Chapter 5 - 12 Accounting Princples Solutions

Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition
CHAPTER 5
Accounting for Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Brief Problems
Study Objectives Questions Exercises Exercises Set A
1. Describe the 1, 2, 3, 4 1 1, 4, 5, 7 1, 2
differences between
service and
merchandising
companies.
2. Prepare entries for 5, 6, 7, 8, 2, 3, 4, 5, 1, 2, 4, 5, 2, 3, 4, 5
purchases under a 9, 11 6 6, 7
perpetual inventory
system.
3. Prepare entries for 7, 10, 11, 7, 8, 9 1, 3, 4, 5, 2, 3, 4, 5
sales under a 12, 13, 14 6, 7
perpetual inventory
system.
4. Perform the steps in 15, 16, 17 10, 11 1, 6, 7, 9 6, 7
the accounting cycle
for a merchandising
company.
5. Prepare single-step 18, 19, 20, 12, 13 1, 8, 9, 10 5, 6, 7
and multiple-step 21,
income statements.
6. Calculate the gross 22, 23 14 1, 10, 11 6, 7, 8
profit margin and
profit margin.
*7. Prepare the entries *24, *25, *15, *16, *12, *13, *9, *10,
for purchases and *26 *17 *14, *15, *11, *12,
sales under a *16 *13
periodic inventory
system and
calculate cost of
goods sold
(Appendix 5A)
*Note: All asterisked Questions, Exercises, and Problems relate to material

contained in the Appendices to each chapter.
Solutions Manual 5-1 Chapter 5

© 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited.
ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time
Number Description Level Allotted (min.)
1A Identify problems and recommend inventory system. Moderate 20-30
2A Record and post inventory transactions – perpetual Moderate 30-40

system. Calculate net sales and gross profit.
3A Record inventory transactions– perpetual system. Moderate 20-30
4A Record inventory transactions and post to inventory Moderate 30-40

account – perpetual system.
5A Record and post inventory transactions – perpetual Moderate 60-70

system. Prepare partial income statement.
6A Prepare adjusting and closing entries and single-step Moderate 50-60

and multiple-step income statements – perpetual
system. Calculate ratios.
7A Prepare adjusting and closing entries and financial Moderate 50-60

statements – perpetual system. Calculate ratios.
8A Calculate ratios and comment. Moderate 20-25
*9A Record inventory transactions – periodic system. Moderate 30-40
*10A Record inventory transactions – periodic system. Moderate 30-40
*11A Record and post inventory transactions – periodic Moderate 60-70

system. Prepare partial income statement.
*12A Prepare correct multiple-step income statement, Moderate 60-70

statement of owner’s equity and classified balance
sheet – periodic system.
*13A Prepare financial statements and closing entries – Moderate 60-70

periodic system.

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-
Chapter Material
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Describe the E5-1 Q5-1 BE5-1
differences Q5-2 E5-4
between service Q5-3 E5-5
and merchandising Q5-4 E5-7
companies. P5-1A P5-2A
2. Prepare entries for E5-1 Q5-5 BE5-2

purchases under a Q5-6 BE5-3
perpetual inventory Q5-7 BE5-5
system. Q5-8 BE5-6
Q5-9 E5-2
Q5-11 E5-4
BE5-4 E5-5
E5-6
E5-7
P5-2A
P5-3A
P5-4A
P5-5A
3. Prepare entries for E5-1 Q5-7 BE5-8

sales under a Q5-11 BE5-9
perpetual inventory Q5-12 E5-3
system. Q5-13 E5-4
Q5-14 E5-5
BE5-7 E5-6
E5-7
P5-2A
P5-3A
P5-4A
P5-5A
4. Perform the steps E5-1 Q5-15 BE5-10

in the accounting Q5-17 Q5-16 BE5-11
cycle for a E5-6
merchandising E5-7
company. E5-9
P5-6A
P5-7A

BLOOM’S TAXONOMY TABLE (Continued)
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

5. Prepare single-step Q5-18 Q5-20 BE5-12
and multiple-step Q5-19 Q5-21 BE5-13
income statements. E5-1 E5-8
E5-9
E5-10
P5-5A
P5-6A
P5-7A
6. Calculate the gross E5-1 Q5-22 BE5-14 E5-11

profit margin and Q5-23 E5-10 P5-8A
profit margin. P5-6A
P5-7A
*7. Prepare the entries *Q5-24 *Q5-26 *BE5-15

for purchases and *Q5-25 *BE5-16
sales under a *BE5-17
periodic inventory *E5-12
system and *E5-13
calculate cost of *E5-14
goods sold *E5-15
(Appendix 5A) *E5-16
*P5-9A
*P5-10A
*P5-11A
*P5-12A
*P5-13A
Broadening Your Continuing BYP5-2

Perspective Cookie Chronicles BYP5-3
Cumulative BYP5-4
Coverage
Chapters 2-5
BYP5-1

ANSWERS TO QUESTIONS
1. Calculating profit for a merchandising company is more complex than
computing profit for a service company because of the fact that profit for a
merchandising company is determined principally by the gross profit
created by the difference between sales revenue and cost of goods sold.
Service companies will have service revenue or service fees earned as
their primary source of revenue. Service companies do not have an
expense comparable to cost of goods sold. Both types of companies will
have operating expenses such as advertising expense, depreciation
expense, insurance expense, rent expense, salaries expense, etc.
2. A “perpetual” inventory system reflects changes for inventory purchases

and sales on a “perpetual” or continuous basis. The company keeps
detailed records of quantity and cost of inventory on hand for every item.
When inventory is sold, the cost of goods sold is recorded as part of the
sale transaction and the Merchandise Inventory account is decreased.
A “periodic” inventory system does not keep detailed records of inventory

on hand throughout the period. Cost of goods sold and ending inventory
are determined at the end of the “period”, usually by an inventory count.
When inventory is sold, the cost of goods sold is not recorded and the
Merchandise Inventory account is not decreased.
3. A physical count is an important control feature. With a perpetual inventory

system a company knows what should be on hand, but there still could be
errors in the record keeping or shortages in stock. By performing a
physical count, and comparing it to the perpetual inventory records, an
error or shortage can be detected. If an error or shortage is found, it is
important to adjust accounting records to reflect actual quantities on hand.
4. The benefits of the perpetual inventory system are that it continuously—

perpetually—shows the quantity and cost of the inventory purchased, sold,
and on hand. Under a perpetual inventory system, the cost of goods sold
and reduction in inventory are recorded each time a sale occurs. A
perpetual inventory system gives stronger internal control over inventories
compared than a periodic system. Another benefit of a perpetual inventory
system is that it makes it easier to answer questions from customers
about merchandise availability. Management can also maintain optimum
inventory levels and avoid running out of stock. In a periodic system the
number of items on hand cannot be determined without physically
examining the inventory. A perpetual inventory system requires more
record keeping and therefore is more expensive to use than a periodic
system. For example, a perpetual inventory system usually requires an
investment in a point of sale system that is integrated with the inventory
system. In a periodic system this not required.

QUESTIONS (Continued)
5. Disagree. An inventory subsidiary ledger is used to organize and track
individual inventory items. It is used in addition to the inventory account in
the general ledger. Using a subsidiary ledger means that the general
ledger is not as detailed and it allows the company to determine the
balance of individual inventory categories.
6. Agree and disagree. Sales taxes include the federal Goods and Services
Tax (GST), the Provincial Sales Tax (PST), and the Harmonized Sales
Tax (HST). GST and HST (which is a combination of GST and PST) are
paid by merchandising companies on inventory purchases but this tax is
reimbursed by being offset against GST and HST collected from
customers or by filing a claim with the government. It is very important to
keep careful records of all GST and HST paid so that the correct amount
can be claimed. Failure to separately record the payment of these taxes
may result in not recovering the sales tax, which would cause an
economic loss to the merchandising company. Companies conducting
business in provinces that are subject to PST do not pay PST on
merchandise purchased for resale.
7. The letters FOB mean free on board. FOB shipping point means that the
goods are placed free on board the carrier by the seller, and the buyer
pays the freight costs. FOB destination means that the goods are placed
free on board to the buyer’s place of business, and the seller pays the
freight.
Freight costs paid on inventory purchases are added to the cost of the
inventory. Freight costs paid on sales are recorded as an expense such
as Freight Out or Delivery Expense.
8. Willow Ridge’s accountant is wrong. The Merchandise Inventory account

shows the cost of the merchandise. If a purchase allowance is received,
the cost of the merchandise is lower so the Merchandise Inventory account
needs to be reduced to reflect the decreased cost of inventory. It doesn’t
matter if the merchandise was physically returned or not. This is consistent
with the cost principle. The lower invoice amount reflects an objective
measurement of the cost of the inventory when the merchandise received
does not exactly match the purchaser’s specifications.

9. Fukushima Company should take advantage of the discount offered. The
bank rate of 7.25% is an annual rate which is equivalent to 0.4% for 20
days (7.25% × 20/365). Since 0.4% cost of borrowing is less than 1%
saved by paying 10 days after the purchase—20 days before the final due
date—it is advantageous to borrow and pay within the discount period.
Another way to explain the advantage is to convert the discount to an

annual rate. In order to obtain the 1% discount the company must pay 20
days ahead of the final due date (30 days – 10 days = 20 days). The
effective annual interest rate of doing this is 18.25% (1% × 365/20). Since
the 18.25% savings is greater than the 7.25% rate on the bank loan, the
company should borrow from the bank and take advantage of the discount.
10. The company needs to record a credit to Sales for $75 and to debit Cost of
Goods Sold for $50 instead of the $25 credit to Gross Profit. Recording the
sales and cost of goods sold in separate accounts allows the company and
users of financial information to do ratio analysis to measure the
company’s profitability and it allows management to analyze trends and
variances in both revenues and expenses separately.
11. A quantity discount gives a reduction in price according to the volume of

the purchase—in other words, the larger the number of items purchased,
the larger the discount. Quantity discounts are not the same as purchase
discounts, which are offered to customers for early payment of the balance
due. Purchase discounts are noted on the invoice by the use of credit
terms that specify the amount and time period for the purchase discount.
Quantity discounts are not recorded or accounted for separately, whereas

purchase discounts are recorded separately. When an invoice is paid
within the discount period, the Merchandise Inventory account will be
reduced by the amount of the discount because inventory is recorded at
cost. By paying within the discount period, a company reduces the cost of
its inventory.
A sales discount is the counterpart of the purchase discount. A purchase

discount is a discount taken by the purchaser, and a sales discount is the
discount offered by the seller. When the invoice is paid within the discount
period, the discount is recorded in a separate Sales Discount account.

12. Most sales returns are recorded as they occur and not based on the date
of the original sale to the customer. The timing of the sales return entry is
based on the assumption that returns are not significant. In this case the
company accepts returns up to six months following the original sale, and
returns may happen in a subsequent fiscal year. If the company
experiences substantial returns, it has to account for them in the same
time period as the related sale in order to properly reflect the gross profit
for that period’s sale. The company faces the uncertainty of having to
estimate the amount of sales returns at December 31, in order to properly
report net sales.
Chandler should consider adopting a different fiscal year end. (Note that
the fiscal year does not have to be the same as the calendar year.) Since
the end of the calendar year is their busy sales season, it would make
more sense to move the fiscal year end to a less busy time. This is
especially true for a merchandising business, which must conduct a
physical inventory as part of its year-end procedures.
13. Sales returns are not debited directly to the Sales account because this
would not provide information on the amount of sales returns and
allowances. This information is important to management as it may
suggest inferior merchandise, errors in billing, or incorrect sales
techniques. Debiting returns directly to sales may also cause problems in
comparing sales for different periods. Geoff may be suggesting this to hide
the volume of returns associated with his sales if many of the sales returns
are from his customers. Raymond should record the sales returns in a
separate contra account in order to have better information to manage the
company.
14. A sales allowance occurs when the buyer keeps the merchandise, but the
sales price is adjusted. This may happen because the purchaser is
dissatisfied because the goods are damaged, of inferior quality or do not
meet the purchaser’s specifications. Since the goods are not returned, the
Merchandise Inventory account cannot be debited. The transaction is
recorded as a reduction to Accounts Receivable or Cash and a debit to
Sales Returns and Allowances.
When goods are returned and are in saleable condition, they are available
to be resold to another customer. A journal entry will debit Merchandise
Inventory and credit Cost of Goods Sold for the same amount as the
original cost of the inventory. If the goods are damaged and cannot be
resold, the transaction is recorded in the same way as a sales allowance;
there is no entry to Merchandise Inventory or Cost of Goods Sold. Since

the items are damaged they do not represent assets to the company and
cannot be returned to the Merchandise Inventory account.
15. Disagree. The steps in the accounting cycle are the same for both a
merchandising company and a service enterprise. The types of
transactions are different, but the steps in the accounting cycle are the
same.
16. This difference could be the result of errors in the perpetual inventory
records, or because of errors in the annual physical inventory count. An
adjustment at the end of the period will be necessary to correctly reflect
the actual inventory on hand at yearend.
17. The additional accounts that must be closed for a merchandising company
using a perpetual inventory system are Sales, Sales Returns and
Allowances, Sales Discounts, Cost of Goods Sold and Freight Out. The
Sales account is debited to close it to the Income Summary account. The
remaining accounts have normal debit balances and are credited when
closed to Income Summary.
18. The single-step income statement differs from the multiple-step income
statement in that (1) all data are classified into two categories: revenues
and expenses; and (2) only one step, subtracting total expenses from total
revenues, is required in determining profit (or loss).
A multiple step income statement includes three main steps (1) cost of
goods sold is subtracted from sales to determine gross profit (2) operating
expenses are subtracted from gross profit to determine profit from
operations and (3) non-operating expenses are subtracted from (and non-
operating revenues are added to) profit from operations to determine
profit.
19. Net sales is calculated by deducting the contra revenue accounts, Sales
Returns and Allowances and Sales Discounts, from Sales.
Gross profit is calculated by subtracting cost of goods sold from net sales.
Profit from operations is calculated by subtracting operating expenses

from gross profit.
Profit is calculated by subtracting non-operating expenses from (or adding

non-operating revenues to) profit from operations.

