CHAPTER 5

Exercise 1: Kimmie Meissner Company had the following adjusted trial balance.

Instructions
(a) Prepare closing entries at June 30, 2008 and a post-closing trial balance.
Exercise 2: Commanche Company ended its fiscal year on July 31, 2008. The company’s
adjusted
trial balance as of the end of its fiscal year is as shown below.
Instructions
(a) Prepare the closing entries.
(b) Post to Retained Earnings and No. 350 Income Summary accounts.
(c) Prepare a post-closing trial balance at July 31.
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified balance sheet at July 31.
Exercise 3: Angela Borke has prepared the following list of statements about the accounting
cycle.
1. “Analyze business transactions” is the first step in the accounting cycle.
2. Adjusting entries are a required step in the accounting cycle.
3. Correcting entries are a required step in the accounting cycle.
4. If a worksheet is prepared, all the steps of the accounting cycle are incorporated into the
worksheet.
5. The accounting cycle begins with the analysis of business transactions and ends with the
preparation of a post-closing trial balance.
6. All steps of the accounting cycle occur daily during the accounting period.
7. The step of “post to the ledger accounts” occurs after the step of “journalize the transactions.”
8. Closing entries must be prepared before financial statements can be prepared.
Instructions: Identify each statement as true of false. If false, indicate how to correct the
statement.
Exercise 4: Jenny Company has an inexperienced accountant. During the first 2 weeks on the
job,
the accountant made the following errors in journalizing transactions. All entries were posted as
made.
1. A payment on account of $720 to a creditor was debited to Accounts Payable $270 and
credited to Cash $270.
2. The purchase of supplies for $650 cash was debited to Inventory $65 and credited to Cash
$65.
3. A $500 cash dividend was debited to Salaries Expense $500 and credited to Cash $500.
Instructions: Prepare the correcting entries.
Exercise 5: The adjusted trial balance for Anthony Bowling Alley at December 31, 2008,
contains the following accounts.

Instructions
(a) Prepare a classified balance sheet; assume that $15,000 of the note payable will be paid in
2009.
(b) Comment on the liquidity of the company.

Exercise 6: The following items were taken from the financial statements of Cat Company.
(All dollars are in thousands.)

Instructions: Prepare a classified balance sheet in good form as of December 31, 2008.
 CHAPTER 6: ACCOUNTING FOR MERCHANDISING ACTIVITIES

PART1: The following statement is true or false?

1. Sales revenue less cost of goods sold is called net profit.
2. In a perpetual inventory system, a company records the cost of goods sold each time a
sale occurs.
3. In a periodic inventory system, companies keep detailed inventory records of the goods
on hand throughout the period.
4. FOB destination means that the seller places the goods free on board the common carrier
and the buyer pays the freight costs.
5. Sales Returns and Allowances is a contra-revenue account to Sales and has a normal
debit balance.
6. A merchandiser using a perpetual system will require one additional adjusting entry to
make the accounting records agree with the actual inventory on hand.
7. Interest expense must be disclosed on the face of the income statement..
8. An income statement distinguishes between operating and non-operating activities.
9. The Other Expenses category includes casualty losses, losses from the sale of plant
assets, and operating expenses.
10. Companies must use a perpetual inventory system for GAAP, but are allowed to use
either the perpetual or periodic inventory system under IFRS.
11. Under a periodic system, the company uses separate accounts to record freight costs,
returns, and discounts.
12. The periodic method uses more accounts in which to record inventory related costs than
does the perpetual method.
13. In a perpetual inventory system, a company determines the cost of goods sold each time a
sale occurs.
14. FOB destination means that the seller places the goods free on board the common carrier
and the buyer pays the freight costs.
15. Measuring net income for a merchandiser is conceptually different from measuring net
income for a service company.
16. For a merchandiser, sales less cost of goods sold is called gross profit.
17. For a merchandiser, the primary source of revenues is the sale of services.
18. Interest is an example of an operating expense.
19. The operating cycle of a merchandiser is the same as that of a service company.
20. In a perpetual inventory system, detailed inventory records of goods on hand are maintained.
21. In a periodic inventory system, the cost of goods sold is determined only at the end of the
accounting period.
22. A periodic inventory system provides better control over inventories than a perpetual
system.

PART 2: Please the correct answer.

