Name: __________________________ Date: _____________

1. Retailers and service companies are both considered merchandising companies.

A) True
B) False

2. When a customer returns defective merchandise to the vendor, the company would debit
the Sales Revenue account for the value of the inventory returned (net of tax).
A) True
B) False

3. Under a perpetual inventory system, the inventory account is updated when the sale is
recorded.
A) True
B) False

4. The terms 2/10, n/30 indicates that the company will get a 10% discount if the balance
is paid within 2 days.
A) True
B) False

5. Which of the following companies would not be considered a merchandising company?

A) Mountain Equipment Co-op
B) Wal-Mart
C) Air Canada
D) General Motors

6. Two categories of expenses in merchandising companies are

A) cost of goods sold and financing expenses.
B) operating expenses and financing expenses.
C) cost of goods sold and operating expenses.
D) sales and cost of goods sold.
 7. Which of the following statements is correct?
A) Under a periodic system, the inventory account is only updated once per period.
B) Under a perpetual system, the inventory account is only updated once per period.
C) Cost of goods sold computed under a periodic system would be higher than under a
perpetual system.
D) The value of inventory computed under a periodic system would be lower than
under a perpetual system.

8. Sales revenue less the cost of goods sold equals

A) operating expenses.
B) gross profit.
C) operating income.
D) net income.

9. Under a perpetual inventory system, acquisition of merchandise for resale is debited to

the
A) Merchandise Inventory account.
B) Cost of Goods Sold account.
C) Supplies account.
D) Purchases account.

10. In a perpetual inventory system, cost of good sold is recorded

A) on a daily basis.
B) on a monthly basis.
C) on an annual basis.
D) with each sale.

11. Under a perpetual inventory system, the following entry would be made to record the
purchase of inventory on account:
A)
Merchandise Inventory xxx
Accounts Payable xxx
B)
Purchases xxx
Accounts Payable xxx
C)
Cost of Goods Sold xxx
Accounts Payable xxx
D)
Merchandise Inventory xxx
Cost of Goods Sold xxx
12. Under a perpetual inventory system, the following entry would be made to record the
return of merchandise purchased on account:
A)
Accounts Payable xxx
Purchases xxx
B)
Accounts Payable xxx
Merchandise Inventory xxx
C)
Accounts Payable xxx
Purchase Returns and Allowances xxx
D)
Accounts Payable xxx
Cost of Goods Sold xxx

13. In a perpetual inventory system, the entry to record the purchase of merchandise
inventory on account would require a
A) debit to the Merchandise Inventory account and a credit to the Accounts Payable
account.
B) debit to the Accounts Payable account and a credit to the Merchandise Inventory
account.
C) debit to the Merchandise Inventory account and a credit to the Cash account.
D) credit to the Merchandise Inventory account and a debit to the Cost of Goods Sold
account.

14. Brown Company purchased merchandise from Drabek Company with freight terms of
FOB shipping point. The freight costs will be paid by the
A) seller.
B) buyer.
C) transportation company.
D) buyer and the seller.

15. Using a perpetual inventory system, the cost of freight in

A) increases the cost of merchandise inventory.
B) is contra to the Purchases account.
C) is a permanent account.
D) reflects the cost of delivering goods to customers.
16. Wright Company recently made a purchase of $10,000 from a major supplier. Shipping
costs were $200, terms FOB shipping point. To record this purchase, Wright Company
will need to debit the
A) Merchandise Inventory account for $10,000.
B) Cost of Goods Sold account for $200.
C) Merchandise Inventory account for $10,200.
D) Cost of Goods Sold account for $10,200.

17. The Sales Returns and Allowances account is classified as

A) an asset account.
B) a contra asset account.
C) an expense account.
D) a contra revenue account.

18. Sales revenues are usually considered earned when

A) cash is received from credit sales.
B) an order is received.
C) goods have been transferred from the seller to the buyer.
D) adjusting entries are made.

19. Freight costs incurred by the seller on outgoing merchandise are recorded as
A) a delivery expense.
B) merchandise inventory.
C) freight-in.
D) cost of goods sold.

20. If a customer agrees to keep merchandise that is defective because the seller is willing to
reduce the selling price, this transaction is known as a sales
A) discount.
B) return.
C) contra asset.
D) allowance.
21. Tokyo Company sells merchandise on account for $1,200 to Thomas Company. Thomas
Company returns $400 (cost $250) of merchandise that was damaged, along with a
cheque to settle the account. What entry does Tokyo Company make upon receipt of the
cheque?
A)
Cash 800
Accounts Receivable 800
B)
Cash 784
Sales Returns and Allowances 416
Accounts Receivable 1,200
C)
Cash 800
Sales Returns and Allowances 400
Inventory 250
Accounts Receivable 1,200
Cost of Goods Sold 250
D)
Cash 1,200
Sales Returns and Allowances 400
Accounts Receivable 800

22. Which of the following accounts has a normal credit balance?

A) Sales Returns and Allowances
B) Delivery Expense
C) Sales
D) Selling Expense

23. If a purchaser returns goods purchased on account to the supplier under a perpetual
inventory system, the purchaser would debit
A) Cost of Goods Sold.
B) Accounts Payable.
C) Merchandise Inventory.
D) Purchase Returns.