Only merchandising companies show net sales and gross profit; service
companies would show service revenues. Profit from operations is used
by both merchandising and service companies as both of these types of
companies may have non-operating revenues or expenses.
20. Interest expense is a non-operating expense because it relates to how a

company’s operations are financed. This is not always within the
company’s control and is usually not a decision of the general manager,
but rather of the chief financial officer.
21. Yes, it is possible for profit from operations and profit to be the same. This
would occur if the company has no non-operating expenses or revenues.
If companies do not have non-operating expenses or revenues the profit
from operations is referred to as profit.
22. Gross profit is calculated as the difference between net sales revenue and
cost of goods sold and is expressed in dollars. Gross profit margin
represents gross profit expressed as a percentage of net sales. The gross
profit margin allows the company to compare its results with past periods,
competitors and industry averages. It shows the relative relationship
between net sales and gross profit.
23. Yes there is. The gross profit margin measures the percentage of net
sales remaining after the cost of goods sold has been deducted to cover
operating expenses and to contribute to profit. The profit margin measures
the percentage of net sales that is left after covering all of the expenses
(including the cost of goods sold).
A company could have a positive gross profit margin and a negative profit
margin if expenses other than cost of goods sold exceed gross profit. In
addition, the gross profit margin may show a positive trend of increasing
profitability, but if operating expenses have an increasing trend, this may
yield decreased overall profitability for the company.
*24. In a periodic inventory system, purchases are recorded to the Purchases

account. Purchase returns and allowances, purchase discounts and
freight in are also recorded in separate accounts. In a perpetual inventory
system, purchases, purchase returns and allowances, purchase discounts
and freight in are recorded directly to the Merchandise Inventory account.
In a perpetual system, cost of goods sold and inventory are updated when
a sale occurs. This does not happen in a periodic system.

*25. Renata would record revenues from the sale of merchandise when sales
are made, in the same way as in a perpetual inventory system, but on the
date of sale the cost of the merchandise sold is not recorded. Instead, the
cost of goods sold during the period is calculated at the end of the period
by taking a physical inventory count and deducting the cost of this
inventory from the cost of the merchandise available for sale during the
period. The gross profit would be then be calculated by deducting the cost
of goods sold from the sales revenue.
*26. The purpose of these entries is to update the Merchandise Inventory

account to the correct ending balance (i.e., adjust for the change between
the beginning and ending inventories).

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1
(a) & (b)

Company A Gross profit = $80,000 ($250,000 – $170,000)
Profit = $30,000 ($80,000 – $50,000)
(c) & (d)
Company B Gross profit = $38,000 ($108,000 – $70,000)
Operating expenses = $8,500 ($38,000 – $29,500)
(e) & (f)

Company C Cost of goods sold = $45,000 ($75,000 – $30,000)
Operating expenses = $19,200 ($30,000 – $10,800)
(g) & (h)

Company D Sales = $170,000 ($75,000 + $95,000)
Loss = $(20,000) ($95,000 – $115,000)
BRIEF EXERCISE 5-2
Inventory Item Quantity Cost per Package Total Cost

Bubble gum 600 $0.95 $ 570
Jelly beans 400 $1.25 500
Lollipops 350 $1.60 560
$1,630

BRIEF EXERCISE 5-3
Total Merchandise Inventory cost:

Invoice cost (500 × $5.50) $2,750
Plus: Freight in 75
Less: Purchase discount (55)
Total cost $2,770
Cost per unit = Total cost ÷ 500 packages

= $2,770 ÷ 500 = $5.54 per package
Balance in Merchandise Inventory account:

Balance from BE5-2 $1,630
Cost of Canada Mints 2,770
Total $4,400
BRIEF EXERCISE 5-4
(a) Mar. 16 Merchandise Inventory.................... 15,000

Accounts Payable ....................... 15,000
18 Accounts Payable............................ 750

Merchandise Inventory ............... 750
25 Accounts Payable ($15,000 – $750) 14,250

Merchandise Inventory
($14,250 × 2%) ............................. 285
Cash ............................................. 13,965
(b)
Date Assets Liabilities Owner’s Equity
Mar. 16 Inventory Accounts Payable NE
+ $15,000 + $15,000
18 Inventory Accounts Payable NE
– $750 – $750
25 Inventory Accounts Payable NE
– $285 – $14,250
Cash
– $13,965

BRIEF EXERCISE 5-5
Jan. 2 Merchandise Inventory.................... 20,000

Jan. 4 Merchandise Inventory.................... 215

Cash ............................................. 215
Jan. 6 Accounts Payable............................ 1,500

Merchandise Inventory ............... 1,500
Feb. 1 Accounts Payable............................ 18,500

Cash ............................................. 18,500
BRIEF EXERCISE 5-6
Mar. 12 Merchandise Inventory.................... 25,000

13 No entry required.
14 Accounts Payable............................ 2,000

21 Accounts Payable ($25,000 – $2,000) 23,000

($23,000 × 2%) ............................. 460
Cash ............................................. 22,540

BRIEF EXERCISE 5-7
(a) Mar. 16 Accounts Receivable ...................... 15,000

Sales ............................................ 15,000
Cost of Goods Sold ......................... 8,700

17 Freight Out ....................................... 170

Cash ............................................. 170
18 Sales Returns and Allowances ....... 750

Accounts Receivable .................. 750
25 Cash ($14,250 – $285) ..................... 13,965

Sales Discounts ($14,250 × 2%) ..... 285
Accounts Receivable
($15,000 – $750)........................... 14,250
(b)
Owner’s
Date Assets Liabilities Equity
Mar.16 Accounts Receivable
+ $15,000 + $15,000
16 Inventory
– $8,700 – $8,700
17 Cash
– $170 – $170
18 Accounts Receivable
– $750 – $750
25 Cash
+ $13,965 – $285
Accounts Receivable
– $14,250

BRIEF EXERCISE 5-8
Jan. 2 Accounts Receivable ...................... 20,000

Sales ............................................ 20,000

6 Sales Returns and Allowances ....... 1,500

Accounts Receivable .................. 1,500
Merchandise Inventory.................... 590

Cost of Goods Sold..................... 590
Feb. 1 Cash ($20,000 – $1,500)................... 18,500

BRIEF EXERCISE 5-9
Mar. 12 Accounts Receivable ...................... 25,000

Sales ............................................ 25,000

13 Freight Out ....................................... 265

Cash ............................................. 265

22 Cash ($23,000 – $460) ..................... 22,540

Sales Discounts ($23,000 × 2%) ..... 460

BRIEF EXERCISE 5-10
June 30 Cost of Goods Sold.............................. 2,500

($89,000 – $86,500) .......................... 2,500
BRIEF EXERCISE 5-11
Sept. 30 Sales ................................................. 218,750

Income Summary ........................ 218,750
30 Income Summary ............................. 171,000

Sales Returns and Allowances .. 3,150
Sales Discounts .......................... 950
Cost of Goods Sold .................... 125,000
Freight Out .................................. 1,900
Salaries Expense ........................ 40,000
Merchandise Inventory and Supplies are balance sheet

(permanent) accounts and are not closed.
BRIEF EXERCISE 5-12
(a) Net sales = $539,000 ($561,000 – $5,500 – $16,500)
(b) Gross profit = $154,000 ($539,000 – $385,000)
(c) Operating expenses = $115,500 ($13,200 + $3,300 + $44,000

+ $55,000)
(d) Profit = $36,300 ($154,000 – $115,500 + $8,800 – $11,000)

BRIEF EXERCISE 5-13
(a) (b)
Single-step income Multiple-step
statement income statement
Cost of goods sold Expenses Gross profit
Depreciation Expenses Operating
expense expenses
Freight out Expenses Operating
expenses
Insurance expense Expenses Operating
expenses
Interest expense Expenses Other expenses
Interest revenue Revenues Other revenues
Rent revenue Revenues Other revenues
Rent expense Expenses Operating
expenses
Sales revenue Revenues Net Sales
(Net Sales)
Sales returns and Revenues Net Sales
allowances (Net Sales)

BRIEF EXERCISE 5-14
2014
Gross profit margin = 36.84%
[($950,000 – $600,000) ÷ $950,000]
Profit margin = 7.37%

[$70,000 ÷ $950,000]
2013
Gross profit margin = 37.50%
[($800,000 – $500,000) ÷ $800,000]

[$65,000 ÷ $800,000]
Red River’s profitability has deteriorated since both its gross

profit margin and its profit margin have decreased from the
previous year.
*BRIEF EXERCISE 5-15
Feb. 5 Purchases .......................................12,000

Accounts Payable ...................... 12,000
6 Freight In ......................................... 110

Cash ............................................ 110
8 Accounts Payable........................... 1,000

Purchase Returns and Allowances 1,000
11 Accounts Payable
($12,000 − $1,000) ...........................11,000
Purchases Discounts ($11,000 × 2%) 220
Cash ($11,000 – $220) ................ 10,780

Feb. 5 Accounts Receivable .....................12,000

Sales ........................................... 12,000
8 Sales Returns and Allowances ...... 1,000

Accounts Receivable ................. 1,000
11 Cash ($11,000 – $220) ....................10,780

Sales Discounts ($11,000 × 2%) .... 220
Accounts Receivable ................. 11,000

(a)
Purchases ........................................................................ $340,000
Less: Purchase returns and allowances ...... $9,350
Purchase discounts............................. 6,800 16,150
Net purchases ................................................................. $323,850
(b)
Net purchases (above) .................................................... $323,850
Add: Freight in................................................................. 13,600
Cost of goods purchased ............................................... $337,450
(c)
Beginning inventory....................................... $ 51,000
Add: Cost of goods purchased (above)........ 337,450
Cost of goods available for sale.................... $388,450
(d)
Cost of goods available for sale (above) ...... $388,450
Less: Ending inventory .................................. 00 68,000
Cost of goods sold ......................................... $320,450
(e)
Net sales ......................................................... $531,250
Less: Cost of goods sold (above) ................. 320,450
Gross profit..................................................... $210,800
Note: Freight-out is not included; it is an operating expense.

SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) 3 Cost of goods sold

(b) 8 Subsidiary ledger
(c) 14 Contra revenue account
(d) 4 Purchase returns
(e) 10 FOB destination
(f) 7 Periodic inventory system
(g) 11 Sales allowance
(h) 1 Gross profit
(i) 12 Non-operating activities
(j) 6 FOB shipping point
(k) 2 Perpetual inventory system
(l) 15 Merchandise inventory
(m) 13 Profit margin
(n) 9 Sales discount

EXERCISE 5-2
(a)
Mar. 1 Merchandise Inventory ...................... 9,000

Accounts Payable........................... 9,000
2 Merchandise Inventory ....................... 155

Cash ................................................ 155
3 Accounts Payable ............................... 1,000

Merchandise Inventory................... 1,000
21 Merchandise Inventory ...................... 13,000

22 (FOB destination point means the seller pays

the freight, therefore no entry required here.)
23 Accounts Payable ............................... 400

Merchandise Inventory................... 400
30 Accounts Payable ($9,000 – $1,000) .. 8,000

Cash ................................................ 8,000
31 Accounts Payable ($13,000 – $400) ... 12,600

($12,600 × 2%) .......................... 252
Cash .......................................... 12,348

EXERCISE 5-2 (Continued)
(b)
Mar. 1 9,000
2 155 Mar. 3 1,000
21 13,000 23 400
31 252
20,503
Cash payments:
March 2 $ 155
March 30 8,000
March 31 12,348
Total cash payments for inventory in March $20,503

EXERCISE 5-3
(a)
Mar. 1 Accounts Receivable ......................... 9,000

Sales ............................................... 9,000
Cost of Goods Sold............................. 3,960

Merchandise Inventory .................. 3,960
2 (FOB shipping point means the buyer pays

3 Sales Returns and Allowances ......... 1,000

Accounts Receivable..................... 1,000
Merchandise Inventory ....................... 440

Cost of Goods Sold ....................... 440
21 Accounts Receivable .......................... 13,000

Sales ............................................... 13,000
Cost of Goods Sold ............................. 5,720

Merchandise Inventory .................. 5,720
22 Freight Out........................................... 170

Cash ................................................ 170
23 Sales Returns and Allowances ......... 400

Accounts Receivable..................... 400
30 Cash ($9,000 – $1,000) ........................ 8,000

Accounts Receivable...................... 8,000
31 Cash ..................................................... 12,348

Sales Discount ($12,600 × 2%) ........... 252
Accounts Receivable ($13,000 – $400) 12,600

(b) Sales ($9,000 + $13,000) $22,000

Less: Sales return ($1,000 + $400) 1,400
Less: Sales discount 252
Net sales $20,348
Cost of goods sold ($3,960 + $5,720) $9,680

Less: Returns to inventory 440
Cost of goods sold $9,240
Net sales (above) $20,348

Less: Cost of goods sold (above) 9,240
Gross profit $11,108

EXERCISE 5-4
(a) Apr. 5 Merchandise Inventory................ 12,000

Accounts Payable ................... 12,000
6 Merchandise Inventory................ 300

Cash ......................................... 300
8 Accounts Payable........................ 1,800

Merchandise Inventory ........... 1,800
May 4 Accounts Payable

($12,000 – $1,800) ........................ 10,200
Cash ......................................... 10,200
(b) Apr. 5 Accounts Receivable .................. 12,000

Sales ............................................ 12,000
Cost of Goods Sold ..................... 8,500

8 Sales Returns and Allowances ... 1,800

Accounts Receivable .............. 1,800
May 4 Cash ($12,000 – $1,800)............... 10,200

(c) Gross profit = $1,700

= ($12,000 – $1,800 – $8,500)

EXERCISE 5-5
(a) Dec. 3 Accounts Receivable .................. 32,000

Sales ........................................ 32,000
Cost of Goods Sold ..................... 18,000

Merchandise Inventory. .......... 18,000
4 Freight Out ................................... 650

Cash ......................................... 650

Merchandise Inventory................ 990

Cost of Goods Sold................. 990
13 Cash ($30,200 × 98%) .................. 29,596

Sales Discount ($30,200 × 2%) ... 604
Accounts Receivable
($32,000 – $1,800).................... 30,200
(b) Dec. 3 Merchandise Inventory................ 32,000



($30,200 × 2%) ......................... 604
Cash ......................................... 29,596
(c) Gross profit = $12,586

= ($32,000 – $18,000 – $1,800 + $990 – $604)

EXERCISE 5-6
(a) June 10 Merchandise Inventory................. 4,000

Accounts Payable .................... 4,000
11 Merchandise Inventory................. 375

Cash .......................................... 375
12 Accounts Payable......................... 200

Merchandise Inventory ............ 200
20 Accounts Payable ($4,000 – $200) 3,800

($3,800 × 2%) ............................ 76
Cash ($3,800 × 98%)................. 3,724
July 15 Cash .............................................. 9,275

Sales ......................................... 9,275
15 Cost of Goods Sold

($4,000 + $375 – $200 – $76) ........ 4,099
Merchandise Inventory ............ 4,099
15 Freight Out .................................... 350

Cash .......................................... 350
17 Sales Returns and Allowances .... 500

Cash .......................................... 500
(b) July 31 Sales .............................................. 9,275

Income Summary ..................... 9,275
31 Income Summary.......................... 4,949

Cost of Goods Sold.................. 4,099
Freight Out ............................... 350
Sales Returns and Allowances 500
31 Income Summary ($9,275 – $4,949) 4,326

Pele, Capital ............................. 4,326

EXERCISE 5-7
(a) Beginning inventory $ 0

Inventory purchase 13,500
Freight in 450
Cost of goods available for sale $13,950
Number of tables available for sale 150
Average cost per table $ 93.00
(b) Beginning inventory, in units 0

Tables purchased, Nov. 3 150
Tables sold, Nov. 19 (45)
Tables returned, Nov. 21 5
Ending balance in inventory subledger, in units 110
Number of tables per the inventory count 109
Adjustment required 1
Nov. 30 Cost of Goods Sold ................. 93

Merchandise Inventory ............ 93
Nov. 1: Beginning balance $ 0

Nov. 3: Purchase of merchandise 13,500
Freight in 450
Nov. 19: Sale of merchandise (45 tables × $93) (4,185)
Nov. 21: Return of merchandise (5 tables × $93) 465
Nov. 30: Balance before adjustment 10,230
Nov. 30: Adj. for missing table (93)
Nov. 30: Balance $10,137
(c) Cost of goods available for sale (above) $13,950

Less: Ending inventory (109 tables × $93) 10,137
Cost of goods sold $ 3,813

(d) Sales (45 tables × $170) $7,650

Less: Sales return (5 tables × $170) 850
Less: Sales discount (2% × [$7,650 – $850]) 136
Net sales $6,664
Net sales (above) $6,664

Less: Cost of goods sold (above) 3,813
Gross profit (loss) $2,851

EXERCISE 5-8
Natural Mattar SE
Cosmetics Grocery Footwear
Sales $215,000 (e) $360,000 $275,000
Sales returns and
allowances (a) 14,000 25,000 20,000
Net sales 201,000 335,000 (i) 255,000
Cost of goods sold 99,000 (f) 140,000 (j) 105,000
Gross profit (b) 102,000 195,000 150,000
Operating expenses 45,000 (g) 122,000 95,000
Profit from
operations (c) 57,000 (h) 73,000 (k) 55,000
Other expenses 5,000 10,000 (l) 14,000
Profit (d) $52,000 $63,000 $41,000
(a) Sales ......................................................................... $215,000

Less: *Sales returns and allowances ............................. (14,000)
Net sales ................................................................... $201,000
(b) Net sales ................................................................... $201,000

Less: cost of goods sold......................................... (99,000)
*Gross profit............................................................. $102,000
(c) Gross profit .............................................................. $102,000

Less: Operating expenses ...................................... (45,000)
*Profit from operations ............................................ $ 57,000
(d) Profit from operations ............................................. $57,000

Less: Other expenses ............................................. (5,000)
*Profit........................................................................ $52,000
(e) *Sales........................................................................ $360,000

Less: Sales returns and allowances ...................... (25,000)
Net sales ................................................................... $335,000

(f) Net sales ................................................................... $335,000

*Cost of goods sold ................................................. (140,000)
Gross profit .............................................................. $195,000
(g) Gross profit .............................................................. $195,000

*Operating expenses ............................................... (122,000)
Profit from operations (from (h)) ............................ $73,000
(h) *Profit from operations ............................................ $73,000

Less: Other expenses ............................................. (10,000)
Profit ......................................................................... $63,000
(i) Sales ......................................................................... $275,000

Less : Sales returns................................................. (20,000)
*Net sales ................................................................. $255,000
(j) Net sales ................................................................... $255,000

Less: *Cost of goods sold....................................... (105,000)
Gross profit .............................................................. $150,000
(k) Gross profit .............................................................. $150,000

Less: Operating expenses ...................................... (95,000)
*Profit from operations ............................................ $55,000
(l) Profit from operations ............................................. $55,000

Less: *Other expenses ............................................ (14,000)
Profit ......................................................................... $41,000

EXERCISE 5-9
(a)
LEFEBVRE COMPANY
Income Statement
Year Ended December 31, 2014
Revenues
Net sales ($1,980,000 – $59,400 – $9,900) $1,910,700
Interest revenue ........................................ 10,000
Rent revenue ............................................. 24,000
Total revenues ...................................... 1,944,700
Expenses
Cost of goods sold ................................... $851,500
Salaries expense....................................... 650,000
Advertising expense ................................. 55,000
Depreciation expense ............................... 45,000
Freight-out................................................. 25,000
Insurance expense ................................... 15,000
Interest expense ....................................... 10,500
Total expenses ..................................... 1,652,000
Profit............................................................... $ 292,700

(b)
LEFEBVRE COMPANY
Income Statement
Sales.............................................................................. $1,980,000
Less: Sales returns and allowances ............. $59,400
Sales discounts ................................... 9,900 69,300
Net sales ....................................................................... 1,910,700
Cost of goods sold ....................................................... 851,500
Gross profit................................................................... 1,059,200
Operating expenses
Salaries expense....................................... $650,000
Advertising expenses ............................... 55,000
Freight-out................................................. 25,000
Total operating expenses ............................................ 790,000
Profit from operations ............................................. 269,200
Other revenues
Interest revenue .......................... $10,000
Rent revenue ............................... 24,000 34,000
Other expenses
Interest expense ....................................... 10,500 23,500
Profit.............................................................................. $ 292,700

(c)
Dec. 31 Sales ............................................ 1,980,000
Interest Revenue ......................... 10,000
Rent Revenue .............................. 24,000
Income Summary ..................... 2,014,000
31 Income Summary ........................ 1,721,300

Sales Returns and Allowances ........ 59,400
Sales Discounts ................................ 9,900
Cost of Goods Sold........................... 851,500
Salaries Expense .............................. 650,000
Advertising Expenses....................... 55,000
Depreciation Expense....................... 45,000
Freight-out ......................................... 25,000
Insurance Expense ........................... 15,000
Interest Expense ............................... 10,500
31 Income Summary
($2,014,000 – $1,721,300) ......... 292,700
C. Lefebvre, Capital.................. 292,700
31 C. Lefebvre, Capital........................... 150,000

C. Lefebvre, Drawings ............. 150,000
LEFEBVRE COMPANY
Post-closing Trial Balance
December 31, 2014
Debit Credit
Cash ............................................................. $ 75,700
Notes receivable .......................................... 100,000
Merchandise inventory ............................... 70,000
Equipment.................................................... 450,000
Accumulated depreciation—equipment .... $135,000
Unearned revenue ....................................... 8,000
Notes payable .............................................. 175,000
C. Lefebvre, capital ..................................... 377,700
Totals ........................................................... $695,700 $695,700

EXERCISE 5-10
(a)
RIKARD’S
Income Statement
Year Ended August 31, 2014
Sales................................................................................. $465,000
Less: Sales returns and allowances ......................... 16,300
Net sales ...................................................................... 448,700
Cost of goods sold .......................................................... 271,500
Gross profit...................................................................... 177,200
Operating expenses
Salaries expense............................................ $50,000
Rent expense ................................................. 24,000
Depreciation expense .................................... 7,000
Supplies expense .......................................... 6,325
Insurance expense ........................................ 3,575
Total operating expenses ...................................... 90,900
Profit from operations ..................................................... 86,300
Other expenses
Interest expense ......................................................... 2,100
Profit................................................................................. $84,200
RIKARD’S
Statement of Owner’s Equity
R. Smistad, capital September 1, 2013* ......................... $ 62,250

Add: Investment.............................................. $ 3,500
Profit ....................................................... 84,200 87,700
149,950
Less: Drawings ................................................................ 80,000
R. Smistad, capital, August 31, 2014 ............................. $69,950
*($65,750 – $3,500)