1.Gross profit will result if
A. operating expenses are less than net income.
B. sales revenues are greater than operating expenses.
C. sales revenues are greater than cost of goods sold.
D. operating expenses are greater than cost of goods sold.
2. Under a perpetual inventory system, when goods are purchased for resale by a company:
A. purchases on account are debited to Merchandise Inventory.
B. purchases on account are debited to Purchases.
C. purchase returns are debited to Purchase Returns and Allowances.
D. freight costs are debited to Freight-out.

3. The sales accounts that normally have a debit balance are:

A. Sales Discounts.
B. Sales Returns and Allowances.
C. both (a) and (b).
D. neither (a) nor (b).

4. A credit sale of $750 is made on June 13, terms 2/10, net/30. A return of $50 is granted
on June 16. The amount received as payment in full on June 23 is:
A. $700.
B. $686.
C. $685.
D. $650.

5. Which of the following accounts will normally appear in the ledger of a merchandising
company that uses a perpetual inventory system?
A. Purchases.
B. Freight-in.
C. Cost of Goods Sold.
D. Purchase Discounts.

6. If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses
are $60,000, the gross profit is:
A. $30,000.
B. $90,000.
C. $340,000.
D. $400,000.
7. In determining cost of goods sold:
A. purchase discounts are deducted from net purchases.
B. freight-out is added to net purchases.
C. purchase returns and allowances are deducted from net purchases.
D. freight-in is added to net purchases.

8. If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory
is $50,000, cost of goods sold is:
A. $390,000.v
B. $370,000.
C. $330,000.
D. $420,000.
9. In a perpetual inventory system, a return of defective merchandise by a purchaser is
recorded by crediting:
A. Purchases
B. Purchase Returns and Allowances
C. Purchase Discounts
D. Merchandise Inventoryx

10. Which of the following is not part of the journal entries made when merchandise is sold on
credit?
A. Credit the Cost of Goods Sold account.x
B. Credit the Sales account.
C. Credit the Merchandise Inventory account.
D. Debit the Accounts Receivable account.

11. FOB shipping point means that the:

A. goods are placed free on board to the buyer's place of business.
B. buyer pays the freight.x
C. seller pays the freight.
D. common carrier pays the freight.

12. In a perpetual inventory system, which of the following would be debited when goods are
purchased with the intent of being resold?
A. Cost of Goods Sold.
B. Merchandise Inventory.x
C. Purchases.
D. Accounts Payable.

13. Which of the following accounts is not closed to Income Summary?

A. Cost of Goods Sold.
B. Merchandise Inventory.x
C. Sales.
D. Sales Discounts.

14. Gross profit is:

A. sales revenue less operating expenses.
B. sales revenue less cost of goods sold.x
C. net income less operating expenses.
D. net income less cost of goods sold.

15. A company determines the cost of goods sold each time a sale occurs in:
A. a periodic inventory system only.
B. a perpetual inventory system only.x
C. both a periodic and perpetual inventory system.
D. neither a periodic nor perpetual inventory system.
16. In a perpetual inventory system, a return of defective merchandise by a purchaser is
recorded by crediting:
A. Purchases
B. Purchase Returns and Allowances
C. Purchase Discounts
D. Merchandise Inventoryx

17. Which of the following is not part of the journal entries made when merchandise is sold
on credit?
A. Credit the Cost of Goods Sold account.x
B. Credit the Sales account.
C. Credit the Merchandise Inventory account.
D. Debit the Accounts Receivable account.

18. FOB shipping point means that the:

A. goods are placed free on board to the buyer's place of business.
B. buyer pays the freight.x
C. seller pays the freight.
D. goods are shipped 'freight on board' after the customer pays for the goods.

19. What kind of account is Sales Discounts?

A. Revenue account
B. Contra-revenue accountx
C. Liability account
D. Expense account

20. Which of the following is the calculation of net sales?

A. Sales less cost of goods sold
B. Sales less sales discounts
C. Sales less sales returns and allowances
D. Sales less sales returns and allowances and sales discountsx

21. Which of the following would not be reported in the operating expenses section of an
income statement?
A. Advertising expense
B. Interest expense x
C. Freight-out
D. All of the above are operating expenses

22. Which of the following appears on the income statement for both merchandising and
service companies?
A. Cost of goods sold
B. Gross profit
C. Operating expenses x
D. Sales returns and allowances
23. In a perpetual inventory system, which one of the following accounts is debited when
goods are purchased for resale?
A. Cost of Goods Sold
B. Merchandise Inventory x
C. Purchases
D. Accounts Payable

24. Which of the following items will not appear in the Other Income section of the income
statement?
A. Gain from the sale of property, plant, and equipment
B. Interest revenue
C. Dividend revenue
D. Sales revenue x

