CHAPTER 6

ACCOUNTING FOR MERCHANDISING BUSINESSES

 Chapter 6—Accounting for Merchandising Businesses

Chapter 6—Accounting for Merchandising Businesses

TRUE/FALSE
1. One of the most important differences between a service business and a retail business is in
what is sold.
ANS: T DIF: 2 OBJ: 01
2. In a merchandise business, sales minus operating expenses equals net income.
ANS: F DIF: 2 OBJ: 01
3. Under a periodic inventory system, the merchandise on hand at the end of the year is
determined by a physical count of the inventory.
ANS: T DIF: 2 OBJ: 02
4. In the periodic inventory system, purchases of merchandise for resale are debited to the
Purchases account.
ANS: T DIF: 2 OBJ: 02
5. Under the periodic inventory system, the cost of goods sold is equal to the beginning
merchandise inventory plus the cost of goods purchased plus the ending merchandise
inventory.
ANS: F DIF: 3 OBJ: 02
6. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect
the beginning inventory.
ANS: F DIF: 2 OBJ: 02
7. In a periodic inventory system, the cost of goods purchased includes the cost of
transportation-in.
ANS: T DIF: 2 OBJ: 02
8. As we compare a merchandise business to a service business, the financial statement that
changes the most is the Balance Sheet.
ANS: F DIF: 2 OBJ: 02

9. When a merchandising business is compared to a service business, the financial statement

that is not affected by that change is the Statement of Owner's Equity.
ANS: T DIF: 2 OBJ: 02
10. The ending merchandise inventory for 2005 is the same as the beginning merchandise
inventory for 2006.
ANS: T DIF: 2 OBJ: 02
11. In a multi-step income statement the dollar amount for income from operations is always the
same as net income.
ANS: F DIF: 2 OBJ: 02
12. Net sales is equal to sales minus cost of merchandise sold.
ANS: F DIF: 2 OBJ: 02
13. Gross profit minus selling expenses equals net income.
ANS: F DIF: 2 OBJ: 02

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14. The form of the balance sheet in which assets, liabilities, and owner's equity are presented in
a downward sequence is called the report form.
ANS: T DIF: 1 OBJ: 02
15. On the income statement in the single-step form, the total of all expenses is deducted from
the total of all revenues.
ANS: T DIF: 1 OBJ: 02
16. The single-step income statement is easier to prepare, but a criticism of this format is that
gross profit and income from operations are not readily available.
ANS: T DIF: 2 OBJ: 02
17. Income that cannot be associated definitely with operations, such as a gain from the sale of a
fixed asset, is listed as Other Income on the multiple-step income statement.
ANS: T DIF: 1 OBJ: 02
18. Under the perpetual inventory system, when a sale is made, both the retail and cost values
are recorded.
ANS: T DIF: 2 OBJ: 03

19. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales
are made.
ANS: T DIF: 1 OBJ: 03
20. If payment is due by the end of the month in which the sale is made, the invoice terms are
expressed as n/30.
ANS: F DIF: 2 OBJ: 03
21. When merchandise that was sold is returned, a credit to sales returns and allowances is
made.
ANS: F DIF: 2 OBJ: 03
22. In a perpetual inventory system, when merchandise is returned to the seller, Cost of
Merchandise Sold is one of the accounts debited to record the transaction.
ANS: T DIF: 2 OBJ: 03
23. Sales Returns and Allowances is a contra-revenue account.
ANS: T DIF: 1 OBJ: 03
24. Sales Discounts is a revenue account with a credit balance.
ANS: F DIF: 2 OBJ: 03
25. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally
treated as credit sales.
ANS: F DIF: 2 OBJ: 03
26. Sales to customers who use nonbank credit cards, such as American Express, are generally
treated as credit sales.
ANS: T DIF: 1 OBJ: 03
27. Retailers record all credit card sales as charge sales.
ANS: F DIF: 3 OBJ: 03
28. The service fee that credit card companies charge retailers varies and is the primary reason
why some businesses do not accept all credit cards.
ANS: T DIF: 2 OBJ: 03

29. The document issued by the seller that informs the buyer of the details of sales returns is
called a debit memorandum.