(a) (Continued)
RIKARD’S
Balance Sheet
August 31, 2014
Assets
Current assets
Cash............................................................................. $15,450
Merchandise inventory .............................................. 70,350
Supplies....................................................................... 950
Prepaid insurance....................................................... 575
Total current assets ............................................... 87,325
Property, plant, and equipment
Equipment .................................. $35,000
Less: Accumulated depreciation 14,000 $21,000
Furniture ..................................... 42,000
Less: Accumulated depreciation 17,500 24,500
Total property, plant and equipment .................... 45,500
Total assets ............................................................ $132,825
Liabilities and Owner’s Equity
Current liabilities
Accounts payable ....................................................... $ 15,500
Salaries payable.......................................................... 2,250
Interest payable .......................................................... 525
Unearned sales revenue............................................. 2,600
Current portion of non-current notes payable.......... 6,000
Total current liabilities ........................................... 26,875
Long-term liabilities
Notes payable ($42,000 – $6,000) .............................. 36,000
Total liabilities ........................................................ 62,875
Owner’s Equity
R. Smistad, capital ...................................................... 69,950
Total liabilities and owner’s equity ....................... $132,825

(b) Gross profit margin = $177,200 ÷ $448,700 = 39.5%

Profit margin = $84,200 ÷ $448,700 = 18.8%

EXERCISE 5-11
(a) Gross profit margin

2012 = 35.7% [($13,909 – $8,939) ÷ $13,909]
2011 = 35.5% [($13,864 – $8,939) ÷ $13,864]
2010 = 35.2% [($13,568 – $8,790) ÷ $13,568]
Profit margin
2012 = 1.1% [$149 ÷ $13,909]
2011 = 1.2% [$168 ÷ $13,864]
2010 = 2.3% [$312 ÷ $13,568]
(b) Profit margin (Profit from operations)

2012 = 4.2% [$582 ÷ $13,909]
2011 = 4.7% [$646 ÷ $13,864]
2010 = 5.8% [$784 ÷ $13,568]
(c) The gross profit margin has increased slightly from 2010
to 2012, from 35.2% to 35.7%. The profit margin has
decreased from 2.3% in 2010 to 1.1% in 2012. The profit
margin based on profit from operations also weakened
from 5.8% in 2010 to 4.2% in 2012.

*EXERCISE 5-12
(a) Apr. 5 Purchases .................................... 12,000

6 Freight In ...................................... 300

Cash ......................................... 300

Purchase Returns and
Allowances .............................. 1,800
May 4 Accounts Payable

($12,000 – $1,800) ........................ 10,200
Cash ......................................... 10,200
(b) Apr. 5 Accounts Receivable .................. 12,000

Sales ......................................... 12,000

May 4 Cash ($12,000 – $1,800)............... 10,200


*EXERCISE 5-13
(a) Dec. 3 Accounts Receivable .................. 32,000

Sales ........................................ 32,000
4 Freight Out ................................... 650

Cash ......................................... 650

13 Cash ($30,200 × 98%) .................. 29,596

Sales Discount ($30,200 × 2%) ... 604
Accounts Receivable
($32,000 – $1,800).................... 30,200
(b) Dec. 3 Purchases .................................... 32,000


Allowances .............................. 1,800

Purchase Discounts
($30,200 × 2%) ......................... 604
Cash ......................................... 29,596

*EXERCISE 5-14
(a) July 2 Purchases ..................................... 15,000

Accounts Payable .................... 15,000
3 Accounts Payable......................... 1,200

Allowances ............................... 1,200
4 Freight In ....................................... 500

Cash .......................................... 500
8 Cash .............................................. 2,000

Sales ......................................... 2,000
11 Accounts Payable......................... 13,800

Purchase Discounts
($13,800 × 2%) .......................... 276
Cash ($13,800 × 98%) ............... 13,524
15 Accounts Receivable ................... 6,000

Sales ......................................... 6,000
25 Cash ($6,000 × 99%) ..................... 5,940

Sales Discounts ($6,000 × 1%) .... 60
Accounts Receivable ............... 6,000

*EXERCISE 5-14 (Continued)
(b)
Sales revenues
Sales ($2,000 + $6,000) ............................................... $8,000
Less: Sales discounts ............................................... 60
Net sales ...................................................................... 7,940
Cost of goods sold
Merchandise inventory, July 1 .................... $ 0
Purchases ................................... $15,000
Less: Purchase returns and
allowances ..................... 1,200
Less: Purchase discounts ......... 276
Net purchases ............................. 13,524
Add: Freight in ............................ 500
Cost of goods purchased......................... 14,024
Cost of goods available for sale .............. 14,024
Merchandise inventory, July 31 ............... 10,500
Cost of goods sold ................................................. 3,524
Gross profit...................................................................... $4,416

*EXERCISE 5-15
St. Pierre Co.:
(a) $1,420 ($1,500 – $50 – $30)
(b) $1,530 ($1,420 + $110)
(c) $1,780 ($1,530 + $250)
(d) $300 ($1,780 – $1,480)
(e) $300 (from (d))
(f) $2,000 ($1,850 + $100 + $50)
(g) $150 ($2,000 from (h) – $1,850)
(h) $2,000 ($2,300 – $300 from (e))
(i) $1,900 ($2,300 – $400)
Silva Co.:
(j) $7,660 ($7,210 + $300 + $150)
(k) $690 ($7,900 – $7,210)
(l) $8,900 ($7,900 + $1,000)
(m) $7,450 ($8,900 from (l) – $1,450)
(n) $1,450 (from year 1 ending inventory)
(o) $9,050 ($9,550 – $400 – $100)
(p) $9,600 ($9,050 from (o) + $550)
(q) $11,050 ($9,600 from (p) + $1,450 from (n))
(r) $9,800 ($11,050 from (q) – $1,250)

*EXERCISE 5-16
(a)
OKANAGAN COMPANY
Income Statement
Year Ended January 31, 2014
Sales revenues
Sales ............................................................................ $325,000
Less: Sales returns and allowances ............ $20,000
Sales discounts .................................... 14,000 34,000
Net sales .......................................................................... 291,000
Cost of goods sold
Inventory, beginning ................................ $ 61,000
Purchases ............................... $210,000
Less:
Purchase discounts . $12,000
Purchase returns
and allowances........ 16,000 28,000
Net purchases ........................ 182,000
Add: Freight in ........................ 6,500
Inventory, ending ...................................... 42,000
Gross profit...................................................................... 83,500
Operating expenses
Freight out ................................................. $ 7,000
Insurance expense .................................. 12,000
Rent expense ........................................... 20,000
Salary expense ......................................... 61,000
Loss from operations ...................................................... (16,500)
Other expenses
Interest expense ......................................................... 6,000
Loss ................................................................................. $ (22,500)

*EXERCISE 5-16 (Continued)
(b) Jan. 31 Sales ................................................. 325,000

Merchandise Inventory (end of year) 42,000
Purchase Returns and Allowances. 16,000
Purchase Discounts......................... 12,000
Income Summary .................... 395,000
31 Income Summary ............................. 417,500

(beginning of year) .................. 61,000
Purchases................................ 210,000
Freight In ................................. 6,500
Freight Out .............................. 7,000
Insurance Expense ................. 12,000
Rent Expense .......................... 20,000
Salaries Expense .................... 61,000
Interest Expense ..................... 6,000
Sales Returns and Allowances 20,000
Sales Discounts ...................... 14,000
31 O. G. Pogo, Capital........................... 22,500

Income Summary .................... 22,500
31 O. G. Pogo, Capital........................... 42,000

O. G. Pogo, Drawings ............. 42,000

SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a) A company’s operating cycle is the average time it takes

to go from cash to cash in producing revenues. The
operating cycle for a merchandising company covers the
period of time between when you pay for your inventory,
to when you sell it, and to when you eventually collect the
accounts receivable from a sale. You are having problems
paying your bills because suppliers expect to be paid in
30 days and it takes 45 days, on average, to sell
merchandise and an additional 60 days to collect
accounts receivable.
(b) Your inventory system is contributing to the problem

because you do not know what you have on hand at any
given time and you often run out of inventory.
Taking It Further:
You should consider switching to a perpetual inventory method

because it has detailed records of each inventory purchase and
sale. This system continuously—perpetually—shows the
quantity and cost of the inventory purchased, sold, and on
hand. This will allow you to order inventory on a more timely
basis.
Perpetual systems are more expensive, so a cost-benefit

analysis should be conducted. Since your business is
profitable, it could be worthwhile obtaining quotes on a
perpetual system. Depending on the number of transactions
per month, it might not make sense to invest in the required
technology for a perpetual system.

PROBLEM 5-2A
(a) GENERAL JOURNAL J1

Date Account Titles and Explanation Debit Credit
Apr. 2 Merchandise Inventory ....................... 6,400

4 Accounts Payable [5 × ($6,400 ÷ 160)] 200

5 Accounts Receivable (45 × $90) ......... 4,050

Sales ................................................ 4,050
Cost of Goods Sold (45 × $40) ........... 1,800

6 Sales Returns and Allowances .......... 1,350

Accounts Receivable (15 × $90) .... 1,350
Merchandise Inventory (15 × $40) ...... 600

Cost of Goods Sold ........................ 600
10 Cash (40 × $90) .................................... 3,600

Sales ............................................... 3,600

12 Sales Returns and Allowances .......... 900

Cash (10 × $90) ............................... 900
Merchandise Inventory (10 × $40) ...... 400


Cash (10 × $90) ............................... 900

PROBLEM 5-2A (Continued)
(a) (Continued)
Apr. 25 Accounts Receivable (60 × $90) ......... 5,400

Sales ................................................ 5,400

29 Sales Returns and Allowances .......... 2,250

Accounts Receivable (25 × $90) .... 2,250
Merchandise Inventory (25 × $40) ...... 1,000

Cost of Goods Sold ....................... 1,000
(b)
Inventory Cost of Goods Sold
Apr. 1 2,000 Apr. 5 1,800 6 600
2 6,400 4 200 10 1,600 12 400
5 1,800 25 2,400 29 1,000
6 600 10 1,600
12 400 25 2,400
29 1,000
Bal. 4,400 Bal. 3,800
Sales Returns and

Sales Allowances
Apr. 5 4,050 Apr. 6 1,350
10 3,600 12 900
25 5,400 17 900
29 2,250
Bal. 13,050 Bal. 5,400

(c) Sales $13,050

Less: Sales returns and allowances 5,400
Net sales $7,650
Net sales (from above) $7,650

Less: Cost of goods sold 3,800
Gross profit $3,850
Taking It Further:
The owner will be missing the detail of the amount of sales

returns. This can convey important information about the
quality of the merchandise, or sales practices. A significant
amount of sales returns can negatively affect customer loyalty
and satisfaction. It is also time consuming and expensive to
process the sales returns and to restock the returned
merchandise. Therefore, the owner should know the amount of
sales returns to determine if any of these problems exist.

PROBLEM 5-3A
GENERAL JOURNAL J1
Sept. 1 Merchandise Inventory.................... 45,000

2 (FOB destination means the seller pays

5 Accounts Payable ............................ 3,000

15 Accounts Receivable....................... 70,000

Sales ............................................ 70,000
Cost of Goods Sold

($45,000 – $3,000) ............................ 42,000
16 Freight-Out ....................................... 1,800

Cash ............................................. 1,800

Merchandise Inventory.................... 3,000

Cost of Goods Sold..................... 3,000
25 Sales Discounts ($65,000 × 2%)...... 1,300

Cash ($65,000 – $1,300)................... 63,700
Accounts Receivable
($70,000 – $5,000) ........................ 65,000

Cash ............................................. 42,000

Oct. 1 Merchandise Inventory.................... 52,000

2 Merchandise Inventory.................... 1,100

Cash ............................................. 1,100


Cash ($50,000 – $1,000) ............. 49,000
Merchandise Inventory ($50,000 × 2%) 1,000

Sales ............................................ 83,500
Cost of Goods Sold

($52,000 + $1,100 – $2,000 – $1,000) 50,100


31 Cash ................................................. 82,000

Accounts Receivable
($83,500 – $1,500) ........................ 82,000
(No discount as not received within 10 days)

Taking It Further:
Companies should take all available discounts since not taking

the discount is equivalent to paying interest for the use of the
money owing to the seller.
For the Sept. 1 purchase from Hillary Company, the interest rate
is calculated as follows:
Amount owing to Hillary Company ($45,000 − $3,000) = $42,000
Credit terms: 1/15, n/30
Discount not taken: $42,000 × 1% = $420.
This equals to an annual interest rate of 24.33% (1% ÷ 15 × 365).
For the Oct. 1 purchase from Kimmel Company, the interest

rate is calculated as follows:
Amount owing to Kimmel Company ($52,000 − $2,000) = $50,000
Credit terms: 2/10, n/30
Discount taken: $50,000 × 2% = $1,000.
This equals to an annual interest rate of 36.50% (2% ÷ 20 × 365).
In both cases, Norlan Company should be able to obtain

financing from the bank at a lower rate of interest.

