEM 5-9A
(a)
[1] Sales = $540,000 (given)
[8] Accounts receivable = Sales × 30% = $540,000 × 30% = $162,000
(b)
[2] Cost of goods sold = 90% × inventory purchased = 90% ×
$300,000 = $270,000
[9] Inventory = 10% × inventory purchased = 10% ×
$300,000 = $30,000 or purchases less cost of
goods sold = $300,000 less $270,000 =
$30,000
[10] Accounts payable = 20% × inventory purchased = 20%
×$300,000 = $60,000
(c)
[3] Gross profit = Sales – Cost of goods sold
= $540,000 – $270,000 = $270,000
[4] Operating expenses = $120,000 (given)
[5] Income before income taxes = Gross profit – Operating expenses =
$270,000 – $120,000 = $150,000
(d)
[6] Income tax expense = Income before income taxes × 30% =
$150,000 × 30% = $45,000
[7] Net income = Income before income taxes – Income tax
expense = $150,000 – $45,000 = $105,000
[11] Income tax payable = given as equal to income tax expense =
$45,000

(e)
Gross profit margin = $270,000 ÷ $540,000 = 50.0%
Profit margin = $105,000 ÷ $540,000 = 19.4%
(e) If Psang Inc. has a higher than average gross profit margin, it is either
because it is selling products at a higher price, (which is not the case), or
because its cost of goods sold as a percentage of sales is smaller than its
competitors. The resulting higher gross profit will be a contributing factor to
a higher than average profit margin ratio. Other factors that could
contribute to a higher than average profit margin ratio include lower than
average operating expenses.
LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5-10A
(a) (in $ millions)
2015 2014 2013
Current $990.8 $902.6 $752.4

ratio = 1.6:1 = 2.1:1 = 1.7:1
$635.1 $425.9 $440.5
Gross ($3,925.3 ($3,347.6 ($3,194.9

= 29.2% = 34.2% = 36.2%
profit – $2,780.8) – $2,201.9) – $2,036.8)
margin $3,925.3 $3,347.6 $3,194.9
Profit $91.9 $221.8 $250.5

= 2.3% = 6.6% = 7.8%
margin $3,925.3 $3,347.6 $3,194.9
(b) Canfor’s current ratio increased (improved) in 2014 but then decreased
(deteriorated) in 2015. Canfor’s gross profit experienced a constant
decrease (deterioration) over the three-year period as did the profit margin.
(c)
2015 2015
Industry Average Canfor Corporation
Current ratio 1.2:1 1.6:1
Gross profit margin 20.8% 29.2%
Profit margin 2.6% 2.3%
Canfor’s current ratio and gross profit margin are both better than those of the
industry, and the profit margin is slightly worse than the industry.
LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


*PROBLEM 5-11A
(a)
June 1 Purchases (180 × $16) ............................................ 2,880
3 Accounts Receivable (220 × $25) ............................ 5,500

Sales ............................................................... 5,500
5 Accounts Payable (10 × $16) ................................... 160

Purchase Returns and Allowances ................. 160
8 Accounts Receivable (80 × $22) .............................. 1,760

Sales ............................................................... 1,760

Accounts Receivable (12 × $22) ..................... 264
11 Purchases (130 × $15) ............................................ 1,950

12 Cash ($5,500 – $110) ........................................... 5,390

Sales Discounts ($5,500 × 2%) .............................. 110
17 Cash ($1,496 – $30) ........................................... 1,466

Sales Discounts ($1,496 × 2%) .............................. 30
Accounts Receivable ($1,760 – $264) .................. 1,496
22 Accounts Receivable (125 × $25) .......................... 3,125

Sales ........................................................... 3,125
25 Sales Returns and Allowances............................... 375

Accounts Receivable (15 × $25).................. 375
29 Accounts Payable ($2,880 – $160) ........................ 2,720

Cash ............................................................ 2,720

*PROBLEM 5-11A (CONTINUED)

(b) The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual
inventory system. There are fewer accounting entries and cash registers
do not need to be able to read bar codes to apply the appropriate cost as
is required in the perpetual inventory system.
However, a perpetual inventory system enables management to monitor

purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the
perpetual system as reductions in inventory levels can be quickly identified
and restocking done, possibly automatically, before the business runs out
of inventory. With the perpetual system, cost of goods sold can be reported
at any time and consequently, timely reporting of results can be achieved.
Perpetual systems allow management to quantify the cost of goods lost to
theft. When customers make inquiries concerning the availability of stock
from a merchant, a quick reply can be obtained and provided when a
perpetual inventory system is used. Finally, fewer inventory counts are
required, saving salary costs and minimizing lost sales from having to close
the business for inventory counts.

*PROBLEM 5-12A
(a)
Sept. 2 Equipment ............................................................ 65,000
Accounts Payable ....................................... 65,000
4 Supplies ............................................................... 4,000

Cash ............................................................ 4,000
6 Purchases ............................................................ 65,000

Accounts Payable ....................................... 65,000
7 Freight In .............................................................. 1,600

Cash ............................................................ 1,600
8 Accounts Payable ................................................ 5,000

Purchase Returns and Allowances ............. 5,000
9 Accounts Receivable............................................ 20,000

Sales ........................................................... 20,000
10 Freight Out ........................................................... 375

Cash ............................................................ 375
17 Cash ($20,000 – $400) ........................................ 19,600

Sales Discount ($20,000 × 2%)............................ 400
20 Accounts Payable ($65,000 – $5,000) ................. 60,000

Cash ($60,000 – $600) ............................... 59,400
Purchase Discounts ($60,000 × 1%) ........... 600
21 Purchases ............................................................ 6,000

Cash ............................................................ 6,000

(a) (continued)
22 Accounts Receivable................................................ 27,000

Sales ............................................................... 27,000

Accounts Receivable ....................................... 10,000
(b)
Oct. 3 Accounts Payable ($65,000 – $5,000) ..................... 60,000

Cash ............................................................. 60,000
The cost of missing this purchase discount is the amount recorded in the
Purchase Discounts account when the payment was made within the discount
period ($60,000 × 1%) = $600. Expressing this in terms of an annual interest rate,
it would be the equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use
of the money for 15 days.
LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 M: Reporting and
Finance

*PROBLEM 5-13A
(a)
Apr. 3 Purchases ...................................................................... 3,200

Accounts Payable ................................................. 3200
5 Freight In ........................................................................ 286
Cash ...................................................................... 286
7 Accounts Receivable ...................................................... 9,750

Sales ..................................................................... 9,750
9 Accounts Payable .......................................................... 320
Purchase Returns and Allowances ....................... 320
11 Accounts Payable ($3,200 – $320) ................................ 2,880

Purchase Discounts ($2,880 × 1%) ....................... 29
Cash ($2,880 – $29) ............................................. 2,851
14 Cash .............................................................................. 4,150

Accounts Receivable............................................. 4,150
16 Purchases ...................................................................... 1,300

Accounts Payable ................................................. 1,300
17 Accounts Payable .......................................................... 100

Purchase Returns and Allowances ....................... 100
20 Accounts Receivable ...................................................... 11,100

Sales ..................................................................... 11,100
24 Accounts Payable ($1,300 – $100) ................................ 1,200

Purchase Discounts ($1,200 × 2%) ....................... 24
Cash ($1,200 – $24) ............................................. 1,176

(a) (continued)
25 Cash…………………………………………………………. 4,375
Accounts Receivable………………………………... 4,375

27 Sales Returns and Allowances ...................................... 85

Accounts Receivable............................................. 85

(b)
Cash
Apr. 1 Bal. 4,200 Apr. 5 286 Sales
Apr. 14 4,150 Apr. 11 2,851 Apr. 7 9,750
Apr. 25 4,375 Apr. 24 1,176 Apr. 20 11,100
Apr. 30 Bal. 8,412 Apr. 30 Bal. 20,850
Accounts Receivable Sales Returns and Allowances

Apr. 7 9,750 Apr. 14 4,150 Apr. 27 85
Apr. 20 11,100 Apr. 25 4,375 Apr. 30 85
Apr. 27 85
Apr. 30 Bal. 12,240 Purchases
Apr. 3 3,200
Inventory Apr. 16 1,300
Apr. 1 Bal. 19,500 Apr. 30 Bal. 4,500
Apr. 30 Bal. 19,500
Purchase Returns and Allowances
Accounts Payable Apr. 9 320
Apr. 9 320 Apr. 3 3,200 Apr. 17 100
Apr. 11 2,880 Apr. 16 1,300 Apr. 30 Bal. 420
Apr. 17 100
Apr. 24 1,200 Purchase Discounts
Apr. 30 Bal. 0 Apr. 11 29
Apr. 21 24
Common Shares Apr. 30 Bal. 53
Apr. 1 Bal. 12,000
Apr. 30 Bal. 12,000 Freight In
Apr. 5 286
Retained Earnings Apr. 30 Bal. 286
Apr. 1 Bal. 11,700
Apr. 30 Bal. 11,700

(c)
IN THE PINES GOLF SHOP
Trial Balance
April 30, 2018
Debit Credit
Cash ............................................................................ $ 8,412
Accounts receivable ..................................................... 12,240
Inventory ...................................................................... 19,500
Accounts $ -
payable………………………………………………… 12,000
Common shares ........................................................... 11,700
Retained earnings ........................................................ 20,850
Sales ............................................................................ 85
Sales returns and allowances ...................................... 4,500
Purchases .................................................................... 286
Freight in ...................................................................... 420
Purchase returns and allowances ................................ 00 000 53
Purchase discounts ...................................................... $45,023 $45,023
(d)
Apr. 30 Inventory (ending) .................................................... 11,763
Purchase Returns and Allowances .......................... 420
Purchase Discounts ................................................. 53
Purchases ........................................................... 4,500
Freight In............................................................. 286
*Cost of goods sold = Beginning inventory + Purchases  Purchase discounts 

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $19,500 + $4,500 – $53 – $420 + $286 – $11,763 = $12,050

*PROBLEM 5-14A
(a) FEISTY LTD.

