chapter 4 solutions
DESCRIPTION
SolutionsTRANSCRIPT
Chapter 4: Accounting for a Merchandising Business
Discussion Questions: Key Points
1. Inventory, Cost of Goods Sold, Sales, Sales Discounts, Sales Returns and Allowances. Students might identify gross profit, but this is not an account, it is a subtotal.
2. A perpetual system allows the company to know more about the inventory items that are selling well and not selling well. It allows companies to monitor inventory more closely to avoid stock-outs or excessive holding costs. It can also help companies to more effectively prevent and detect theft of inventory through closer monitoring.
3. Subsidiary ledgers are used to keep track of detailed information that would be too cumbersome for a general ledger. For example, individual accounts receivable and payable would be noted in a subsidiary ledger.
4. The terms 2/10, n/30 mean that the purchasing company gets a two percent discount if it pays within 10 days, otherwise the full amount is due within 30 days. You should advise them to take advantage of all early payment discounts because by delaying payment by 20 days it is costing two percent. Given that there are approximately 18 twenty-day periods in a year, that translates into a 36 percent interest rate.
5. Four accounts are involved. A/R is debited and Sales is credited while Cost of Goods Sold is debited while Inventory is credited.
6. Sales returns and allowances is a contra-revenue account. It would appear on the income statement along with sales (subtracting from it) in order to arrive at a net sales subtotal.
7. Debit memos are most commonly used to decrease accounts payable. Credit memos are most commonly used to decrease accounts receivable. Both documents would be used with the return of defective merchandise. The purchaser would use a debit memorandum to reduce accounts payable (with a debit) on items that were returned so that they would not pay for the returned items. The seller of merchandise would use a credit memorandum to reduce receivables (with a credit) so that they would not bill the customer for items that were returned.
8. Free on board or “f.o.b.” terms describe where the goods change hands and who is responsible for the shipping charges. It is important to understand f.o.b. terms because shipping charges can significantly affect the total price paid to acquire items. If a merchandiser does not take shipping charges on merchandise received into account when setting prices, suitable profit might not be earned. Also, if goods are damaged in transit, it is important to know which party is responsible for making the situation right.
9. A single step income statement arrives at net income in a single-step of subtracting expenses from revenues. A multi-step income statement arrives at several subtotals along the way to calculating net income. A multi-step income statement is appropriate for a merchandising or a manufacturing company.
10. Several factors could account for the shrinking difference between what a company sells its goods for and what it costs to acquire.. It could be that competitors have entered the market, lowering the prices that could be charged. It could be that recessionary forces have made consumers of the product more price-conscious. Later periods of a product’s life cycle are generally associated with lower prices. All of the above assumed a single product being sold. If a company sells multiple products, moving from high mark-up items to lower mark-up items would have a similar effect.
Waybright Kemp Financial Accounting 1e 231
Short Exercises
(5-10 min.) S 4-1
a. A physical count of goods on hand at year end is required.
c. Both periodic and perpetual inventory
b. Inventory records are continuously updated. b. Perpetual inventoryc. Purchases of inventory are recorded in an asset account at the time of purchase.
b. Perpetual inventory
d. Bar code scanners are often utilized when using this inventory system.
b. Perpetual inventory
e. It is necessary to calculate the cost of goods sold at the end of the year with this inventory system.
a. Periodic inventory
(5-10 min.) S 4-2
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,700
Inventory 1,700
Adjust inventory to physical count
232 Solutions Manual
(5-10 min.) S 4-3
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Mar 1 Inventory 40,000
Accounts Payable – Pacific Trail 40,000
Purchase inventory on account
Mar 8 Accounts Payable – Pacific Trail 40,000
Cash ($40,000 × .98) 39,200
Inventory ($40,000 × .02) 800
Record payment of inventory
purchases within the discount period.
Req 2
Final cost of Inventory = Inventory $40,000 – discount taken $800 = $39,200.
(5-10 min.) S 4-4
Req 1
a. $8,000 - $1,100 = $6,900
($8,000 - $1,100) x .98 = $6,762
Waybright Kemp Financial Accounting 1e 233
(5-10 min.) S 4-5
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
a. Inventory 8,000
Accounts Payable – Pool Warehouse 8,000
b. Accounts Payable – Pool Warehouse 1,100
Inventory 1,100
c. Accounts Payable – Pool Warehouse 6,900
Cash ($6,900 × .98) 6,762
Inventory ($6,900 × .02) 800
234 Solutions Manual
(5-10 min.) S 4-6
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
a. Inventory 8,700
Accounts Payable 8,700
Purchase inventory on account
b. Inventory 175
Cash 175
Paid freight charges to have inventory delivered
c. Accounts Payable 8,700
Cash ($8,700 × .98) 8,526
Inventory ($8,700 × .02) 174
Record payment of inventory purchases
less returns within the discount period.
Waybright Kemp Financial Accounting 1e 235
(5-10 min.) S 4-7
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
a. Accounts Receivable – Sonny’s Spas 55,000
Sales Revenue 55,000
Cost of Goods Sold 30,250
Inventory 30,250
b. Cash ($55,000 × .98) 53,900
Sales Discount ($55,000 × .02) 1,100
Accounts Receivable – Sonny’s Spas 55,000
236 Solutions Manual
(5-10 min.) S 4-8
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
May 17 Accounts Receivable 750.00
Sales Revenue 750.00
Cost of Goods Sold 460.00
Inventory 460.00
Record sale of inventory on account.
21 Sales Returns and Allowances 225.00
Accounts Receivable 225.00
Inventory 140.00
Cost of Goods Sold 140.00
Record receipt of returned goods.
26 Cash [($750 – 225) × .98] 514.50
Sales Discount [($750 – 225) × .02] 10.50
Accounts Receivable ($750 - $225) 525.00
Record payment received within the
discount period.
Waybright Kemp Financial Accounting 1e 237
(5-10 min.) S 4-9
Req 1 Net Sales Revenue:Sales Revenue……………………………..…. $
750.00Less: Sales Returns and Allowances ………. (225
Sales Discounts [($750 − $225) ×.02]... (10.50)
Net Sales Revenue……………………………. $ 514
Req 2 Net Sales Revenue: $ 514Less: Cost of Goods Sold…………………………… (320 Gross profit……………………………………………. $ 194
(5-10 min.) S 4-10
Req 1
a. Cash $ 5,200
Accounts Receivable 6,000
Inventory 37,000
Supplies 3,400
Prepaid Rent 6,200
Total Current Assets $ 57,800
b. Accounts Payable $ 19,500
Wages Payable 1,500
Unearned Revenue 2,000
Total Current Liabilities $ 23,000
c. Equipment $ 33,000
Less: Accumulated Depreciation, Equipment (4,500) $28,500
238 Solutions Manual
Building $ 87,000
Less: Accumulated Depreciation, Building (24,000) 63,000
Book Value of Plant Assets $ 91,500
d. Total Long-Term Liabilities (Note Payable, Long Term) $28,000
Waybright Kemp Financial Accounting 1e 239
(10-15 min.) S 4-11
Req. 1
ADR, Inc.Income Statement
Year Ended August 31, 2010
Net sales revenue $28,000
Less: Cost of goods sold 19,500
Gross profit 8,500
Less: Operating expense 3,700
Net income $ 4,800
240 Solutions Manual
(10-15 min.) S 4-12
ADR, Inc.Balance Sheet
August 31, 2010Assets
Current assets:Cash $ 3,500Accounts Receivable 2,900Inventory 1,700Prepaid Rent 800 Total current assets 8,900
Fixed assets: Equipment, net 6,100Total assets $15,000
LiabilitiesCurrent liabilities:
Accounts Payable $ 4,500Wages Payable 1,100Accrued Liabilities 1,900 Total current liabilities 7,500
Long-term liabilities:Long-Term Notes Payable 2,300
Total liabilities 9,800
Stockholder’s equityTotal stockholder’s equity 5,200
Total liabilities and stockholder’s equity $15,000
Waybright Kemp Financial Accounting 1e 241
(10-15 min.) S 4-13
Gross Profit Percentage
=Gross Profit
=($28,000 - $19,500)
= 0.304 or 30.4%Net Sales Revenue $28,000
Current Ratio
=
Current Assets
=($3,500 + $2,900 + $1,700 + $800)
= 1.19Current
Liabilities$4,500 + $1,100 + $1,900)
242 Solutions Manual
Exercises
(5-10 min.) E 4-14A
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,800
Inventory 1,800
Adjust inventory to physical count
Req 2The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.