25. Which of the following events would be included as a component of comprehensive

income?
A. Sale of merchandise to customers x
B. Amounts resulting from adjusting recorded amounts to fair value
C. Interest revenue
D. Loss on sale of plant assets

26. All of the following items would be reported as other revenues and gains except:
A. gain on sale of equipment.
B. interest revenue.
C. rent revenue.
D. sales revenue. x

27. Income from operations is:

A. net sales less cost of goods sold.
B. net sales less operating expenses.
C. gross profit less other expenses and losses.
D. gross profit less operating expenses. x

28. Which of the following groups consists only of operating expenses?

A. Salaries expense, cost of goods sold, depreciation expense
B. Utilities expense, sales discounts, insurance expense
C. Rent expense, depreciation expense, merchandise inventory expense
D. Depreciation expense, rent expense, utilities expense x

29. Appendix: In a periodic inventory system the entry to record the credit sale of
merchandise affects which of the following accounts?
A. Cost of Goods Sold
B. Purchases
C. Merchandise Inventory
D. Sales x
30. Company A purchases $1,200 of merchandise from Company B on July 1 with credit
terms 2/10, n/30. Company A returns $200 of the merchandise on July 5. On July 11, Company
B received full payment from Company A. How much is the amount of the payment on July 11?
A. $980
B. $20
C. $1,176
D. $1,000

31. A company has the following account balances: Sales, $1,000,000; Sales Returns and
Allowances, $180,000; Sales Discounts, $20,000; and Cost of Goods Sold, $600,000. What is the
company's gross profit rate?
A. 20%
B. 25%
C. 38.8%
D. 40%

32. Appendix: Salad Sales Company had the following amounts related to its business:
Beginning Inventory, $12,000; Purchases, $42,000; Net Sales, $50,000; and Gross Profit,
$15,000. How much is the amount of ending inventory?
A. $54,000
B. $77,000
C. $19,000
D. $35,000

33. Appendix: The following amounts relate to Drisden Company for the current year:
Beginning Inventory, $20,000; Ending Inventory, $28,000; Purchases, $166,000; Purchase
Returns, $4,800; and Freight-Out, $6,000. How much is Cost of Goods Sold for the period?
A. $159,200
B. $169,200
C. $162,800
D. $153,200

PART 3: EXERCISES

Ex1. Information related to Pagnucci Co. is presented below.

1. On April 5, purchased merchandise from Steff Company for $20,000 terms 2/10, net/30,
FOB shipping point.
2. On April 6 paid freight costs of $700 on merchandise purchased from Bryant.
3. On April 7, purchased equipment on account for $29,000.
4. On April 8, returned damaged merchandise to Steff Company and was granted a $3,000
credit for returned merchandise.
5. On April 15 paid the amount due to Steff Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Pagnucci Co. under
a perpetual inventory system.
(b) Assume that Pagnucci Co. paid the balance due to Steff Company on May 4 instead of April
15. Prepare the journal entry to record this payment.

Ex2: This information relates to Jabenez Co.

1. On April 5 purchased merchandise from Cornerstone Company for $25,000, terms 2/10,
net/30, FOB shipping point.
2. On April 6 paid freight costs of $800 on merchandise purchased from Cornerstone Company.
3. On April 7 purchased equipment on account for $37,000.
4. On April 8 returned some of April 5 merchandise to Cornerstone Company which cost
$3,000.
5. On April 15 paid the amount due to Cornerstone Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Jabanez Co. using a
perpetual inventory system.
(b) Assume that Jabanez Co. paid the balance due to Cornerstone Company on May 4 instead
of April 15. Prepare the journal entry to record this payment.

Ex 3: Presented below is information related to Tyrus Co.

1. On April 5, purchased merchandise from Thomas Company for $35,000, terms 2/10, net/30,
FOB shipping point.
2. On April 6, paid freight costs of $1,000 on merchandise purchased from Thomas.
3. On April 7, purchased equipment on account from Thabo Sefalosha Mfg. Co. for $41,000.
4. On April 8, returned damaged merchandise to Thomas Company and was granted a $5,000
allowance.
5. On April 15, paid the amount due to Thomas Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Tyrus Co. using a
periodic inventory system.
(b) Assume that Tyrus Co. paid the balance due to Thomas Company on May 4 instead of April
15. Prepare the journal entry to record this payment.