Year Ended April 30, 2018
Sales revenue
Sales .................................................................................. $9,300,000
Less: Sales returns and allowances.................................. 250,000
Net sales ............................................................................ 9,050,000
Cost of goods sold
Inventory, May 1, 2017 ...................................................... $ 600,000
Purchases ................................................... $5,900,000
Less: Purchase discounts ........................... 40,000
Net purchases ............................................. 5,860,000
Add: Freight in ........................................... 120,000
Cost of goods purchased ................................................... 5,980,000
Cost of goods available for sale ......................................... 6,580,000
Inventory, April 30, 2018 .................................................... 700,000
Cost of goods sold ..................................................... 5,880,000
Gross profit ............................................................................ $3,170,000
(b)
Cost of Goods Sold .................................................. 5,880,000
Purchases ........................................................... 5,900,000
Freight In............................................................. 120,000

(c) Gross profit margin:
$3,170,000 = 35.0%
$9,050,000
Feisty’s gross profit margin of 35% is better than the industry average of 30%.
This indicates that Feisty is making a higher gross profit from each dollar of
sales than the industry average, due to higher selling prices or lower costs
for its inventory.
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

*PROBLEM 5-15A
ACTIVE ATHLETIC WEAR INC.

Income Statement
Sales revenue
Sales ......................................................................................... $955,500
Less: Sales discounts .............................................................. $22,500
Sales returns and allowances ......................................... 12,000 34,500
Net sales ................................................................................... 921,000
Cost of goods sold
Inventory, January 1 .................................................................. $ 60,750
Purchases .......................................................... $602,400
Less: Purchase discounts .................................... 33,750
Purchase returns and allowances ............... 9,600
Net purchases ...................................................... 559,050
Add: Freight in ...................................................... 8,400
Cost of goods purchased .......................................................... 567,450
Cost of goods available for sale ................................................ 628,200
Less: Inventory, December 31 .................................................. 108,900
Cost of goods sold .............................................................. 519,300
Gross profit ...................................................................................... 401,700
Operating expenses
Administrative expenses ............................................................ $271,350
Selling expenses........................................................................ 11,250
Total operating expenses ................................................... 282,600
Income from operations ................................................................... 119,100
Interest expense ........................................................................ 15,600
Income before income tax ............................................................... 103,500
Income tax expense ........................................................................ 24,000
Net Income ..................................................................................... $ 79,500
(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)



Balance, January 1 $ 75,000 $102,900 $177,900

Net income 79,500 79,500
Balance, December 31 $112,500 $170,400 $282,900

December 31, 2018
Assets
Current assets
Cash ............................................................................................................ $ 25,500
Accounts receivable ................................................................................... 66,300
Inventory ...................................................................................................... 108,900
Prepaid insurance ...................................................................................... 3,600
Total current assets ............................................................................ 204,300
Land..................................................................... $112,500
Buildings .............................................................. $285,000
Less: Accumulated depreciation .......................... 77,700 207,300
Equipment ........................................................... $165,000
Less: Accumulated depreciation .......................... 64,350 100,650
Total property, plant, and equipment ......... 420,450
Total assets ............................................................................................... $624,750


Current liabilities
Accounts payable ..................................................................... $ 129,450
Salaries payable ....................................................................... 5,250
Property tax payable ................................................................. 7,200
Unearned revenue .................................................................... 12,450
Current portion of mortgage payable ........................................ 18,750
Total current liabilities ..................................................... 173,100
Mortgage payable ($187,500 – $18,750) ................................. 168,750
Total liabilities .................................................................. 341,850
Common shares .................................................... $112,500
Retained earnings ................................................. 170,400
Total shareholders’ equity ................................................ 282,900
Total liabilities and shareholders’ equity .................................... $624,750

PROBLEM 5-1B
(a) A company’s operating cycle is the average time it takes to go from cash to
cash in producing revenues. The operating cycle for a merchandising
company covers the period of time between when you purchase your
inventory, to when you sell it, and to when you eventually collect the
accounts receivable from a sale. The Fashion Palace is having problems
paying its bills because the period of time between sales and collection of
accounts receivable is lengthened because many customers take more
than one month to pay.
The company’s inventory is contributing to the problem because some items

have been in stock for a long period of time, which means a long operating
cycle for those items.
(b) The Fashion Palace should consider switching to a perpetual inventory

system where detailed records of each inventory purchase and sale are
maintained. This system continuously—perpetually—shows the quantity
and cost of the inventory purchased, sold, and on hand. This system will
help the company see which inventory items are out-of-stock, which items
are taking a long time to sell, and provide management with the total
inventory on hand each month to prepare its monthly financial statements,
eliminating the need for a monthly count. The company will still need to
perform at least one annual inventory count to ensure its accounting records
agree with the physical inventory count.
(c) For control reasons, a physical inventory count must always be taken at
least one a year, and ideally more often under the perpetual inventory
system. By using a perpetual inventory system, a company knows what
inventory should be on hand. Performing a physical count and checking it
to the perpetual records is necessary to detect any errors in record keeping
and/or shortages in stock.
LO 1 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5-2B
(a) Travel Warehouse Ltd. is a wholesaler. Its suppliers are suitcase

manufacturers and its customers are stores.
(b)
July 2 Inventory (75 × $60) .......................................... 4,500
Accounts Payable ................................... 4,500
3 Accounts Payable ............................................. 240

Inventory (4 × $60) ................................. 240
6 Accounts Receivable (55 × $90) ....................... 4,950

Sales ...................................................... 4,950
Cost of Goods Sold (55 × $50).......................... 2,750

Inventory................................................. 2,750
7 Sales Returns and Allowances.......................... 270

Accounts Receivable (3 × $90) .............. 270
Inventory ........................................................... 150

Cost of Goods Sold (3 × $50) ................. 150
9 Accounts Receivable (3 × $100) ....................... 300

Sales ...................................................... 300
Cost of Goods Sold (3 × $60)............................ 180

Inventory................................................. 180
11 Accounts Payable ($4,500 – $240) ................... 4,260

Inventory ($4,260 × 2%) ......................... 85
Cash ($4,260 – $85) ............................... 4,175
13 Accounts Receivable (25 × $100) ..................... 2,500

Sales ...................................................... 2,500

PROBLEM 5-2B (CONTINUED)
(b) (continued)
July 13 Cost of Goods Sold (25 × $60).......................... 1,500
Inventory................................................. 1,500
16 Inventory (70 × $62) .......................................... 4,340

17 Sales Returns and Allowances.......................... 500

Accounts Receivable (5 × $100)............. 500
July 20 Cash ($4,980 – $100) ..................................... 4,880
Sales Discounts ($4,980 × 2%) ......................... 100
Accounts Receivable
($4,950 – $270 + $300) .......................... 4,980
27 Cash ($2,000 – $40) ......................................... 1,960

Sales Discounts ($2,000 × 2%) ......................... 40
Accounts Receivable ($2,500 – $500).... 2,000
(c)
Inventory
July 1* 3,000 July 3 240
2 4,500 6 2,750
7 150 9 180
16 4,340 11 85
13 1,500
July 31 Bal. 7,235
*(60 × $50)
(d) Number of suitcases on hand at July 31

= 60 + 75 – 4 – 55 + 3 – 3 – 25 + 70 = 121
$7,235  121 = $60
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5-3B
(a)
Oct. 1 Inventory ........................................................................... 86,000

Accounts Payable ................................................... 86,000
1 Inventory ........................................................................... 1,400

Cash ....................................................................... 1,400
2 Accounts Payable ............................................................. 4,000

Inventory................................................................. 4,000
6 Supplies ............................................................................ 2,800

Cash ....................................................................... 2,800
8 Accounts Receivable......................................................... 140,000

Sales ...................................................................... 140,000
Cost of Goods Sold ........................................................... 83,400

Inventory ($86,000 + $1,400 – $4,000) .................. 83,400
9 Freight Out ........................................................................ 2,300

Cash ....................................................................... 2,300
10 Equipment ......................................................................... 62,000

Accounts Payable ................................................... 62,000
12 Sales Returns and Allowances.......................................... 3,500

Accounts Receivable .............................................. 3,500
15 Inventory ........................................................................... 36,300

Cash ....................................................................... 36,300
17 Cash ($136,500 – $2,730) ................................................ 133,770

Sales Discounts [($140,000 – $3,500) × 2%] .................... 2,730
Accounts Receivable ($140,000 – $3,500) ............. 136,500
(a) (continued)
Oct. 28 Accounts Receivable......................................................... 30,000

Sales ...................................................................... 30,000
Cost of Goods Sold ........................................................... 18,000

Inventory................................................................. 18,000

30 Accounts Payable ($86,000 – $4,000) .............................. 82,000
Cash ....................................................................... 82,000
31 Sales Returns and Allowances.......................................... 5,000

Accounts Receivable .............................................. 5,000
Inventory ........................................................................... 3,000

Cost of Goods Sold ................................................ 3,000
(b)
Oct. 14 Accounts Payable ($86,000 – $4,000) ........................... 82,000

Inventory ($82,000 × 1%) .................................... 820
Cash ($82,000 – $820) ........................................ 81,180
The cost of missing this purchase discount is the amount recorded as a reduction
to the Inventory account when the payment was made within the discount period
($820). Expressing this in terms of an annual interest rate, it would be the
equivalent of paying 24.6% ($820 ÷ $81,180 × 365/15) for the use of the money
for 15 days.
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

PROBLEM 5-4B
(a)
April 2 Inventory ................................................................. 5,800

3 Inventory ................................................................. 160

Cash ............................................................... 160
5 Accounts Payable.................................................... 100

Inventory ........................................................ 100
9 Supplies .................................................................. 1,130

Cash ............................................................... 1,130

Inventory ($5,700 × 2%) ................................. 114
Cash ($5,700 – $114) .................................... 5,586
13 Inventory ................................................................. 1,560

Cash ............................................................... 1,560
16 Inventory ................................................................. 115

Cash ............................................................... 115
18 Cash ....................................................................... 110

Inventory......................................................... 110

Sales .............................................................. 11,100
Cost of Goods Sold ................................................. 6,660

Inventory......................................................... 6,660


(a) (continued)
April 21 Sales Returns and Allowances ................................ 1,000

Inventory .................................................................. 600

Cost of Goods Sold ........................................ 600
23 Equipment ............................................................... 11,700


Sales ............................................................... 9,800

Inventory ......................................................... 5,880
27 Cash ........................................................................ 9,800