Waybright Kemp Financial Accounting 1e 243
(10-15 min.) E 4-15A
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Jun 15 Inventory 4,300
Accounts Payable 4,300
18 Inventory 350
Cash 350
20 Accounts payable 900
Inventory 900
28 Accounts Payable ($4,300 - $900) 3,400
Cash ($3,400 × .97) 3,298
Inventory ($3,400 × .03) 102
244 Solutions Manual
(10-15 min.) E 4-16A
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Mar 3 Inventory 4,850
Accounts Payable 4,850
Purchased Inventory on account.
6 Accounts payable 600
Inventory 600
Returned damaged inventory to supplier.
12 Accounts Payable ($4,850 - $600) 4,250
Cash ($4,250 - $80) 4,170
Inventory [($4,600-600) x .02] 80
Paid invoice in full.
Waybright Kemp Financial Accounting 1e 245
(10-15 min.) E 4-17A
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Sep 14 Accounts Receivable 2,300
Sales Revenue 2,300
Cost of Goods Sold 1,350
Inventory 1,350
16 Delivery Expense 75
Cash 75
20 Sales Returns and Allowances 900
Accounts Receivable 900
Inventory 540
Cost of Goods Sold 540
23 Cash ($1,400 × .99) 1,386
Sales Discount ($1,400 × .01) 14
Accounts Receivable ($2,300 - $900) 1,400
246 Solutions Manual
(10-15 min.) E 4-18A
Journal
DATEACCOUNTS
POST
REF. Dr. Cr.
Nov 3 Accounts Receivable 1,600.00
Sales Revenue 1,600.00
Cost of Goods Sold 1,040.00
Inventory 1,040.00
Record sale of inventory on account.
3 Accounts Receivable 85.00
Cash 85.00
Record prepayment of shipping charges.
7 Sales Returns and Allowances 250.00
Accounts Receivable 250.00
Inventory 162.50
Cost of Goods Sold 162.50
Record return of goods from customer.
16 Cash ($1,600 +$85 - $250 - $27) 1,408.00
Sales Discounts [($1,600 – $250) × .02] 27.00
Accounts Receivable ($1,600 + $85 - $250) 1,435.00
Record receipt of payment from customer.
Waybright Kemp Financial Accounting 1e 247
(15-20 min.) E 4-19A
Journal
DATEACCOUNTS
POST
REF. Dr. Cr.
Apr 3 Inventory 3,500Accounts Payable 3,500
6 Accounts Payable 400Inventory 400
8 Inventory 110Cash 110
11 Accounts Receivable 4,300Sales Revenue 4,300
Cost of Goods Sold 2,100Inventory 2,100
12 Accounts Payable ($3,500 - $400) 3,100Cash ($3,100 × .98) 3,038Inventory ($3,100 × .02) 62
18 Sales Returns and Allowances 300Accounts Receivable 300
25 Cash ($4,000 × .97) 3,880Sales Discounts ($4,000 × .03) 120
Accounts Receivable ($4,300 - $300) 4,000
248 Solutions Manual
(10-15 min.) E 4-20A
a. Sales * = Net Sales + Sales Discounts = $100,400 + $2,500
= $102,900
b. Net Sales = Gross Profit + Cost of Goods Sold = $32,100 + $68,300
= $100,400
c. Net Sales = Sales – Sales Discounts = $64,000 − $1,700
= $62,300
d. Gross Profit = Net Sales − Cost of Goods Sold = $62,300 − $44,600
= $17,700
e. Sales Discounts = Sales – Net Sales = $102,000 - 93,500
= $8,500
f. Cost of Goods Sold = Net Sales – Gross Profit = $93,500 − 28,600
= $64,900
g Sales = Net Sales + Sales Discounts = $86,300 + 2,100
= $88,400
h. Gross Profit = Net Sales – Cost of Goods Sold = $86,300 - $57,700
= $28,600
* You must find (b) before you find (a).
Waybright Kemp Financial Accounting 1e 249
(10-15 min.) E 4-21A
Req 1
Atlantis Aquatics, Inc.Income Statement
Year Ended December 31, 2010Revenues: Net Sales Revenue $ 236,500
Expenses: Cost of Goods Sold $136,400 Selling Expenses 26,800 General and Administrative Expenses 18,200 Total Expenses 181,400Net Income $ 55,100
Computations: Net Sales Revenue: $243,500 - $4,800 - $2,200 = $236,500
Req 2
The single-step income statement is not recommended for Atlantis Aquatics because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.
250 Solutions Manual
(15-20 min.) E 4-22A
Req 1
Atlantis Aquatics, Inc.Income Statement
Year Ended December 31, 2010Sales Revenue $243,500
Less: Sales Returns and Allowances $4,800 Sales Discounts 2,200 7,000Net Sales Revenue $ 236,500
Cost of Goods Sold 136,400Gross Profit 100,100Operating Expenses:
Selling Expenses 26,800General and Administrative Expenses 18,200 45,000
Net Income $ 55,100
Note: There are no Other Revenue or Expense items so Operating Income is Net Income
Req 2
Gross Profit Percentage
=Gross Profit
=$100,100
= .423 or 42.3%Net Sales Revenue $236,500
Req 3
Atlantis Aquatics’ Gross Profit rate of 42.3% in 2010 is an improvement over the gross profit rate of 38.7% in 2009. Atlantis Aquatics has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.
Waybright Kemp Financial Accounting 1e 251
(15-20 min.) E 4-23A
Req 1Atlantis Aquatics, Inc.
Balance SheetDecember 31, 2010
Assets LiabilitiesCurrent assets: Current Liabilities: Cash $ 3,700 Accounts Payable $ 4,500 Accounts Receivable 3,200 Wages Payable 1,100 Inventory 1,700 Unearned Revenues 1,900 Prepaid Rent 800 Total Current Liabilities $ 7,500 Supplies 900 Long-term liabilities: Total current assets $ 10,300 Long-Term Notes Payable 10,000Fixed assets: Mortgage Payable 37,000 47,000 Equipment 13,700 Total liabilities 54,500 Less Accumulated Depreciation, Equip 6,100 7,600 Stockholder’s Equity Common Stock 35,000 Building 125,000 Retained Earnings* 34,900 Less Accumulated Total Stockholder’s Equity 69,900 Depreciation, Bldg 18,500 106,500
Total Liabilities andTotal assets $ 124,400Stockholder’s Equity $ 124,400
*Retained Earnings = ($13,800 Beginning Balance + $55,100 Net Income - $34,000 Dividends) = $34,900
Req 2
Current Ratio
=
Current Assets
=$10,300
= 1.37Current
Liabilities$7,500
Req 3
Atlantis Aquatics’ Current Ratio of 1.37 in 2010 is an improvement over the Current Ratio of 1.25 in 2009. Atlantis Aquatics has a higher percentage of current assets compared to current liabilities than it did in 2009.