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ANS: F DIF: 2 OBJ: 03

30. A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
ANS: T DIF: 2 OBJ: 03
31. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in
cash or accounts receivable.
ANS: T DIF: 1 OBJ: 03
32. Merchandise Inventory normally has a debit balance.
ANS: T DIF: 1 OBJ: 04
33. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the
invoice date to take advantage of the cash discount.
ANS: F DIF: 1 OBJ: 04
34. Discounts taken by the buyer for early payment of an invoice are credited to Cash Discounts
by the buyer.
ANS: F DIF: 2 OBJ: 04
35. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.
ANS: T DIF: 2 OBJ: 04
36. Under the perpetual inventory system, a company purchases merchandise on terms 2/10,
n/30. If payment is made within 10 days of the purchase, the entry to record the payment
will include a credit to Cash and a credit to Purchase Discounts.
ANS: F DIF: 2 OBJ: 04
37. Purchases of merchandise are typically credited to the merchandise inventory account under
the perpetual inventory system.
ANS: F DIF: 1 OBJ: 04
38. When the seller offers a sales discount, even if borrowing has to be done, it is generally
advantageous for the buyer to pay within the discount period.
ANS: T DIF: 3 OBJ: 04
39. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is
called a trade discount.
ANS: T DIF: 1 OBJ: 05
40. A deduction allowed to wholesalers and retailers from the price of merchandise listed in
catalogs is called cash discounts.
ANS: F DIF: 2 OBJ: 05
41. Sellers and buyers are required to record trade discounts.
ANS: F DIF: 2 OBJ: 05
42. If the ownership of merchandise passes to the buyer when the seller delivers the
merchandise for shipment, the terms are stated as FOB destination.
ANS: F DIF: 1 OBJ: 05
43. A sale of $600 on account, subject to a sales tax of 5%, would be recorded as an account
receivable of $600.
ANS: F DIF: 2 OBJ: 05
44. When merchandise is sold for $500 plus 5% sales tax, the Sales account should be credited
for $525.
ANS: F DIF: 2 OBJ: 05
45. The abbreviation FOB stands for Free On Board.
ANS: T DIF: 1 OBJ: 05

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46. Merchandise is sold for $4,500, terms FOB destination, 2/10, n/30, with prepaid
transportation costs of $250. If $800 of the merchandise is returned prior to payment and
the invoice is paid within the discount period, the amount of the sales discount is $79.
ANS: F DIF: 3 OBJ: 05
47. If the buyer bears the transportation costs related to a purchase, the terms are said to be FOB
destination.
ANS: F DIF: 1 OBJ: 05

48. When the terms of sale are FOB shipping point, the buyer should pay the transportation
charges.
ANS: T DIF: 2 OBJ: 05
49. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid
transportation costs of $100, is paid within 10 days, the amount of the purchases discount is
$50.
ANS: T DIF: 3 OBJ: 05
50. Comparing the merchandise entries for the seller and the buyer, the seller is required to
record more entries for the same transactions than the buyer.
ANS: T DIF: 2 OBJ: 06
51. The chart of accounts for a merchandise business would include an account called
Transportation-Out.
ANS: T DIF: 1 OBJ: 07
52. In comparing a retail business to a service business, the accounting cycle is basically the
same.
ANS: T DIF: 1 OBJ: 08
53. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.
ANS: T DIF: 1 OBJ: 08
54. Closing entries for a merchandising business are not similar to those for a service business.
ANS: F DIF: 1 OBJ: 08
55. The ratio of net sales to assets measures how effectively a business is using its assets to
generate sales.
ANS: T DIF: 1 OBJ: 09
56. In a computerized accounting system, special journals may be replaced by electronic forms
that capture the necessary information.
ANS: T DIF: 1 OBJ: Ap1

57. The worksheet for a merchandise business is basically the same as one for a service
business.
ANS: T DIF: 1 OBJ: Ap 2
58. The balance sheet accounts of a work sheet provide the information to prepare the closing
entries.