28 Sales Returns and Allowances ............................... 150

Accounts Receivable ...................................... 150

(b)
Cash
Apr. 1 Bal. 16,400 Apr. 3 160 Accounts Payable
Apr. 18 110 Apr. 9 1,130 Apr. 5 100 Apr. 2 5,800
Apr. 27 9,800 Apr. 11 5,586 Apr. 11 5,700 Apr. 23 11,700
Apr. 13 1,560 Apr. 30 Bal. 11,700
Apr. 16 115
Apr. 30 Bal. 17,759 Common Shares
Apr. 1 Bal. 20,000
Accounts Receivable Apr. 30 Bal. 20,000
Apr. 20 11,100 Apr. 21 1,000
Apr. 27 9,800 Apr. 27 9,800 Retained Earnings
Apr. 28 150 Apr. 1 Bal. 12,600
Apr. 30 Bal. 9,950 Apr. 30 Bal. 12,600
Inventory Sales
Apr. 1 Bal. 16,200 Apr. 5 100 Apr. 20 11,100
Apr. 2 5,800 Apr. 11 114 Apr. 25 9,800
Apr. 3 160 Apr. 18 110 Apr. 30 Bal. 20,900
Apr. 13 1,560 Apr. 20 6,660
Apr. 16 115 Apr. 25 5,880 Sales Returns and Allowances
Apr. 21 600 Apr. 21 1,000
Apr. 30 Bal. 11,571 Apr. 28 150
Apr. 30 Bal. 1,150
Supplies
Apr. 9 1,130 Cost of Goods Sold
Apr. 30 Bal. 1,130 Apr. 20 6,660 Apr. 21 600
Apr. 25 5,880
Equipment Apr. 30 Bal. 11,940
Apr. 23 11,700
Apr. 30 Bal. 11,700

(c) GRAND SLAM TENNIS SHOP

Trial Balance
April 30, 2018
Debit Credit
Cash ................................................................................. $ 17,759
Inventory ........................................................................... 11,571
Supplies ............................................................................ 1,130
Equipment......................................................................... 11,700
Accounts payable ............................................................. $ 11,700
Common shares ............................................................... 20,000
Retained earnings ............................................................. 12,600
Sales ................................................................................. 20,900
Sales returns and allowances ........................................... 1,150
Cost of goods sold ............................................................ 11,940 0 0000
$65,200 $65,200

PROBLEM 5-5B
(a)
Apr. 2 Inventory .................................................................. 8,900

3 Inventory .................................................................. 225

Cash ............................................................... 225

Sales ............................................................... 11,600

Inventory ......................................................... 7,540
9 Freight Out ............................................................... 290

Cash ............................................................... 290
10 Sales Returns and Allowances ................................ 1,600

Inventory .................................................................. 1,030

11 Inventory .................................................................. 4,200

12 No entry necessary

Inventory ......................................................... 300
14 Cash ($10,000 – $200) ............................................ 9,800

Sales Discounts ($10,000 × 2%) ............................. 200
Accounts Receivable ($11,600 – $1,600) .......... 10,000


(a) (continued)
Apr. 17 Accounts Payable .................................................... 8,900

Inventory ($8,900 × 1%) ................................. 89
Cash ............................................................... 8,811
20 Accounts Payable ($4,200 – $300)………… 3,900

Inventory ($3,900 × 1%) ................................. 39
Cash ($3,900 – $39) ....................................... 3,861
23 Cash ........................................................................ 6,400

Sales............................................................... 6,400

Inventory ......................................................... 5,200

Cash ............................................................... 400
27 Inventory .................................................................. 6,100

Cash ............................................................... 6,100
30 Cash ........................................................................ 500

Inventory ......................................................... 500


(b)
Cash
Apr. 1 Bal. 4,000 Apr. 3 225 Sales
Apr. 14 9,800 Apr. 9 290 Apr. 5 11,600
Apr. 23 6,400 Apr. 17 8,811 Apr. 23 6,400
Apr. 30 500 Apr. 20 3,861 Apr. 30 Bal. 18,000
Apr. 24 400
Apr. 27 6,100 Sales Returns and Allowances
Apr. 30 Bal. 1,013 Apr. 10 1,600
Apr. 24 400
Accounts Receivable Apr. 30 Bal. 2,000
Apr. 1 Bal. 3,500 Apr. 10 1,600
Apr. 5 11,600 Apr. 14 10,000 Sales Discounts
Apr. 30 Bal. 3,500 Apr. 14 200
Apr. 30 Bal. 200
Inventory
Apr. 1 Bal. 2,500 Apr. 5 7,540 Freight Out
Apr. 2 8,900 Apr. 13 300 Apr. 9 290
Apr. 3 225 Apr. 17 89 Apr. 30 Bal. 290
Apr. 10 1,030 Apr. 20 39
Apr. 11 4,200 Apr. 23 5,200 Cost of Goods Sold
Apr. 27 6,100 Apr. 30 500 Apr. 5 7,540 Apr. 10 1,030
Apr. 30 Bal. 9,287 Apr. 23 5,200
Common Shares Apr. 30 Bal. 11,710

Apr. 1 Bal. 5,000
Apr. 30 Bal. 5,000 Retained Earnings
Apr. 1 Bal. 5,000
Accounts Payable Apr. 30 Bal. 5,000
Apr. 13 300 Apr. 2 8,900
Apr. 17 8,900 Apr. 11 4,200
Apr. 20 3,900
Apr. 30 Bal. 0


(c)
NISSON DISTRIBUTING LTD.
Income Statement
Month Ended April 30, 2018
Sales ...................................................................... $18,000

Less: Sales returns and allowances ..................... $2,000
Sales discounts .......................................... 200 2,200
Net sales .................................................................. 15,800
Cost of goods sold ................................................... 11,710
Gross profit .............................................................. $ 4,090
(d)
NISSON DISTRIBUTING LTD.
Statement of Financial Position (Partial)
April 30, 2018
Assets
Current assets
Cash..................................................................................... $ 1,013
Accounts receivable ............................................................. 3,500
Inventory .............................................................................. 9,287
Total current assets ....................................................... $13,800

PROBLEM 5-6B
(a) BRIGUS WHOLESALE LTD.

Income Statement (Single-step)
Year Ended November 30, 2018
Revenues
Sales ........................................................................................ $2,234,800
Less: Sales returns and allowances ....................... $12,800
Sales discounts ............................................. 11,400 24,200
Net sales ................................................................................. 2,210,600
Interest revenue ...................................................................... 2,800 $2,213,400
Expenses
Cost of goods sold .................................................................. $1,387,200
Administrative expenses ......................................................... 366,000
Selling expenses ..................................................................... 286,000
Interest expense ..................................................................... 12,300 2,051,500
Income before income tax .......................................................... 161,900
Income tax expense ................................................................... 32,400
Net income ................................................................................. $ 129,500


(b) BRIGUS WHOLESALE LTD.
Sales ..................................................................................... $2,234,800

Less: Sales returns and allowances ............................... $12,800
Sales discounts..................................................... 11,400 24,200
Net sales ........................................................................... 2,210,600
Cost of goods sold .................................................................. 1,387,200
Gross profit ............................................................................. 823,400
Operating expenses
Selling expenses.......................................................... 286,000
Total operating expenses........................................ 652,000
Income from operations .......................................................... 171,400
Interest revenue ............................................................... ($2,800)
Interest expense ................................................................ 12,300 9,500
Income before income tax ...................................................... 161,900
Income tax expense ............................................................... 32,400
Net income ............................................................................. $ 129,500
(c) Both income statements result in the same amount of net income. The
multiple-step income statement provides the user with more information
than the single-step income statement does. The multiple-step income
statement provides information on gross profit and income from operations
which is not included on the single-step income statement.
(d) Brigus is classifying its expenses by their function. They are reported
according to the activity (business function) for which they were incurred
(for example, cost of goods sold, administrative, selling).

PROBLEM 5-7B
(a)
Nov. 30 Insurance Expense ($1,800 × 4/12) ................................... 600

Prepaid Insurance ...................................................... 600
30 Supplies Expense .............................................................. 700

Supplies ($1,650 – $950) ........................................... 700
30 Depreciation Expense ........................................................ 5,360

Accumulated Depreciation—Equipment .................... 5,360
30 Salaries Expense ............................................................... 1,210

Salaries Payable ........................................................ 1,210
30 Interest Expense ................................................................ 175

Interest Payable ......................................................... 175
30 Unearned Revenue ............................................................ 2,400

Sales.......................................................................... 2,400
Cost of Goods Sold ............................................................ 1,560

Inventory .................................................................... 1,560
30 Income Tax Expense ......................................................... 1,100

Income Tax Payable .................................................. 1,100
30 Cost of Goods Sold .............................................................. 940

Inventory .................................................................... 940
($27,500 – $1,560 = $25,940; $25,940 – $25,000 = $940 shortage)


(b)
Cash
Nov. 30 22,000
Nov. 30 Bal. 22,000 Accounts Payable
Nov. 30 34,400
Accounts Receivable Nov. 30 Bal. 34,400
Nov. 30 30,600
Nov. 30 Bal. 30,600 Salaries Payable
Nov. 30 1,210
Inventory Nov. 30 Bal. 1,210
Nov. 30 27,500 Nov. 30 1,560
Nov. 30 940 Interest Payable
Nov. 30 Bal. 25,000 Nov. 30 175
Nov. 30 Bal. 175
Supplies
Nov. 30 1,650 Nov. 30 700 Income Tax Payable
Nov. 30 Bal. 950 Nov. 30 1,100
Nov. 30 Bal. 1,100
Prepaid Insurance
Nov. 30 1,800 Nov. 30 600 Unearned Revenue
Nov. 30 Bal. 1,200 Nov. 30 2,400 Nov. 30 3,000
Nov. 30 Bal. 600
Long-term Investments
Nov. 30 37,000 Bank Loan Payable
Nov. 30 Bal. 37,000 Nov. 30 35,000
Nov. 30 Bal. 35,000
Equipment
Nov. 30 26,800 Common Shares
Nov. 30 Bal. 26,800 Nov. 30 16,400
Nov. 30 Bal. 16,400
Equipment Retained Earnings
Nov. 30 10,720
Nov. 30 30,000
Nov. 30 5,360
Nov. 30 Bal. 30,000
Nov. 30 Bal. 16,080