PROBLEM 5-4A
(a)
GENERAL JOURNAL
July 1 Merchandise Inventory (50 × $30) ...... 1,500



10 Accounts Receivable (45 × $55) ........ 2,475

Sales ................................................ 2,475


Merchandise Inventory (5 × $30) ........ 150

15 Merchandise Inventory (60 × $27.50) 1,650


Cash ................................................ 150

(a) (Continued)
July 21 Accounts Receivable (54 × $55) ......... 2,970

Sales ................................................ 2,970


30 Accounts Payable ............................... 1,350

Cash ($1,500 – $150) ...................... 1,350
31 Cash ($2,475 – $275) ........................... 2,200

Accounts Receivable ..................... 2,200
(b)
Bal. 750*
July 1 1,500 July 4 150
10 1,350
12 150
15 1,650
18 150
21 1,620
Bal. 1,080
* Balance from June 30 = 25 suitcases × $30 per suitcase
(c) There are 36 suitcases on hand on July 31. The balance in

the merchandise inventory account is $1,080:
$30 per suitcase × 36 suitcases = $1,080.

Taking It Further:
Freight terms indicate when ownership of the goods transfers

from the seller to the buyer and who pays for the transportation
charges.
In the July 1st transaction, the freight terms are FOB

destination. The seller, Trunk Manufacturers, pays for the
freight charges, resulting in an inventory cost of $30 per item
(50 suitcases × $30 = $1,500). When the seller pays for the
freight costs, this usually results in a higher unit cost to cover
the shipping expense, as shown in the July 1st transaction.
In the July 15th transaction, the freight terms are FOB shipping
point. The buyer, Travel Warehouse, pays for the freight
charges, resulting in a lower unit cost charged by the vendor.
Invoice cost (60 suitcases × $27.50) $1,650
Freight 150
Total inventory cost $1,800
Cost per suitcase ($1,800 ÷ 60) $30

PROBLEM 5-5A

June 1 Merchandise Inventory ....................... 9,000



Sales ................................................ 12,000


Accounts Receivable...................... 950
Merchandise Inventory ....................... 595

6 Freight Out........................................... 290

Cash ................................................ 290
7 Supplies ............................................... 800

Cash ................................................ 800
10 Merchandise Inventory ....................... 4,300


Cash ................................................ 100


(a) (Continued)
June 14 Accounts Payable ............................... 9,000

Merchandise Inventory ($9,000 × 1%) 90
Cash ($9,000 − $90) ........................ 8,910
15 Cash ($11,050 − $221) ......................... 10,829

Sales Discounts ($11,050 × 2%) ......... 221
Accounts Receivable ($12,000 – $950) 11,050
19 Cash ..................................................... 7,250

Sales ................................................ 7,250

20 Accounts Payable ($4,300 − $300) ..... 4,000

Merchandise Inventory ($4,000 × 2%) 80
Cash ($4,000 − $80) ........................ 3,920

Cash ................................................ 500

Sales ................................................ 4,280


(b)
Date Explanation Ref. Debit Credit Balance
June 1 Balance  5,000

1 J1 9,000 14,000
5 J1 7,540 6,460
6 J1 595 7,055
10 J1 4,300 11,355
10 J1 100 11,455
12 J1 300 11,155
14 J1 90 11,065
19 J1 4,570 6,495
20 J1 80 6,415
30 J1 2,700 3,715
Sales
June 5 J1 12,000 12,000

19 J1 7,250 19,250
30 J1 4,280 23,530
Sales Returns and Allowances

June 6 J1 950 950

25 J1 500 1,450
Sales Discounts
June 15 J1 221 221

(b) (Continued)
Cost of Goods Sold

June 5 J1 7,540 7,540

6 J1 595 6,945
19 J1 4,570 11,515
30 J1 2,700 14,215
(c)
WILLINGHAM DISTRIBUTING COMPANY
Income Statement (Partial)
Month Ended June 30, 2014
Sales revenues
Sales ............................................................................ $23,530
Less: Sales returns and allowances......................... 1,450
Sales discounts ............................................... 221
Net sales ...................................................................... 21,859
Gross profit...................................................................... $ 7,644
Taking It Further:
Willingham would face uncertainty about the amount of sales

recorded in June that may be returned in a subsequent
accounting period. If Willingham experiences significant
returns and accepts returns for up to six months after the initial
sale, the June gross profit will be overstated. If a company
experiences substantial returns, it has to record an estimate of
them in the same time period as the related sale in order to
properly reflect the gross profit for that period’s sale. This topic
is usually explored further in an intermediate accounting
course.

PROBLEM 5-6A
(a) Aug. 31 Cost of Goods Sold ........................ 2,440

($57,440 − $55,000)..................... 2,440
(b)
WOLCOTT WAREHOUSE STORE
Income Statement
Revenues
Net sales ($703,360 – $3,700 – $14,440) ..... $685,220
Interest revenue ......................................... 960 $686,180
Expenses
Cost of goods sold ($569,680 + $2,440) ..... $572,120
Depreciation expense ................................. 6,680
Freight out ................................................... $4,720
Insurance expense ...................................... 2,895
Interest expense .......................................... 2,160
Rent expense ............................................... 16,000
Supplies expense ........................................ 5,840 610,415
Profit................................................................ $ 75,765

(c)
WOLCOTT WAREHOUSE STORE
Income Statement
Sales................................................................................. $703,360
Less: Sales returns and allowances ........ $14,440
Sales discounts ............................... 3,700 18,140
Net sales ...................................................................... 685,220
Cost of goods sold ($569,680 + $2,440) ......................... 572,120
Gross profit...................................................................... 113,100
Operating expenses
Depreciation expense ................................ $ 6,680
Freight out .................................................. $44,720
Insurance expense .................................... 2,895
Rent expense ............................................. 16,000
Supplies expense ...................................... 5,840
Other revenues and expenses
Interest revenue ......................................... $ 960
Interest expense ........................................ 2,160 1,200
Profit................................................................................. $ 75,765
(d) Gross profit margin = $113,100 ÷ $685,220 = 16.5%

Profit margin = $75,765 ÷ $685,220 = 11.1%
The gross profit margin has deteriorated significantly

from 20% in 2013 to 16.5% in 2014. The profit margin has
improved slightly from 10% in 2013 to 11.1% in 2014.

(e)
Aug. 31 Interest Revenue ............................... 960
Sales .................................................. 703,360
Income Summary.......................... 704,320
31 Income Summary .............................. 628,555

Sales Returns and Allowances .... 14,440
Sales Discounts ............................ 3,700
Cost of Goods Sold ...................... 572,120
Depreciation Expense ................ 6,680
Freight Out .................................. 4,720
Insurance Expense ..................... 2,895
Interest Expense ........................... 2,160
Rent Expense .............................. 16,000
Supplies Expense ....................... 5,840
31 Income Summary .............................. 75,765

V. Wolcott, Capital ........................ 75,765
31 V. Wolcott, Capital............................. 60,640

V. Wolcott, Drawings .................... 60,640
Income Summary
704,320
628,555
Bal.* 75,765
75,765
Bal. 0
* Check $75,765 = Profit

Taking It Further:
Both income statements result in the same amount of profit.

The multiple-step income statement provides the user with
much more information than the single-step income statement.
The multiple-step income statement provides information on
gross profit and profit from operations which is not included on
the single-step income statement. On the other hand, the
single-step method is quick and easy to understand if final
profit is all that is required by users of the financial statements.

PROBLEM 5-7A
(a)
Dec. 31 Supplies Expense .............................. 2,200

Supplies ($2,950 − $750) ............... 2,220
31 Insurance Expense ............................ 2,500

Prepaid Insurance ......................... 2,500
$3,000 × 10/12
31 Depreciation Expense ....................... 14,500

Accumulated Depreciation
—Equipment .................................. 10,000
—Furniture..................................... 4,500
31 Interest Expense ................................ 675

Interest Payable ............................ 675
31 Unearned Revenue ............................ 3,025

Sales ($4,000 − $975) .................... 3,025
31 Cost of Goods Sold ........................... 1,750

Merchandise Inventory ................. 1,750

[($37,050 − $1,750) − $32,750] ........... 2,550

(b)
WORLD ENTERPRISES
Income Statement
Sales revenues
Sales ($265,000 + $3,025) ........................................... $268,025
Less: Sales returns and allowances ........... $2,500
Sales discounts .................................. 3,275 5,775
Net sales ...................................................................... 262,250
Cost of goods sold ($153,000 + $1,750 + $2,550) .......... 157,300
Gross profit...................................................................... 104,950
Operating expenses
Salaries expense............................................ $35,450
Utilities expense ............................................ 5,100
Supplies expense .......................................... 2,200
Insurance expense ........................................ 2,500
Depreciation expense ................................... 14,500
Other expenses
Interest expense ($6,875 + $675) ............................... 7,550
Profit ................................................................................ $ 37,650
WORLD ENTERPRISES
S. Kim, capital, January 1, 2014 ($46,200 − $5,000) ...... $41,200

Add: Investment................................................ $ 5,000
Profit ......................................................... 37,650 42,650
83,850
Less: Drawings ............................................................... 48,000
S. Kim, capital, December 31, 2014 ................................ $35,850

(b) (Continued)
WORLD ENTERPRISES
Balance Sheet
December 31, 2014
______________________________________________________
Assets
Current assets
Cash............................................................................. $ 15,000
Accounts receivable .................................................. 19,200
Merchandise inventory ($37,050 – $1,750 – $2,550) . 32,750
Prepaid insurance....................................................... 500
Supplies ($2,940 – $2,190).......................................... 750
Property, plant, and equipment
Equipment ................................... $150,000
Less: Accumulated depreciation
($35,000 + $10,000) ........... 45,000 105,000
Furniture ......................................... $45,000
Less: Accumulated depreciation
($18,000 + $4,500)............. 22,500 22,500
Total property, plant, and equipment ..................... 127,500
Total assets .......................................................... $195,700
Liabilities and Owner's Equity
Current liabilities
Accounts payable ......................................................... $ 33,200
Interest payable ............................................................ 675
Unearned sales revenue ($4,000 − $3,025).................. 975
Current portion of mortgage payable .......................... 8,500
Total current liabilities ............................................. 43,350
Mortgage payable ($125,000 − $8,500) ........................ 116,500
Total liabilities .......................................................... 159,850
Owner's equity
S. Kim, capital ............................................................... 35,850
Total liabilities and owner's equity ......................... $195,700

(c) Dec. 31 Sales ........................................... 268,025

Income Summary .................. 268,025
31 Income Summary....................... 230,375

Sales Discounts .................... 3,275
Cost of Goods Sold............... 157,300
Interest Expense ................... 7,550
Salaries Expense .................. 35,450
Utilities Expense ................... 5,100
Supplies Expense ................. 2,200
Insurance Expense ............... 2,500
Depreciation Expense........... 14,500
31 Income Summary....................... 37,650

S. Kim, Capital ....................... 37,650
31 S. Kim, Capital ........................... 48,000

S. Kim, Drawings................... 48,000
(d) Gross profit margin = $104,950 ÷ $262,250 = 40.0%

Profit margin = $37,650 ÷ $262,250 = 14.4%
The gross profit margin has improved significantly from

35% in 2013 to 40% in 2014. The profit margin has also
improved significantly from 10% in 2013 to 14.4% in 2014.
The increasing trend for both the gross profit margin and
the profit margin shows an improvement of the
company’s profitability.
Taking It Further:
A multiple-step income statement for a service company

would show service revenue rather than net sales. There
would not be any cost of goods sold or gross profit. The
operating expenses and other revenues and expenses would
be shown in the same way as for a merchandising company.