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ANS: F DIF: 1 OBJ: Ap2

MULTIPLE CHOICE
1. Which one of the following is not a difference between a retail business and a service
business?
a. in what is sold
b. greater number of new accounts
c. specialized journals
d. changes in financial statements
ANS: C DIF: 2 OBJ: 01
2. Net income plus operating expenses is equal to
a. cost of goods sold
b. cost of goods available for sale
c. net sales
d. gross profit
ANS: D DIF: 1 OBJ: 01
3. Generally, the revenue account for a merchandising business is entitled
a. Sales
b. Net Sales
c. Gross Sales
d. Gross Profit
ANS: A DIF: 1 OBJ: 02
4. What is the term applied to the excess of net revenue from sales over the cost of
merchandise sold?
a. gross profit
b. income from operations
c. net income
d. gross sales
ANS: A DIF: 1 OBJ: 02

5. A company using the periodic inventory system has the following account balances:
Merchandise Inventory at the beginning of the year, $4,000; Transportation-In, $450;
Purchases, $12,000; Purchases Returns and Allowances, $2,300; Purchases Discounts, $220.
The cost of merchandise purchased is equal to
a. $13,930
b. $9,930
c. $9,489
d. $14520
ANS: B DIF: 4 OBJ: 02

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6. A company, using the periodic inventory system, has merchandise inventory costing $140
on hand at the beginning of the period. During the period, merchandise costing $400 is
purchased. At year-end, merchandise inventory costing $180 is on hand. The cost of
merchandise sold for the year is
a. $720
b. $550
c. $360
d. none of the above
ANS: C DIF: 4 OBJ: 02
7. Expenses that are incurred directly or entirely in connection with the sale of merchandise are
classified as
a. selling expenses
b. general expenses
c. other expenses
d. administrative expenses
ANS: A DIF: 1 OBJ: 02
8. Office salaries, depreciation of office equipment, and office supplies are examples of what
type of expense?
a. selling expense
b. miscellaneous expense
c. administrative expense
d. other expense
ANS: C DIF: 1 OBJ: 02
9. The form of income statement that derives its name from the fact that the total of all
expenses is deducted from the total of all revenues is called a
a. multiple-step statement
b. revenue statement
c. report-form statement
d. single-step statement
ANS: D DIF: 1 OBJ: 02

10. Multiple-step income statements show

a. gross profit but not income from operations
b. neither gross profit nor income from operations
c. both gross profit and income from operations
d. income from operations but not gross profit
ANS: C DIF: 2 OBJ: 02
11. When the three sections of a balance sheet are presented on a page in a downward sequence,
it is called the
a. account form
b. comparative form
c. horizontal form
d. report form
ANS: D DIF: 1 OBJ: 02

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12. The statement of owner's equity shows

a. only net income, beginning and ending capital
b. only total assets, beginning and ending capital
c. only net income, beginning capital, and withdrawals
d. all the changes in the owner's capital as a result of net income, net loss, additional
investments, and withdrawals
ANS: D DIF: 3 OBJ: 02
13. Merchandise inventory is classified on the balance sheet as a
a. Current Liability
b. Current Asset
c. Long-Term Asset
d. Long-Term Liability
ANS: B DIF: 1 OBJ: 02
14. Which account is not classified as a selling expense?
a. Sales Salaries
b. Transportation-Out
c. Sales Discounts
d. Advertising Expense
ANS: C DIF: 2 OBJ: 02
15. The primary difference between a periodic and perpetual inventory system is that a
a. periodic system determines the inventory on hand only at the end of the accounting
period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made
ANS: A DIF: 3 OBJ: 02
16. The inventory system employing accounting records that continuously disclose the amount
of inventory is called
a. retail
b. periodic
c. physical
d. perpetual
ANS: D DIF: 1 OBJ: 02
17. When the perpetual inventory system is used, the inventory sold is shown on the income
statement as
a. cost of merchandise sold
b. purchases
c. purchases returns and allowances
d. net purchases
ANS: A DIF: 1 OBJ: 02
18. When comparing a retail business to a service business, the financial statement that changes
the most is the
a. Balance Sheet
b. Income Statement
c. Statement of Owner's Equity

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d. Statement of Cash Flow

ANS: B DIF: 2 OBJ: 02
19. When comparing a retail business to a service business, the financial statement that changes
the least is the
a. Balance Sheet
b. Income Statement
c. Statement of Owner's Equity
d. Statement of Cash Flow
ANS: C DIF: 2 OBJ: 02
20. Using a perpetual inventory system, the entry to record the sale of merchandise on account
includes a
a. debit to Sales
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Accounts Receivable
ANS: C DIF: 2 OBJ: 03