Dividends Declared Depreciation Expense

Nov. 30 10,000 Nov. 30 5,360
Nov. 30 Bal. 10,000 Nov.30 Bal. 5,360
Sales Rent Expense

Nov. 30 248,500 Nov. 30 13,850
Nov. 30 2,400 Nov. 30 Bal. 13,850
Nov. 30 Bal. 250,900
Advertising Expense
Sales Returns and Allowances Nov. 30 2,100
Nov. 30 4,600 Nov. 30 Bal. 2,100
Nov. 30 Bal. 4,600
Supplies Expense
Sales Discounts Nov. 30 700
Nov. 30 4,520 Nov. 30 Bal. 700
Nov. 30 Bal. 4,520
Insurance Expense
Cost of Goods Sold Nov. 30 600
Nov. 30 157,000 Nov. 30 Bal. 600
Nov. 30 1,560
Nov. 30 940 Interest Expense
Nov. 30 Bal. 159,500 Nov. 30 4,000
Nov. 30 175
Salaries Expense Nov. 30 Bal. 4,175
Nov. 30 32,600
Nov. 30 1,210 Income Tax Expense
Nov. 30 Bal. 33,810 Nov. 30 2,000
Nov. 30 1,100
Nov. 30 Bal. 3,100

(c)
FASHION CENTRE LTD.
November 30, 2018
Debit Credit
Cash ........................................................................... $ 22,000
Accounts receivable .................................................... 30,600
Inventory ..................................................................... 25,000
Supplies ...................................................................... 950
Prepaid insurance ....................................................... 1,200
Long-term investments ............................................... 37,000
Equipment................................................................... 26,800
Accumulated depreciation—equipment ...................... $ 16,080
Accounts payable ....................................................... 34,400
Salaries payable ......................................................... 1,210
Interest payable .......................................................... 175
Income tax payable ..................................................... 1,100
Unearned revenue ...................................................... 600
Bank loan payable ...................................................... 35,000
Common shares ......................................................... 16,400
Retained earnings ....................................................... 30,000
Dividends declared ..................................................... 10,000
Sales ........................................................................... 250,900
Sales discounts........................................................... 4,520
Sales returns and allowances ..................................... 4,600
Cost of goods sold ...................................................... 159,500
Salaries expense ........................................................ 33,810
Rent expense.............................................................. 13,850
Depreciation expense ................................................. 5,360
Supplies expense ....................................................... 700
Insurance expense ..................................................... 600
Interest expense ......................................................... 4,175
Advertising expense ................................................... 2,100
Income tax expense .................................................... 3,100 0000 000
Totals ................................................................... $385,865 $385,865


(d)
FASHION CENTRE LTD.
Income Statement
Sales revenue
Sales........................................................................................... $250,900
Less: Sales returns and allowances ........................ $4,600
Sales discounts .............................................. 4,520 9,120
Net sales..................................................................................... 241,780
Cost of goods sold .............................................................................. 159,500
Gross profit .......................................................................................... 82,280
Operating expenses
Salaries expense ..................................................... $33,810
Rent expense ............................................................ 13,850
Depreciation expense ............................................... 5,360
Advertising expense .................................................. 2,100
Supplies expense ...................................................... 700
Insurance expense ................................................... 600
Income from operations ....................................................................... 25,860
Interest expense ......................................................................... 4,175
Income before income tax ................................................................... 21,685
Income tax expense ............................................................................ 3,100
Net income .......................................................................................... $ 18,585
(Income from operations + Other revenues – Other expenses = Income before income tax)


(d) (continued)
FASHION CENTRE LTD.


Balance, December 1, 2017 $ 11,400 $30,000 $41,400

Net income 18,585 18,585
Dividends declared _______ (10,000) (10,000)
Balance, November 30, 2018 $ 16,400 $ 38,585 $ 54,985
FASHION CENTRE LTD.

November 30, 2018
Assets
Current assets
Cash .................................................................................. $22,000
Inventory ............................................................................. 25,000
Supplies .............................................................................. 950
Prepaid insurance .............................................................. 1,200
Total current assets ................................................... $ 79,750
Long-term investments ................................................................ .......................... 37,000
Equipment .......................................................................... $26,800
Less: Accumulated depreciation ......................................... 16,080
..........................Total property, plant, and equipment 10,720
Total assets ........................................................................ $127,470


(d) (continued)
Current liabilities
Accounts payable ............................................................... $ 34,400
Salaries payable ................................................................. 1,210
Interest payable .................................................................. 175
Income tax payable ............................................................ 1,100
Unearned revenue .............................................................. 600
Current portion of bank loan payable .................................. 5,000
Total current liabilities ............................................... 42,485
Bank loan payable* ............................................................. 30,000
Total liabilities ............................................................ 72,485
Common shares ...................................................... ...... $16,400
Retained earnings ................................................... ........... 38,585
Total shareholders’ equity ............................... ....................... 54,985
Total liabilities and shareholders’ equity .................. ....................... $127,470
*($35,000 – $5,000)

PROBLEM 5-8B
(a) Gross profit margin $823,400 ÷ $2,210,600 = 37.2%
Profit margin $129,500 ÷ $2,210,600 = 5.9%
(b)
Net Gross Net
Sales Profit Income
Existing balances $2,210,600 $823,400 $129,500

Increase sales ($2,210,600 × 10%) 221,060
Increase in gross profit 60,000 60,000
Increase in operating expenses (32,000)
Increase in income tax expense (4,000)
Revised amounts $2,431,660 $883,400 $153,500
(c) Revised gross profit margin $883,400 ÷ $2,431,660 = 36.3%
Revised profit margin $153,500 ÷ $2,431,660 = 6.3%
While the gross profit margin decreases slightly, the profit margin increases
from 5.9% to 6.3%. The plan has increased net income, so it has merit.


PROBLEM 5-9B
(a)
[1] Sales = $400,000 (given)
[8] Accounts receivable = Sales × 20% = $400,000 × 20% = $80,000
(b)
[2] Cost of goods sold = 80% × inventory purchased = 80% ×
$200,000 = $160,000
[9] Inventory = 20% × inventory purchased = 20% ×
$200,000 = $40,000 or purchases less cost
of goods sold
= $200,000 less $160,000 = $40,000
[10] Accounts payable = 25% × inventory purchased = 25% ×
$200,000 = $50,000
(c)
[3] Gross profit = Sales – Cost of goods sold
= $400,000 – $160,000 = $240,000
[4] Operating expenses = $140,000 (given)
[5] Income before income taxes = Gross profit – Operating expenses =
$240,000 – $140,000
= $100,000
(d)
[6] Income tax expense = Income before income taxes × 30% =
$100,000 × 30%
= $30,000
[7] Net income = Income before income taxes – Income tax
expense
= $100,000 – $30,000 = $70,000
[11] Income tax payable = given as equal to income tax expense =
$30,000
(e)
Gross profit margin = $240,000 ÷ $400,000 = 60.0%
Profit margin = $70,000 ÷ $400,000 = 17.5%

(e) Although Tsang Inc. may sell its product at the same price as other
companies in the industry, its cost of goods sold percentage may be higher
compared with other companies in the industry. Because the business is
new, it might not yet enjoy the economies of scale and have strong
relationships with suppliers that allow them to buy at competitive prices.
Tsang may be unable to negotiate lower purchase prices for merchandise
and therefore experiences lower gross profit margins compared to its
competitors. Similarly, other competitors are likely larger businesses that
enjoy cost savings through economies of scale. Tsang is a new business
and does not enjoy this advantage and experiences higher operating costs
yielding a lower profit margin.
LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5-10B
(a) [in SEK (Swedish krona) millions]

2015 2014 2013
170,687 ÷ 155,860 177,302 ÷ 136,393 163,612 ÷ 140,316
Current
ratio = 1.1:1 = 1.3:1 = 1.2:1
(312,515 – 240,653) (282,948 – 220,012) (272,622 – 212,504)

Gross 312,515 282,948 272,622
profit
margin = 23.0% = 22.2% = 22.1%
15,099 ÷ 312,515 2,235 ÷ 282,948 3,802 ÷ 272,622

Profit
margin
= 4.8% = 0.8% = 1.4%
(b) Volvo’s current ratio increased (improved) from 2013 to 2014 but decreased
(deteriorated) in 2015. Volvo’s gross profit margin increased slightly in 2014
and experienced another increase (improvement) in 2015. On the other hand,
the company’s profit margin was very low in 2013 and 2014, but then improved
dramatically in 2015.
(c)
2015 2015
Industry Average Volvo
Current ratio 1.2:1 1.1:1
Gross profit margin 16.3% 23.0%
Profit margin 2.5% 4.8%
Volvo’s 2015 current ratio is slightly lower (worse) and its gross profit margin
considerably higher (better) than the industry averages, indicating that the
company is performing much better than other companies in the industry. Its
2015 profit margin is also substantially higher (better) than the average company
in the industry.
LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

*PROBLEM 5-11B
(a)
July 2 Purchases (75 × $60) ............................................ 4,500
3 Accounts Payable (4 × $60) .................................. 240

Purchase Returns and Allowances ............... 240
6 Accounts Receivable (55 × $90) ........................... 4,950
Sales ............................................................ 4,950
7 Sales Returns and Allowances .............................. 270
Accounts Receivable (3 × $90) .................... 270
9 Accounts Receivable (3 × $100) ........................... 300
Sales ............................................................ 300
Purchase Discounts ($4,260 × 2%) ............. 85
Cash ($4,260 – $85) .................................... 4,175
13 Accounts Receivable (25 × $100)........................... 2,500
Sales ........................................................... 2,500
16 Purchases (70 × $62) ............................................. 4,340

17 Sales Returns and Allowances ............................... 500
Accounts Receivable (5 × $100).................. 500
20 Cash ($4,980 – $100) .......................................... 4,880
Sales Discounts $4,980 × 2%) ............................... 100
Accounts Receivable
($4,950 – $270 + $300) .............................. 4,980
27 Cash ($2,000 – $40) ............................................... 1,960
Sales Discounts ($2,000 × 2%) .............................. 40
Accounts Receivable ($2,500 – $500)......... 2,000

*PROBLEM 5-11B (CONTINUED)
(b) The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual
inventory system. There are fewer accounting entries and cash registers do
not need to be able to read bar codes to apply the appropriate cost, as is
required in the perpetual inventory system.
However, a perpetual inventory system enables management to monitor

purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the
perpetual system as reductions in inventory levels can be quickly identified
and restocking done, possibly automatically, before the business runs out of
inventory. With the perpetual system, cost of goods sold can be reported at
any time and consequently, timely reporting of results can be achieved.
Perpetual systems allow management to quantify the cost of goods lost to
theft. When customers make inquiries concerning the availability of stock
from a merchant, a quick reply can be obtained and provided when a
perpetual inventory system is used. Finally, fewer inventory counts are
required, saving salary costs and minimizing lost sales from having to close
the business for inventory counts.