252 Solutions Manual
(10-15 min.) E 4-24A
Gross Profit Percentage
=Gross Profit **
=$20,500,000
= .461 or 46.1%Net Sales Revenue * $44,500,000
* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($47,000,000 - $2,000,000 - $500,000) = ($44,500,000)
** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($44,500,000 - $24,000,000) = $20,500,000
Current Ratio
=
Current Assets
=$15,000,000
= 1.67Current
Liabilities$9,000,000
(5-10 min.) E 4-25B
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Dec 31 Cost of Goods Sold 1,500
Inventory 1,500
Adjust inventory to physical count
Req 2The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.
Waybright Kemp Financial Accounting 1e 253
(10-15 min.) E 4-26B
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Nov 15 Inventory 5,100
Accounts Payable 5,100
18 Inventory 175
Cash 175
20 Accounts payable 600
Inventory 600
28 Accounts Payable ($5,100 - $600) 4,500
Cash ($4,500 × .97) 4,365
Inventory ($4,500 × .03) 135
254 Solutions Manual
(10-15 min.) E 4-27B
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Jan 3 Inventory 5,925
Accounts Payable 5,925
Purchased inventory on account.
6 Accounts payable 500
Inventory 500
Returned damaged inventory to supplier.
12 Accounts Payable ($5,925 - $500) 5,425
Cash ($5,425 - $52) 5,373
Inventory [($5,700-500) x .01] 52
Paid invoice in full.
Waybright Kemp Financial Accounting 1e 255
(10-15 min.) E4-28B
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Nov 14 Accounts Receivable 3,100
Sales Revenue 3,100
Cost of Goods Sold 1,330
Inventory 1,330
16 Delivery Expense 65
Cash 65
20 Sales Returns and Allowances 800
Accounts Receivable 800
Inventory 420
Cost of Goods Sold 420
23 Cash ($2,300 × .97) 2,231
Sales Discount ($2,300 × .03) 69
Accounts Receivable ($3,100 - $800) 2,300
256 Solutions Manual
(10-15 min.) E 4-29B
Journal
DATEACCOUNTS
POST
REF. Dr. Cr.
Apr 3 Accounts Receivable 2,100.00
Sales Revenue 2,100.00
Cost of Goods Sold 1,470.00
Inventory 1,470.00
Record sale of inventory on account.
3 Accounts Receivable 50.00
Cash 50.00
Record prepayment of shipping charges.
7 Sales Returns and Allowances 225.00
Accounts Receivable 225.00
Inventory 157.50
Cost of Goods Sold 157.50
Record return of goods from customer.
16 Cash ($2,100.00 + $50.00 - $225.00 - $18.75) 1,906.25
Sales Discounts [($2,100.00 – $225.00) × .01] 18.75
Accounts Receivable ($2,100 + $50 - $225) 1,925.00
Record receipt of payment from customer.
Waybright Kemp Financial Accounting 1e 257
(15-20 min.) E 4-30B
Journal
DATE ACCOUNTSPOSTREF. Dr. Cr.
Apr 3 Inventory 3,400Accounts Payable 3,400
6 Accounts Payable 500Inventory 500
8 Inventory 130Cash 130
11 Accounts Receivable 2,800Sales Revenue 2,800
Cost of Goods Sold 1,600Inventory 1,600
12 Accounts Payable ($3,400 - $500) 2,900Cash ($2,900 × .99) 2,2,871Inventory ($2,900 × .01) 29
18 Sales Returns and Allowances 225Accounts Receivable 225
25 Cash ($2,575 × .97) 2,497.75Sales Discounts ($2,575 × .03) 77.25
Accounts Receivable ($2,800 - $225) 2,575.00
258 Solutions Manual
(10-15 min.) E 4-31B
a. Sales * = Net Sales + Sales Discounts = $105,200 + $1,700
= $106,900
b. Net Sales = Gross Profit + Cost of Goods Sold = $37,700 + $67,500
= $105,200
c. Net Sales = Sales – Sales Discounts = $89,600 − $2,900
= $86,700
d. Gross Profit = Net Sales − Cost of Goods Sold = $86,700 − $55,700
= $31,000
e. Sales Discounts = Sales – Net Sales = $103,000 – 94,300
= $8,700
f. Cost of Goods Sold = Net Sales – Gross Profit = $94,300 – 31,500
= $62,800
g Sales = Net Sales + Sales Discounts = $88,000 + 1,400
= $89,400
h. Gross Profit = Net Sales – Cost of Goods Sold = $88,000 - $51,900
= $36,100
* You must find (b) before you find (a).
Waybright Kemp Financial Accounting 1e 259
(10-15 min.) E 4-32B
Req 1
Great Gadget, Inc.Income Statement
Year Ended December 31, 2010Revenues: Net Sales Revenue $ 252,600
Expenses: Cost of Goods Sold $135,000 Selling Expenses 43,500 General and Administrative Expenses 18,200 Total Expenses 196,700Net Income $ 55,900
Computations: Net Sales Revenue: $257,000 - $2,900 - $1,500 = $252,600
Req 2
The single-step income statement is not recommended for Great Gadget because they are a Merchandiser. A Merchandiser should use a Multi-step income to provide more detailed information to the financial statement users.
260 Solutions Manual
(15-20 min.) E 4-33B
Req 1
Great Gadget, Inc.Income Statement
Year Ended December 31, 2010Sales Revenue $257,000
Less: Sales Returns and Allowances $2,900 Sales Discounts 1,500 4,400Net Sales Revenue $ 252,600
Cost of Goods Sold 135,000Gross Profit 117,600Operating Expenses:
Selling Expenses 43,500General and Administrative Expenses 18,200 61,700
Net Income $ 55,900
Note: There are no Other Revenue or Expense items so Operating Income is Net Income
Req 2
Gross Profit Percentage
=Gross Profit
=$117,600
= .466 or 46.6%Net Sales Revenue $252,600
Req 3
Great Gadget’s Gross Profit rate of 46.6% in 2010 has deteriorated from the gross profit rate of 52.3%% in 2009. Great Gadget has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.
Waybright Kemp Financial Accounting 1e 261
(15-20 min.) E 4-34B
Req 1Great Gadget, Inc.
Balance SheetDecember 31, 2010
Assets LiabilitiesCurrent assets: Current Liabilities: Cash $ 9,300 Accounts Payable $ 6,300 Accounts Receivable 4,500 Wages Payable 1,300 Inventory 3,700 Unearned Revenues 1,900 Prepaid Rent 2,600 Total Current Liabilities $ 9,500 Supplies 3,300 Long-term liabilities: Total current assets $ 23,400 Long-Term Notes Payable 35,000Fixed assets: Mortgage Payable 43,500 78,500 Equipment 39,800 Total liabilities 88,000 Less Accumulated Depreciation, Equip 13,700 26,100 Stockholder’s Equity Common Stock 25,000 Building 130,000 Retained Earnings* 40,600 Less Accumulated Total Stockholder’s Equity 65,600 Depreciation, Bldg 25,900 104,100
Total Liabilities andTotal assets $ 153,600Stockholder’s Equity $ 153,600
*Retained Earnings = ($25,700 Beginning Balance + $55,900 Net Income - $41,000 Dividends) = $40,600.