21. Which of the following accounts has a normal debit balance?

a. Accounts Payable
b. Sales Returns and Allowances
c. Sales
d. Interest Revenue
ANS: B DIF: 2 OBJ: 03
22. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the
invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is
received by the buyer on November 17; the entry is made in the buyer's accounts on
November 18. The credit period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 18
ANS: B DIF: 3 OBJ: 03
23. Using a perpetual inventory system, the entry to record the return from a customer of
merchandise sold on account includes a
a. credit to Sales Returns and Allowances
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. debit to Cost of Merchandise Sold
ANS: B DIF: 2 OBJ: 03

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24. If merchandise sold on account is returned to the seller, the seller may inform the customer
of the details by issuing a
a. sales invoice
b. purchase invoice
c. credit memorandum
d. debit memorandum
ANS: C DIF: 2 OBJ: 03
25. The arrangements between buyer and seller as to when payments for merchandise are to be
made are called
a. credit terms
b. net cash
c. cash on demand
d. gross cash
ANS: A DIF: 1 OBJ: 03

26. In credit terms of 1/10, n/30, the "1" represents the

a. number of days in the discount period
b. full amount of the invoice
c. number of days when the entire amount is due
d. percent of the cash discount
ANS: D DIF: 1 OBJ: 03
27. Merchandise with a sales price of $500 is sold on account with term 2/10, n/30. The journal
entry to record the sale would include a
a. debit to Cash for $500
b. Debit to Sales Discounts for $10
c. Credit to Sales for $500
d. Debit to Accounts Receivable for $$490
ANS: C DIF: 2 OBJ: 03
28. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a
customer for $15,000. The seller paid transportation costs of $1,000 and issued a credit
memorandum for $5,000 prior to payment. What is the amount of the cash discount
allowable?
a. $160
b. $150
c. $140
d. $100
ANS: D DIF: 3 OBJ: 03
29. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales
c. Merchandise Inventory

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d. Transportation Out
ANS: B DIF: 1 OBJ: 03
30. The entry to record the return of merchandise from a customer would include a
a. debit to Sales
b. credit to Sales
c. debit to Sales Returns and Allowances
d. credit to Sales returns and Allowances
ANS: C DIF: 2 OBJ: 03

31. Sales to customers who use bank credit cards such as MasterCard and Visa are usually
recorded by a
a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
b. debit to Cash and a credit to Sales
c. debit to Cash, credit to Credit Card Expense, and a credit to Sales
d. debit to Sales, debit to Credit Card Expense, and a credit to Cash
ANS: B DIF: 3 OBJ: 03
32. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally
treated as
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
ANS: C DIF: 1 OBJ: 03
33. When a buyer returns merchandise purchased for cash, the buyer may record the transaction
using the following entry
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash
ANS: B DIF: 3 OBJ: 04
34. When merchandise is returned, the buyer would credit
a. Merchandise Inventory
b. Purchases Returns and Allowances
c. Accounts Payable
d. (a) or (b) depending on the inventory system used.
ANS: D DIF: 03 OBJ: 04
35. When purchases of merchandise are made for cash, the transaction may be recorded with the
following entry
a. debit Cash; credit Merchandise Inventory

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b. debit Merchandise Inventory; credit Cash

c. debit Merchandise Inventory; credit Cash Discounts
d. debit Merchandise Inventory; credit Purchases
ANS: B DIF: 3 OBJ: 04

36. Using a perpetual inventory system, the entry to record the purchase of $30,000 of
merchandise on account would include a
a. debit to Sales
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Sales
ANS: B DIF: 2 OBJ: 04
37. Using a perpetual inventory system, the entry to record the return of merchandise purchased
on account includes a
a. debit to Cost of Goods Sold
b. credit to Accounts Payable
c. credit to Merchandise Inventory
d. credit to Sales
ANS: C DIF: 2 OBJ: 04
38. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is
a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Merchandise Inventory
ANS: B DIF: 3 OBJ: 04
39. The amount of the total cash paid to the seller for merchandise purchased would normally
include
a. only the list price
b. only the sales tax
c. the list price plus the sales tax
d. the list price less the sales tax
ANS: C DIF: 2 OBJ: 05
40. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a
25% trade discount and credit terms of 2/10, n/30. What amount should the retailer debit to
the Merchandise Inventory account?
a. $7,500
b. $10,000
c. $9,800

