Accounting Volume 1 Canadian 9th Edition Horngren Test Bank

Accounting Volume 1 Canadian 9th
Edition Horngren Test Bank

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Accounting, Vol. 1, 9e Cdn. Ed. (Horngren et al.)
Chapter 5 Merchandising Operations and the Accounting Cycle
Objective 5-1
1) Inventory includes all goods that the company owns and expects to use in normal operations.
Answer: FALSE
Diff: 1
Learning Outcome: A-03 Analyze and record transactions and their effects on the financial statements
Skill: Knowledge
Objective: 5-1 Use sales and gross margin to evaluate a company
2) Sales revenue and Net sales are synonymous terms.

Answer: FALSE
Diff: 1
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
3) Cost of goods sold is an operating expense.

Answer: FALSE
Diff: 1
Skill: Knowledge
4) Gross margin is equal to net sales plus cost of goods sold.

Answer: FALSE
Diff: 1
Skill: Knowledge
5) Inventory is a current liability on the balance sheet.

Answer: FALSE
Diff: 1
Skill: Knowledge
6) Net sales is equal to sales revenue plus sales returns and minus sales discounts.
Answer: FALSE
Diff: 2
Skill: Knowledge
1
© 2014 Pearson Canada Inc.
7) Gross margin minus expenses equals gross profit.
Answer: FALSE
Diff: 2
Skill: Knowledge
8) Sales revenue minus sales returns and allowances and sales discounts equals:
A) gross margin.
B) income from operations.
C) cost of goods sold.
D) net sales.
Answer: D
Diff: 2
Skill: Knowledge
2
Table 5-4
The following data is for the Atlantis Merchandising, which uses a periodic inventory system:
Sales revenue $600,000

Interest revenue 12,000
Freight in 42,000
Beginning inventory 77,000
Purchase discounts 19,000
Sales returns and allowances 33,000
Operating expenses 77,000
Interest expense 9,000
Ending inventory 81,000
Purchases 415,000
Sales discounts 35,000
Omar Atlantis, Withdrawals 71,000
Purchase returns and allowances 39,000
9) Refer to Table 5-4. Net sales for Atlantis Merchandising are:

A) $532,000
B) $600,000
C) $567,000
D) $565,000
Answer: A
Explanation: A)
Sales $600,000
Returns & allowances 33,000
Discounts 35,000
Net sales $532,000
Cost of goods sold:
Beg. inventory $77,000
Net purchases (415-19-39) 357,000
Freight-in 42,000
Available $476,000
End. inventory 81,000
Cost of goods sold 395,000
Gross margin $137,000
Operating income $60,000
Other income and expenses:
Interest income $12,000
Interest expense 9,000 3,000
Net income $63,000
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual
Framework
Skill: Application
3
Table 5-5
The following items were taken from the December 31, 2013 records of Speedy Boat Company, which
uses a periodic inventory system:
Salary payable $1,100

Sales revenue 480,000
Freight in 20,000
Purchases of inventory 240,000
Owner withdrawals 12,000
10) Refer to Table 5-5. The net sales for Speedy Boat Company are:
A) $427,000
B) $445,000
C) $480,000
D) $462,000
Answer: A
Explanation: A)
Sales $480,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
Interest revenue $3,000
Interest expense 7,000 (4,000)
Net income $168,000
Diff: 2
Skill: Application
4
11) What is the difference between a sales return and a sales allowance?
A) A sales return reduces the amount receivable from the customer, but an allowance does not.
B) A sales return involves an adjustment to Inventory, but a sales allowance does not.
C) A sales return requires a debit to Sales returns and allowances, but a sales allowance does not.
D) A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.
Answer: B
Diff: 2
Skill: Knowledge
Match the following.
A) gross margin
B) sales returns and allowances
C) inventory
12) The excess of sales revenue over cost of goods sold

Diff: 1
Skill: Knowledge
13) All goods that a business owns and expects to sell in the normal course of operation
Diff: 1
Skill: Knowledge
14) A contra account to Sales Revenue

Diff: 1
Skill: Knowledge
Answers: 12) A 13) C 14) B
15) Define gross margin and operating income. Explain how they are used in evaluating a company.
Answer: Gross margin is the excess of sales revenue over the cost of the goods sold. It helps measure a
business's success. A sufficiently high gross margin is vital to success. Gross margin must be high enough
to cover the operating expenses of the firm in order to result in operating income for the period.
Operating income is gross margin minus operating expenses plus any other operating revenues. There
must be sufficient operating income to cover other expenses of the period to end up with a net income
instead of a net loss.
Diff: 2
Skill: Comprehension
5
Objective 5-2
1) The entry to record the purchase of inventory on account in a perpetual inventory system includes a
debit to the Purchases account.
Answer: FALSE
Diff: 2
Skill: Knowledge
Objective: 5-2 Account for the purchase and sale of inventory under the perpetual inventory system
2) Purchase returns of merchandise decrease the liability to a creditor.

Answer: TRUE
Diff: 2
3) In a purchase discount, the larger the quantity of merchandise purchased, the lower the price per item.
Answer: FALSE
Diff: 3
4) Credit terms of 1/15 n/30 means the purchaser can deduct 1% of the invoice price if paid within 15
days.
Answer: TRUE
Diff: 1
Skill: Knowledge
5) Quantity discounts offered by suppliers for large shipments of inventory are always recorded
separately.
Answer: FALSE
Diff: 1
Skill: Knowledge
6) FOB shipping point means that the title to the goods passes to the purchaser upon receipt of the goods
and the seller is responsible for the cost of the freight.
Answer: FALSE
Diff: 2
Skill: Knowledge
6
7) Sales discounts is a contra account and has a normal credit balance.
Answer: FALSE
Diff: 2
Skill: Knowledge
8) When the seller accepts a return of undamaged goods from the purchaser, the seller's journal entries
would include two entries, if they are using a perpetual inventory system.
Answer: TRUE
Diff: 3
9) A seller requesting payment will send the purchaser a purchase order.