Ex4: On September 1, Jiggs Office Supply had an inventory of 40 calculators at a cost of $18
each.The company uses a perpetual inventory system. During September, the following
transactions occurred.
Sept. 6 Purchased 70 calculators at $20 each from Billy Jack Co. for cash.
9 Paid freight of $68 on calculators purchased from Billy Jack Co.
10 Returned 2 calculators to Billy Jack Co. for $40 credit because they did not meet
specifications.
12 Sold 40 calculators costing $18 for $34 each to Kerry Book Store, terms n/30.
14 Granted credit of $34 to Kerry Book Store for the return of one calculator that was not
ordered.
20 Sold 30 calculators costing $21 (including freight) for $35 each to Sayer’s Card Shop, terms
n/30.
Instructions: Journalize the September transactions.

Ex5: On June 10, Mary Jane Company purchased $9,000 of merchandise from Petty
Company, FOB shipping point, terms 2/10, n/30. Mary Jane pays the freight costs of $500 on
June 11. damaged goods totaling $700 are returned to Petty for credit on June 12. The scrap
value of these goods is $300. On June 19, Mary Jane pays Petty Company in full, less the
purchase discount. Both companies use a perpetual inventory system.
Instructions
(a) Prepare separate entries for each transaction on the books of Mary Jane Company.
(b) Prepare separate entries for each transaction for Petty Company. The merchandise
purchased by Mary Jane on June 10 had cost Petty $5,400.

Ex6: Presented below are transactions related to Winkler Company.

1. On December 3,Winkler Company sold $400,000 of merchandise to Mark Co., terms 2/10,
n/30, FOB shipping point.The cost of the merchandise sold was $240,000.
2. On December 8, Mark Co. was granted an allowance of $20,000 for merchandise purchased
on December 3.
3. On December 13,Winkler Company received the balance due from Mark Co.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Winkler Company
using a perpetual inventory system.
(b) Assume that Winkler Company received the balance due from Mark Co. on January 2 of the
following year instead of December 13. Prepare the journal entry to record the receipt of
payment on January 2.

Ex7: The adjusted trial balance of Contreras Company shows the following data pertaining to
sales at the end of its fiscal year October 31, 2008: Sales $950,000, Freight-out $20,000, Sales
Returns and Allowances $31,000, and Sales Discounts $18,000.
Instructions
(a) Prepare the sales revenues section of the income statement.
(b) Prepare separate closing entries for (1) sales, and (2) the contra accounts to sales.

Ex 8: Peter Pan Company had the following account balances at year-end: cost of goods sold
$90,000; merchandise inventory $23,000; operating expenses $44,000; sales $165,000; sales
discounts $2,000; and sales returns and allowances $3,000.A physical count of inventory
determines that merchandise inventory on hand is $21,800.
Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries.

Ex 9: Presented is information related to Hammerstein Co. for the month of January 2008
Instructions
(a) Prepare the necessary adjusting entry for inventory.
(b) Prepare the necessary closing entries.

Ex 10: Paul’s Book Warehouse distributes hardcover books to retail stores and extends credit
terms of 2/10, n/30 to all of its customers. At the end of May, Paul’s inventory consisted of 300
books purchased at $1,800.During the month of June the following merchandising transactions
occurred.
June 1 Purchased 200 books on account for $6 each from Logan Publishers, FOB destination,
terms 2/10, n/30.The appropriate party also made a cash payment of $50 for the freight
on this date.

3 Sold 240 books on account to Reading Rainbow for $10 each.

6 Received $120 credit for 20 books returned to Atkinson Publishers.
9 Paid Logan Publishers in full, less discount.
15 Received payment in full from Reading Rainbow.
17 Sold 180 books on account to Cheap Books for $10 each.
20 Purchased 250 books on account for $6 each from Phantom Publishers, FOB destination,
terms 2/15, n/30. The appropriate party also made a cash payment of $50 for the freight on this
date.
24 Received payment in full from Cheap Books.
26 Paid Phantom Publishers in full, less discount.
28 Sold 130 books on account to Willow Bookstore for $10 each.
30 Granted Willow Bookstore $120 credit for 12 books returned costing $72.
Paul’s Book Warehouse’s chart of accounts includes the following: No. 101 Cash, No. 112
Accounts Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable,No. 401
Sales, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods
Sold
Instructions
Journalize the transactions for the month of June for Paul’s Book Warehouse using a perpetual
inventory system