Req 2
Current Ratio
=
Current Assets
=$23,400
= 2.46Current
Liabilities$9,500
Req 3
Great Gadget’s Current Ratio of 2.46 in 2010 has deteriorated from the Current Ratio of 3.62 in 2009. Great Gadget has a lower percentage of current assets compared to current liabilities than it did in 2009.
262 Solutions Manual
(10-15 min.) E 4-35B
Gross Profit Percentage
=Gross Profit **
=$27,700,000
= .546 or 54.6%Net Sales Revenue * $50,700,000
* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($53,000,000 - $2,000,000 - $300,000) = ($50,700,000)
** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($50,700,000 - $23,000,000) = $27,700,000
Current Ratio
=
Current Assets
=$13,000,000
= 1.86Current
Liabilities$7,000,000
Waybright Kemp Financial Accounting 1e 263
Problems
(15-20 min.) P 4-36A
Req. 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.Feb 3 Inventory 5,400
Cash 5,400
9 Supplies 650Accounts Payable – Supplies Unlimited 650
16 Inventory 6,800Accounts Payable – A to Z, Inc. 6,800
22 Accounts Payable – A to Z, Inc. 1,200Inventory 1,200
28 Accounts Payable – Supplies Unlimited 650Cash 650
28 Accounts Payable – A to Z, Inc. ($6,800 - $1,200) 5,600 Cash ($5,600 x .98) 5,488 Inventory ($5,600 x .02) 112
264 Solutions Manual
(10-15 min.) P4-37A
Req 1Journal
DATE ACCOUNTSPOSTREF. Dr. Cr.
Jun 3 Accounts Receivable – J. Henderson 3,200Sales Revenue 3,200
Cost of Goods Sold 2,100Inventory 2,100
4 Delivery Expense 250 Cash 250
10 Cash 1,800Sales Revenue 1,800
Cost of Goods Sold 1,200Inventory 1,200
17 Cash ($3,200 x .98) 3,136Sales Discount ($3,200 x .02) 64 Accounts Receivable – J. Henderson 3,200
22 Accounts Receivable – M. Perez 4,700Sales Revenue 4,700
Cost of Goods Sold 3,100Inventory 3,100
26 Sales Returns and Allowances 600Accounts Receivable – M. Perez 600
30 Cash ($4,100 × .97) 3,977Sales Discount ($4,100× .03) 123
Accounts Receivable ($4,700 - $600) 4,100
Waybright Kemp Financial Accounting 1e 265
(20-25 min.) P 4-38A
Req 1 M&L Furniture Warehouse
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
May 4 Inventory 5,800 Accounts Payable - M & L Furniture
Warehouse5,800
Record purchase of inventory onaccount.
7 Inventory 125 Cash 125Record payment of freight charges.
10 Accounts Payable – M & L Furniture Warehouse 1,400Inventory 1,400
Record inventory returned to supplier.
18 Accounts Payable – M & L Furniture Warehouse 2,000Cash ($2,000 x .98) 1,960Inventory ($2,000 × .02) 40
Record partial payment of invoice.
31 Accounts Payable – M & L Furniture Warehouse($5,800 – $1,400 - $2,000) 2,400 Cash 2,400Record payment of remainder of invoice in full.
266 Solutions Manual
Req 2 Kinzer Warehouse
May 4 Accounts Receivable - Kinzer Furniture 5,800 Sales Revenue 5,800
Cost of Goods Sold 3,300Inventory 3,300
Record sale of inventory on account.
10 Sales Returns and Allowances 1,400Accounts Receivable - Kinzer Furniture 1,400
Inventory 800Cost of Goods Sold 800
Record receipt of returned goods.
18 Cash ($2,000 x .98) 1,960 Sales Discount ($2,000 x .02) 40
Accounts Receivable - Kinzer Furniture 2,000Record partial payment received.
31 Cash 2,400 Accounts Receivable - Kinzer Furniture
($5,800 - $1,400 - $2,000)2,400
Record payment on remainder of invoice received.
Waybright Kemp Financial Accounting 1e 267
(20-25 min.) P 4-39A
Journal
DATE ACCOUNTSPOSTREF. Dr. Cr.
Oct 4 Inventory ($5,900 + $300) 6,200 Accounts Payable – Firerock Tire 6,200Record purchase of inventory on account
7 Supplies 350 Accounts Payable – OfficeMaxx 350Record purchase of supplies on account
9 Accounts Receivable – L. Simpson 950 Sales Revenue 950Cost of Goods Sold 500 Inventory 500Record sale on account
11 Delivery Expense 75 Cash 75Record payment of freight charges
13 Accounts Payable – Firerock Tire 1,400 Inventory 1,400
Record return of merchandise to supplier
15 Cash 650 Sales Revenue 650Cost of Goods Sold 350 Inventory 350Record cash sales.
16 Accounts Payable - OfficeMaxx 350 Cash ($350 X .98) 343 Supplies ($350 X .02) 7 Record payment for supplies
18 Accounts Payable – Firerock Tire ($5,900 + $300 − $1,400) 4,800
Cash ($4,800 – $90) 4,710Inventory [($5,900 - $1,400) × .02] 90
20 Sales Returns and Allowances 175 Accounts Receivable – L. Simpson 175
268 Solutions Manual
Inventory 100Cost of Goods Sold 100
Record receipt of returned goods.
22 Inventory 2,100
Cash 2,100
Record purchase of inventory for cash.
23 Cash ($775× .97) 751.75Sales Discounts ($775 × .03) 23.25
Accounts Receivable – L. Simpson ($950 - $175)
775.00
Record payment received on account
Req. 2
Sales Revenue ($950 + $650) $1,600.00Less: Sales Returns and Allowance $ 175.00
Sales Discounts 23 .25 198 .25 Net Sales Revenue 1,401.75Cost of Goods Sold ($500+ $350 -$100) 750 .00 Gross Profit $ 651 .75
Waybright Kemp Financial Accounting 1e 269
(20-25 min.) P 4-40A
Req. 1
Sparky’s Electrical, Inc.Income Statement
Month Ended November 30, 2010Sales Revenue $193,200
Less: Sales Returns and Allowances $8,700 Sales Discounts 2,600 11,300Net Sales Revenue $ 181,900
Cost of Goods Sold 103,400Gross Profit 78,500Operating Expenses:
Selling Expenses 25,200General and Administrative Expenses 16,100 41,300
Net Income $ 37,200
Note: There are no Other Revenue or Expense items so Operating Income is Net Income
Req 2
Gross Profit Percentage
=Gross Profit
=$78,500
= .432 or 43.2%Net Sales Revenue $181,900
Req 3
Sparky’s Electrical Inc.’s 43.2% gross profit percentage means that each dollar of net sales generates 43.2 cents of gross profit that is used to cover operating expenses and generate net income.