Answer: FALSE
Diff: 2
Skill: Knowledge
10) The entry to record the return of $250 of inventory to a supplier under the perpetual inventory system
is recorded with a debit to:
A) Accounts Payable and a credit to Purchases Discounts.
B) Purchases Returns and Allowances and a credit to Accounts Payable.
C) Accounts Payable and a credit to Inventory.
D) Inventory and a credit to Accounts Payable.
Answer: C
Diff: 2
Skill: Knowledge
11) Using a perpetual inventory system, the entry to record the purchase of merchandise on account
involves a:
A) debit to Inventory.
B) debit to Accounts Payable.
C) credit to Inventory.
D) credit to Cash.
Answer: A
Diff: 2
Skill: Knowledge
7
12) Credit terms of 1/10 n/30 indicates that the buyer is:
A) allowed a 10% discount if payment is made within 30 days.
B) allowed a 1% discount if payment is made within 10 days.
C) allowed a 1% discount if payment is made within 30 days.
D) allowed a 30% discount if payment is made within 10 days.
Answer: B
Diff: 1
Skill: Knowledge
13) Which of the following credit terms allows for a cash discount?
A) n/30
B) n/eom
C) n/60
D) 1/10 n/30
Answer: D
Diff: 1
Skill: Knowledge
14) A merchandiser purchases inventory on account under a perpetual inventory system with terms of
2/10 n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) debit Purchases Discounts on date of purchase if the discount is not taken.
Answer: A
Diff: 3
15) A company makes a purchase of $2,000 of inventory, subject to credit terms of 3/10 n/45 and returns
$500 of inventory prior to payment. What is the amount of the payment assuming payment is made
within the discount period?
A) $1,500
B) $1,455
C) $1,440
D) $1,560
Answer: B
Diff: 2
Skill: Analysis
8
16) If a purchaser returns goods purchased on account to the supplier under a perpetual inventory
system, the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Receivable and credit Inventory.
Answer: B
Diff: 2
Skill: Knowledge
17) When a discount is taken for prompt payment under a perpetual inventory system, the purchaser
would credit:
A) Accounts Payable.
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: D
Diff: 2
Skill: Knowledge
18) A purchase return or allowance under a perpetual inventory system is credited to:
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: C
Diff: 2
Skill: Knowledge
19) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a
perpetual inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Accounts Payable and credit to Inventory for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: A
Diff: 2
Skill: Application
9
20) When the seller accepts a return of goods from the purchaser originally sold on account, the seller's
journal entry would include a debit to:
A) Sales Discounts and credit to Cash.
B) Sales Returns and Allowances and credit to Accounts Receivable.
C) Sales Returns and Allowances and credit to Sales Discounts.
D) Sales Revenue and credit to Cash.
Answer: B
Diff: 2
Skill: Knowledge
21) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record
payment for the merchandise within the discount period under a perpetual inventory system would
include a:
A) debit to Inventory of $1,940.
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: D
Diff: 2
Skill: Application
22) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made
within the discount period, the entry to record the payment under a perpetual inventory system would
include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Skill: Application
10
23) Green Company purchased $3,600 of merchandise on account, terms 2/10 n/30. If payment was made
after the expiration of the discount period and a perpetual inventory system is used, the entry to record
the payment would include a:
A) credit to Inventory of $3,600.
B) credit to Cash of $3,528.
C) credit to Cash of $3,600.
D) debit to Accounts Payable of $3,528.
Answer: C
Diff: 2
Skill: Application
24) The seller is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: A
Diff: 2
Skill: Knowledge
25) The buyer is responsible for the shipping costs when the shipping terms are:
A) FOB destination.
B) COD destination.
C) FOB shipping point.
D) COD shipping point.
Answer: C
Diff: 2
Skill: Knowledge
26) When the buyer pays the freight costs, the entry to record the payment under a perpetual inventory
system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: C
Diff: 2
Skill: Knowledge
11
27) When the seller is liable for the shipping costs, the payment for the freight in the seller's accounts is
recorded with a debit to:
A) Delivery Expense or Freight Out.
B) Freight In.
C) Inventory.
D) Cash.
Answer: A
Diff: 2
28) Under a perpetual inventory system, the entry to record the cost of goods sold would include a debit
to:
A) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the cost of the inventory.
D) Inventory and a credit to Cost of Goods Sold for the cost of the inventory.
Answer: C
Diff: 2
Skill: Knowledge
29) Under a perpetual inventory system, the entry to record a sale on account would include a debit to:
A) Accounts Receivable and a credit to Sales Revenue for the retail price of the inventory.
B) Inventory and a credit to Sales Revenue for the retail price of the inventory.
C) Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
D) Accounts Receivable and a credit to Sales Revenue for the cost of the inventory.
Answer: A
Diff: 2
Skill: Knowledge
30) The entry to record the sale of merchandise for cash includes a:
A) debit to Accounts Receivable.
B) credit to Sales Discounts.
C) debit to Sales Revenue.
D) credit to Sales Revenue.
Answer: D
Diff: 1
Skill: Knowledge
12
31) To update the inventory records for the sale of merchandise under a perpetual inventory system, the
entry would include a:
B) credit to Accounts Payable.
D) debit to Cost of Goods Sold.
Answer: D
Diff: 2
Skill: Knowledge
32) To update the inventory records for the sale of merchandise under a perpetual inventory system, the
entry would include a:
A) credit to Inventory.
D) credit to Cost of Goods Sold.
Answer: A
Diff: 2
Skill: Knowledge
33) The entries to record a $5,000 cash sale under a perpetual inventory system, when the cost of the
merchandise is $3,200, include a:
A) debit to Inventory for $5,000.
B) debit to Sales Revenue for $5,000.
C) credit to Cost of Goods Sold for $3,200.
D) debit to Cost of Goods Sold for $3,200.
Answer: D
Diff: 2
Skill: Application
34) The entries to record a $4,500 sale on account under a perpetual inventory system, when the cost of
the merchandise is $3,000, include a:
B) credit to Sales Revenue for $3,000.
C) debit to Sales Revenue for $4,500.
D) credit to Inventory for $3,000.
Answer: D
Diff: 2
Skill: Application
13
35) Under a perpetual inventory system, the entry to record the return of inventory sold on account for
$250 with a cost of $185 would be recorded by the seller as a:
A) debit to Accounts Receivable for $250.
B) debit to Sales Returns and Allowances for $185.
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: D
Diff: 3
Skill: Application
36) Under a perpetual inventory system, the entry to record the return of inventory sold on account for
A) credit to Accounts Receivable for $210.
B) credit to Sales Returns and Allowances for $210.
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: D
Diff: 3
Skill: Application
37) Eastern Outfitters sold $2,500 of inventory to a customer on account, terms 3/15 n/40. Freight terms
were FOB shipping point and freight charges totalled $150. The entry to record the sale would include a:
A) credit to Accounts Receivable for $2,350.
B) debit to Sales Revenue for $2,500.
C) credit to Sales Revenue for $2,500.
D) debit Accounts Receivable for $2,650.
Answer: C
Diff: 3
Skill: Application
38) A merchandiser received payment in full within the discount period on a $5,000 sales invoice, terms
2/15 n/30. The journal entry would include a:
A) debit to Cash for $5,000.
B) credit to Accounts Receivable for $5,000.
C) credit to Accounts Receivable for $5,900.
D) credit to Sales Discounts for $100.
Answer: B
Diff: 3
Skill: Application
14
39) A merchandiser received payment in full after the expiration of the discount period on a $3,000 sales
invoice, terms 3/15 n/30. The journal entry would include a:
A) debit to Cash for $2,910.
B) credit to Accounts Receivable for $2,910.
C) debit to Sales Discount of $90.
D) debit to Cash for $3,000.
Answer: D
Diff: 3
Skill: Application
40) Under a perpetual inventory system, the entries to record a $2,600 sales return of undamaged goods
for a sale originally made on account, when the merchandise had a cost of $1,200, include a:
B) debit to Sales Returns and Allowances of $1,200.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: A
Diff: 3
Skill: Application
41) Under a perpetual inventory system, the entries to record a $3,400 sales return for undamaged goods
on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $1,500.
D) Inventory of $1,500.
Answer: D
Diff: 3
Skill: Application
42) Which of the following is true about freight in?

A) Freight in is added to the cost of merchandise inventory.
B) Freight in is a selling expense.
C) Freight in is an operating expense.
D) Freight in is deducted from Accounts payable.
Answer: A
Diff: 1
Skill: Knowledge
15
43) Michelin Jewellers completed the following transactions. Michelin Jewellers uses the perpetual
inventory system. On April 2, Michelin sold $9,000 of merchandise to a customer on account with terms
of 3/15, n/30. Michelin's cost of the merchandise sold was $5,500. On April 4, the customer reported
damaged goods and Michelin granted a $1,000 sales allowance. On April 10, Michelin received payment
from the customer. Which of the following entries correctly records the cash receipt on Michelin's books?
A)
Cash 7,760
Sales discount 240
Accounts receivable 8,000
B)
Sales discount 240
Cash 7,760
C)
Cash 8,000
D)
Cash 7,760
Answer: A
Diff: 2
Skill: Application
A) sales discount
44) Reduction in the amount receivable from a customer, offered by the seller as an incentive for the
customer to pay promptly.
Diff: 1
Skill: Knowledge
Answers: 44) A
16
45) The following data pertain to Corbet Merchandising for the year ended December 31, 2013:
Beginning inventory $190,300

Purchases of inventory on credit during the year 450,000
Cost of goods sold during the year 65% of sales
Sales (75% on credit) during the year 800,000
a) Prepare entries for the following transactions using a perpetual inventory system:
1) Purchase of inventory during 2013
2) Sales during 2013
3) Cost of goods sold during 2013
b) Compute the balance in the inventory account on December 31, 2013.

Answer:
a) General Journal
Date Accounts Debit Credit
1) Inventory 450,000
Accounts Payable 450,000
To record inventory purchases during 2013.
2) Cash 200,000
Accounts Receivable 600,000
Sales Revenue 800,000
To record cash and credit sales during 2013.
3) Cost of Goods Sold 520,000

Inventory 520,000
To record cost of goods sold during 2013.
b) $190,300 + $450,000 - $520,000 = $120,300

Diff: 2
Skill: Analysis
17
46) Details of a purchase invoice, credit terms, and a purchase return are shown below. Assume the credit
memo was received and payment made within the discount period.
Cost of merchandise as shown on purchase invoice $9,200

Cost of merchandise returned 3,700
Transportation charges, terms FOB shipping point 500
Credit terms 2/10 n/30
Compute the following:

a) amount of discount
b) amount paid by purchaser, within the discount period, including freight, if applicable
c) amount paid by purchaser if paid after expiration of discount including freight, if applicable
Answer:
a) ($9,200 - $3,700) × 0.02 = $110
b) ($5,500 × 0.98) + $500 = $5,890
c) $5,500 + $500 = $6,000

Diff: 2
Skill: Analysis
47) Details of purchase invoices including shipping terms, credit terms, and returns appear below.
Compute the total amount to be paid in full settlement of each invoice, assuming that credit for returns is
granted before the expiration of the discount period and payment is made within the discount period.
Transportation Returns and

Invoice Freight and Credit Terms Charges Allowances
a) $2,000 FOB destination, 3/10 n/45 $55 $200
b) $5,500 FOB shipping point, 2/10 n/30 $100 $50
c) $6,700 FOB shipping point, 2/10 n/45 $200 $350
d) $9,300 FOB destination, 2/10 n/60 $150 $550
Answer:
a) ($2,000 - $200) × 0.97 = $1,746
b) [($5,500 - $50) × 0.98] + $100 = $5,441
c) [($6,700 - $350) × 0.98] + $200 = $6,423
d) ($9,300 - $550) × 0.98 = $8,575

Diff: 2
Skill: Analysis
18
48) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,

FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required:
Assuming the perpetual inventory system is used, prepare the journal entries to record the above
transactions.
Answer:
General Journal
May 5 Inventory 2,700
Purchased merchandise on account, 3/15 n/6.0
9 Inventory 250
Cash 250
Paid transportation cost on May 5 purchase.e.
10 Accounts Payable 400

Inventory 400
Returned defective merchandise purchased on
May 5.
15 Accounts Payable 2,300