*PROBLEM 5-12B
(a)
Oct. 1 Purchases............................................................................. 86,000

Accounts Payable ........................................................ 86,000
1 Freight In .............................................................................. 1,400

Cash ............................................................................ 1,400
2 Accounts Payable ................................................................. 4,000

Purchase Returns and Allowances .............................. 4,000
6 Supplies ................................................................................ 2,800

Cash ............................................................................ 2,800
8 Accounts Receivable ............................................................ 140,000

Sales............................................................................ 140,000
9 Freight Out............................................................................ 2,300

Cash ............................................................................ 2,300
10 Equipment ............................................................................ 62,000

Accounts Payable ........................................................ 62,000
12 Sales Returns and Allowances ............................................. 3,500

Accounts Receivable ................................................... 3,500
15 Purchases............................................................................. 36,300
Cash ............................................................................ 36,300
17 Cash ($136,500 – $2,730) .................................................... 133,770

Sales Discounts [($140,000 – $3,500) × 2%] ....................... 2,730
Accounts Receivable ($140,000 – $3,500) ................. 136,500
28 Accounts Receivable ............................................................ 30,000

Sales ........................................................................... 30,000

(a) (continued)
Oct. 29 No entry necessary.
30 Accounts Payable ($86,000 – $4,000) .................................. 82,000

Cash............................................................................ 82,000
31 Sales Returns and Allowances ............................................. 5,000

Accounts Receivable................................................... 5,000
(b)
Oct. 14 Accounts Payable ($86,000 – $4,000) ........................... 82,000
Purchase Discounts ($82,000 × 1%) ................... 820
Cash ($82,000 – $820) ........................................ 81,180
The cost of missing this purchase discount is the amount recorded as a purchase
discount when the payment was made within the discount period ($820).
Expressing this in terms of an annual interest rate, it would be the equivalent of
paying 24.6% ($820 ÷ $81,180 × 365/15) for the use of the money for 15 days.
LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


*PROBLEM 5-13B
(a)
Apr. 2 Purchases .................................................................. 5,800

Accounts Payable .............................................. 5,800
3 Freight In .................................................................... 160

Cash .................................................................. 160
5 Accounts Payable ....................................................... 100

Purchase Returns and Allowances .................... 100
9 Supplies...................................................................... 1,130
Cash .................................................................. 1,130
11 Accounts Payable ($5,800 – $100) ............................ 5,700

Purchase Discounts ($5,700× 2%) .................... 114
Cash ($5,700 – $114) ........................................ 5,586
13 Purchases .................................................................. 1,560

Cash .................................................................. 1,560
16 Freight In .................................................................... 115

Cash .................................................................. 115
18 Cash .......................................................................... 110

Purchase Returns and Allowances .................... 110
20 Accounts Receivable .................................................. 11,100

Sales ................................................................. 11,100
21 Sales Returns and Allowances .................................. 1,000

Accounts Receivable ........................................ 1,000


(a) (continued)
Apr. 23 Equipment ................................................................. 11,700

Accounts Payable ............................................. 11,700
25 Accounts Receivable ................................................. 9,800

Sales ................................................................. 9,800
27 Cash .......................................................................... 9,800

Accounts Receivable 9,800
28 Sales Returns and Allowances .................................. 150

Accounts Receivable ........................................ 150


(b)
Cash Common Shares

Apr. 1 Bal. 16,400 Apr. 3 160 Apr. 1 Bal. 20,000
Apr. 18 110 Apr. 9 1,130 Apr. 30 Bal. 20,000
Apr. 27 9,800 Apr. 11 5,586
Apr. 13 1,560
Apr. 16 115 Retained Earnings
Apr. 30 Bal. 17,759 Apr. 1 Bal. 12,600
Apr. 30 Bal. 12,600
Accounts Receivable
Apr. 20 11,100 Apr. 21 1,000 Sales
Apr. 25 9,800 Apr. 27 9,800 Apr. 20 11,100
Apr. 28 150 Apr. 25 9,800
Apr. 30 Bal. 9,950 Apr. 30 Bal. 20,900
Inventory Sales Returns and Allowances

Apr. 1 Bal. 16,200 Apr. 21 1,000
Apr. 30 Bal. 16,200 Apr. 28 150
Apr. 30 Bal. 1,150
Supplies
Apr. 9 1,130 Purchases
Apr. 30 Bal. 1,130 Apr. 2 5,800
Apr. 13 1,560
Equipment Apr. 30 Bal. 7,360
Apr. 23 11,700
Apr. 30 Bal. 11,700
Purchase Returns and Allowances
Accounts Payable Apr. 5 100
Apr. 5 100 Apr. 2 5,800 Apr. 18 110
Apr. 11 5,700 Apr. 23 11,700 Apr. 30 Bal. 210
Apr. 30 Bal. 11,700


(b) (continued)
Purchase Discounts
Apr. 11 114
Apr. 30 Bal. 114
Freight In
Apr. 3 160
Apr. 16 115
Apr. 30 Bal. 275
(c)
GRAND SLAM TENNIS SHOP
Trial Balance
April 30, 2018
Debit Credit
Cash....................................................................................... $ 17,759
Accounts receivable ............................................................... 9,950
Inventory ................................................................................ 16,200
Supplies ................................................................................. 1,130
Equipment .............................................................................. 11,700
Accounts payable ................................................................... 590 $11,700
Common shares..................................................................... 20,000
Retained earnings .................................................................. 12,600
Sales ...................................................................................... 20,900
Sales returns and allowances ................................................ 1,150
Purchases .............................................................................. 7,360
Purchase returns and allowances .......................................... 210
Purchase discounts ................................................................ 114
Freight in ................................................................................ 275 00 000
$65,524 $65,524


(d)

Purchase Returns and Allowances .......................... 210
Purchase Discounts ................................................. 114
Purchases ........................................................... 7,360
Freight In............................................................. 275
*Cost of goods sold = Beginning inventory + Purchases – Purchase discounts – Purchase

returns and allowances + Freight in – Ending inventory
Cost of goods sold = $16,200 + $7,360 – $114 – $210 + $275 – $11,571 = $11,940

*PROBLEM 5-14B
(a)
SEVERN LIMITED
Year Ended June 30, 2018
Sales revenue
Sales ............................................................................. $7,800,000
Less: Sales discounts .................................................. 100,000
Net sales ....................................................................... $7,700,000
Cost of goods sold
Inventory, July 1, 2017 .................................................. $ 520,000
Purchases .................................................. $6,280,000
Less: Purchase returns and allowances .... . 240,000
Net purchases ............................................ .. 6,040,000
Add: Freight in .......................................... 80,000
Cost of goods purchased .............................................. 6,120,000
Cost of goods available for sale .................................... 6,640,000
Inventory, June 30, 2018 .............................................. 600,000
Cost of goods sold ................................................ 6,040,000
Gross profit ....................................................................... $1,660,000
(b)
June 30 Inventory (ending) .................................................... 600,000
Cost of Goods Sold .................................................. 6,040,000
Purchase Returns and Allowances .......................... 240,000
Purchases ........................................................... 6,280,000
Freight In............................................................. 80,000

(c) Gross profit margin:
$1,660,000 = 21.6%
$7,700,000
Severn’s gross profit margin of 21.6% is less than the industry average of
26%. This indicates that Severn is making less gross profit than the industry
average on its sales.
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

*PROBLEM 5-15B
THE GOODY SHOP LTD.

Income Statement
Sales revenue
Sales ......................................................................................... $989,000
Less: Sales discounts .............................................................. $15,000
Sales returns and allowances ......................................... 10,000 25,000
Net sales ................................................................................... 964,000
Cost of goods sold
Inventory, December 1, 2017 .................................................... $ 34,360
Purchases .......................................................... $684,700
Less: Purchase discounts .................................... 16,000
Purchase returns and allowances .............. 3,315
Net purchases ...................................................... 665,385
Add: Freight in ...................................................... 5,060
Cost of goods purchased .......................................................... 670,445
Cost of goods available for sale ................................................ 704,805
Inventory, November 30, 2018 .................................................. 37,350
Cost of goods sold .............................................................. 667,455
Gross profit ...................................................................................... 296,545
Operating expenses
Administrative expenses ............................................................ $230,100
Selling expenses....................................................................... 8,200
Income from operations ................................................................... 58,245
Interest expense ....................................................................... 11,315
Income before income tax .............................................................. 46,930
Income tax expense ....................................................................... 10,000
Net income ..................................................................................... $ 36,930


THE GOODY SHOP LTD.

Balance, December 1, 2017 $ 1,000 $ 82,800 $ 83,800

Net income 36,930 36,930
Dividends declared 000000 (5,000) (5,000)
Balance, November 30, 2018 $26,000 $114,730 $140,730
THE GOODY SHOP LTD.