270 Solutions Manual
(25-30 min.) P 4-41A
Req. 1
Williams Industries, Inc.Income Statement
Year Ended December 31, 2010Sales Revenue $322,800
Less: Sales Returns and Allowances $6,700 Sales Discounts 2,200 8,900Net Sales Revenue $ 313,900
Cost of Goods Sold 158,400Gross Profit 155,500Operating Expenses:
Selling Expenses: Commission Expense 22,300 Advertising Expense 12,600 Delivery Expense 1,300 36,200 General and Administrative Expenses Office Salaries Expense 52,000 Utilities Expense 10,300 Rent Expense 5,800 Insurance Expense 5,700 73,800 110,000Operating Income 45,500Other Revenues (Expenses) Interest Expense (1,700)Net Income $43,800
Req 2
Williams Industries, Inc.Statement of Retained EarningsYear Ended December 31, 2010
Retained earnings, January 1, 2010 $ 87,600Plus: Net Income 43,800Subtotal 131,400Less: Dividends 14,000Retained earnings, December 31, 2010 $ 117,400
Waybright Kemp Financial Accounting 1e 271
Req 3
Williams Industries, Inc.Balance Sheet
December 31, 2010Assets
Current Assets:Cash $ 7,800Accounts Receivable 6,900Inventory 16,400
Supplies 600Prepaid Rent 1,200Total Current Assets 32,900
Fixed Assets:Equipment $104,000Less: Accumulated Depreciation, Equipment 26,400 77,600
Building 140,000
Less: Accumulated Depreciation, Building 40,500 99,500Total assets $210,000
LiabilitiesCurrent Liabilities:
Accounts Payable $ 16,500 Wages Payable 1,600
Unearned Sales Revenue 2,500Total Current Liabilities 20,600
Long-Term Liabilities:Mortgage Payable 37,000
Total Liabilities 57,600Stockholder’s Equity
Common Stock 35,000Retained Earnings 117,400Total Stockholder’s Equity 152,400
Total Liabilities and Stockholder’s Equity $210,000
272 Solutions Manual
(20-25 min.) P 4-42A
Req 1
Gross Profit Percentage
=Gross Profit
=$155,500*
= .495 or 49.5%Net Sales Revenue $313,900*
* Numbers are taken from the solution to P4-41A above
Req 2
Williams Industries, Inc.’s Gross Profit rate of 49.5% in 2010 has deteriorated from the gross profit rate of 51.3%% in 2009. Williams Industries, Inc. has retained a lower percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.
Req 3
Current Ratio
=
Current Assets
=$32,900
= 1.60Current
Liabilities$20,600
Req 4
Williams Industries, Inc.’s Current Ratio of 1.60 in 2010 has improved from the Current Ratio of 1.47 in 2009. Williams Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.
Waybright Kemp Financial Accounting 1e 273
(15-20 min.) P 4-43B
Req. 1
Journal
DATE ACCOUNTSPOSTREF. Dr. Cr.
Sep 3 Inventory 5,100Cash 5,100
9 Supplies 800Accounts Payable – Chandler Unlimited 800
16 Inventory 4,300Accounts Payable – Garden Supplies, Inc. 4,300
22 Accounts Payable – Garden Supplies, Inc. 1,100Inventory 1,100
28 Accounts Payable – Chandler Unlimited 800Cash 800
28Accounts Payable – Garden Supplies, Inc.
($4,300- $1,100)3,200
Cash ($3,200 x .97) 3,104 Inventory ($3,200 x .03) 96
274 Solutions Manual
(10-15 min.) P4-44B
Req 1
Journal
DATE ACCOUNTS
POST
REF. Dr. Cr.
Apr 3 Accounts Receivable – A. Klecans 3,600Sales Revenue 3,600
Cost of Goods Sold 1,700Inventory 1,700
4 Delivery Expense 75 Cash 75
10 Cash 2,700Sales Revenue 2,700
Cost of Goods Sold 1,200Inventory 1,200
17 Cash ($3,600 x .97) 3,492Sales Discount ($3,600 x .03) 108 Accounts Receivable – A. Klecans 3,600
22 Accounts Receivable – M. Perez 5,100Sales Revenue 5,100
Cost of Goods Sold 2,500Inventory 2,500
26 Sales Returns and Allowances 200Accounts Receivable – M. Perez 200
30 Cash ($4,900 × .98) 4,802Sales Discount ($4,900× .02) 98
Accounts Receivable ($5,100 - $200) 4,900
Waybright Kemp Financial Accounting 1e 275
(20-25 min.) P 4-45B
Req 1 Retro Furniture
Journal
DATE ACCOUNTS POSTREF. Dr. Cr.
Oct 4 Inventory 8,000 Accounts Payable - E & S Furniture
Warehouse5,800
Record purchase of inventory onaccount.
7 Inventory 200 Cash 200Record payment of freight charges.
10 Accounts Payable – E & S Furniture Warehouse 1,000Inventory 1,000
Record inventory returned to supplier.
18 Accounts Payable – E & S Furniture Warehouse 2,000Cash ($2,000 x .99) 1,980Inventory ($2,000 × .01) 20
Record partial payment of invoice.
31 Accounts Payable – E & S Furniture Warehouse($8,000 – $1,000 - $2,000) 5,000 Cash 5,000Record payment of remainder of invoice in full.
276 Solutions Manual
Req 2 E & S Furniture Warehouse
Oct 4 Accounts Receivable - Retro Furniture 8,000
Sales Revenue 8,000
Cost of Goods Sold 2,900
Inventory 2,900
Record sale of inventory on account.
10 Sales Returns and Allowances 1,000
Accounts Receivable - Retro Furniture 1,000
Inventory 450
Cost of Goods Sold 450
Record receipt of returned goods.
18 Cash ($2,000 x .99) 1,980
Sales Discount ($2,000 x .01) 20
Accounts Receivable - Retro Furniture 2,000
Record partial payment received.
31 Cash 5,000
Accounts Receivable - Retro Furniture
($8,000 - $1,000 - $2,000)
5,000
Record payment on remainder of invoice received.
Waybright Kemp Financial Accounting 1e 277
(20-25 min.) P 4-46B
Journal
DATE ACCOUNTSPOSTREF. Dr. Cr.
May 4 Inventory ($5,400 + $125) 5,525 Accounts Payable – Bargain Tire 5,525Record purchase of inventory on account
7 Supplies 375 Accounts Payable – Office Maxx 375Record purchase of supplies on account
9 Accounts Receivable – W. Furmick 950 Sales Revenue 950Cost of Goods Sold 250 Inventory 250Record sale on account
11 Delivery Expense 25 Cash 25Record payment of freight charges
13 Accounts Payable – Bargain Tire 600 Inventory 600
Record return of merchandise to supplier
15 Cash 900 Sales Revenue 900Cost of Goods Sold 350 Inventory 350Record cash sales.
16 Accounts Payable – Office Maxx 375 Cash ($375 x .97) 363.75 Supplies (375 x .03) 11.25 Record payment for supplies
18 Accounts Payable – Bargain Tire ($5,400 + $125 − $600) 4,925
Cash ($4,925 – $144) 4,781Inventory [($5,400 - $600) × .03] 144
20 Sales Returns and Allowances 175 Accounts Receivable – W. Furmick 175
278 Solutions Manual
Inventory 100Cost of Goods Sold 100
Record receipt of returned goods.
22 Inventory 3,900
Cash 3,900
Record purchase of inventory for cash.
23 Cash ($775× .97) 751.75Sales Discounts ($775 × .03) 23.25
Accounts Receivable – W. Furmick ($950 - $175)
775.00
Record payment received on account
Req. 2
Sales Revenue ($950 + $900) $1,850.00Less: Sales Returns and Allowance $ 175.00
Sales Discounts 23 .25 198 .25 Net Sales Revenue 1,651.75Cost of Goods Sold ($250+ $350 -$100) 500 .00 Gross Profit $ 1,151 .75
Waybright Kemp Financial Accounting 1e 279
(20-25 min.) P 4-47B
Req. 1
CED Electric, Inc.Income Statement
Month Ended June 30, 2010Sales Revenue $197,500
Less: Sales Returns and Allowances $4,800 Sales Discounts 3,100 7,900Net Sales Revenue $ 189,600
Cost of Goods Sold 101,400Gross Profit 88,200Operating Expenses:
Selling Expenses 37,000General and Administrative Expenses 20,600 57,600
Net Income $ 30,600
Note: There are no Other Revenue or Expense items so Operating Income is Net Income
Req 2
Gross Profit Percentage
=Gross Profit
=$88,200
= .465 or 46.5%Net Sales Revenue $189,600
Req 3
CED Electric Inc.’s 46.5% gross margin percentage means that each dollar of net sales generates 46.5 cents of gross profit that is used to cover operating expenses and generate net income.