Cash 2,231
Inventory 69
Paid for May 5 purchase, less return and
discount.
Diff: 2
Skill: Application
19
49) Romeo Merchandising had the following transactions in June. Prepare journal entries for these
transactions assuming Romeo uses a perpetual inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
The cost of the merchandise sold was $5,100.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5. The cost of
the returned merchandise was $1,450.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
June 2 Inventory 18,000
Inventory 2,000
Cash 2,000
Inventory 2,500
5 Accounts Receivable 8,000
Sales Revenue 8,000
Cost of Goods Sold 5,100
Inventory 5,100
Cash 15,190
Inventory 310
15 Sales Returns and Allowances 2,500
Inventory 1,450
19 Cash 5,335
Sales Discounts 165
Diff: 2
Skill: Application
20
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
50) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming
that Latest Fashions uses a perpetual inventory system.
Answer:
General Journal
Inventory 400
8 Inventory 100
Cash 100
Sales Revenue 5,000
Inventory 4,000
Inventory 16
Cash 1,584
12 Sales Returns and Allowances 300
Accounts Receivable 300
23 Cash 4,606
Sales Discount 94
Diff: 2
Skill: Application
21
51) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed,
assuming that Trendy uses a perpetual inventory system.
Answer:
General Journal
June 2 Accounts Receivable 2,000
Sales Revenue 2,000
Inventory 1,800
10 Cash 1,584
Sales Discount 16
Diff: 3
Skill: Application
52) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming
that New Miss Store uses a perpetual inventory system.
Answer:
General Journal
Inventory 300
Inventory 94
Cash 4,606
Diff: 3
Skill: Application
22
Table 5-9
Reid Art Supply Company uses a perpetual inventory system. The company had the following
transactions during August, 2013:
Aug. 5 Purchased $2,900 of merchandise on account; FOB shipping point, 3/15, n/60.
Aug. 9 Paid transportation costs of $440 for the Aug. 5 purchase.
Aug. 10 Returned $600 of defective merchandise purchased on Aug. 5.
Aug. 15 Paid the amount owing for the merchandise purchased Aug. 5.
53) Record the August journal entries for Reid Art Supply.
Answer:
General Journal
Aug 5 Inventory 2,900
9 Inventory 440
Cash 440

Inventory 600

Inventory 69
Cash 2,231
Diff: 2
Skill: Application
23
54) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.

May 5 Purchased purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return.
Required:
1. Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record
the above transactions.
2. Assuming weighted-average and that the periodic inventory system is used, prepare the journal
entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date Account Name Debit Credit

May 9 Inventory 240

Cash 240
May 10 Accounts Payable 54

Inventory 54
May 11 Accounts Receivable (30 × $50) 1,500

Sales 1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3)) 800
Inventory 800
May 15 Accounts Payable ($2,160 - $54) 2,106

Cash 2,106
May 20 Accounts receivable 500

Sales 500
Cost of Goods Sold (10 × $30) 300

Inventory 300
24
Requirement 2: Periodic Inventory Method

May 5 Purchases 2,160
May 9 Frieght-in 240

Cash 240

Purchase Returns 54
May 11 Accounts Receivable 1,500

Sales 1,500
May 15 Accounts Payable 2,160

Cash 2,160
May 20 Accounts Receivable 500

Sales 500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective 5-3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold
account in a perpetual inventory system.
Answer: TRUE
Diff: 2
Skill: Knowledge
Objective: 5-3 Adjust and close the accounts of a merchandising business under the perpetual inventory
system
2) In the closing entry process, the sales returns and allowances account is debited.
Answer: FALSE
Diff: 2
Skill: Knowledge
system
25
3) The adjusting entry required when the inventory counted is greater than the balance in the inventory
account has a credit to Cost of Goods Sold.
Answer: TRUE
Diff: 2
system
4) In a perpetual inventory system, the closing entries include a credit to the Inventory account in an
amount that equals the ending inventory, and a debit to the Inventory account in an amount that equals
the beginning inventory.
Answer: FALSE
Diff: 3
Learning Outcome: A-05 Define and record adjusting and closing entries
Skill: Knowledge
system
5) Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would
include a:
A) credit to Miscellaneous Expense.
B) credit to Cost of Goods Sold.
D) debit to Miscellaneous Expense.
Answer: C
Diff: 2
Skill: Knowledge
system
6) Which accounts are affected in the closing process under a perpetual inventory system?
A) Gross Margin and Cost of Goods Sold.
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts.
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts.
D) Operating Expenses, Sales Revenue, and Purchases.
Answer: B
Diff: 3
Skill: Knowledge
system
26
7) Under a perpetual inventory system, which accounts would be closed to Income Summary with
credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Skill: Knowledge
system
8) A company's ledger shows an Inventory balance of $20,000 and a physical count of the inventory
shows $19,000. Which of the following entries is needed to record the shrinkage?
A)
Shrinkage expense 1,000
B)
Inventory 1,000
C)
Inventory 1,000
D)
Cash 1,000
Inventory 1,000
Answer: C
Diff: 2
Skill: Application
system
27
9) An adjusted trial balance is shown below.
Debit Credit
Cash $12,600
Prepaid rent 800
Inventory 28,000
Accounts payable $4,200
Salary payable 1,000
Notes payable 800
Capital 13,800
Withdrawals 1,000
Sales discounts 400
Salary expense 21,000
Rent expense 14,000
Amortization expense 8,500
Supplies expense 500
Total $115,800 $115,800
What will the final balance in Capital be after the closing entries?
A) $37,800
B) $12,700
C) $24,000
D) $36,800
Answer: A
Explanation: A) Calculations: $13,800 - $1,000 + $96,000 - $71,000 = $37,800
Diff: 3
Skill: Application
system
28
10) State whether the following accounts are:
a) closed with a debit

b) closed with a credit
c) not closed
1) cost of goods sold ________

2) sales returns and allowances ________
3) salary expense ________
4) inventory (assume perpetual inventory system) ________
5) amortization expense ________
6) accumulated amortization ________
7) accounts receivable ________
8) sales discounts ________
9) interest expense ________
10) sales revenue ________
Answer: 1) b
2) b
3) b
4) c
5) b
6) c
7) c
8) b
9) b
10) a
Diff: 2
Skill: Knowledge
system
29
11) Following is a random list of some of the accounts and their balances on December 31, 2013, for
Copperfield Merchandising. Copperfield uses a perpetual inventory system and all account balances are
normal.
Inventory $ 67,000
Sales returns & allowances 30,000
Delivery expense 15,000
Insurance expense 8,000
P.Copperfield, Capital 50,000
Utilities expense 29,000
Amortization expense 20,000
P Copperfield, Withdrawals 25,000
Accounts payable 56,000
Cash 29,000
A physical count on December 31, 2013, reveals $65,000 of inventory on hand.
a) Prepare the entry to adjust the inventory account on December 31, 2013.
b) Prepare the closing entries on December 31, 2013.
30
Answer:
General Journal
a)
Dec. 31 Cost of Goods Sold 2,000
Inventory 2,000
b)
Dec. 31 Sales Revenue 470,000
Interest Revenue 28,000
Income Summary 498,000
31 Income Summary 447,000
Sales Ret. and Allow. 30,000
Sales Discounts 25,000
Salary Expense 46,000
Utilities Expense 29,000
Amortization Expense 20,000
Delivery Expense 15,000
Interest Expense 13,000
Insurance Expense 8,000
P.Copperfield, Capital 51,000
31 P.Copperfield, Capital 25,000
P.Copperfield, Withdrawals 25,000
Diff: 3
Skill: Application
system
31
12) Underwater Adventures has the following account balances on August 31, 2014:

Accumulated amortization - equipment 30,300
Cash 2,200
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Supplies 7,100
Unearned sales revenue 4,500
The following information as at August 31, 2014 was also available:
a. A physical count of items showed $1,200 of supplies on hand.

b. An inventory count showed inventory on hand of $66,400.
c. The equipment has an estimated useful life of eight years and is expected to have no salvage value.
d. Unearned sales revenue of $1,000 was earned.
Required:
1. Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating
expenses are combined into a single operating expense account for financial statement purposes. Use the
normal account name for the adjusting journal entries.
2. Prepare a classified balance sheet based on adjusted account balances.
32
Answer: General Journal
Aug 31 Supplies expense 5,900
Supplies 5,900
31 Cost of goods sold 5,100

Inventory 5,100
31 Amortization expense, equipment 11,000

Accumulated amort., equip. 11,000
31 Unearned sales revenue 1,000

Sales revenue 1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $2,200
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner's Equity

Current liabilities:
Total current liabilities $12,300
Jacobson capital 113,800
Total liabilities and owner's equity $126,100
Diff: 3
Skill: Application
system
Table 5-10
33
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
Debit Credit
Cash $12,600
Prepaid rent 800
Inventory 28,000
Notes payable 800
Capital 13,800
Drawing 1,000
Sales discounts 400
Rent expense 22,500
Total $115,800 $115,800
34
13) Using the information from Table 5-10 prepare an income statement in single-step format and the
closing entries for Camptown Company.
Answer:
Camptown Company
Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue $ 96,000
Less: Sales discounts $ 400
Sales returns and allowances 1,600 2,000
Net sales revenue $ 94,000
Expenses:
Cost of goods sold $ 25,000
Rent expense 22,500
Total expenses 69,000
Net income $ 25,000
General Journal
Dec 31 Sales revenue 96,000
Income summary 96,000
31 Income summary 71,000