PROBLEM 5-8A
(a)
2011 2010 2009
Gross 11.64% 12.82% 8.82%

profit
margin ($28,748 – ($23,465 – ($16,876 –
$25,401) ÷ $28,748 $20,456) ÷ $23,465 $15,387) ÷ $16,876
Profit 3.54% 4.27% (2.68)%

margin
$1,018 ÷ $28,748 $1,003 ÷ $23,465 $(453) ÷ $16,876
Current 1.42:1 1.51:1 1.47:1

ratio
$8,146 ÷ $5,724 $7,485 ÷ $4,968 $6,233 ÷ $4,232
(b) Magna International’s gross profit margin and profit margin

have improved over the three years from 2009 to 2011. Both
ratios showed a significant increase from 2009 to 2010 and
a slight decrease from 2010 to 2011 for an overall increase
in profitability over the three year period.
The current ratio increased in 2010 but subsequently

decreased in 2011 below the 2009 level for an overall
decrease in liquidity.

Taking It Further
The underlying financial statements, in particular the income

statement, would provide additional information to explain the
nature of the changes in the ratios and to help an investor
assess the cause for the loss in 2009 and determine whether
this is of a recurring nature.
The balance sheet would also help a potential investor assess

the change in liquidity over the 3-year period by examining
the underlying current assets and liabilities. For example an
increase in inventory and receivables can signal a
deteriorating liquidity even though the current ratio shows an
increase over the previous year.
The financial statements would also allow a potential investor

to calculate additional ratios to assess profitability and
liquidity.

*PROBLEM 5-9A
GENERAL JOURNAL
Sept. 1 Purchases .......................................... 45,000

Accounts Payable ........................ 45,000

5 Accounts Payable .............................. 3,000

15 Accounts Receivable........................ 70,000

Sales .............................................. 70,000
16 Freight Out ....................................... 1,800

Cash ............................................. 1,800

25 Sales Discounts ($65,000 × 2%)...... 1,300

Cash ($65,000 − $1,300)................... 63,700
Accounts Receivable
($70,000 − $5,000)........................ 65,000
30 Accounts Payable ($45,000 − $3,000) 42,000

Cash ............................................. 42,000

*PROBLEM 5-9A (Continued)
Oct. 1 Purchases ........................................ 52,000

2 Freight In .......................................... 1,100

Cash ............................................. 1,100

10 Accounts Payable ($52,000 − $2,000) 50,000

Cash ($50,000 − $1,000) ............. 49,000
Purchase Discounts ($50,000 × 2%) 1,000

Sales ............................................ 83,500


31 Cash ................................................. 82,000

Accounts Receivable
($83,500 − $1,500)........................ 82,000
(No discount as not received within 10 days)

Taking It Further
Norlan Company has few transactions (1 purchase and 1 sale

per month). A periodic inventory system is less costly to
implement and maintain than a perpetual system. If the
company has relatively low inventory quantities and can
maintain control over its inventory visually rather than
electronically, then a periodic inventory system may be
sufficient to meet their information needs.

*PROBLEM 5-10A
GENERAL JOURNAL
July 1 Purchases (50 × $30) ........................ 1,500


4 Accounts Payable .............................. 150

Purchase Returns and Allowances 150
10 Accounts Receivable (45 × $55) ...... 2,475

Sales ............................................. 2,475
12 Sales Returns and Allowances ........ 275

Accounts Receivable ................... 275
15 Purchases (60 × $27.50) .................... 1,650

18 Freight In ............................................ 150

Cash .............................................. 150
21 Accounts Receivable (54 × $55) ...... 2,970

Sales ............................................. 2,970
23 Sales Returns and Allowances ........ 110

Accounts Receivable ................... 110

Cash ($1,500 – $150) ..................... 1,350
31 Cash ($2,475 − $275) ......................... 2,200

Accounts Receivable .................... 2,200

Taking It Further:
A perpetual inventory system provides detailed records of

inventory. This would allow Travel Warehouse to track the
quantity and cost of inventory purchased, sold and on hand.
This would provide the benefit of being able to answer
customer questions about merchandise availability and for
management to maintain optimum inventory levels and avoid
running out of stock. This system also allows the company to
prepare financial statements more easily, since the cost of
goods sold and ending inventory amounts are readily available.
For a company such as Travel Warehouse, a perpetual system

includes the freight in costs in the inventory cost rather than in
a separate account. This would reflect the fact that the cost is
the same regardless of whether Travel Warehouse or the
supplier pays the freight.
A perpetual inventory system is more costly to implement and

maintain because of the need to enter all merchandise in the
accounting system. The accounting system must also be
sufficiently sophisticated to track purchases and sales of
merchandise, usually through the use of scanners.

*PROBLEM 5-11A

June 1 Purchases ........................................... 9,000

Accounts Payable .......................... 9,000

5 Accounts Receivable ......................... 12,000

Sales ............................................... 12,000

Accounts Receivable ..................... 950
6 Freight Out .......................................... 290

Cash ............................................... 290
7 Supplies .............................................. 800

Cash ............................................... 800
10 Purchases ............................................ 4,300

Accounts Payable .......................... 4,300
10 Freight In ............................................. 100

Cash ............................................... 100

Purchase Returns and Allowances 300

(a) (Continued)
June 14 Accounts Payable ............................... 9,000

Purchase Discounts ($9,000 × 1%) 90
Cash ($9,000 − $90) ........................ 8,910
15 Cash ($11,050 − $221) ........................ 10,829

Sales Discounts ($11,050 × 2%) ......... 221
Accounts Receivable ($12,000 - $950) 11,050
19 Cash .................................................... 7,250

Sales ............................................... 7,250
20 Accounts Payable ($4,300 − $300) ..... 4,000

Purchase Discounts ($4,000 × 2%) 80
Cash ($4,000 − $80) ........................ 3,920

Cash ................................................ 500
30 Accounts Receivable ......................... 4,280

Sales ................................................ 4,280
(b)
June 1 Balance  5,000

(b) (Continued)
Sales
June 5 J1 12,000 12,000

19 J1 7,250 19,250
30 J1 4,280 23,530

June 6 J1 950 950

25 J1 500 1,450
Sales Discounts
June 15 J1 221 221
Purchases
June 1 J1 9,000 9,000

10 J1 4,300 13,300
Purchases Discounts
June 14 J1 90 90
20 J1 80 170
Purchases Returns and Allowances

June 12 J1 300 300

(b) (Continued)
Freight In
June 10 J1 100 100
Freight Out
June 6 J1 290 290
(c)
WILLINGHAM DISTRIBUTING COMPANY
Income Statement (Partial)
Month Ended June 30, 2014
Sales revenues
Sales ............................................................................ $23,530
Less: Sales returns and allowances......................... 1,450
Sales discounts ............................................... 221
Net sales ...................................................................... 21,859
Cost of goods sold
Merchandise inventory, June 1................... $5,000
Purchases ................................... $13,300
Less:
Purchase discounts....... $ 170
Purchase returns and
allowances ................. 300 470
Net purchases ............................. 12,830
Add: Freight in ............................ 100
Merchandise inventory, June 30.............. 3,715
Gross profit...................................................................... $ 7,644

Taking It Further:
The gross profit should be the same under both periodic and
perpetual systems since the same transactions are recorded
with the same impact on cash outflows, and the company will
have the same amount of ending inventory.

*PROBLEM 5-12A
NEW WEST COMPANY

Income Statement
Sales................................................................................. $395,000
Less: Sales discounts ................................. $2,900
Sales returns and allowances........... 7,500 10,400
Net sales ...................................................................... 384,600
Cost of goods sold
Inventory, January 1, 2014 ....................... $ 30,000
Purchases .................................. $232,000
Less:
Purchase discounts.. $3,480
Purchase returns
and allowances........ 4,000 7,480
Net purchases ............................ $224,520
Freight in .................................... 4,500 229,020
Goods available for sale........................... 259,020
Inventory, December 31, 2014.................. 24,000
Gross profit...................................................................... 149,580
Operating expenses
Freight out ................................................. $9,500
Rent expense ............................................ 18,000
Salary expense ......................................... 42,000
Interest revenue ....................................... $1,500
Interest expense ...................................... (2,500) (1,000)
Profit................................................................................. $ 61,580

NEW WEST COMPANY

K. Oliver, capital, January 1, 2014 .................................. $75,000

Add: Investment............................................................. 3,500
Profit ...................................................................... 61,580
140,080
Less: Drawings ................................................................ 48,000
K. Oliver, capital, December 31, 2014 ............................ $92,080

NEW WEST COMPANY

Balance Sheet
December 31, 2014
Assets
Current assets
Cash............................................................................. $ 16,780
Accounts receivable ................................................... 7,800
Inventory ..................................................................... 24,000
Long-term investments
Long-term debt investment ........................................ 50,000
Property, plant and equipment
Equipment ..................................................... 70,000
Less: Accumulated depreciation ................. 21,000
Total assets ............................................................ $147,580
Current liabilities
Unearned revenue ...................................................... $ 5,500
Loan payable, current portion ................................... 5,000
Loan payable ($50,000 − $5,000) ................................ 45,000
Owner’s Equity
K. Oliver, capital.......................................................... 92,080

Taking It Further:
A company using a periodic inventory system does not have to

show the details of how cost of goods sold is calculated. The
company can show its income statement using only the
account cost of goods sold or show the details produced by the
periodic system. GAAP for private enterprises as well as IFRS
do not require the additional detail produced by the periodic
system to be disclosed. This is because the decision to use
either the periodic or perpetual system is a question of cost of
the system as opposed to its benefits for a particular company.
The additional detail produced by the periodic system provide
information that is valuable to the company`s owners and
managers and not to outside users of the income statement.

*PROBLEM 5-13A
(a)
BUD’S BAKERY
Income Statement
Year Ended November 30, 2014
Sales................................................................................. $872,000
Less: Sales discounts ................................. $8,250
Sales returns and allowances........... 9,845 18,095
Net sales ...................................................................... 853,905
Cost of goods sold
Inventory, December 1, 2013 ................... $ 34,360
Purchases .................................. $634,700
Less:
Purchase discounts.. $6,300
Purchase returns
and allowances........ 13,315 19,615
Net purchases ............................ $615,085
Freight in .................................... 5,060 620,145
Goods available for sale........................... 654,505
Inventory, November 30, 2014 ................. 37,350
Gross profit...................................................................... 236,750
Operating expenses
Depreciation expense ............................... $14,000
Property tax expense ............................... 3,500
Salaries expense....................................... 122,000
Freight out ................................................. 8,200
Utilities expense ....................................... 19,800
Rent revenue ............................................ $2,800
Interest expense ...................................... (5,300) (2,500)
Profit................................................................................. $ 57,750

(a) (Continued)
BUD’S BAKERY
Year Ended November 30, 2014
B. Hachey, capital, December 1, 2013 ............................ $104,480

Add: Profit........................................................................ 57,750
162,230
Less: Drawings ................................................................ 12,000
B. Hachey, capital, November 30, 2014.......................... $150,230

(a) (Continued)
BUD’S BAKERY
Balance Sheet
November 30, 2014
Assets
Current assets
Cash............................................................................. $ 8,500
Accounts receivable ................................................... 13,770
Inventory ..................................................................... 37,350
Prepaid insurance....................................................... 4,500
Land ............................................................ $ 85,000
Building ...................................... $175,000
Equipment .................................. 57,000
Total assets ............................................................ $300,040
Current liabilities
Salaries payable.......................................................... 8,500
Unearned revenue ...................................................... 3,000
Mortgage payable, current portion ............................ 8,500
Mortgage payable ($106,000 − $8,500) ...................... 97,500
Owner’s Equity
B. Hachey, capital ....................................................... 150,230

(b)
Nov. 30 Sales ............................................... 872,000

Purchase Discounts ...................... 6,300
Rent Revenue................................. 2,800
Inventory (Nov. 30, 2014) .............. 37,350
Income Summary ...................... 931,765
30 Income Summary........................... 874,015

Purchases .................................. 634,700
Freight In ................................... 5,060
Sales Discounts ........................ 8,250
Salaries Expense ...................... 122,000
Freight Out................................. 8,200
Depreciation Expense............... 14,000
Utilities Expense ....................... 19,800
Property Tax Expense .............. 3,500
Insurance Expense ................... 9,000
Interest Expense ....................... 5,300
Inventory (Dec. 1, 2013) ............ 34,360
30 Income Summary........................... 57,750

B. Hachey, Capital ..................... 57,750
30 B. Hachey, Capital ......................... 12,000

B. Hachey, Drawings................. 12,000

(c)
Inventory
Nov. 30 Balance  34,360

Nov. 30 Closing entry 34,360 0
30 Closing entry 37,350 37,350
B. Hachey, Capital
Nov. 30 Balance  104,480

Nov. 30 Closing entry 57,750 162,230
30 Closing entry 12,000 150,230
Taking It Further:
The list of accounts includes the following accounts that are

used in a periodic inventory system: purchases, purchase
discounts, purchase returns and allowances, and freight in.
The periodic inventory system provides information about

purchase returns and allowances, and purchase discounts. The
purchase returns and allowances account provides
management with similar information as the sales returns and
allowances account. This account provides information about
the volume of returns to suppliers and information about the
quality of the products. The Freight In account allows
management to see directly the cost of transportation for its
purchased merchandise.