280 Solutions Manual
(25-30 min.) P 4-48B
Req. 1
Clark Industries, Inc.Income Statement
Year Ended March 31, 2010Sales Revenue $275,100
Less: Sales Returns and Allowances $4,900 Sales Discounts 2,500 7,400Net Sales Revenue $ 267,700
Cost of Goods Sold 119,000Gross Profit 148,700Operating Expenses:
Selling Expenses: Commission Expense 31,700 Advertising Expense 11,500 Delivery Expense 1,200 44,400 General and Administrative Expenses Office Salaries Expense 54,000 Utilities Expense 14,000 Insurance Expense 10,200 Rent Expense 5,200 83,400 127,800Operating Income 20,900Other Revenues (Expenses) Interest Expense (700)Net Income $20,200
Req 2
Clark Industries, Inc.Statement of Retained Earnings
Year Ended March 31, 2010Retained earnings, April 1, 2009 $ 112,800Plus: Net Income 20,200Subtotal 133,000Less: Dividends 12,000Retained earnings, March 31, 2010 $ 121,000
Waybright Kemp Financial Accounting 1e 281
Req 3
Clark Industries, Inc.Balance Sheet
March 31, 2010Assets
Current Assets:Cash $ 22,500Accounts Receivable 8,800Inventory 29,000
Supplies 1,200Prepaid Rent 5,000Total Current Assets 66,500
Fixed Assets:Equipment $27,000Less: Accumulated Depreciation, Equipment 13,000 14,000
Building 190,000
Less: Accumulated Depreciation, Building 52,500 137,500Total assets $218,000
LiabilitiesCurrent Liabilities:
Accounts Payable $ 16,500 Wages Payable 1,000
Unearned Sales Revenue 2,500Total Current Liabilities 20,000
Long-Term Liabilities:Mortgage Payable 42,000
Total Liabilities 62,000Stockholder’s Equity
Common Stock 35,000Retained Earnings 121,000Total Stockholder’s Equity 156,000
Total Liabilities and Stockholder’s Equity $218,000
282 Solutions Manual
(20-25 min.) P 4-49B
Req 1
Gross Profit Percentage
=Gross Profit
=$148,700*
= .555 or 55.5%Net Sales Revenue $267,700*
* Numbers are taken from the solution to P4-48B above
Req 2
Clark Industries, Inc.’s Gross Profit rate of 55.5% in 2010 has improved from the gross profit rate of 39.1% in 2009. Clark Industries, Inc. has retained a higher percentage of every dollar of Net Sales Revenue to use towards covering Operating Expenses and generating Net Income than it did in 2009.
Req 3
Current Ratio
=
Current Assets
=$66,500
= 3.33Current
Liabilities$20,000
Req 4
Clark Industries, Inc.’s Current Ratio of 3.33 in 2010 has improved from the Current Ratio of 2.33 in 2009. Clark Industries, Inc. has a higher percentage of current assets compared to current liabilities than it did in 2009.
Waybright Kemp Financial Accounting 1e 283
Continuing Exercise
Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS DEBIT CREDIT
Sept. 2 Cash 500Service Revenue 500
5 Plant Inventory ($250 +$10) 260Accounts Payable 260
15 Accounts Receivable 400Sales Revenue 400
Cost of Goods Sold 104Plant Inventory 104
17 Accounts Receivable 150Service Revenue 150
20 Plant Inventory 300Accounts Payable 300
21 Accounts Payable 100Cash 100
25 Cash 700Sales Revenue 700
Cost of Goods Sold 276Plant Inventory 276
31 Salaries Expense 225 Salaries Payable 225
31 Depreciation Expense - Equipment 30Accumulated Depreciation – Equip. 30
31 Cost of Goods Sold 30Plant Inventory 30
284 Solutions Manual
Cash Accounts ReceivableBal. 1,480 July 21 100 Bal. 150July 2 500 July 15 400
25 700 17 150Bal. 700
Bal. 2,580
Lawn Supplies Plant InventoryBal. 20 Bal. 0 July 15 104
July 5 260 25 27620 300 31 30
Bal. 20 Bal. 150
Equipment Acc. Depreciation – Equip.Bal. 1,400 Bal. 30
July 31 30Bal. 60
Accounts Payable Salaries PayableJuly 21 100 Bal. 1,400 July 31 225
July 5 260 Bal. 22520 300
Bal. 1,860
Common Stock Retained EarningsBal. 1,000 Bal. 620
Service Revenue Sales RevenueJuly 2 500 July 15 400
17 150 25 700Bal. 650 Bal. 1,100
Cost of Goods Sold Fuel ExpenseJuly 15 104 Bal.
25 27631 30
Bal. 410
Waybright Kemp Financial Accounting 1e 285
Supplies expense Depreciation Exp. – EquipBal. Bal. 0
July 31 30
Bal. 30Bal.