Sales discounts 400
Rent expense 22,500

Capital 25,000
31 Capital 1,000
Drawing 1,000
Diff: 2
Skill: Application
system
Objective 5-4
35
1) Operating expenses are divided into manufacturing expenses and selling expenses on the income
statement.
Answer: FALSE
Diff: 2
Skill: Knowledge
Objective: 5-4 Prepare a merchandiser's financial statements under the perpetual inventory system
2) The multi-step income statement format shows subtotals to highlight significant relationships.
Answer: TRUE
Diff: 1
3) Gross margin minus operating expenses equals income from operations on a multi-step income
statement.
Answer: TRUE
Diff: 2
Skill: Knowledge
4) A single-step format of the income statement will always have fewer sub-totals than the multi-step
income statement format.
Answer: TRUE
Diff: 1
Skill: Knowledge
5) The income from operations is presented on both the multi-step and single-step income statements.
Answer: FALSE
Diff: 2
Skill: Knowledge
36
6) The major revenue of a merchandiser is ________ while the major expense(s) is (are) ________.
A) sales revenue, cost of goods sold
B) gross margin, operating expenses
C) income from operations, cost of goods sold
D) sales revenue, operating expenses
Answer: A
Diff: 3
7) Inventory held by a business is a(n) ________ and when sold becomes a(n) ________.
A) liability, withdrawal
B) asset, expense
C) liability, asset
D) asset, contra asset
Answer: B
Diff: 3
Table 5-1

8) Referring to Table 5-1, what is gross margin?

A) $145,000
B) $105,000
C) $140,000
D) $90,000
Answer: A
Diff: 2
Skill: Application
37
9) Referring to Table 5-1, what is net sales revenue?
A) $400,000
B) $445,000
C) $415,000
D) $455,000
Answer: B
Diff: 1
Skill: Application
10) Referring to Table 5-1, what is the income from operations?

A) $20,000
B) $55,000
C) $60,000
D) $190,000
Answer: C
Diff: 2
Skill: Application
11) Referring to Table 5-1, what is the net income?

A) $60,000
B) $65,000
C) $55,000
D) $180,000
Answer: B
Diff: 2
Skill: Application
38
Table 5-2

Net sales revenue $360,000
Gross margin 255,000
12) Referring to Table 5-2, if sales discounts amount to $15,000, the balance in Sales Returns and
Allowances must be:
A) $7,000.
B) $29,000.
C) $22,000.
D) $8,000.
Answer: A
Diff: 2
Skill: Analysis
13) Referring to Table 5-2, what is the operating income or operating loss?
A) operating income of $123,000
B) operating loss of $177,000
C) operating loss of $27,000
D) operating income of $27,000
Answer: A
Diff: 2
Skill: Application
14) Referring to Table 5-2, cost of goods sold is:

A) $105,000.
B) $78,000.
C) $100,000.
D) $27,000.
Answer: A
Diff: 2
Skill: Analysis
39
15) Referring to Table 5-2, what is the net income or net loss?
A) net loss of $3,000
B) net income of $30,000
C) net loss of $30,000
D) net income of $153,000
Answer: D
Diff: 2
Skill: Application
16) Expenses other than cost of goods sold, that are incurred in the entity's major line of business are
called:
A) merchandising expenses.
B) servicing expenses.
C) other expenses.
D) operating expenses.
Answer: D
Diff: 1
Skill: Knowledge
40
A) income from operations

B) operating expenses
C) other revenue
D) single-step income statement
E) cost of goods sold
17) Expenses, other than cost of goods sold, that are incurred in the entity's major line of business
Diff: 1
Skill: Knowledge
18) Gross margin minus operating expenses

Diff: 1
Skill: Knowledge
19) The largest single expense of most merchandising businesses

Diff: 1
Skill: Knowledge
20) A format that groups all revenues together and then lists and deducts all expenses together without
drawing any subtotals
Diff: 1
Skill: Knowledge
21) Revenue that originates outside the main operations of a business

Diff: 1
Skill: Knowledge
Answers: 17) B 18) A 19) E 20) D 21) C
41
22) Given the following worksheet with the trial balance already entered, and the related adjustment
information, complete the worksheet.
All Star Merchandising

Accounting Work Sheet
Account Trial Adjustments Inc. Balance

Balance Statement Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15
Accounts Rec. 9
Inventory 30
Prepaid Rent 4
Furniture 18
Accumulated
Amortization-
Furniture 7
Accounts
Payable 19
Salary Payable 0
Unearned
Service
Revenue 9
A.J. Star,
Capital 40
A.J. Star,
Withdrawals 7
Sales Revenue 65
Sales Discounts 4
Sales Returns
and Allowances 2
Cost of Goods
Sold 30
Salary Expense 14
Rent Expense 0
Utilities
Expense 7
Amortization
Expense-
Furniture
140 140
Net Income
42
Additional information:
a) Prepaid rent expired, $3
b) Amortization on furniture, $2
c) Unearned sales revenue earned during the period, $4
d) Accrued salaries, $5
e) Physical count of ending inventory, $33
Answer: All Star Merchandising
Accounting Work Sheet
Account Trial Adjustments Inc. Balance

Balance Statement Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 15 15
Accounts Rec. 9 9
Inventory 30 3 33
Prepaid Rent 4 3 1
Furniture 18 18
Accumulated
Amortization-
Furniture 7 2 9
Accounts
Payable 19 19
Salary Payable 0 5 5
Unearned
Service
Revenue 9 4 5
A.J. Star,
Capital 40 40
A.J. Star,
Withdrawals 7 7
Sales Revenue 65 4 69
Sales Discounts 4 4
Sales Returns
and Allowances 2 2
Cost of Goods
Sold 30 3 27
Salary Expense 14 5 19
Rent Expense 0 3 3
Utilities
Expense 7 7
Amortization
Expense-
Furniture 0 2 2
140 140 17 17 64 69 83 78
Net Income 5 5
69 69 83 83
43
Diff: 3
Skill: Application
23) Following is a random list of accounts with normal balances for the Lexis Merchandising as of
December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
K. Lexis, Capital $159,000

Land 80,000
Supplies expense 9,000
Mortgage payable 80,000
Cash 22,000
Unearned service revenue 11,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
K. Lexis, Withdrawals 15,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Supplies 4,000
Amortization expense-building 8,000
Amortization expense-equipment 8,000
Interest payable 14,000
Building 115,000
Prepare a multi-step income statement for Lexis Merchandising for the year ended December 31, 2013.
44
Answer: Lexis Merchandising
Income Statement

Less: Sales discounts $18,000
Sales returns & allowances 13,000 31,000
Gross margin $ 98,000
Operating expenses:
Delivery expense 7,000 84,000
Operating income 14,000
Other revenue and (expense):
Interest expense 6,000 8,000
Net income $22,000
Diff: 3
Skill: Application
45
24) Following is a random list of accounts with normal balances for the Sisco Merchandising as of
December 31, 2013. All adjusting entries have been made. Closing entries have not been made.
C. Sisco, Capital $159,000

Land 80,000
Mortgage payable 80,000
Cash 22,000
Unearned service revenue 11,000
Accumulated amort.-building 17,000
Equipment 46,000
Prepaid insurance 8,000
C. Sisco, Withdrawals 15,000
Interest receivable 5,000
Inventory 28,000
Accumulated amort.-equipment 12,000
Supplies 4,000
Interest payable 14,000
Building 115,000
Prepare a single-step income statement for Sisco Merchandising for the year ended December 31, 2013.
46
Answer:
Sisco Merchandising
Income Statement
Revenues:
Net sales (net of sales discounts, $18,000, and
sales returns and allowances, $13,000) $254,000
Total revenue 268,000
Expenses:
Net income $ 22,000
Diff: 3
Skill: Application
47
25) Please refer to the following trial balance.
Debit Credit
Cash $5,000
Inventory 20,000
Supplies 5,000
Land 100,000
Notes payable 25,000
Capital 90,000
Drawing 1,000
Sales revenues 160,000
Utility expense 23,000
Rent expense 18,000
Totals $278,000 $278,000
Please prepare a multi-step income statement:

Answer:
Sales revenues $160,000
Less: Sales returns and allowances $2,000
Sales discounts 3,000 5,000
Gross profit $75,000
Operating expenses
Salary expense $5,000
Rent expense 18,000 46,000
Other revenue and (expense)
Interest expense (2,000)
Net income $27,000
Diff: 2
Skill: Application
48
26) Describe single-step and multi-step formats for income statements.
Answer: A single-step income statement only has two sections, one for revenues and the other for
expenses; and, a single income amount for net income. A multi-step income statement has subtotals for
gross margin and income from operations. The multi-step format is the most widely used format.
Diff: 2
27) Underwater Adventures has the following account balances on August 31, 2014:

Accumulated amortization - equipment 30,300
Cash 2,200
Jacobson, capital 190,700
Jacobson, withdrawals 44,000
Equipment 88,000
Interest earned 2,000
Inventory 71,500
Supplies 7,100
The following information as at August 31, 2014 was also available:
a. A physical count of items showed $1,200 of supplies on hand.