November 30, 2018
Assets
Current assets
Cash ...................................................................................................... $ 8,500
Accounts receivable ............................................................................. 13,770
Inventory ................................................................................................ 37,350
Prepaid insurance .................................................................................. 4,500
Total current assets ...................................................................... 64,120
Land.................................................................................. $ 85,000
Buildings ..................................................... $175,000
Less: Accumulated depreciation ................. 61,200 113,800
Equipment .................................................. $57,000
Less: Accumulated depreciation ................. 19,880 ...... 37,120
Total property, plant, and equipment ........................................... 235,920
Total assets ........................................................................................... $300,040

Current liabilities
Accounts payable ............................................................................ $ 32,310
Unearned revenue ........................................................................... 3,000
Salaries payable .............................................................................. 8,500
Property tax payable ........................................................................ 3,500
Income tax payable ......................................................................... 6,000
Current portion of mortgage payable ............................................... 5,300
Total current liabilities ............................................................ 58,610
Mortgage payable ($106,000 – $5,300) ......................................... 100,700
Total liabilities ......................................................................... 159,310
Common shares ........................................................ $ 26,000
Retained earnings ..................................................... 114,730
Total shareholders’ equity ....................................................... 140,730
Total liabilities and shareholders’ equity .......................................... $300,040

ACR5-1 ACCOUNTING CYCLE REVIEW

(a)
Date Account Titles Debit Credit
March 1 Cash ............................................................... 125,000

Accounts Receivable .............................. 125,000
2 Accounts Payable ............................................ 200,000

Inventory ................................................ 4,000
Cash ($200,000 – $4,000) ...................... 196,000
5 Inventory.......................................................... 300,000
6 Cash ............................................................... 285,000

Sales....................................................... 285,000

Inventory ................................................. 200,000
7 Accounts Payable ............................................ 25,000

Inventory ................................................. 25,000
8 No entry necessary
9 Accounts Receivable ....................................... 200,000

Sales....................................................... 200,000

Inventory ................................................. 140,000
9 Freight Out ...................................................... 5,000

Cash ....................................................... 5,000

ACR5-1 (CONTINUED)
(a) (continued)
March 12 Cash ............................................................... 12,500

Unearned Revenue ................................ 12,500
13 Sales Returns and Allowances ........................ 20,000

Accounts Receivable .............................. 20,000
Inventory .......................................................... 14,000

Cost of Goods Sold................................. 14,000
14 Accounts Payable ($300,000 – $25,000)......... 275,000

Inventory ($275,000 × 2%) ..................... 5,500
Cash ($300,000 – $25,000 – $5,500) 269,500
16 Salaries Expense............................................. 45,000

Cash ....................................................... 45,000
19 Cash ($200,000 – $20,000 – $3,600) ............. 176,400

Sales Discounts ($180,000 × 2%) .................. 3,600
Accounts Receivable
($200,000 – $20,000) ...................... 180,000
20 Cash .............................................................. 255,000

Sales ..................................................... 255,000
Cost of Goods Sold ........................................ 179,000

Inventory ................................................ 179,000
27 Salaries Expense............................................ 50,000

Cash ...................................................... 50,000

ACR5-1 (CONTINUED)
(a) (continued)
March 30 Rent Expense ................................................. 5,000

Cash ...................................................... 5,000
31 Utilities Expense ............................................. 10,000

31 Salaries Expense............................................ 10,000

Salaries Payable.................................... 10,000
31 Interest Expense............................................. 9,000

Interest Payable ..................................... 9,000
31 Depreciation Expense..................................... 14,500

Accumulated Depreciation—Equipment 14,500
($145,000 ÷ 10 years = $14,500)
31 Income Tax Expense ...................................... 50,000

Income Tax Payable .............................. 50,000

ACR5-1 (CONTINUED)
(b), (d), and (g)
CE = Closing entry
Cash Supplies
Feb. 28 Bal. 65,000 Feb. 28 Bal. 7,500
Mar. 1 125,000 Mar. 2 196,000 Mar. 31 Bal. 7,500
6 285,000 9 5,000
12 12,500 14 269,500 Prepaid Rent
19 176,400 16 45,000 Feb. 28 Bal. 5,000
20 255,000 27 50,000 Mar. 31 Bal. 5,000

30 5,000
Mar. 31 Bal. 348,400 Equipment
Feb. 28 Bal. 145,000
Accounts Receivable
Mar. 31 Bal. 145,000
Feb. 28 Bal. 350,000
Mar. 9 200,000 Mar. 1 125,000 Accumulated Depreciation
—Equipment
13 20,000
Feb. 28 Bal. 29,000
19 180,000
Mar. 31 14,500
Mar. 31 Bal. 225,000
Mar. 31 Bal. 43,500
Accounts Payable
Inventory Feb. 28 Bal. 1,550,000
Feb. 28 Bal. 2,750,000 Mar. 2 200,000 Mar. 5 300,000
Mar. 5 300,000 Mar. 2 4,000 7 25,000 31 10,000
13 14,000 6 200,000 14 275,000
7 25,000 Mar. 31 Bal. 1,360,000
9 140,000
14 5,500 Salaries Payable
20 179,000 Mar. 31 10,000
Mar. 31 Bal. 2,510,500 Mar. 31 Bal. 10,000

ACR5-1 (CONTINUED)
(b), (d), and (g) (continued)
Interest Payable Sales

Mar. 31 9,000 Feb. 28 Bal. 5,479,400
Mar. 31 Bal. 9,000 Mar. 6 285,000
9 200,000
Unearned Revenue 20 255,000
Feb. 28 Bal. 35,000 Mar. 31 Bal. 6,219,400
Mar. 12 12,500 Mar. 31 CE 6,219,400
Mar. 31 Bal. 47,500 Mar. 31 Bal. 0
Bank Loan Payable Sales Returns and Allowances

Feb. 28 Bal. 450,000 Feb. 28 Bal. 107,000
Mar. 31 Bal. 450,000 Mar. 13 20,000
Mar. 31 Bal. 127,000
Income Tax Payable
Mar. 31 CE 127,000
Mar. 31 50,000
Mar. 31 Bal. 0
Mar. 31 Bal. 50,000
Sales Discounts
Common Shares
Feb. 28 Bal. 65,000
Feb. 28 Bal. 200,000
Mar. 19 3,600
Mar. 31 Bal. 200,000
Mar. 31 Bal. 68,600
Mar. 31 CE 68,600
Retained Earnings
Mar. 31 Bal. 0
Feb. 28 Bal. 550,500
Mar. 31 CE 50,000 Mar. 31 CE 570,900 Cost of Goods Sold
Mar. 31 Bal. 1,071,400 Feb. 28 Bal. 3,843,900
Dividends Declared Mar. 6 200,000 Mar. 13 14,000
9 140,000
Feb. 28 Bal. 50,000
20 179,000
Mar. 31 Bal. 50,000
Mar. 31 Bal. 4,348,900
Mar. 31 CE 50,000
Mar. 31 CE 4,348,900
Mar. 31 Bal. 0
Mar. 31 Bal. 0

ACR5-1 (CONTINUED)
Advertising Expense
Rent Expense
Feb. 28 Bal. 75,000
Feb. 28 Bal. 55,000
Mar. 31 Bal. 75,000
Mar. 30 5,000
Mar. 31 CE 75,000
Mar. 31 Bal. 60,000
Mar. 31 Bal. 0
Mar. 31 CE 60,000
Freight Out Mar. 31 Bal. 0

Feb. 28 Bal. 180,000
Salaries Expense
Mar. 9 5,000
Feb. 28 Bal. 360,000
Mar. 31 Bal. 185,000
Mar. 16 45,000
Mar. 31 CE 185,000
27 50,000
Mar. 31 Bal. 0
31 10,000
Depreciation Expense Mar. 31 Bal. 465,000
Feb. 28 Bal. 0 Mar. 31 CE 465,000
Mar. 31 14,500 Mar. 31 Bal. 0
Mar. 31 Bal. 14,500

Travel Expense
Mar. 31 CE 14,500
Feb. 28 Bal. 12,500
Mar. 31 Bal. 0
Mar. 31 Bal. 12,500
Interest Expense Mar. 31 CE 12,500
Feb. 28 Bal. 27,000 Mar. 31 Bal. 0
Mar. 31 9,000
Mar. 31 Bal. 36,000 Utilities Expense
Mar. 31 CE 36,000 Feb. 28 Bal. 20,000
Mar. 31 Bal. 0 Mar. 31 10,000

Mar. 31 Bal. 30,000
Office Expense Mar. 31 CE 30,000
Feb. 28 Bal. 26,000 Mar. 31 Bal. 0
Mar. 31 Bal. 26,000
Mar. 31 CE 6,000
Mar. 31 Bal. 0

ACR5-1 (CONTINUED)
Income Tax Expense

Feb. 28 Bal. 150,000
Mar. 31 50,000
Mar. 31 Bal. 200,000
Mar. 31 CE 200,000
Mar. 31 Bal. 0
Income Summary
Mar. 31 CE 5,648,500 Mar. 31 CE 6,219,400
CE 570,900
Bal. 0

ACR5-1 (CONTINUED)
(c)
HERITAGE FURNITURE LIMITED
Trial Balance
March 31, 2018
Debit Credit
Cash $ 348,400
Accounts receivable 225,000
Inventory 2,510,500
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Accumulated depreciation—equipment $ 29,000
Accounts payable 1,350,000
Unearned revenue 47,500
Bank loan payable—non-current 450,000
Common shares 200,000
Retained earnings 550,500
Dividends declared 50,000
Sales 6,219,400
Sales returns and allowances 127,000
Sales discounts 68,600
Advertising expense 75,000
Cost of goods sold 4,348,900
Freight out 185,000
Office expense 26,000
Rent expense 60,000
Salaries expense 455,000
Travel expense 12,500
Utilities expense 20,000
Income tax expense 150,000 000000v 0
$8,846,400 $8,846,400

ACR5-1 (CONTINUED)
(e) HERITAGE FURNITURE LIMITED
March 31, 2018
Debit Credit
Cash $ 348,400
Inventory 2,510,500
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Salaries payable 10,000
Interest payable 9,000
Bank loan payable 450,000
Income tax payable 50,000
Retained earnings 550,500
Dividends declared 50,000
Sales 6,219,400
Sales returns and allowances 127,000
Sales discounts 68,600
Freight out 185,000
Depreciation expense 14,500
Rent expense 60,000
Salaries expense 465,000
Income tax expense 200,000 000000v 0
$8,939,900 $8,939,900

ACR5-1 (CONTINUED)
(f)
Income Statement
Year Ended March 31, 2018
Sales revenue
Sales $6,219,400
Less: Sales returns and allowances $127,000
Sales discounts 68,600 195,600
Net sales 6,023,800
Gross profit 1,674,900
Operating expenses
Salaries expense $465,000
Freight out 185,000
Rent expense 60,000
Depreciation expense 14,500
Total operating expenses 868,000
Income from operations 806,900
Income before income tax 770,900
Income tax expense 200,000
Net income $ 570,900