Salaries ExpenseJuly 31 225
Bal. 225
Req. 2
Graham’s Yard Care, Inc.Income Statement
Month Ended July 31, 2010Revenues: Service Revenue $ 650 Sales Revenue 1,100 Total Revenues $ 1,750Expenses:
Cost of Goods Sold 410Salaries Expense 225
Depreciation Expense - Equipment 30Total expenses 665
Net income $ 1,085
286 Solutions Manual
Continuing Problem
Req 1
8/2 Salary Payable 675 Cash 675
8/3 Inventory 20,600 Accounts Payable – Spa Superstore 20,600
8/5 Supplies 750 Cash 750
8/6 Inventory 475 Cash 475
8/8 Accounts Receivable – R. Tanaka 5,800 Sales 5,800Cost of Goods Sold 3,600 Inventory 3,600
8/10 Office Furniture 1,200 Cash 1,200
8/11 Advertising Expense 625 Cash 625
8/12 Accounts Payable – Spa Superstore 3,400 Inventory 3,400
8/13 Cash 6,750 Sales 6,750Cost of Goods Sold 3,360 Inventory 3,360
8/15 Sales Returns and Allowances 300 Accounts Receivable – R. Tanaka 300
8/16 Salary Expense 675 Cash 675
8/17 Accounts Payable – Spa Superstore 17,200
Waybright Kemp Financial Accounting 1e 287
Cash 16,684 Inventory 516
8/19 Inventory 12,100 Accounts Payable – Pool Universe 12,100
8/21 Accounts Receivable – B. Wagoner 13,700 Sales 13,700Cost of Goods Sold 8,500 Inventory 8,500
8/22 Cash 5,390Sales Discounts 110Accounts Receivable – R. Tanaka 5,500
8/24 Delivery Expense 560 Cash 560
8/25 Equipment 2,600 Accounts Payable – Betterbuy, Inc. 2,600
8/27 Cash 13,426Sales Discounts 274 Accounts Receivable – B. Wagoner 13,700
8/28 Accounts Payable – Pool Universe 12,100 Cash 11,858 Inventory 242
8/30 Utilities Expense 850 Cash 850
8/31 Commission Expense 1,300 Cash 1,300
288 Solutions Manual
Req 2
CashPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 17,380
2 675 16,7055 750 15,9556 475 15,48010 1,200 14,28011 625 13,65513 6,750 20,40516 675 19,73017 16,684 3,04622 5,390 8,43624 560 7,87627 13,426 21,30228 11,858 9,44430 850 8,59431 1,300 7,294
Accounts ReceivablePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 5,400
8 5,800 11,20015 300 10,90021 13,700 24,60022 5,500 19,10027 13,700 5,400
Waybright Kemp Financial Accounting 1e 289
InventoryPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
3 20,600 20,6006 475 21,0758 3,600 17,47512 3,400 14,07513 3,360 10,71517 516 10,19919 12,100 22,29921 8,500 13,79928 242 13,557
SuppliesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 350
5 750 1,100
Prepaid RentPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 3,600
LandPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 15,000
290 Solutions Manual
FurniturePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 3,300
10 1,200 4,500
Accumulated Depreciation, FurniturePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 210
EquipmentPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 4,700
25 2,600 7,300
Accumulated Depreciation, EquipmentPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 400
VehiclesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 31,000
Waybright Kemp Financial Accounting 1e 291
Accumulated Depreciation, VehiclesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 650
Accounts PayablePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 1,840
3 20,600 22,44012 3,400 19,04017 17,200 1,84019 12,100 13,94025 2,600 16,54028 12,100 4,440
Salary PayablePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 675
2 675 0
Unearned Service Revenue POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 2,800
Notes Payable POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 31,000
292 Solutions Manual
Common StockPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 38,500
Retained EarningsPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 4,655
SalesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
8 5,800 5,80013 6,750 12,55021 13,700 26,250
Sales DiscountsPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
22 110 11027 274 384
Sales Returns and AllowancesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
15 300 300
Waybright Kemp Financial Accounting 1e 293
Cost of Goods SoldPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
8 3,600 3,60013 3,360 6,96021 8,500 15,460
Advertising ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
11 625 625
Salary ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
16 675 675
Delivery ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
24 560 560
294 Solutions Manual
Utilities Expense POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
30 850 850
Commissions ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,300 1,300
Waybright Kemp Financial Accounting 1e 295
Req 3
Aqua Elite, Inc.Unadjusted Trial Balance
August 31, 2010ACCOUNT DEBIT CREDITCashAccounts ReceivableInventorySuppliesPrepaid RentLandFurnitureAccumulated Depreciation, FurnitureEquipmentAccumulated Depreciation, EquipmentVehiclesAccumulated Depreciation, VehiclesAccounts PayableUnearned Service RevenueNotes PayableCommon StockRetained EarningsSalesSales DiscountsSales Returns and AllowancesCost of Goods SoldCommision ExpenseUtilities ExpenseSalary ExpenseAdvertising ExpenseDelivery ExpenseTotal
$7,2945,400
13,5571,1003,600
15,0004,500
7,300
31,000
384300
15,4601,300
850675625
___560$108,905
$210
400
6504,4402,800
31,00038,5004,655
26,250
_ $108,905
296 Solutions Manual
Req. 4
8/31 Rent Expense 1,800 Prepaid Rent 1,800
8/31 Supplies Expense 655 Supplies 655
8/31 Depreciation Expense 1,605 Accumulated Depreciation, Equipment 575 Accumulated Depreciation, Furniture 380 Accumulated Depreciation, Vehicles 650
8/31 Cost of Goods Sold 170 Inventory 170
Rent ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,800 1,800
Waybright Kemp Financial Accounting 1e 297
Prepaid RentPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 3,600
31 1,800 1,800
Supplies ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 655 655
SuppliesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 350
5 750 1,10031 655 445
Depreciation ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,605 1,605
298 Solutions Manual
Accumulated Depreciation, EquipmentPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 400
31 575 975
Accumulated Depreciation, FurniturePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 210
31 380 590
Accumulated Depreciation, VehiclesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 650
31 650 1,300
Cost of Goods SoldPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
8 3,600 3,60013 3,360 6,96021 8,500 15,46031 170 15,630
Waybright Kemp Financial Accounting 1e 299
InventoryPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
3 20,600 20,6006 475 21,0758 3,600 17,47512 3,400 14,07513 3,360 10,71517 516 10,19919 12,100 22,29921 8,500 13,79928 242 13,55731 170 13,387
300 Solutions Manual
Req. 5
Aqua Elite, Inc.Adjusted Trial Balance
August 31, 2010ACCOUNT DEBIT CREDITCashAccounts ReceivableInventorySuppliesPrepaid RentLandFurnitureAccumulated Depreciation, FurnitureEquipmentAccumulated Depreciation, EquipmentVehiclesAccumulated Depreciation, VehiclesAccounts PayableUnearned Service RevenueNotes PayableCommon StockRetained EarningsSalesSales DiscountsSales Returns and AllowancesCost of Goods SoldRent ExpenseDepreciation ExpenseCommision ExpenseUtilities ExpenseSalary ExpenseSupplies ExpenseAdvertising ExpenseDelivery ExpenseTotal
$7,2945,400
13,387445
1,80015,0004,500
7,300
31,000
384300
15,6301,8001,6051,300
850675655625
___560$110,510
$590
975
1,3004,4402,800
31,00038,5004,655
26,250
_ $110,510
Waybright Kemp Financial Accounting 1e 301
Req. 6
Aqua Elite, Inc.Income Statement
Month ended August 31, 2010Sales revenue $26,250
Less: Sales Discounts $384 Sales Returns and Allowances 300 684
Net Sales Revenue $25,566Cost of Goods Sold 15,630Gross Profit 9,936Operating Expenses:
Selling Expenses: Commissions Expense 1,300 Delivery Expense 560 1,860
General and Administrative Expenses: Rent Expense 1,800 Depreciation Expense 1,605 Utilities Expense 850 Salaries Expense 675 Supplies Expense 655 Advertising Expense 625 6,210 8,070Net income $ 1,866
Aqua Elite, Inc.Statement of Retained EarningsMonth Ended August 31, 2010
Retained Earnings, August 1, 2010Add: Net IncomeRetained Earnings, August 31, 2010
$4,6551,866
$6,521
302 Solutions Manual
Aqua Elite, Inc.Balance Sheet
August 31, 2010Assets
Current Assets:Cash $ 7,294Accounts Receivable 5,400Inventory 13,387Supplies 445
Prepaid Rent 1,800Total Current Assets 28,326
Fixed assets: Land 15,000 Furniture $ 4,500
Less: Accumulated Depreciation, Furniture 590 3,910
Equipment 7,300Less: Accumulated Depreciation, Equipment 975 6,325
Vehicles 31,000Less: Accumulated Depreciation, Vehicles 1,300 29,700
Total Assets $83,261
LiabilitiesCurrent Liabilities:
Accounts Payable $ 4,440 Unearned Service Revenue 2,800 Total Current Liabilities 7,240Long-Term Liabilities:
Notes Payable 31,000Total Liabilities 38,240
Stockholders’ Equity Common Stock 38,500 Retained Earnings 6,521Total Stockholders’ Equity 45,021Total Liabilities and Stockholders’ Equity $83,261
Waybright Kemp Financial Accounting 1e 303
Req. 7
8/31 Sales 26,250 Retained Earnings 26,250
8/31 Retained Earnings 24,384 Sales Discounts 384 Sales Returns and Allowances 300 Cost of Goods Sold 15,630 Rent Expense 1,800 Depreciation Expense 1,605 Commission Expense 1,300 Utilities Expense 850 Salary Expense 675 Supplies Expense 655 Advertising Expense 625 Delivery Expense 560
8/31 Note – there were no dividends during August so no closing entry is required to close dividends
304 Solutions Manual
Retained EarningsPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 4,655
31 26,250 30,90531 24,384 6,521
SalesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
8 5,800 5,80013 6,750 12,55021 13,700 26,25031 26,250 0
Sales DiscountsPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
22 110 11027 274 38431 384 0
Waybright Kemp Financial Accounting 1e 305
Sales Returns and AllowancesPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
15 300 30031 300 0
Cost of Goods SoldPOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
8 3,600 3,60013 3,360 6,96021 8,500 15,46031 170 15,63031 15,630 0
Rent ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,800 1,80031 1,800 0
306 Solutions Manual
Depreciation ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,605 1,60531 1,605 0
Commissions ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
31 1,300 1,30031 1,300 0
Utilities Expense POST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
30 850 85031 850 0
Salary ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
16 675 67531 675 0
Supplies Expense
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POST. BALANCEDATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Aug. 1 Bal. 031 655 65531 655 0
Advertising ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
11 625 62531 625 0
Delivery ExpensePOST. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDITAug. 1 Bal. 0
24 560 56031 560 0
308 Solutions Manual
Req. 8
Aqua Elite, Inc.Post-closing Trial Balance
August 31, 2010ACCOUNT DEBIT CREDITCashAccounts receivableInventorySuppliesPrepaid rentLandFurnitureAccumulated depreciation, furnitureEquipmentAccumulated depreciation, equipmentVehiclesAccumulated depreciation, vehiclesAccounts payableUnearned service revenueNotes payableCommon stockRetained earningsTotal
$7,2945,400
13,387445
1,80015,0004,500
7,300
31,000
$86,126
$590
975
1,3004,4402,800
31,00038,5006,521
$86,126
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Ethics in Action
Case 1
It is unethical for Tim to encourage the customer to make this purchase. While it is a
salesman’s job to convince customers to make purchases, intentionally soliciting a
purchase with the full knowledge that the merchandise will likely be returned just to earn
the sales commission is wrong.