b. An inventory count showed inventory on hand of $66,400.
c. The equipment has an estimated useful life of eight years and is expected to have no
salvage value.
d. Unearned sales revenue of $1,000 was earned.
Required:
1. Prepare the necessary adjusting journal entries at August 31, 2014. For simplicity all operating
expenses are combined into a single operating expense account for financial statement purposes.
Use the normal account name for the adjusting journal entries.
2. Prepare a classified balance sheet based on adjusted account balances.
49
Aug 31 Supplies expense 5,900
Supplies 5,900
31 Cost of goods sold 5,100

Inventory 5,100
31 Amortization expense, equipment 11,000

Accumulated amort., equip. 11,000
31 Unearned sales revenue 1,000

Sales revenue 1,000
Underwater Adventures
Balance Sheet
August 31, 2014
Assets
Current assets:
Cash $ 2,200
Supplies 1,200
Inventory 66,400
Total current assets $79,400
Property, plant and equipment:
Equipment $ 88,000
Less: accumulated amortization 41,300 46,700
Total assets $126,100
Liabilities and Owner's Equity

Current liabilities:
Accounts payable $ 8,800
Total current liabilities $ 12,300
Jacobson capital 113,800
Total liabilities and owner's equity $ 126,100
Diff: 3
Skill: Application
Table 5-10
The December 31, 2014 adjusted trial balance for Camptown Company is shown below.
50
Debit Credit
Cash $12,600
Prepaid rent 800
Inventory 28,000
Notes payable 800
Capital 13,800
Drawing 1,000
Sales discounts 400
Rent expense 22,500
Total $115,800 $115,800
51
28) Using the information from Table 5-10 prepare an income statement in single-step format and the
closing entries for Camptown Company.
Answer: Camptown Company
Income Statement
Revenues:
Less: Sales discounts $400
Sales returns and allowances 1,600 2,000
Expenses:
Cost of goods sold $25,000
Rent expense 22,500
Net income $ 25,000
General Journal
Dec 31 Sales revenue 96,000
Income summary 96,000

Sales discounts 400
Rent expense 22,500

Capital 25,000
31 Capital 1,000
Drawing 1,000
Diff: 2
Skill: Application
Objective 5-5
1) The gross margin percentage is determined by dividing the gross margin by the net sales revenue.
Answer: TRUE
52
Diff: 1
Learning Outcome: A-16 Define and use the different types of financial statement analysis tools
Skill: Knowledge
Objective: 5-5 Use the gross margin percentage and the inventory turnover ratio to evaluate a business
2) The faster the sale of inventory and the collection of cash, the higher the profits will be for a business.
Answer: TRUE
Diff: 2
3) There is no such thing as too high an inventory turnover ratio.

Answer: FALSE
Diff: 1
Skill: Knowledge
4) Inventory turnover does not affect profitability but does affect the amount of inventory on the shelf.
Answer: FALSE
Diff: 2
5) The gross margin percentage is calculated as:

A) gross margin minus net sales revenue.
B) gross margin divided by net sales revenue.
C) gross margin plus net sales revenue.
D) gross margin times net sales revenue.
Answer: B
Diff: 2
Skill: Knowledge
53
6) Inventory turnover indicates how:
A) quickly inventory is received from the supplier after the order is placed.
B) many days it takes the inventory to travel between the seller's warehouse and the buyer's warehouse.
C) rapidly inventory is sold.
D) many days it takes from the time an order is received to the day it is shipped.
Answer: C
Diff: 2
7) Inventory turnover is calculated as:

A) cost of goods sold divided by average inventory.
B) cost of goods sold minus average inventory.
C) cost of goods sold times average inventory.
D) average inventory divided by cost of goods sold.
Answer: A
Diff: 2
Skill: Knowledge
54
8) Please refer to the following trial balance.
Debit Credit
Cash $5,000
Inventory 20,000
Supplies 5,000
Land 100,000
Notes payable 25,000
Capital 90,000
Withdrawals 1,000
Sales revenues 160,000
Rent expense 18,000
Totals $278,000 $278,000
How much is the gross profit percentage?

A) 50.0%
B) 51.6%
C) 46.8%
D) 48.4%
Answer: D
Explanation: D) Calculations: $155,000 - $80,000 = $75,000/$155,000 = 48.4%
Diff: 3
Skill: Application
9) Alpha Company had $45,000 in beginning inventory and $80,000 in ending inventory. Cost of goods
sold for the period was $25,000. The inventory turnover is:
A) 0.56.
B) 0.3125.
C) 0.4.
D) 4.0.
Answer: C
Explanation: C) Calculations: $25,000/(($45,000 + $80,000)/2)
Diff: 2
Skill: Application
55
A) gross margin percentage

B) inventory turnover
10) Gross margin divided by net sales revenue

Diff: 1
Skill: Knowledge
11) Ratio of cost of goods sold to average inventory

Diff: 1
Skill: Knowledge
Answers: 10) A 11) B
Table 5-5

Freight in 20,000
56
12) Based on the information in Table 5-5 provide the following:
1. Multi-step income statement

2. Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on
the effect that an increasing inventory turnover has on a business.
Answer:
Speedy Boat Company

Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
Net income $168,000
2. Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for
shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Skill: Application
57
Objective 5-6
1) The preparation of the income statement for a merchandising company that is following international
financial reporting standards (IFRS) is not significantly different from the approach used by companies
following accounting standards for private enterprises (ASPE).
Answer: TRUE
Diff: 2
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 5-6 Describe the merchandising operations effects of IFRS
2) What are two key criteria that merchandisers who report under international financial reporting
standards (IFRS) must follow?
A) Revenue-recognition criteria and time-allotment assumption
B) Revenue-recognition criteria and matching objective
C) Revenue-recognition criteria and economic-period assumption
D) Revenue-recognition criteria and time-concern assumption
Answer: B
Diff: 2
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual
Framework
Skill: Knowledge
A) statement of comprehensive income

B) income statement
3) The name of the statement that presents revenues and expenses under IFRS
Diff: 1
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Answers: 3) A
Objective 5-A1
1) The entry to record the purchase of inventory on account in a periodic inventory system includes a
debit to the Purchases account.
Answer: TRUE
Diff: 2
Skill: Knowledge
Objective: 5-A1 Account for the purchase and sale of inventory under the periodic inventory system
58
2) When the seller accepts a return of undamaged goods from the purchaser, the seller's journal entries
would include two entries, if they are using a periodic inventory system.
Answer: FALSE
Diff: 3
3) In a periodic inventory system, purchases of inventory are debited to an account entitled Purchases.
Answer: TRUE
Diff: 1
Skill: Knowledge
4) In a periodic inventory system, purchase returns and allowances and purchase discounts are
considered contra liability accounts.
Answer: FALSE
Diff: 2
5) Purchase discounts normally have a credit balance.