ACR5-1 (CONTINUED)
(f) (continued)

Year Ended March 31, 2018

Balance, April 1, 2017 $199,000 $ 550,500 $ 749,500

Net income 570,900 570,900
Balance, March 31, 2018 $200,000 $1,071,400 $1,271,400

ACR5-1 (CONTINUED)
(f) (continued)
March 31, 2018
Assets
Current assets
Cash $ 348,400
Inventory 2,510,500
Supplies 7,500
Prepaid rent 5,000 $3,096,400
Property, plant and equipment
Equipment $145,000
Less: Accumulated depreciation 43,500 101,500
Total assets $3,197,900

Current liabilities
Accounts payable $1,360,000
Current portion of bank loan payable 45,000
Total current liabilities 1,521,500
Non-current liabilities*
Total liabilities 1,926,500
Common shares $ 200,000
Retained earnings 1,071,400 1,271,400
Total liabilities and shareholders’ equity $3,197,900
*($450,000 - $45,000 current)

ACR5-1 (CONTINUED)
(g)
March 31 Sales .............................................................. 6,219,400

Income Summary ................................... 6,219,400
31 Income Summary ............................................. 5,648,500

Sales Returns and Allowances ................ 127,000
Sales Discounts ....................................... 68,600
Advertising Expense ................................ 75,000
Cost of Goods Sold.................................. 4,348,900
Freight out ............................................... 185,000
Depreciation Expense .............................. 14,500
Interest Expense ...................................... 36,000
Office Expense ........................................ 26,000
Rent Expense .......................................... 60,000
Salaries Expense ..................................... 465,000
Travel Expense ........................................ 12,500
Utilities Expense ...................................... 30,000
Income Tax Expense ............................... 200,000
31 Income Summary ............................................. 570,900

Retained Earnings .................................. 570,900
31 Retained Earnings ........................................... 50,000

Dividends Declared.................................. 50,000

ACR5-1 (CONTINUED)
(h)

Post-Closing Trial Balance
March 31, 2018
Debit Credit
Cash $ 348,400
Inventory 2,510,500
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Retained earnings 000000000 1,071,400
$3,241,400 $3,241,400

CT5-1 FINANCIAL REPORTING CASE

(a) The North West Company is a merchandising company because it buys
products and resells them to the public.
(b) The North West Company classifies its operating expenses by function
since captions include titles like “selling, operating and administrative
expenses.”
(c) Other non-operating expenses reported include interest expense totalling

$6,210,000 for the fiscal year ended January 31, 2016.
(d) and (e)
($ in thousands) 2016 2015
Gross profit $522,614 $464,218

margin = 29.1% = 28.6%
$1,796,035 $1,624,400
Profit margin $69,779 $62,883

= 3.9% = 3.9%
$1,796,035 $1,624,400
(f) The company’s profitability has remained relatively constant for the fiscal
year ended January 31, 2016, with a slight increase in gross profit margin.
With an increase in the gross profit margin and an unchanged profit margin,
we can conclude that North West either had increased operating expenses
or interest expenses. In fact, it was the result of increased operating
expenses.
LO 1,4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005


(a) The North West Company Sobeys
(in millions) (in millions)
1 ($1,796.0 – $1,624.4) ($24,618.8 – $23,928.8)

Percentage
1. . $1,624.4 $23,928.8
change in sales
= 10.6% = 2.9%
2. Gross profit margin ($1,796.0 – $1,273.4) (24,618.8 - $18,661.2)

$1,796.0 $24,618.8
= 29.1% = 24.2%
(b) North West had the bigger increase in sales. In fiscal 2015, North West’s
gross profit was 28.6% ($464,218 ÷ $1,624,400). North West was able to
increase its gross profit margin. We can conclude that North West is doing
well managing its purchasing and pricing policies.
(c) Sobeys experienced an increase in sales but had a decreased gross

margin. Gross margin was $5,962.5 (23,928.8 – 17,966.3) in 2015 and
dropped slightly to $5,957.6 (24,618.8 – 18,661.2) in 2016. This could have
been caused by mismanagement of inventory, lower selling prices, or
purchasing price constraints.



(a) The main difference between these two income statements is that Happy
Coffee presents its expense items by function (such as general and
administrative expenses) while Country Coffee presents its expenses by
nature of the expense item. Under IFRS, Happy Coffee is required to also
disclose the total depreciation expense and salaries and benefits expense
in the notes to the financial statements.
(b) Under IFRS both formats of expense presentation, by nature or by function,

are acceptable. ASPE does not have a requirement on how to report
expenses. Expenses under ASPE can be classified in any manner that
would be useful to the key stakeholders.
The method that classifies expenses by function can require a higher

degree of judgement since expenses have to be allocated to each of the
functional categories (depending on how many functional categories are
present). In the case of Happy Coffee, there are three categories—cost of
goods sold, selling expenses, and administrative expenses. This method
provides better information to the reader despite the requirement for
increased judgement.
(c) The difference in format could make it difficult to compare expense items.
For example, expense items as a percentage of sales would not be
comparable. However, Country Coffee can still easily compare the key
profitability measures of gross profit margin and profit margin. These
profitability ratios are not dependent on the expense classifications.
(d) No, comparability of the gross profit margin and profit margin will not be
impacted. The definitions of gross profit and net income do not change
when preparing the income statements with a different format.

CT5-3 (CONTINUED)
(e) Country Coffee can change the presentation of its income statement and
begin classifying its expenses by function. This would be an acceptable
presentation under ASPE.
Under IFRS, if a company chooses to report its expenses by function it must

still disclose total depreciation and salaries and benefit expense in the note
disclosures. Country Coffee could use this additional information from the
notes of Happy Coffee for improved comparability.
LO 4,5 BT: E Difficulty: C Time: 35 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

CT5-4 ETHICS CASE

Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare and
Present section of WileyPLUS.
(a) The CEO asked for three inappropriate adjustments to be made to the
financial statements. By recording a purchase return as an increase in sales
revenue, the sales revenue is now overstated and cost of goods sold is also
overstated. By recording freight-in relating to inventory that has now been
sold as an operating expense, it overstates operating expense while
understating cost of goods sold. Finally by recording a sales return as an
operating expense, it overstates sales and overstates operating expenses.
All of these adjustments were designed to boost gross profit in order to
increase the bonus of the CEO.
If we reverse the adjustments made, we get:
2018 Draft Adjustments 2018 Revised

$(7,000)
Net sales $113,000 (6,000) $100,000
5,000
Cost of goods sold 62,000 (7,000) 60,000
Gross profit 51,000 (11,000) 40,000
(6,000)
Operating expenses 21,000 (5,000) 10,000
Income from operations 30,000 0 30,000
Income tax expense 9,000 0 9,000
Net income $ 21,000 $ 0 $ 21,000
Gross profit margin: $51,000 ÷ $113,000 45.1%

Gross profit margin: $40,000 ÷ $100,000 40.0%
When we calculate the gross profit margin using the revised amounts, we
can see that it has not risen by more than 3% compared to the prior year
of 40% ($32,000 ÷ $80,000) and because of this, the CEO will not eligible
for his bonus.

CT5-4 (CONTINUED)
(b) The profit margin in 2018 is 21.0% ($21,000 ÷ $100,000) which is
unchanged from the prior year ($16,800 ÷ $80,000). However, in the first
draft of the income statement, the profit margin was 18.6% ($21,000 ÷
$113,000), which is lower than the 21.0% determined using the correct
amounts. This is because net sales were overstated even though overall
profit was not.
(c) Harm was done to the users of the financial statements. Assuming no
corrections were made, the income statement would have been adjusted
for the bonus given to the CEO. Many of the elements except for income
tax expense reported in the statement are false and misleading. Users of
the financial statements would not have obtained a true reflection of the
performance trends of Peshawar Inc. and may have made inappropriate
decisions based on misleading financial statements. Furthermore, the CEO
would have been awarded a bonus that he did not deserve, thereby taking
assets away from the company and its shareholders.
LO 2,3,5 BT: E Difficulty: C Time: 40 min. AACSB: Analytic and Ethics CPA: cpa-t001, cpa-e001, cpa-
t005 CM: Reporting, Ethics, and Finance

CT5-5 ETHICS CASE

(a) Rita Pelzer, as a new employee, is placed in a position of responsibility and
is pressured by her supervisor to continue an unethical practice previously
performed by him. The unethical practice is taking unearned cash
discounts. Her dilemma is either to follow her boss’s unethical instructions
or offend her boss and maybe lose the job she just assumed.
(b) The stakeholders (affected parties) are:
Rita Pelzer, the assistant controller

Jamie Caterino, the controller (he looks good to superiors because of
increased income)
Zaz Stores Ltd., the company benefited
Creditors of Zaz Stores Ltd. (suppliers harmed)
Canada Post employees (those blamed harmed)
(c) Ethically Rita should not continue the practice started by Jamie. She has
several choices in that she could:
1. Tell the controller (her boss) that she will attempt to take every
allowable cash discount by preparing and mailing cheques within the
discount period—the ethical thing to do. This will offend her boss and
may jeopardize her continued employment.
2. Comply with Jamie’s directions and continue the unethical practice of

taking unearned cash discounts.

CT5-5 (CONTINUED)
(c) (continued)
3. Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to Jamie. The company
may not condone this practice. Rita definitely has a choice, but
probably not without consequences. To continue the practice is
definitely unethical. If Rita submits to this request, she may be asked
to perform other unethical tasks. If Rita stands her ground and refuses
to participate in this unethical practice, she probably won’t be asked to
do other unethical things—if she isn’t fired. Maybe nobody has ever
challenged Jamie’s unethical behaviour and his reaction may be one
of respect rather than anger and retribution. Being ethically
compromised is no way to start a new job.
LO 2 BT: C Difficulty: M Time: 30 min. AACSB: Ethics CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics

CT5-6 SERIAL CASE

(a)
June 30 Inventory...................................................................... 1,750
Cost of Goods Sold ............................................ 1,750
($18,000 physical count – $16,250 perpetual record = $1,750 overage)
Note to instructors: June balances were taken from the answer to CT4-6.