Conway can deter this behavior by basing sales commissions on net sales rather than
on gross sales.
Case 2
Normally there is nothing wrong with Tina asking her parents to loan Cottage Café
money. However, if Tina’s request is soley for the pupose of making the Cottage Café’s
current ratio look better in order to receive credit from UMT, then Tina’s request could
be viewed as unethical behavior. This is especially true if Tina intends on repaying the
loan before the due date.
Creditors like to see a current ration of 1.5 or higher because they know that some of a
company’s assets such as prepaid expenses and supplies will not be available to pay off
liabilities as they come due. They also realize that inventory and accounts receivable can
not be used to pay liabilities as they come due. They must first be converted to cash.
310 Solutions Manual
Financial Analysis
Req 1
Columbia Sportswear uses a multi-step income statement format. You can tell because line items
for gross profit, and operating expenses can be seen.
Req 2
2006 2007 2008
$541,055= 42.0%
$579,751= 42.8%
$567,811=43.1 %
$1,287,672 $1,356,039 $1,317,835
Columbia Sportswear’s gross profit rate has been improving each year.
Req 3
Columbia Sportswear uses a classified balance sheet format. In addition to current assets and
current liabilities, other categories such as property and equipment can be seen.
Req 4
2007 2008
$885,6645.32
$872,5195.04
$166,531 $173,189
Columbia Sportswear’s current ratio has deteriorated slightly from 2007 to 2008. However, at
5.04 it is still a very high current ratio.
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Industry Analysis
Both the Consolidated Balance Sheets and the Consolidated Statements of Income (or Operations) give you clues to the fact that these companies are merchandising businesses. On the balance sheet, merchandising businesses will have an account called Inventories or Merchandise Inventory. This represents the merchandise the company has already bought but hasn’t sold yet.
On the income statement, there may be several clues. The first one may be the name of the revenue account. Most merchandising businesses call this account Sales or Net Sales, as Columbia Sportswear does. However, Under Armour uses the term Net Revenues.
The next clue on the income statement is the account located right under the revenue account. That account is usually called Cost of Goods Sold. Columbia Sportswear uses the term Cost of Sales, but it means the same thing. This account represents the cost to the company for the items that they sold during that particular accounting period. When they sell merchandise, the cost of that merchandise is moved from the Inventory account on the balance sheet to the Cost of Goods Sold account on the income statement.
Small Business Analysis
The only thing that’s certain is that this transaction will not save your client any tax dollars. The purchase of inventory is not an expense that appears on the income statement. Inventory is an asset until it is sold. Then it will be moved from the asset account on the balance sheet to the income statement as cost of merchandise sold. So, your client’s main objective for making this large purchase will not be achieved.
As far as paying cash for this transaction, that depends on a lot of different factors. If your client had ample cash prior to this purchase and the discount was sufficient to cover the cost of tying up his money until the inventory can be sold (one of the carrying costs of inventory), then it was probably not a bad idea. However, if this cash purchase created a cash shortage, even to the point of having to borrow money on the company’s line of credit, then the transaction was probably not a good idea.
Your client’s last statement about making more profit when he sells this inventory is also contingent upon some of the other items mentioned above. It would seem like that would be the case, but if this vendor normally offers a discount for early payment anyway, then maybe the per-unit cost of this product isn’t as good as he may think.
312 Solutions Manual
Written Communication
Regardless of whether or not you choose to have the customer return the youth footballs or just give them an allowance (reduce the invoice amount) for the error, the accounting is the same. You will be debiting an account called Sales Returns and Allowances and crediting accounts receivable for the amount that you will be reducing the invoice. Sales Returns and Allowances is an account known as a contra-revenue account which only means that the normal balance of the account is contrary (opposite) to what a revenue account would normally be. So by debiting the Sales Returns and Allowance account, you are increasing it.
The accounting form that you will issue to the customer for this transaction is called a credit memorandum, or a credit memo. The form gets its name from the fact that you will be crediting (decreasing) their accounts receivable account because the customer now owes you less.
Concerning the freight costs, the customer is correct. If the terms for the sale were in fact FOB Destination, then the customer is not responsible for paying the freight, or shipping costs. Had the terms been FOB Shipping point, then the customer would be responsible for those costs. These terms derive their name from the point at which title passes for the merchandise. So whoever owns the goods while they’re in route ultimately is responsible for paying to get them there.
So your letter might read like this:
Dear Customer:
Thank you for the letter concerning your recent purchase from us. I apologize for the mix-up in the product. As football season approaches, it tends to get a little hectic around here, but that is no reason for us to not get your order correct. So here’s what we can do to correct it now.
I’ll give you the option to either send the footballs back to us (freight will be paid by us), or if you like, you can keep the youth footballs and we will reduce the price 50% from the normal cost of a youth football. Either way, we will reduce the amount of your invoice and issue you a credit memorandum for the amount of the reduction. Please let us know what you prefer to do.
Concerning the shipping terms on the invoice, you are correct that you do not normally pay for shipping. So the shipping terms on your invoice were correct, but there should be no freight charged to you. FOB (Free on Board) Destination only means that you didn’t officially own the product until it reached its destination, that being your store. So since we still officially owned the product, we were responsible for paying the freight. We will deduct the freight from your invoice and include it as part of the credit memo we will be issuing to you.
Thank you for your business, and, again, we apologize for the mix-up. Hopefully, this will clear everything up.
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