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d. $7,350
ANS: A DIF: 2 OBJ: 05

41. A sales invoice included the following information: merchandise price, $4,000;
transportation, $300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for
merchandise returned of $600 is granted prior to payment, that the transportation is prepaid
by the seller, and that the invoice is paid within the discount period, what is the amount of
cash received by the seller?
a. $3,366
b. $3,400
c. $3,666
d. $3,950
ANS: C DIF: 3 OBJ: 05
42. Which of the following accounts usually has a debit balance?
a. Purchase Discounts
b. Sales tax Payable
c. Allowance for Doubtful Accounts
d. Transportation-In
ANS: D DIF: 1 OBJ: 05
43. Merchandise is sold for cash. The selling price of the merchandise is $2,000 and the sale is
subject to a 5% state sales tax. The journal entry to record the sale would include
a. A debit to Cash for $2,000.
b. A credit to Sales for $2,100.
c. A credit to Sales Tax Payable for $100.
d. None of the above.
ANS: C DIF: 2 OBJ: 05
44. If the buyer is to pay the transportation costs of delivering merchandise, delivery terms are
stated as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB buyer
ANS: A DIF: 1 OBJ: 05
45. If the seller is to pay the transportation costs of delivering merchandise, the delivery terms
are stated as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB seller
ANS: B DIF: 1 OBJ: 05

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46. If title to merchandise purchases passes to the buyer when the goods are shipped from the
seller, the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
ANS: B DIF: 1 OBJ: 05
47. Merchandise with an invoice price of $4000 is purchased on June 2 subject to terms of 2/10,
n/30, FOB destination. Transportation costs paid by the seller totaled $150. What is the
cost of the merchandise if paid on June 12, assuming the discount is taken?
a. $4,150
b. $4,070
c. $4,067
d. $3,920
ANS: D DIF: 3 OBJ: 05
48. When goods are shipped FOB destination and the seller pays the transportation charges, the
buyer
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.
ANS: D DIF: 2 OBJ: 05
49. X sold Y merchandise on account FOB shipping point, 2/10, net 30, for $10,000. X prepaid
the $200 shipping charge. Which of the following entries does X make to record this sale?
a. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000
b. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000, and
Accounts Receivable-Y, debit $200; Cash, credit $200
c. Accounts Receivable-Y, debit $10,400; Sales, credit $10,400
d. Accounts Receivable-Y, debit $10,000; Sales, credit $10,000, and Transportation
Out, debit $200; Cash, credit $200
ANS: B DIF: 3 OBJ: 05

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50. X sold Y merchandise on account FOB shipping point, 2/10, net 30, for $10,000. X prepaid
the $200 shipping charge. Using the perpetual inventory method, which of the following
entries will Y make if Y pays within the discount period?
a. Accounts Payable-X, debit $10,000; Transportation In, credit $200; Cash, credit
$9,800
b. Accounts Payable-X, debit $10,200; Merchandise Inventory, credit $200; Cash,
credit $10,000
c. Accounts Payable-X, debit $10,000; Transportation In, debit $200; Cash, credit
$10,200
d. Accounts Payable-X, debit $10,200; Merchandise Inventory, debit $200; Cash,
credit $10,400
ANS: B DIF: 3 OBJ: 05
51. A chart of accounts for a merchandising business usually
a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Goods Sold account if a perpetual inventory system is used
ANS: B DIF: 2 OBJ: 07
52. A net sales to asset ratio of 1.5 means
a. assets are one and one-half times as large as sales
b. that for every $1.50 of sales, there is $1.00 in assets
c. that for every $1.50 of assets, there is $1.00 of sales
d. assets are being poorly utilized
ANS: B DIF: 3 OBJ: 09
53. The net sales to assets ratio measures a company's
a. working capital
b. net worth
c. effective use of sales to support the purchase of new assets
d. effective use of assets to generate sales
ANS: D DIF: 1 OBJ: 09
54. A merchandising business
a. that uses a manual accounting system usually uses only two special journals
b. that uses a computerized accounting system usually uses only five special journals
c. is required to use a computerized accounting system because of the volume of
journal entries
d. that uses a computerized accounting system usually uses no special journals
ANS: D DIF: 2 OBJ: Ap1