24. All of the following accounts are closed at the end of the accounting period except
A) sales returns and allowances.
B) freight out.
C) cost of goods sold.
D) merchandise inventory.
25. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point,
then the
A) Merchandise Inventory account will be increased by the freight costs.
B) Merchandise Inventory account will not be affected.
C) seller will bear the freight cost.
D) carrier will bear the freight cost.

26. Freight costs paid by a seller on merchandise sold to customers will cause an increase
A) in the selling expense of the buyer.
B) in operating expenses for the seller.
C) to the cost of goods sold of the seller.
D) to a contra-revenue account of the seller.

27. Using a perpetual inventory system, the respective normal account balances of
Merchandise Inventory, Sales Returns and Allowances, and Cost of Goods Sold are
A) credit, credit, credit.
B) debit, debit, debit.
C) debit, credit, credit.
D) debit, debit, credit.

28. The operating expense section of an income statement for a wholesaler would not
include
A) shipping expense.
B) utilities expense.
C) cost of goods sold.
D) insurance expense.

29. The Cost of Goods Sold account

A) is a temporary account.
B) is a permanent account.
C) appears on the balance sheet as an asset.
D) appears on the income statement as an operating expense.

30. When contrasting a perpetual inventory system to a periodic system, the

A) perpetual system requires less clerical work.
B) perpetual system provides better control over inventories.
C) periodic system requires more clerical work.
D) periodic system provides better control over inventories.
31. Selling terms 2/10, net 30 indicates which of the following?
A) The purchaser is required to pay the entire bill within 10 days.
B) The purchaser can take a 20% discount if they pay within 30 days.
C) The purchaser can take a 2% discount if they pay within 10 days.
D) The purchaser can take a 2% discount if they pay within 30 days.

32. The term n/30 means

A) the entire bill must be paid within 30 days.
B) the purchaser must pay 3% interest if their payment is late.
C) the seller is offering a 30% discount for early payment.
D) the seller is expected to deliver the goods within 30 days.

33. The factor which determines whether or not goods should be included in a physical count of inventory is

A) physical possession.

B) legal title.

C) management's judgement.

D) whether or not the purchase price has been paid.

34. If goods in transit are shipped FOB destination

A) the seller has legal title to the goods until they are delivered.

B) the buyer has legal title to the goods when a public carrier accepts the goods from the seller.

C) the transportation company has legal title to the goods while the goods are in transit.

D) no one has legal title to the goods until they are delivered.

35. An employee assigned to counting computer monitors in boxes should

A) estimate the number if there are a large quantity to be counted.

B) read each box and rely on the box description for the contents.

C) open each box and check that the box contains a monitor.

D) rely on the warehouse records of the number of computer monitors.

36. Which of the following best indicates that a company is managing its inventory efficiently?

A) A low inventory turnover ratio

B) A high inventory turnover ratio

C) A high days sales in inventory ratio

D) A low gross profit margin

37. The four subdivisions for property, plant, and equipment are normally

A) land, land improvements, buildings, and equipment.

B) intangibles, land, buildings, and equipment.

C) furnishings and fixtures, land, buildings, and equipment.

D) property, plant, equipment, and land.

38. Juang Company acquires land for $56,000 cash. Additional costs are as follows:

Removal of shed $ 1,800

Filling and grading 1,500

Residual value of lumber from shed 600

Paving of parking lot 10,000

Closing costs 690

Juang will record the acquisition cost of the land as

A) $56,000.

B) $60,590.

C) $69,390.

D) $59,990.
39. The balance in the Accumulated Amortization account represents the

A) cash fund to be used to replace long-lived assets.

B) amount to be deducted from the cost of the long-lived asset to arrive at its fair market value.

C) amount charged to expense in the current period.

D) amount charged to expense since the acquisition of the long-lived asset.

40. The net book value of an asset is equal to the

A) asset's market value less its historical cost.

B) asset's cost less amortization expense.

C) replacement cost of the asset.

D) asset's cost less accumulated amortization.

41. Recording amortization each period is necessary in accordance with the

A) going concern principle.

B) cost principle.

C) matching principle.

D) revenue recognition principle.