Answer: TRUE
Diff: 2
Skill: Knowledge
6) Using a periodic inventory system, the entry to record the purchase of merchandise on account
involves a:
D) debit to Purchases.
Answer: D
Diff: 2
Skill: Knowledge
59
7) A merchandiser purchases inventory on account under a periodic inventory system with terms of 2/10
n/30. The merchandiser would:
A) credit Inventory on date of payment if the discount is taken.
B) credit Inventory on date of payment if the discount is not taken.
C) credit Purchases Discounts on date of purchase if the discount is taken.
D) credit Purchases Discounts on date of purchase if the discount is not taken.
Answer: C
Diff: 3
8) If a purchaser returns goods purchased on account to the supplier under a periodic inventory system,
the purchaser would debit:
A) Inventory and credit Accounts Payable.
B) Accounts Payable and credit Inventory.
C) Inventory and credit Accounts Receivable.
D) Accounts Payable and credit Purchase Returns.
Answer: D
Diff: 3
Skill: Knowledge
9) When a discount is taken for prompt payment under a periodic inventory system, the purchaser would
credit:
B) Accounts Receivable.
C) Purchases Discounts.
D) Inventory.
Answer: C
Diff: 2
Skill: Knowledge
10) A purchase return or allowance under a periodic inventory system is credited to:
B) Purchase Returns and Allowances.
C) Inventory.
D) Purchases.
Answer: B
Diff: 2
Skill: Knowledge
60
11) If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a
periodic inventory system would record payment of the freight with a debit to:
A) Inventory and credit to Cash for $200.
B) Freight In and a credit to Cash for $200.
C) Inventory and credit to Purchases Discounts for $200.
D) Purchases Discounts and credit to Inventory for $200.
Answer: B
Diff: 2
Skill: Application
12) Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record
payment for the merchandise within the discount period under a periodic inventory system would
include a:
B) debit to Accounts Payable of $1,940.
C) credit to Purchase Discounts of $90.
D) credit to Inventory of $90.
Answer: C
Diff: 2
Skill: Application
13) Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made
within the discount period, the entry to record the payment under a periodic inventory system would
include a credit to:
A) Cash of $2,425.
B) Inventory of $2,352.
C) Accounts Payable of $2,400.
D) Cash for $2,400.
Answer: A
Diff: 2
Skill: Application
61
14) When the buyer pays the freight costs, the entry to record the payment under a periodic inventory
system would include a debit to:
A) Delivery Expense.
B) Purchases Discounts.
C) Inventory.
D) Freight In.
Answer: D
Diff: 2
Skill: Knowledge
15) When goods are shipped FOB destination and a periodic inventory system is used, the buyer would:
A) debit Freight In for the amount of the transportation charges.
B) debit Delivery Expense for the amount of the transportation charges.
C) make no journal entry for the transportation charges.
D) debit Inventory for the amount of the transportation charges.
Answer: C
Diff: 2
Skill: Knowledge
16) To update the inventory records for the sale of merchandise on account under a periodic inventory
system, the entry would include:
A) a credit to Inventory.
B) a debit to Accounts Payable.
C) no entry as inventory records are not updated at the time of sale.
D) a debit to Cost of Goods Sold.
Answer: C
Diff: 3
17) The entries to record a $5,000 cash sale under a periodic inventory system, when the cost of the
merchandise is $3,200, include a:
B) credit to Sales Revenue for $5,000.
C) debit to Cost of Goods Sold for $3,200.
D) debit to Accounts Receivable for $5,000.
Answer: B
Diff: 2
Skill: Application
62
18) Under a periodic inventory system, the entry to record the return of inventory sold on account for
C) credit to Sales Revenue for $250.
D) credit to Cost of Goods Sold for $185.
Answer: A
Diff: 3
Skill: Application
19) Under a periodic inventory system, the entry to record the return of inventory sold on account for
C) debit to Sales Revenue for $360.
D) debit to Inventory for $210.
Answer: B
Diff: 3
Skill: Application
20) Under a periodic inventory system, the entries to record a $2,600 sales return of undamaged goods for
a sale originally made on account, when the merchandise had a cost of $1,200, include a:
B) debit to Sales Returns and Allowances of $2,600.
C) credit to Cost of Goods Sold of $2,600.
D) credit to Sales Returns and Allowances of $1,200.
Answer: B
Diff: 3
Skill: Application
21) Under a periodic inventory system, the entries to record a $3,400 sales return for undamaged goods
on an original cash sale when the merchandise had a cost of $1,500 include a debit to:
A) Accounts Receivable of $3,400.
B) Cost of Goods Sold of $1,500.
C) Sales Returns and Allowances of $3,400.
D) Inventory of $1,500.
Answer: C
Diff: 3
Skill: Application
63
22) In a periodic inventory system, the entry to record the purchase of merchandise on account would
include a:
A) debit to Accounts Payable.
B) debit to Inventory.
C) credit to Cash.
D) debit to Purchases.
Answer: D
Diff: 2
Skill: Knowledge
23) In a periodic inventory system, when a company returns merchandise previously purchased on
account, the entry to record the return would include a:
B) credit to Purchase Returns and Allowances.
C) debit to Sales Returns and Allowances.
D) credit to Accounts Payable.
Answer: B
Diff: 2
Skill: Knowledge
24) In a periodic inventory system, the entry to record the taking of a cash discount for the purchase of
merchandise would include a:
A) credit to Purchase Discounts
B) credit to Inventory
C) debit to Purchase Discounts
D) credit to Purchase Returns and Allowances.
Answer: A
Diff: 2
Skill: Knowledge
25) In a periodic inventory system, the entry to record the payment of shipping costs by the company
buying the merchandise when the terms are FOB shipping point would include a:
A) debit to Freight In.
B) debit to Delivery Expense.
C) credit to Cost of Goods Sold.
D) credit to Freight Out.
Answer: A
Diff: 2
Skill: Knowledge
64
26) In a periodic inventory system, the entry to record the sale of $2,000 of merchandise on account with a
cost of $1,400 would include a:
A) credit to Accounts Receivable for $1,400.
B) debit to Accounts Receivable for $2,000.
C) debit to Cost of Goods Sold for $2,000.
D) credit to Inventory for $1,400.
Answer: B
Diff: 2
Skill: Application
27) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account.
The terms were 3/10, n/30. The purchase was made on February 1. Avery paid the supplier on February 9.
Which of the following journal entries properly records this payment transaction?
A)
Cash 9,700
B)
Purchase Discounts 300
Purchases 10,000
C)
Cash 9,700
D)
Cash 10,000
Answer: C
Diff: 2
Skill: Application
65
28) Avery Supplies uses a periodic inventory system. Avery purchased $10,000 of inventory on account.
The terms were 3/10, n/30. The purchase was made on February 1. On February 2, Avery returned $400 of
damaged goods to the supplier and was granted an allowance. How should Avery properly record the
allowance?
A)
Accounts Payable 400
Purchase Returns and Allowances 400
B)
Purchases 10,000
C)
Cash 9,600
D)
Accounts Payable 400
Cash 400
Answer: A
Diff: 2
Skill: Application
66
29) Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,

FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required: Assuming the periodic inventory system is used, prepare the journal entries to record the
above transactions.
Answer:
General Journal
Purchased merchandise, terms 3/15 n/60.
9 Freight In 250
Cash 250
Paid transportation cost on May 5 purchase.
Returned merchandise purchased May 5.
Cash 2,231
Paid for May 5 purchase less return and
discount.
Diff: 2
Skill: Application
67
30) Romeo Merchandising had the following transactions in June. Prepare journal entries for these
transactions assuming Romeo uses a periodic inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5.
19 Britt received payment on the remaining amount due from the sale of
June 5, less the return and the discount.
Answer:
General Journal
June 2 Purchases 18,000
Freight In 2,000
Cash 2,000
Purchase Returns and Allowances 2,500
Sales Revenue 8,000
Cash 15,190
15 Sales Returns and Allowances 2,500
19 Cash 5,335
Sales Discounts 165
Diff: 2
Skill: Application
68
Table 5-6
The following are transactions for Latest Fashions for the month of June.
June 2 Purchased $2,000 of inventory under terms 1/10, n/60 and FOB shipping point
from Trendy Manufacturing. The merchandise had cost Trendy $1,800
June 7 Returned defective merchandise to Trendy Manufacturing with invoice price of $400.
June 8 Paid the freight charges on the purchase from Trendy Manufacturing in cash for $100.
June 9 Sold merchandise to New Miss Store on account for $5,000 with terms 2/15, n/60 FOB
shipping point. Cost of the merchandise sold was $4,000.
June 10 Paid Trendy Manufacturing the balance on account.
June 12 Granted sales allowance of $300 to New Miss Store for defective merchandise.
June 23 Collected balance owing from New Miss Store.
31) Refer to table 5-6. Prepare the journal entries for Latest Fashions for the transactions listed, assuming
that Latest Fashions uses a periodic inventory system.
Answer:
General Journal
8 Freight In 100
Cash 100
Sales Revenue 5,000
Cash 1,584
25 Cash 4,606
Sales Discount 94
Diff: 3
Skill: Application
69
32) Refer to table 5-6. Prepare the journal entries for Trendy Manufacturing for the transactions listed,
assuming that Trendy uses a periodic inventory system.
Answer:
General Journal
June 2 Accounts Receivable 2,000
Sales Revenue 2,000
10 Cash 1,584
Sales Discount 16
Diff: 3
Skill: Application
33) Refer to table 5-6. Prepare the journal entries for New Miss Store for the transactions listed, assuming
that New Miss Store uses a periodic inventory system.
Answer:
General Journal
Cash 4,606
Diff: 3
Skill: Application
70
34) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.

May 5 Purchased 80 units of merchandise on account for $2,160, terms n/15,
FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 15 Paid for the May 5 purchase, less the return.
Required:
1. Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record
the above transactions.
2. Assuming weighted-average and that the periodic inventory system is used, prepare the journal
entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method

May 9 Inventory 240

Cash 240

Inventory 54
May 11 Accounts Receivable (30 × $50) 1,500

Sales 1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3)) 800
Inventory 800
May 15 Accounts Payable ($2,160 - $54) 2,106

Cash 2,106
May 20 Accounts receivable 500

Sales 500
Cost of Goods Sold (10 × $30) 300

Inventory 300
71
Requirement 2: Periodic Inventory Method

May 9 Frieght-in 240

Cash 240

Purchase Returns 54
May 11 Accounts Receivable 1,500

Sales 1,500
May 15 Accounts Payable 2,160

Cash 2,160
May 20 Accounts Receivable 500

Sales 500
Diff: 3
Learning Outcome: A-09 Explain and apply inventory costing methods
Skill: Application
Objective 5-A2
1) In a periodic inventory system, cost of goods sold is determined by subtracting the ending inventory
from the cost of goods available for sale.
Answer: TRUE
Diff: 2
Skill: Knowledge
Objective: 5-A2 Compute the cost of goods sold under the periodic inventory system
2) In a periodic inventory system, beginning inventory plus net purchases minus freight in equals cost of
goods sold.
Answer: FALSE
Diff: 2
Skill: Knowledge
72
3) In a periodic inventory system, the cost of freight-in is part of the cost of goods available for sale.
Answer: TRUE
Diff: 2
Skill: Knowledge
Table 5-3

Freight in 44,000
Purchases discounts 20,000
Purchases 415,000
William Browning, Withdrawals 61,000
4) Refer to Table 5-3. Net purchases are:

A) $359,000.
B) $415,000.
C) $395,000.
D) $439,000.
Answer: A
Diff: 2
Skill: Application
5) Refer to Table 5-3. The total cost of goods available for sale is:
A) $388,000.
B) $478,000.
C) $470,000.
D) $394,000.
Answer: B
Diff: 3
Skill: Application
73
6) Refer to Table 5-3. The cost of goods sold is:
A) $470,000.
B) $478,000.
C) $406,000.
D) $351,000.
Answer: C
Diff: 3
Skill: Application
7) Cost of goods sold is $7,400. Beginning inventory is $3,500 and ending inventory is $4,000. If there is no
freight in and total purchases were $8,250, what were purchase returns and allowances?
A) $850
B) $500
C) $350
D) $550
Answer: C
Diff: 3
Skill: Analysis
8) Cost of goods sold is $108,000, beginning inventory is $20,000 and purchases is $100,000. What is
ending inventory?
A) $32,000
B) $12,000
C) $128,000
D) $102,000
Answer: B
Diff: 2
Skill: Analysis
9) Cost of goods sold is $108,000 ,ending inventory is $12,000 and purchases is $100,000. What is
beginning inventory?
A) $20,000
B) 32,000
C) $120,000
D) $102,000
Answer: A
Diff: 2
Skill: Analysis
74
10) Purchases of inventory minus purchase discounts and minus purchase returns and allowances equals:
A) gross purchases.
B) cost of goods available for sale.
C) net purchases.
D) cost of goods sold.
Answer: C
Diff: 2
Skill: Knowledge
11) Beginning inventory plus net purchases and plus freight in equals:
A) net purchases.
C) cost of goods sold.
D) gross purchases.
Answer: B
Diff: 2
Skill: Knowledge
12) Cost of goods sold plus ending inventory equals:

A) net purchases.
C) gross margin.
D) gross profit.
Answer: B
Diff: 2
75
Table 5-4

Freight in 42,000
Purchases 415,000
13) Refer to Table 5-4. Net purchases for Atlantis Merchandising are:
A) $415,000.
B) $357,000.
C) $396,000.
D) $376,000.
Answer: B
Diff: 2
Skill: Application
14) Refer to Table 5-4. The total cost of goods available for sale for the Atlantis Merchandising is:
A) $434,000.
B) $408,000.
C) $476,000.
D) $441,000.
Answer: C
Diff: 3
Skill: Application
76
15) Refer to Table 5-4. The cost of goods sold for Atlantis Merchandising is:
A) $524,000.
B) $489,000.
C) $557,000.
D) $395,000.
Answer: D
Diff: 3
Skill: Application
Table 5-5

Freight in 20,000
16) Refer to Table 5-5. The net purchases for Speedy Boat Company are:
A) $230,000.
B) $195,000.
C) $240,000.
D) $205,000.
Answer: B
Diff: 2
Skill: Application
77
17) Refer to Table 5-5. Cost of goods available for sale for Speedy Boat Company is:
A) $155,000.
B) $225,000.
C) $230,000.
D) $250,000.
Answer: D
Diff: 3
Skill: Application
18) Refer to Table 5-5. Cost of goods sold for Speedy Boat Company is:
A) $170,000.
B) $180,000.
C) $330,000.
D) $220,000.
Answer: A
Diff: 3
Skill: Application
19) In a periodic system, inventory balances and the cost of goods sold for the current period are
determined:
A) at the time of sale.
B) on a frequent basis.
C) on the first day of each year.
D) when a physical inventory count is taken.
Answer: D
Diff: 2
78
20) The following refers to periodic inventory:
Net sales $198,000

Purchases 92,000
Purchases returns and allowances 1,800
Freight in 1,590
Beginning merchandise inventory 63,000
Ending merchandise inventory 37,000
Compute cost of goods sold.

A) $116,540
B) $81,460
C) $114,950
D) $53,540
Answer: A
Explanation: A) Calculations: $63,000 + $88,950 + $1,590 - $37,000 = $116,540
Diff: 2
Skill: Application
21) Fill in the missing amounts for each case in the table presented below:
A B C D
Beginning inventory $6,000 $7,200 $9,100
Net purchase 9,000 32,700 32,000
Freight in 500 950 1,200
Cost of goods avail. for sale 50,000 17,250 45,600
Ending inventory 5,375 14,850
Cost of goods sold 32,600 14,800
Answer:
A B C D
Beginning inventory $ 6,000 $ 7,200 $11,950 $ 9,100
Net purchase 43,500 9,000 32,700 32,000
Freight in 500 1,050 950 1,200
Cost of goods avail. for sale 50,000 17,250 45,600 42,300
Ending inventory 17,400 5,375 14,850 27,500
Cost of goods sold 32,600 11,875 30,750 14,800
Diff: 2
Skill: Analysis
79
22) The following items were taken from the records of Slow Boat Company, which uses a periodic
inventory system:

Freight in 20,000
Prepare the cost of goods sold section for the Slow Boat Company's income statement.
Answer: Beginning inventory $35,000
Purchases of inventory $240,000
Purchase returns and allowances 35,000)
Purchase discounts (10,000)
Net purchases 195,000
Freight in 20,000
Cost of goods available for sale $250,000
Ending inventory (80,000)
Diff: 3
Skill: Analysis
Objective 5-A3
1) The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold
account in a periodic inventory system.
Answer: FALSE
Diff: 2
Skill: Knowledge
Objective: 5-A3 Adjust and close the accounts of a merchandising business under the periodic inventory
system
80
2) In a periodic inventory system, the closing entries include a debit to the Inventory account in an
amount that equals the ending inventory, and a credit to the Inventory account in an amount that equals
the beginning inventory.
Answer: TRUE
Diff: 3
Skill: Knowledge
system
3) Which accounts are affected in the closing process under a periodic inventory system?
A) Gross Margin and Cost of Goods Sold
B) Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts
C) Gross Margin, Sales Returns and Allowances, and Sales Discounts
D) operating expenses, Sales Revenue, and Purchases
Answer: D
Diff: 2
Skill: Knowledge
system
4) Under a periodic inventory system, which accounts would be closed to income summary with credits?
A) Sales Returns and Allowances, Sales Revenue, and Inventory
B) Sales Discounts, Sales Returns and Allowances, and Purchases
C) Sales Revenue and Cost of Goods Sold
D) Sales Returns and Allowances and Sales Revenue
Answer: B
Diff: 3
Skill: Knowledge
system
81
Table 5-3
Freight in 44,000
Purchases 415,000
5) Refer to Table 5-3. Net sales is:

A) $681,000.
B) $750,000.
C) $725,000.
D) $706,000.
Answer: A
Explanation: A)
Sales $750,000
Less: Returns & allowances 44,000
Discounts 25,000
Net sales $681,000
Cost of goods sold:
Net purchases (415-20-36) 359,000
Freight-in 44,000
Available $478,000
End. inventory (72,000)
Total other income and expenses 3,000
Net income $179,000
Diff: 2
Skill: Application
system
82
6) In a periodic inventory system, the closing process includes crediting the following accounts to bring
their balances to zero:
A) Cost of Goods Sold and Freight In.
B) Purchases and Freight In.
C) Purchase Discounts and Sales Discounts.
D) Purchase Returns and Allowances and Purchase Discounts.
Answer: B
Diff: 2
Skill: Knowledge
system
7) In a periodic inventory system, the closing process includes:

A) debiting Purchases.
B) crediting Purchase Returns and Allowances.
C) debiting Sales Discounts.
D) debiting Inventory for the ending balance.
Answer: D
Diff: 3
Skill: Knowledge
system
A) Cost of Goods Sold
8) The account used to offset the adjustment to inventory to the actual amount on hand
Diff: 1
Skill: Knowledge
system
Answers: 8) A
83
9) Following is a random list of some of the accounts and their December 31, 2014, balances for Carmen &
Company. Carmen & Company uses a periodic inventory system and all account balances are normal.
Purchases $320,000
Freight in 17,000
B.J. Carmen, Capital 30,000
B.J. Carmen, Withdrawals 15,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Prepare the closing entries for Carmen & Company.
84
Dec. 31 Sales Revenue 460,000

Interest Revenue 23,000
Purchase Discounts 31,000
Purchase Returns & Allowances 46,000

Sales Ret. and Allow 35,000
Sales Discounts 27,000
Purchases 320,000
Salary Expense 45,000
Freight in 17,000
Delivery Expense 24,000
Insurance Expense 16,000
Utilities Expense 14,000
Amortization Exp- equip 10,000

Inventory (beg bal) 58,000
31 Inventory (end bal) 65,000


B.J. Carmen, Capital 41,000
31 B.J. Carmen, Capital 15,000

B.J. Carmen, Withdrawals 15,000
Diff: 3
Skill: Application
system
85
Objective 5-A4
1) The caption "Net sales" in a multi-step income statement is different if a business uses the periodic
instead of the perpetual inventory system.
Answer: FALSE
Diff: 2
Skill: Knowledge
Objective: 5-A4 Prepare a merchandiser's financial statements under the periodic inventory system
2) Net purchases caption on the multi-step income statement is calculated by subtracting purchase
discounts and purchase returns and allowances from purchases.
Answer: TRUE
Diff: 2
Skill: Knowledge
3) Inventory and cost of goods sold for a business using the periodic inventory system appear on the:
A) balance sheet and statement of owner's equity, respectively
B) statement of owner's equity and income statement, respectively
C) balance sheet and income statement, respectively
D) income statement and cash flow statement, respectively
Answer: C
Diff: 2
Skill: Knowledge
86
Table 5-3

Freight in 44,000
Purchases 415,000
4) Refer to Table 5-3. Operating income is:

A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: D
Diff: 3
Skill: Application
5) Refer to Table 5-3. Net income is:

A) $161,000
B) $214,000
C) $179,000
D) $176,000
Answer: C
Diff: 3
Skill: Application
87
Table 5-4

Freight in 42,000
Purchases 415,000
6) Refer to Table 5-4. The operating income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: D
Diff: 3
Skill: Application
7) Refer to Table 5-4. The net income for Atlantis Merchandising is:
A) $(11,000).
B) $63,000.
C) $51,000.
D) $60,000.
Answer: B
Diff: 3
Skill: Application
88
Table 5-5

Freight in 20,000
8) Refer to Table 5-5. The operating income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: B
Diff: 3
Skill: Application
9) Refer to Table 5-5. The net income for Speedy Boat Company is:
A) $156,000.
B) $172,000.
C) $168,000.
D) $160,000.
Answer: C
Diff: 3
Skill: Application
89
A) net purchases
10) Purchases minus purchase discounts and minus purchase returns and allowances
Diff: 1
Skill: Knowledge
Answers: 10) A
11) Following is a random list of some of the accounts and their December 31, 2014, balances for Milita
Merchandising. Milita Merchandising uses a periodic inventory system and all account balances are
normal.
Purchases $330,000
Freight in 17,000
R. Milita, Capital 35,000
R. Milita, Withdrawals 18,000
The beginning and ending amounts for inventory are $58,000 and $65,000, respectively.
Calculate the following for Milita Merchandising:
Net sales revenue $__________

Net purchases $__________
Cost of goods available for sale $__________
Cost of goods sold $__________
Gross margin $__________
Operating income $__________
Net income $__________
90
Answer: Net sales revenue
($470,000 - $40,000 - $27,000) = $403,000
Net purchases
($330,000 - $31,000 - $49,000) = $250,000
Cost of goods available for sale

($58,000 + $250,000 + $17,000) = $325,000
Cost of goods sold

($325,000 - $65,000) = $260,000
Gross margin
($403,000 - $260,000) = $143,000
Operating income
($143,000 - $45,000 - $24,000 - $16,000 - $14,000 - $10,000) = $34,000
Net income
($34,000 + $23,000 - $18,000) = $39,000
Diff: 3
Skill: Analysis
Table 5-5

Freight in 20,000
91
12) Based on the information in Table 5-5 provide the following:

2. Gross margin percentage and the inventory turnover ratio for Speedy Boat Company. Comment on
the effect that an increasing inventory turnover has on a business.
Answer:
Speedy Boat Company

Income Statement
For the Period Ending December 31, 2013
Sales $480,000
Discounts 18,000
Net sales $427,000
Cost of goods sold:
Net purchases (240-35-10) 195,000
Freight-in 20,000
Available $250,000
Net income $168,000
2. Ratios
Gross margin percentage = ($257,000/$427,000) = 60%
Inventor turnover = {$170,000/($35,000 + $80,000)/2] = 2.96 times
Increasing inventory turnover increases cash flow, reduces the risk of obsolescence, reduces the need for
shelf space and warehousing, reduces the need for trade credit.
Diff: 3
Skill: Application
92
Objective 5-B1
1) Describe the difference between a perpetual inventory system and a periodic inventory system.
Answer: The perpetual inventory system is used by businesses that sell expensive products or that have
fairly sophisticated computer systems. This system keeps track of the inventory as it is both bought and
sold, constantly updating the inventory account to current levels. This system offers management more
control over inventory but requires a tremendous amount of record keeping. The sale of inventory
requires not just one but two entries to record the transaction. One entry to record the sales price in the
revenue account and another to record the cost in the cost of goods sold account.
The periodic inventory system is used by businesses that sell relatively inexpensive goods without the aid
of sophisticated computers. This system does not keep track of the daily buying and selling of
merchandise at cost. The only way to determine the cost of goods sold is to take a physical count of the
merchandise on hand and to assume that if it is not on hand, it has been sold. This system does not offer
as much control over inventory, but is much easier to account for on a daily basis.
Diff: 3
Objective: 5-B1 Compare the perpetual and periodic inventory systems
Objective 5-C1
1) Goods and services taxes add an extra cost to the value of inventory.
Answer: FALSE
Diff: 2
Objective: 5-C1 Describe the basic elements of sales taxes, HST, GST, and PST
93
2) Benny's Shoes and Feet Stuff operates in a province where HST is applicable at a rate of 12%. Last week
he purchased $5,000 of shoe inventory on credit. Which of the following journal entries correctly records
this transaction if Benny's Shoes and Feet Stuff uses a periodic inventory system?
A)
Purchases 5,000
HST Recoverable 600
B)
Purchases 5,000
HST Payable 600
C)
Inventory 5,000
HST Recoverable 600
D)
Inventory 5,000
HST Payable 600
Answer: A
Diff: 2
Skill: Application
A) HST Payable
B) HST Recoverable
3) The tax account debited when goods are purchased

Diff: 1
Skill: Knowledge
Answers: 3) B
94
Table 5-7
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases
at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are
transactions for the month of May.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale

$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
4) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May,
assuming that Marvelous Merchandising uses a perpetual inventory system.
Answer:
General Journal
GST Recoverable 50
GST Recoverable 15
Inventory 300
GST Payable 150
Sales Revenue 3,000
Inventory 2,500
28 Cash 3,150
Cash 735
Diff: 2
Skill: Application
95
5) Refer to Table 5-7. Prepare the journal entries for Marvelous Merchandising for the month of May,
assuming that Marvelous Merchandising uses a periodic inventory system.
Answer:
General Journal
GST Recoverable 50
GST Recoverable 15
GST Payable 150
Sales Revenue 3,000
28 Cash 3,150
Cash 735
Diff: 2
Skill: Application
96
Table 5-8
Marvelous Merchandising charges GST on all its sales at the rate of 5% and pays GST on all its purchases
at the rate of 5%. For purposes of this question, any applicable PST is ignored. The following are
transactions for the month of May. Marvelous uses a perpetual inventory system.
May 8 Purchased inventory, on account, FOB destination, from Stranhern Wholesale,

$1,000 plus applicable GST.
10 Returned defective merchandise to Stranhern, $300 plus applicable GST.
12 Sold merchandise to Dainty Store on account for $3,000 plus applicable GST.
FOB shipping point. Cost of the merchandise sold was $2,500.
28 Collected balance on account from Dainty Store.
30 Paid balance on account to Stranhern.
General Journal
GST Recoverable 50
GST Recoverable 15
Inventory 300
GST Payable 150
Sales Revenue 3,000
Inventory 2,500
28 Cash 3,150
Cash 735
6) Refer to Table 5-8. Prepare the remittance payment of GST on June 15, based on the assumption that
the only transactions for May are those listed in Table 5-8.
Answer:
General Journal
June 15 GST Payable 150
GST Recoverable 35
Cash 115
Diff: 2
Skill: Application
97

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Accounting Volume 1 Canadian 9th

Edition Horngren Test Bank

2) Sales revenue and Net sales are synonymous terms.

3) Cost of goods sold is an operating expense.

4) Gross margin is equal to net sales plus cost of goods sold.

5) Inventory is a current liability on the balance sheet.

Sales revenue $600,000

9) Refer to Table 5-4. Net sales for Atlantis Merchandising are:

Salary payable $1,100

Match the following.

12) The excess of sales revenue over cost of goods sold

14) A contra account to Sales Revenue

Answers: 12) A 13) C 14) B

2) Purchase returns of merchandise decrease the liability to a creditor.

9) A seller requesting payment will send the purchaser a purchase order.

42) Which of the following is true about freight in?

Match the following.

Beginning inventory $190,300

b) Compute the balance in the inventory account on December 31, 2013.

3) Cost of Goods Sold 520,000

b) $190,300 + $450,000 - $520,000 = $120,300

Cost of merchandise as shown on purchase invoice $9,200

Compute the following:

b) ($5,500 × 0.98) + $500 = $5,890

c) $5,500 + $500 = $6,000

Transportation Returns and

b) [($5,500 - $50) × 0.98] + $100 = $5,441

c) [($6,700 - $350) × 0.98] + $200 = $6,423

d) ($9,300 - $550) × 0.98 = $8,575

May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60,

10 Accounts Payable 400

15 Accounts Payable 2,300

10 Accounts Payable 600

15 Accounts Payable 2,300

May 1 Beginning inventory was 20 units valued at $25 per unit.

Date Account Name Debit Credit

May 9 Inventory 240

May 10 Accounts Payable 54

May 11 Accounts Receivable (30 × $50) 1,500

May 15 Accounts Payable ($2,160 - $54) 2,106

May 20 Accounts receivable 500

Cost of Goods Sold (10 × $30) 300

Date Account Name Debit Credit

May 9 Frieght-in 240

May 10 Accounts Payable 54

May 11 Accounts Receivable 1,500

May 15 Accounts Payable 2,160

May 20 Accounts Receivable 500

a) closed with a debit

1) cost of goods sold ________

A physical count on December 31, 2013, reveals $65,000 of inventory on hand.

Accounts payable $8,800

The following information as at August 31, 2014 was also available:

a. A physical count of items showed $1,200 of supplies on hand.

31 Cost of goods sold 5,100

31 Amortization expense, equipment 11,000

31 Unearned sales revenue 1,000

Liabilities and Owner's Equity