CONTINUING COOKIE CHRONICLE
(a) Responses to Natalie’s questions

1. The mixers should be classified as inventory as they
are for resale.
2. A perpetual inventory system will provide better control
over inventory. Because you are dealing with high
value items, you should use the perpetual system. Also
because you are dealing with low volume and not
operating a store, the cost of a perpetual system is
minimized because it is not necessary to invest in
technology such as scanners.
3. You still need to count inventory to ensure that your
records are accurate and that the inventory that is
supposed to be on hand is actually there. I suggest you
should count once a month.
(b)
GENERAL JOURNAL J1
Jan. 6 Merchandise Inventory...................... 1,575

Accounts Payable ......................... 1,575
7 Merchandise Inventory...................... 60
Cash ............................................... 60
8 Accounts Payable [($1,575 ÷ 3) + $20] 545

Merchandise Inventory ................. 545
9 Cash ................................................... 500

Accounts Receivable .................... 500
13 Accounts Receivable......................... 2,100

Sales .............................................. 2,100

CONTINUING COOKIE CHRONICLE (Continued)
(b) (Continued)
Jan. 13 Cost of Goods Sold

[($1,575 + $60) ÷ 3 × 2] ....................... 1,090
14 Freight Out ......................................... 75

Cash ............................................... 75
14 Merchandise Inventory...................... 2,100

15 Cash ................................................... 125

Unearned revenue ......................... 125
20 Cash ................................................... 1,000

N. Koebel, Capital.......................... 1,000
21 Merchandise Inventory...................... 80
Cash ............................................... 80
21 Cash ................................................... 2,100

Sales ............................................. 2,100
21 Cost of Goods Sold .......................... 1,090

[($2,100 + $80) ÷ 4 × 2]
28 Salaries Expense ............................... 240

Salaries Payable ................................ 48
Cash ............................................... 288

Telephone Expense ........................... 78
Cash ............................................... 154

Cash ............................................... 3,130

(b) and (d)
Cash
Jan. 1 Balance  2,929

7 J1 60 2,869
9 J1 500 3,369
14 J1 75 3,294
15 J1 125 3,419
20 J1 1,000 4,419
21 J1 80 4,339
21 J1 2,100 6,439
28 J1 288 6,151
29 J1 154 5,997
31 J1 3,130 2,867
Accounts Receivable
Jan. 1 Balance  675

9 J1 500 175
13 J1 2,100 2,275
Jan. 6 J1 1,575 1,575

7 J1 60 1,635
8 J1 545 1,090
13 J1 1,090 0
14 J1 2,100 2,100
21 J1 80 2,180
21 J1 1,090 1,090

(b) and (d) (Continued)
Supplies
Equipment
Accumulated Depreciation—Equipment
31 Adjusting entry J2 43 121
Accounts Payable
6 J1 1,575 1,651
8 J1 545 1,106
14 J1 2,100 3,206
29 J1 76 3,130
31 J1 3,130 0
Salaries Payable
28 J1 48 0


Unearned Revenue

15 J1 125 225
Interest Payable
31 Adjusting entry J2 8 16
Notes Payable
N. Koebel, Capital

20 J1 1,000 2,939
Sales
Jan. 13 J1 2,100 2,100

21 J1 2,100 4,200
Cost of Goods Sold

Jan. 13 J1 1,090 1,090

21 J1 1,090 2,180

Salaries Expense
Jan. 28 J1 240 240
Telephone Expense
Jan. 29 J1 78 78
Depreciation Expense
Jan. 31 Adjusting entry J2 43 43
Freight Out
Jan. 14 J1 75 75
Interest Expense
Jan. 31 Adjusting entry J2 8 8

(c)
COOKIE CREATIONS
Trial Balance
January 31, 2014
Debit Credit
Cash .................................................................... $ 2,867
Accounts receivable ......................................... 2,275
Merchandise inventory ..................................... 1,090
Supplies ............................................................. 95
Equipment .......................................................... 1,550
Accumulated depreciation—equipment .......... $ 78
Unearned revenue ............................................. 225
Interest payable ................................................. 8
Notes payable .................................................... 3,000
N. Koebel, capital .............................................. 2,939
Sales ................................................................... 4,200
Cost of goods sold ............................................ 2,180
Salary expense .................................................. 240
Telephone expense ............................................ 78
Freight out ......................................................... 75 ______
$10,450 $10,450
(d)
GENERAL JOURNAL J2
Jan. 31 Depreciation Expense ....................... 43

Accumulated Depreciation—
Equipment ..................................... 43
($1,550 ÷ 36 months)

($3,000 × 3% × 1/12)

(e)
COOKIE CREATIONS
Adjusted Trial Balance
January 31, 2014
Debit Credit
Cash .................................................................... $ 2,867
Accounts receivable .......................................... 2,275
Merchandise inventory ...................................... 1,090
Supplies .............................................................. 95
Equipment........................................................... 1,550
Accumulated depreciation—equipment ........... $ 121
Unearned revenue .............................................. 225
Interest payable .................................................. 16
Notes payable ..................................................... 3,000
N. Koebel, capital ............................................... 2,939
Sales.................................................................... 4,200
Cost of goods sold ............................................. 2,180
Salary expense ................................................... 240
Telephone expense ............................................ 78
Depreciation expense ........................................ 43
Freight out .......................................................... 75
Interest expense ................................................. 8 _ _____
$10,501 $10,501

(f)
COOKIE CREATIONS
Income Statement
Month ended January 31, 2014
Sales................................................................................. $4,200
Gross profit...................................................................... 2,020
Operating expenses
Salaries expense............................................ $240
Telephone expense ....................................... 78
Depreciation expense .................................... 43
Freight out ...................................................... 75
Total operating expenses ...................................... 436
Other expenses
Interest expense ......................................................... 8
Profit................................................................................. $1,576
(g) Gross profit margin = 48.1%

($2,020 ÷ $4,200)

($1,576 ÷ $4,200)

CUMULATIVE COVERAGE – CHAPTERS 2 TO 5
(a), (b), (d) and (g)
Cash
Aug. 1 Balance  21,385

1 1,650 19,735
2 6,500 13,235
4 12,260 25,495
5 500 24,995
9 425 24,570
11 12,250 12,320
15 3,100 9,220
19 14,700 23,920
24 525 24,445
30 3,100 21,345
30 8,918 12,427
31 4,800 7,627
Accounts Receivable
Aug. 1  0
10 15,750 15,750
12 750 15,000
19 15,000 0

CUMULATIVE COVERAGE (Continued)
(a), (b), (d) and (g) (Continued)

4 7,900 56,225
5 24,500 80,725
5 500 81,225
9 265 81,490
10 9,765 71,725
12 465 72,190
21 9,900 82,090
23 800 81,290
30 182 81,108
31 Adjusting entry 2,325 78,783
Supplies
Aug. 1  3,750
8 345 4,095
31 Adjusting entry 3,340 755
Equipment
Accumulated Depreciation—Equipment



Accounts Payable

2 6,500 6,150
5 24,500 30,650
8 345 30,995
11 12,250 18,745
21 9,900 28,645
23 800 27,845
30 9,100 18,745
Unearned Revenue

24 525 5,205
Notes Payable
Interest Payable
Aug. 1 Balance  0
31 Adjusting entry 175 175
A. John, Capital

31 Closing entry 70,442 128,842
31 Closing entry 57,600 71,242

A. John, Drawings

31 4,800 57,600
31 Closing entry 57,600 0
Income Summary
Aug. 31 Closing entry 518,460 518,460

31 Closing entry 448,018 70,442
Sales

4 12,260 497,760
10 15,750 513,510


9 425 11,845
12 750 12,595

Sales Discounts
19 300 300
31 Closing entry 300 0
Rent Revenue

Cost of Goods Sold


4 7,900 308,910
9 265 308,645
10 9,765 318,410
12 465 317,945
Salaries Expense

15 3,100 71,300
30 3,100 74,400

Supplies Expense
Rent Expense

1 1,650 19,800
Interest Expense

31 Adjusting entry 175 2,100
Insurance Expense

Depreciation Expense

(b)
GENERAL JOURNAL
Aug. 1 Rent Expense ..................................... 1,650

Cash ............................................... 1,650

Cash ............................................... 6,500
4 Cash ................................................... 12,260

Sales .............................................. 12,260

Inventory ........................................ 7,900
5 Inventory ............................................ 24,500

5 Inventory ............................................ 500

Cash ............................................... 500
8 Supplies ............................................. 345

Accounts Payable ......................... 345

Cash ............................................... 425
9 Inventory ............................................ 265

Cost of Goods Sold....................... 265
10 Accounts Receivable......................... 15,750

Sales .............................................. 15,750

Inventory ........................................ 9,765

(b) (Continued)
Aug. 11 Accounts Payable .............................. 12,250

Cash ............................................... 12,250

Accounts Receivable .................... 750
12 Inventory ............................................ 465

Cost of Goods Sold....................... 465
15 Salaries Expense ............................... 3,100

Cash ............................................... 3,100
19 Cash ($15,000 − $300) ....................... 14,700

Sales Discounts ($15,000 × 2%)........ 300
Accounts Receivable ($15,750 − $750) 15,000
21 Inventory ............................................ 9,900


Inventory ........................................ 800
24 Cash ................................................... 525

Unearned Revenue........................ 525
30 Salaries Expense ............................... 3,100

Cash ............................................... 3,100
30 Accounts Payable ($9,900 − $800).... 9,100

Inventory ($9,100 × 2%) ................ 182
Cash ($9,100 − $182) ..................... 8,918
31 A. John, Drawings ............................ 4,800

Cash .............................................. 4,800

(c)
THE BOARD SHOP
Trial Balance
August 31, 2014
Debit Credit
Cash .......................................................... $ 7,627
Merchandise inventory ............................ 81,108
Supplies .................................................... 4,095
Equipment................................................. 70,800
Accumulated depreciation—equipment . $ 13,275
Accounts payable..................................... 18,745
Unearned revenue .................................... 5,205
Notes payable ........................................... 42,000
A. John, capital ......................................... 58,400
A. John, drawings .................................... 57,600
Sales.......................................................... 513,510
Sales returns and allowances ................. 12,595
Sales discounts ........................................ 300
Rent revenue ............................................ 1,200
Cost of goods sold ................................... 317,945
Salaries expense ...................................... 74,400
Rent expense ............................................ 19,800
Interest expense ....................................... 1,925 __ _____
Totals .................................................... $652,335 $652,335

(d)
GENERAL JOURNAL
Aug. 31 Supplies Expense ($4,095 – $755) .... 3,340

Supplies ......................................... 3,340
31 Depreciation Expense ($70,800 ÷ 8) 8,850

—Equipment .................................. 8,850
31 No entry required—reclassification on balance

sheet only.
31 Unearned Revenue ............................ 3,570

Sales .............................................. 3,570
31 Cost of Goods Sold .......................... 2,325

Inventory ........................................ 2,325


($76,560 – [$81,108 – $2,325]) ........... 2,223

(e)
THE BOARD SHOP
Adjusted Trial Balance
August 31, 2014
Debit Credit
Cash .................................................................. $ 7,627
Merchandise inventory .................................... 76,560
Supplies ............................................................ 755
Equipment......................................................... 70,800
Accumulated depreciation—equipment ......... $ 22,125
Accounts payable............................................. 18,745
Unearned revenue ............................................ 1,455
Notes payable ................................................... 42,000
Interest payable ................................................ 175
A. John, capital ................................................. 58,400
A. John, drawings ............................................ 57,600
Sales.................................................................. 517,260
Sales returns and allowances ......................... 12,595
Sales discounts ................................................ 300
Rent revenue .................................................... 1,200
Cost of goods sold ........................................... 322,493
Salaries expense .............................................. 74,400
Rent expense .................................................... 19,800
Interest expense ............................................... 2,100
Insurance expense ........................................... 4,140
Supplies expense ............................................. 3,340
Depreciation expense ..................................... 8,850 ___ ____
Totals ............................................................ $661,360 $661,360