CT5-6 (CONTINUED)
Cash
June Bal. 34,534 (Ch. 4) Unearned Revenue
(Ch. 4) June Bal. 1,000
Accounts Receivable
Salaries Payable
June Bal. 12,090 (Ch. 4)
(Ch. 4) June Bal. 1,000
Inventory
Interest Payable
June Bal. 16,250 (Ch. 4)
(Ch. 4) June Bal. 50
30 AJE 1,750
June Bal. 18,000
Income Tax Payable
(Ch. 4) June 30 AJE 5,000
Supplies
June Bal. 3,775 (Ch. 4)
Bank Loan Payable
(Ch. 4) June Bal. 22,500
Prepaid Insurance
June Bal. 6,000 (Ch. 4) Mortgage Payable
(Ch. 4) June Bal. 53,200
Land
June Bal. (Ch. 4) Common Shares
100,000
(Ch. 4) June Bal. 300
Buildings
Retained Earnings
June Bal. (Ch. 4)
(Ch. 4) June Bal. 146,788
165,000
Accumulated Depreciation—Buildings
(Ch. 4) June Bal. 143,000
Equipment
June Bal. (Ch. 4)
44,520
Accumulated Depreciation—Equipment
(Ch. 4) Bal. 21,070
Vehicles
June Bal. 52,500 (Ch. 4)
Accumulated Depreciation—Vehicles
(Ch. 4) June Bal. 4,200
Accounts Payable
(Ch. 4) June Bal. 7,265

CT5-6 (CONTINUED)
(a) (continued)
Dividends Declared Utilities Expense

June Bal. 30,000 (Ch. 4) June Bal. 13,225 (Ch. 4)
Rent Revenue Advertising Expense

(Ch. 4) June Bal. 6,000 June Bal. 9,600 (Ch. 4)
Sales Insurance Expense

(Ch. 4) June Bal. 640,358 June Bal. 6,000 (Ch. 4)
Cost of Goods Sold Property Tax Expense

June Bal. 102,386 (Ch. 4) June Bal. 5,950 (Ch. 4)
June 30 AJE 1,750
June Bal. 100,636 Interest Expense
June Bal. 5,349 (Ch. 4)
Salaries Expense
June Bal. 391,782 (Ch. 4) Income Tax Expense
June Bal. 18,000
Depreciation Expense
June Bal. 16,770 (Ch. 4)
Office Expense
June Bal. 18,000 (Ch. 4)

CT5-6 (CONTINUED)
(b)
ANTHONY BUSINESS COMPANY LTD.
June 30, 2017
Debit Credit
Cash .............................................................................. $ 34,534

Accounts receivable....................................................... 12,090
Inventory........................................................................ 18,000
Supplies......................................................................... 3,775
Prepaid insurance.......................................................... 6,000
Land .............................................................................. 100,000
Buildings ........................................................................ 165,000
Accumulated depreciation—buildings ............................ $ 143,000
Equipment ..................................................................... 44,520
Accumulated depreciation—equipment ......................... 21,070
Vehicles ......................................................................... 52,500
Accumulated depreciation—vehicles ............................. 4,200
Accounts payable .......................................................... 7,265
Unearned revenue ......................................................... 1,000
Salaries payable ............................................................ 1,000
Interest payable ............................................................. 50
Income tax payable ....................................................... 5,000
Bank loan payable ......................................................... 22,500
Mortgage payable .......................................................... 53,200
Common shares ............................................................ 300
Retained earnings ......................................................... 146,788
Dividends declared ........................................................ 30,000
Rent revenue ................................................................. 6,000
Sales ............................................................................. 640,358
Cost of goods sold ......................................................... 100,636
Salaries expense ........................................................... 391,782
Depreciation expense .................................................... 16,770
Office expense............................................................... 18,000
Utilities expense ............................................................ 13,225
Advertising expense ...................................................... 9,600
Insurance expense ........................................................ 6,000
Property tax expense ..................................................... 5,950
Interest expense ............................................................ 5,349
Income tax expense....................................................... 18,000 000 0000
Totals ..................................................................... $1,051,731 $1,051,731

CT5-6 (CONTINUED)
(c)
Income Statement
Sales ............................................................................................................ $640,358

Cost of goods sold ....................................................................................... 100,636
Gross profit .................................................................................................. 539,722
Operating expenses
Salaries expense ............................................................ $391,782
Depreciation expense ...................................................... 16,770
Office expense................................................................. 18,000
Utilities expense .............................................................. 13,225
Advertising expense ........................................................ 9,600
Insurance expense .......................................................... 6,000
Property tax expense ...................................................... 5,950
Total operating expenses ........................................................... 461,327
Income from operations ................................................................................ 78,395
Rent revenue ................................................................... $6,000
Interest expense.............................................................. 5,349 651
Income before income tax ............................................................................. 79,046
Income tax expense ...................................................................................... 18,000
Net income ................................................................................................... $ 61,046


Balance, July 1, 2016 $300 $146,788 $147,088

Net income 61,046 61,046
Dividends declared 0000 (30,000) (30,000)
Balance, June 30, 2017 $300 $177,834 $178,134
Note to instructors: Although ABC would most likely prepare a statement of retained
earnings rather than a statement of changes in equity since it has been assumed that it is
using ASPE, the statement of retained earnings is not explained in detail until Ch. 11,
which is why we chose to require a statement of changes in equity here instead.

CT5-6 (CONTINUED)
(c) (continued)
June 30, 2017
Assets
Current assets
Cash ................................................................................................................. $34,534
Accounts receivable ......................................................................................... 12,090
Inventory ........................................................................................................... 18,000
Supplies ............................................................................................................ 3,775
Prepaid insurance ............................................................................................. 6,000
Total current assets ............................................................................... 74,399
Land ........................................................................ $100,000
Buildings ................................................................. $165,000
Less: Accumulated depreciation.............................. 143,000 22,000
Equipment ............................................................... $44,520
Vehicles .................................................................. $52,500
Total property, plant, and equipment ..................................................... 193,750
Total assets ............................................................................................................... $268,149

Current liabilities
Accounts payable .............................................................................................. $ 7,265
Unearned revenue ............................................................................................ 1,000
Salaries payable ............................................................................................... 1,000
Interest payable ................................................................................................ 50
Income tax payable ........................................................................................... 5,000
Current portion of bank loan payable................................................................. 7,500
Current portion of mortgage payable ................................................................. 5,000
Total current liabilities ............................................................................ 26,815
Bank loan payable ($22,500 – $7,500) ............................................................. 15,000
Mortgage payable ($53,200 – $5,000) .............................................................. 48,200
Total liabilities ......................................................................................... 90,015
Common shares ............................................................................... $ 300
Retained earnings ............................................................................ . 177,834
Total shareholders’ equity....................................................................... 178,134
Total liabilities and shareholders’ equity ..................................................................... $268,149

CT5-6 (CONTINUED)
(d)
ABC Competitor
Current $74,399
ratio = 2.8:1 2.5:1
$26,815
Gross profit $539,722

margin = 84.3% 75%
$640,358
Profit $61,046
margin = 9.5% 8%
$640,358
(1) Compared to its competitor, ABC’s ratios are better in every respect. ABC
has better liquidity and profitability than its competitor.
(2) We must recall that ABC is a small, family company while its competitor is a
large, publicly-traded company. They likely have different product lines, cost
structures, and other differences affecting its financial results.
LO 4,5 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII vi F2)


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND

Solutions Manual 5-1 Chapter 5

AACSB Association to Advance Collegiate Schools of Business

CPA CM CPA Canada Competency

Solutions Manual 5-2 Chapter 5

(b) The normal operating cycle for a merchandising company is likely to be

2. (a) The income measurement process of a merchandising company is the

(b) The income measurement process of a merchandising company differs

Solutions Manual 5-3 Chapter 5

4. A physical count is an important control feature. By using a perpetual inventory

5. The key distinction between a periodic inventory system and a perpetual

Solutions Manual 5-4 Chapter 5

Solutions Manual 5-5 Chapter 5

10. In a perpetual inventory system, purchase returns are credited to Inventory

Solutions Manual 5-6 Chapter 5

13. If the merchandise is not resaleable, it cannot be included in inventory since it

Solutions Manual 5-7 Chapter 5

16. North West Company uses a multiple-step income statement.

(b) It does not matter whether a single-step or multiple-step income statement

18. Because the Overwaitea is a private enterprise, it can follow Accounting

Solutions Manual 5-8 Chapter 5

19. Interest expense is a non-operating expense because it relates to how a

22. High gross profit Low gross profit

Solutions Manual 5-9 Chapter 5

*24. Periodic System

Solutions Manual 5-10 Chapter 5

Cost of Goods Sold =

Solutions Manual 5-11 Chapter 5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5-2

[2] Net income = $35 (from [1]) – $9 = $26

[3] Cost of goods sold = $100 – $60 = $40

[4] Operating expenses = $60 – $35 = $25

[5] Income tax expense = $35 – $26 = $9

Solutions Manual 5-12 Chapter 5

BRIEF EXERCISE 5-3

218,000 Cost of goods sold

Purchases Inventory .................................................................. 220,000

Purchase Accounts Payable .................................................... 26,000

Purchase Accounts Payable ($220,000 – $26,000) ................. 194,000

Freight In Inventory .................................................................. 2,700

Cost of Cost of Goods Sold .................................................. 218,000

Solutions Manual 5-13 Chapter 5

BRIEF EXERCISE 5-4

Wydell Inc. (Seller):

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

BRIEF EXERCISE 5-5

5 No entry necessary – Freight costs paid by Fundy Corp.

6 Accounts Payable .................................................... 6,000

11 Accounts Payable ($45,000 - $6,000) ...................... 39,000

Solutions Manual 5-14 Chapter 5

BRIEF EXERCISE 5-6

Jan. 2 Accounts Receivable ................................................ 45,000

2 Cost of Goods Sold .................................................. 25,200

5 Freight Out ............................................................... 900

6 Sales Returns and Allowances................................. 6,000

6 Inventory .................................................................. 3,360

11 Cash ......................................................................... 38,220

Solutions Manual 5-15 Chapter 5

BRIEF EXERCISE 5-7

(a) Sales .................................................................... $1,110,000

(b) Net sales ..................................................................... $1,070,000