42. Which amortization method is most frequently used in businesses today?

A) Straight-line

B) Declining-balance

C) Units-of-activity

D) Double declining-balance

43. A gain or loss on disposal of a long-lived asset is determined by comparing the

A) replacement cost of the asset with the asset's original cost.

B) net book value of the asset with the asset's original cost.

C) original cost of the asset with the proceeds received from its sale.

D) net book value of the asset with the proceeds received from its sale.
44. If a fully amortized long-lived asset is still used by a company, the

A) estimated remaining useful life must be revised to calculate the correct revised amortization.

B) asset is removed from the books.

C) accumulated amortization account is removed from the books but the asset account remains.

D) asset and the accumulated amortization continue to be reported on the balance sheet without
adjustment until the asset is retired.

45. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting

A) Legal Expense.

B) an Intangible Loss account.

C) the Patent account.

D) an operating expenditure account.

46. A patent can be renewed

A) every twenty years.

B) only after its economic life has been exhausted.

C) only if significantly defended in an infringement suit.

D) A patent can never be renewed.

47. A franchise should be classified on the balance sheet as a(n)

A) current asset.

B) prepaid expanse.

C) intangible asset.

D) property, plant, and equipment.

The ledger of Casper Consulting at January 31, 2008 includes the following selected accounts:

Debit Credit

Prepaid insurance $ 3,600

Supplies 1,800

Building 100,000

Land 60,000

Notes (loan) payable $90,000

Unearned service revenue 8,000

Casper’s accountant is inexperienced, and he would like your help in preparing the company’s year end
January 31, 2008 financial statements. Casper makes adjusting entries annually - only at year end. The
accountant has provided you with the following information:

1. A one-year insurance policy costing $3,600 was purchased on January 1, 2008. At that time the full
amount was debited to prepaid insurance.

2. A physical inventory count on January 31, 2008 revealed $800 in supplies were still remaining.

3. a) Land and building were purchased on February 1, 2007 at a cost of $160,000. The building has an
expected useful life of 20 years. b) The purchase was financed by paying $70,000 in cash and the
balance on a 2-year, 8% note payable. Interest on the note is due at maturity.

4. The amount contained the Unearned Service Revenue Account is related to a client retainer paid on
January 15, 2008. On January 31, 2008, half of this amount has been earned.

PART 1 – KNOWLEDGE /5 marks

Identify the type of adjustment required:

Prepaid Expense, Unearned Revenue, Accrued Expense, Accrued Revenue

Adjustment 1 __________________________________________________________
Adjustment 2 __________________________________________________________
Adjustment 3a _________________________________________________________
Adjustment 3b _________________________________________________________
Adjustment 4 __________________________________________________________

PART 2 – APPLICATION /15 marks

Journalize the adjusting entries required at January 31, 2008 on the sheet provided.
PART 2b – COMMUNICATION /5 marks
Ensure adjusting journal entries are formatted correctly and include an explanation.

In 2003, Vender Manufacturing Inc. purchased three capital assets. Information concerning the
assets is summarized below:

Asset Acquired Cost Salvage Useful life in Amortization

Value years method
Chair March 1, 10,000 1,000 8 40%
2003 declining
balance
Elevator April 30, 85,000 15,000 10 Straight line
2003
Couch July 30, 2003 60,000 6,000 5 Units of
activity

For the units-of-activity method, lifetime machine hours are expected to be 15,000. Actual hours
of use in 2003 were 8,389.
Instructions
Calculate the depreciation
(a) expense for each machine in
2003.
On January 1, 2004, the
company had to dispose of
the couch; they also sold the
(b)
elevator for $80,000.
Journalize both disposal
entries.
1. Martin Sports Equipment sells a variety of sports items. The following data relates to Martin's
inventory of golf club sets. 0n March 1, 2008, Martin had 22 sets of clubs in inventory at a cost
of $395 each. During March, the following transactions occurred.

Mar. 2 Sold 7 sets of clubs on account to Flex Golf Club for $560 each, terms 2/10 n/30

4 Flex Golf Club returned 2 sets of clubs. Martin returned the clubs to inventory

11 Flex Golf Club paid the account in full

15 Purchased 8 sets of clubs from Taylor Sports Canada at $395, terms n/30

17 Freight of $600 on the purchase from Taylor was FOB destination and was paid by the
appropriate party
18 Sold 6 sets of clubs at $560 each for cash, and gave a 5% discount to the customer for paying
cash.

22 Purchased 11 sets of clubs from Lopez Golf for $400 each. Terms 3/10 net/30

24 Returned one set of clubs to Lopez Golf because they were defective

31 Paid the Lopez Golf account within the discount period.

Instructions: Using the perpetual inventory system, prepare the journal entries to record the
transactions.