(f)
THE BOARD SHOP
Income Statement
Sales revenues
Sales ............................................................................ $517,260
Less: Sales returns and allowances.......... $12,595
Sales discounts ................................ 300 12,895
Net sales ...................................................................... 504,365
Gross profit...................................................................... 181,872
Operating expenses
Salaries expense........................................ $74,400
Rent expense ............................................. 19,800
Insurance expense .................................... 4,140
Supplies expense ...................................... 3,340
Depreciation expense ................................ 8,850
Rent revenue .............................................. $1,200
Interest expense ........................................ 2,100 900
Profit................................................................................. $ 70,442
THE BOARD SHOP

A. John, capital, September 1, 2013............................... $ 58,400

Add: Profit........................................................................ 70,442
128,842
Less: Drawings ................................................................ 57,600
A. John, capital, August 31, 2014 ................................... $ 71,242

(f) (Continued)
THE BOARD SHOP

Balance Sheet
August 31, 2014
Assets
Current assets
Cash............................................................................. $ 7,627
Merchandise inventory ............................................... 76,560
Supplies....................................................................... 755
Equipment .................................................. $70,800
Less: Accumulated depreciation ............. 22,125 48,675
Total assets ............................................................ $133,617
Liabilities and Owner's Equity
Current liabilities
Unearned revenue ...................................................... 1,455
Interest payable .......................................................... 175
Current portion of notes payable .............................. 6,000
Notes payable ............................................................. 36,000
Owner's equity
A. John, capital ........................................................... 71,242
Total liabilities and owner's equity ....................... $133,617

(g)
GENERAL JOURNAL
Aug. 31 Sales ................................................... 517,260

Rent revenue ...................................... 1,200
Income Summary .......................... 518,460
31 Income Summary............................... 448,018

Sales Returns and Allowances .... 12,595
Sales Discounts ............................ 300
Cost of Goods Sold....................... 322,493
Salaries Expense .......................... 74,400
Supplies Expense ......................... 3,340
Rent Expense ................................ 19,800
Interest Expense ........................... 2,100
Insurance Expense ....................... 4,140
Depreciation Expense................... 8,850
31 Income Summary............................... 70,442

A. John, Capital ............................. 70,442
31 A. John, Capital ................................. 57,600

A. John, Drawings ......................... 57,600

(h)
THE BOARD SHOP
Post-closing Trial Balance
August 31, 2014
Debit Credit
Cash .................................................................. $ 7,627
Merchandise inventory .................................... 76,560
Supplies ............................................................ 755
Equipment......................................................... 70,800
Accumulated depreciation—equipment ......... $ 22,125
Accounts payable............................................. 18,745
Unearned revenue ............................................ 1,455
Notes payable ................................................... 42,000
Interest payable ................................................ 175
A. John, capital ................................................. ___ ____ 71,242
Totals ............................................................ $155,742 $155,742

BYP 5-1 COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning

activity, including a suggested solution, can be found in the
Collaborative Learning section of the Instructor Resource site
accompanying this textbook.

BYP 5-2 COMMUNICATION ACTIVITY
(a) and (b)
MEMORANDUM
TO: President, Great Canadian Snowboards
FROM:
SUBJECT: Revenue and Expense Recognition Criteria
DATE:
Revenue should be recognized when there is an increase in

assets or a decrease in liabilities as the result of a contract with
a customer. In general, this simply means that the revenue
must be recognized in the period when it is earned.
Typically, sales revenues are earned when the goods are

transferred from the buyer to the seller. At this point, the sales
transaction is completed and the sales price is established. In
this situation Dexter has made a down payment before the
snowboard is complete and they should record the amount as
unearned revenue. Revenue on the snowboard ordered by
Dexter is earned at event No. 6, when Dexter picks up the
snowboard.
Whether Dexter makes a down payment or pays 100% of the

board with his purchase order is irrelevant in recognizing sales
revenue because at this time, you have not done anything to
earn the revenue. A payment at the time of the order may be an
indication of Dexter’s “good faith.” However, its effect on your
financial statements is limited to recognizing the payment as
unearned revenue.

BYP 5-2 (Continued)
Expenses, on the other hand, are recognized when there is a

decrease in assets or an increase in liabilities, excluding
transactions with the owner. Expense recognition is tied to
revenue recognition when there is a direct association between
costs incurred and the earning of revenue. Thus any costs
directly associated with the snowboard, such as cost of goods
sold, should be recognized as expenses at the same time the
sales revenue is recognized.
If you have further questions about the accounting for this sale,
please let me know.

BYP 5-3 ETHICS CASE
(a) Rita Pelzer, as a new employee, is placed in a position of

responsibility and is pressured by her supervisor to
continue delaying payments to creditors. Delaying
payment is not an unethical practice. Companies can pay
their bills late, but they risk incurring interest charges,
impairing their credit ratings, or losing a discount. What is
unethical is taking the discount for early payment even if
the payment is made after the discount period, and lying by
blaming the late payment on the post office.
Rita’s dilemma is to decide whether to (1) delay payments

and place inappropriate blame for these late payments on
the mail room and / or post office, or (2) risk offending her
boss and possibly lose the job she just assumed.
(b) The stakeholders (affected parties) are:

Rita Pelzer, the assistant controller.
Jamie Caterino, the controller.
Liu Stores, the company.
Creditors of Liu Stores (suppliers).
Mail room / post office employees (those assigned
the blame).
(c) Rita’s alternatives:
1. Tell the controller (her boss) that she will prepare and
mail creditors’ cheques to take advantage of the full
credit period but will not delay mailing the cheques
beyond their due dates. This may offend her boss and
may jeopardize her continued employment.

BYP 5-3 (Continued)
(c) (Continued)
2. Tell the controller (her boss) that she will be happy to

delay the payment four days but will not blame others
for this delay when asked. This is contrary to current
practice and may also offend her boss and jeopardize
her continued employment.
3. Join the team and continue the practice of delaying

payments and laying blame on others for the delay.
4. Go over her boss’s head and take the chance of

receiving just and reasonable treatment from an officer
superior to Jamie. The company may not condone this
practice.
Rita definitely has choices, but probably not without

consequences. To continue the practice of claiming
discounts and lying is definitely unethical. If Rita
submits to this request, she may be asked to perform
other unethical tasks. If Rita stands her ground and
refuses to participate in this unethical practice, she
probably won’t be asked to do other unethical things—
if she isn’t fired. Maybe nobody has ever challenged
Jamie’s unethical behaviour and his reaction may be
one of respect rather than anger and retribution. Being
ethically compromised is no way to start a new job.

BYP 5-4 “PERSONAL FINANCIAL LITERACY” ACTIVITY
(a) The amount of inventory shrinkage can be determined by

comparing the amount of actual inventory on hand to the
inventory in the accounting records. This comparison
should be done on a retail price basis. The amount of
shrinkage is usually expressed as a percentage of total
sales.
(b) Some technology solutions can be costly. Management will

need to determine if the amount of savings will outweigh
the amount spent and on the training for staff to use the
technology. They will also need to determine if the
technology will be well received by the customers and will
not discourage them from shopping and buying at the
store.
(c) The amount is calculated by multiplying the Sales

revenues by the shrinkage percentage: $400,000 × 4% =
$16,000. This represents the loss in sales revenue. The
actual loss is the cost of the inventory that is missing.
(d) Great customer service involves staying with the customer

to provide service. At the same time, this reduces the
opportunity for customers to shoplift. Great customer
service can help prevent shoplifting in the following ways:
• Schedule an adequate number of employees to work at

one time.
• Greet every customer that enters the store. This lets the
customer know you are aware of their presence.
• Make yourself available to all customers and never leave
the store unattended.
• Don't allow customers to distract the cashier while
another person is being checked out.
• Approach the suspicious person and ask if he/she is
finding everything okay. Mention that you’ll be nearby
should he/she need your help. Make the shoplifter feel
watched.

BYP 5-6 (Continued)
(e) Controls to reduce employee theft:

- have an updated policies and procedures manual
- prevent employees being alone in the store
- limit access to store keys
- limit markdown availability
- control false refunds by collecting customer
information and doing follow-up
- use a cash register that produces an audit trail
- control the back door of the store to prevent
merchandise from being taken out the back.
- check the garbage and employee parcels.
- do new employee reference checks.
- provide employee discounts on merchandise.
(f) Since the sales discounts are not authorized, the friend’s
behaviour is inappropriate and consists of employee theft.
The sales discounts reduce the amount received as sales
revenue and reduce profitability of the store. If you fail to
inform management of the unauthorized sales discounts,
you are contributing to the lower profitability of the store.
Inventory shrinkage, through theft such as unauthorized
discounts, leads to higher prices for consumers and
affects the store’s ability to be competitive. If management
knows that you are aware of the unauthorized discounts by
your friend, they could consider that you participated in the
theft and this could lead to the loss of your employment
and reputation. Management would also question your
integrity and this could affect your future promotion
opportunities.

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
written permission of John Wiley & Sons Canada, Ltd.
(MMXIV II F1)


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Weygandt, Kieso, Kimmel, Trenholm, Kinnear, Barlow, Atkins: Principles of Financial Accounting, Canadian Edition

*Note: All asterisked Questions, Exercises, and Problems relate to material

Solutions Manual 5-1 Chapter 5

ASSIGNMENT CHARACTERISTICS TABLE

1A Identify problems and recommend inventory system. Moderate 20-30

2A Record and post inventory transactions – perpetual Moderate 30-40

3A Record inventory transactions– perpetual system. Moderate 20-30

4A Record inventory transactions and post to inventory Moderate 30-40

5A Record and post inventory transactions – perpetual Moderate 60-70

6A Prepare adjusting and closing entries and single-step Moderate 50-60

7A Prepare adjusting and closing entries and financial Moderate 50-60

8A Calculate ratios and comment. Moderate 20-25

*9A Record inventory transactions – periodic system. Moderate 30-40

*10A Record inventory transactions – periodic system. Moderate 30-40

*11A Record and post inventory transactions – periodic Moderate 60-70

*12A Prepare correct multiple-step income statement, Moderate 60-70

*13A Prepare financial statements and closing entries – Moderate 60-70

Solutions Manual 5-2 Chapter 5

BLOOM’S TAXONOMY TABLE

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

2. Prepare entries for E5-1 Q5-5 BE5-2

3. Prepare entries for E5-1 Q5-7 BE5-8

4. Perform the steps E5-1 Q5-15 BE5-10

Solutions Manual 5-3 Chapter 5

BLOOM’S TAXONOMY TABLE (Continued)

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

6. Calculate the gross E5-1 Q5-22 BE5-14 E5-11

*7. Prepare the entries *Q5-24 *Q5-26 *BE5-15

Broadening Your Continuing BYP5-2

Solutions Manual 5-4 Chapter 5

2. A “perpetual” inventory system reflects changes for inventory purchases

A “periodic” inventory system does not keep detailed records of inventory

3. A physical count is an important control feature. With a perpetual inventory

4. The benefits of the perpetual inventory system are that it continuously—

Solutions Manual 5-5 Chapter 5

8. Willow Ridge’s accountant is wrong. The Merchandise Inventory account

Solutions Manual 5-6 Chapter 5

Another way to explain the advantage is to convert the discount to an

11. A quantity discount gives a reduction in price according to the volume of

Quantity discounts are not recorded or accounted for separately, whereas

A sales discount is the counterpart of the purchase discount. A purchase

Solutions Manual 5-7 Chapter 5

Solutions Manual 5-8 Chapter 5

Profit from operations is calculated by subtracting operating expenses

Profit is calculated by subtracting non-operating expenses from (or adding

Solutions Manual 5-9 Chapter 5

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

*24. In a periodic inventory system, purchases are recorded to the Purchases

Solutions Manual 5-10 Chapter 5

*26. The purpose of these entries is to update the Merchandise Inventory

Solutions Manual 5-11 Chapter 5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5-1

(a) & (b)

(e) & (f)

(g) & (h)

BRIEF EXERCISE 5-2

Inventory Item Quantity Cost per Package Total Cost

Solutions Manual 5-12 Chapter 5

BRIEF EXERCISE 5-3

Total Merchandise Inventory cost:

Cost per unit = Total cost ÷ 500 packages

Balance in Merchandise Inventory account:

7. Prepare the entries Q5-24 Q5-26 BE5-15