Ex11: P5-2C Newman Hardware Store completed the following merchandising transactions in
the month of May. At the beginning of May, the ledger of Newman showed Cash of $5,000 and
Common Stock of $5,000.
May 1 Purchased merchandise on account from Jerry’s Wholesale Supply $4,200, terms
2/10,n/30.
2 Sold merchandise on account $2,100, terms 1/10, n/30.The cost of the merchandise sold was
$1,300.
5 Received credit from Jerry’s Wholesale Supply for merchandise returned $300.
9 Received collections in full, less discounts, from customers billed on sales of $2,100 on
May 2.
10 Paid Jerry’s Wholesale Supply in full, less discount.
11 Purchased supplies for cash $400.
12 Purchased merchandise for cash $1,400.
15 Received refund for poor quality merchandise from supplier on cash purchase $150.
17 Purchased merchandise from Cosmo Distributors $1,300, FOB shipping point, terms 2/10,
n/30.
19 Paid freight on May 17 purchase $130.
24 Sold merchandise for cash $3,200.The merchandise sold had a cost of $2,000.
25 Purchased merchandise from Costanza, Inc. $550, FOB destination, terms 2/10, n/30.
27 Paid Cosmo Distributors in full, less discount.
29 Made refunds to cash customers for defective merchandise $60. The returned merchandise
had a scrap value of $10.
31 Sold merchandise on account $900, terms n/30.The cost of the merchandise sold was $560.
Newman Hardware’s chart of accounts includes the following: No. 101 Cash, No. 112
Accounts Receivable, No. 120 Merchandise Inventory, No. 126 Supplies, No. 201 Accounts
Payable, No. 311 Common Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No.
414 Sales Discounts, No. 505 Cost of Goods Sold.
Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Enter the beginning cash and common stock balances and post the transactions. (Use J1 for
the journal reference.)
(c) Prepare an income statement through gross profit for the month of May 2008.

Ex 12: Tarp Department Store is located in midtown Platteville. During the past several years,
net income has been declining because of suburban shopping centers. At the end of the
company’s fiscal year on November 30, 2008, the following accounts appeared in two of its
trial balances.
Analysis reveals the following additional data.
1. Salaries expense is 75% selling and 25% administrative.
2. Insurance expense is 50% selling and 50% administrative.
3. Rent expense, utilities expense, and property tax expense are administrative expenses.
4. Notes payable are due in 2011.
Instructions
(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified
balance sheet.
(b) Journalize the adjusting entries that were made.
(c) Journalize the closing entries that are necessary.

Ex13: Caleb Borke, a former disc golf star, operates Caleb’s Discorama. At the beginning of
the current season on April 1, the ledger of Caleb’s Discorama showed Cash $1,800,
Merchandise Inventory $2,500, and Common Stock $4,300.The following transactions were
completed during April.
Apr. 5 Purchased golf discs, bags, and other inventory on account from Innova Co. $1,200,
FOB shipping point, terms 2/10, n/60.
7 Paid freight on Innovas purchase $50.
9 Received credit from Innova Co. for merchandise returned $100.
10 Sold merchandise on account for $900, terms n/30. The merchandise sold had a cost of
$540.
12 Purchased disc golf shirts and other accessories on account from Lightning Sportswear
$670, terms 1/10, n/30.
14 Paid Innova Co. in full, less discount.
17 Received credit from Lightning Sportswear for merchandise returned $70.
20 Made sales on account for $560, terms n/30.The cost of the merchandise sold was $340.
21 Paid Lightning Sportswear in full, less discount.
27 Granted an allowance to members for clothing that was flawed $30.
30 Received payments on account from customers $800.
The chart of accounts for the store includes the following: No. 101 Cash, No. 112 Accounts
Receivable, No. 120 Merchandise Inventory, No. 201 Accounts Payable, No. 311 Common
Stock, No. 401 Sales, No. 412 Sales Returns and Allowances, No. 505 Cost of Goods Sold.
Instructions
(a) Journalize the April transactions using a perpetual inventory system.
(b) Enter the beginning balances in the ledger accounts and post the April transactions. (Use
J1 for the journal reference.)
(c) Prepare a trial balance on April 30, 2008.

Ex 14: Letterman Inc. operates a retail operation that purchases and sells home entertainment
products. The company purchases all merchandise inventory on credit and uses a periodic
inventory system. The accounts payable account is used for recording inventory purchases
only; all other current liabilities are accrued in separate accounts. You are provided with the
following selected information for the fiscal years 2005 through 2008, inclusive.
Instructions
(a) Calculate the missing amounts.
(b) Sales declined over the 3-year fiscal period, 2006–2008. Does that mean that profitability
necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio
for each fiscal year to help support your answer. (Round to one decimal place.)