55. Which of the following accounts should be closed to Income Summary at the end of the
fiscal year?
a. Merchandise Inventory
b. Accumulated Depreciation

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c. Drawing
d. Cost of Merchandise Sold
ANS: D DIF: 1 OBJ: Ap2

PROBLEM
1. The following data for the current year ended June 30 were extracted from the accounting
records of Roe Co.:

Cost of merchandise sold $225,000

Operating expenses 75,000
Sales 485,000

Prepare a multiple-step income statement for the year ended June 30, 2005.
ANS:

Roe Co.
Income Statement
For the Year Ended June 30, 2005
Sales $485,000
Cost of merchandise sold 225,000
Gross profit $260,000
Operating expenses 75,000
Net income $185,000
========
DIF: 1 OBJ: 02
2. Selected data from the ledger of Willis Co. after adjustment at June 30, 2005 the end of the
fiscal year, are listed as follows:

Accounts Receivable $ 39,120 Office Equipment $ 82,700

Accumulated 60,540 Prepaid Insurance 4,680
Depreciation
Administrative 90,000 Note Payable 77,750
Expenses
Greg Willis, Capital 75,000 Salaries Payable 3,060
Cost of Merchandise 655,000 Sales (net) 900,000
Sold
Greg Willis, Drawing 40,000 Selling Expenses 110,000
Interest Revenue 10,000 Supplies 3,125

Prepare an income statement, using the single-step form, and a statement of owner's equity.
ANS:

Willis Co.
Income Statement
For the Year Ended June 30, 2005

Revenues:

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Net sales $900,000

Interest revenue 10,000
Total revenues $910,000
Expenses:
Cost of merchandise sold $655,000
Selling expenses 110,000
Administrative expenses 90,000
Total expenses 855,000
Net income $ 55,000
========

Willis Co.
Statement of Owner's Equity
For the Year Ended June 30, 2005

Greg Willis, capital, July 1, 2004 $75,000

Net income for the year $55,000
Less withdrawals 40,000
Increase in owner's equity 15,000
Greg Willis, capital, June 30, 2005 $90,000
=======
DIF: 3 OBJ: 02

3. Prepare (a) a single-step income statement, (b) a statement of owner's equity, and (c) a
balance sheet in report form from the following data for Russell Co., taken from the ledger
after adjustment on December 31, 2005 the end of the fiscal year.

Accounts Payable $ 47,200

Accounts Receivable 64,300
Accumulated Depreciation - Office Equipment 22,750
Accumulated Depreciation - Store Equipment 62,100
Administrative Expenses 75,500
Al Russell, Capital 141,750
Cash 39,700

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Cost of Merchandise Sold 545,000

Al Russell, Drawing 42,000
Interest Expense 9,000
Merchandise Inventory 93,250
Note Payable, Due 2006 50,000
Office Equipment 49,750
Prepaid Insurance 6,500
Rent Revenue 7,500
Salaries Payable 3,700
Sales (net) 820,500
Selling Expenses 101,500
Store Equipment 125,000
Supplies 4,000
ANS:
(a)

Russell Co.
Income Statement
For the Year Ended December 31, 2005

Revenues:
Net sales $820,500
Rent revenue 7,500
Total revenues $828,000
Expenses:
Cost of merchandise sold $545,000
Selling expenses 101,500
Administrative expenses 75,500
Interest expense 9,000
Total expenses 731,000
Net income $ 97,000
========

(b)

Russell Co.
Statement of Owner's Equity
For the Year Ended December 31, 2005

Al Russell, capital, January 1, 2005 $141,750

Net income for year $97,000
Less withdrawals 42,000
Increase in owner's equity 55,000
Al Russell, capital, December 31, 2005 $196,750

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========

(c)

Russell Co.
Balance Sheet
December 31, 2005

Assets
Current assets:
Cash $39,700
Accounts receivable 64,300
Merchandise inventory 93,250
Prepaid insurance 6,500
Supplies 4,000
Total current assets $207,750
Property, plant, and equipment:
Store equipment $125,000
Less Accumulated depreciation 62,100 $62,900
Office equipment $ 49,750
Less Accumulated depreciation 22,750 27,000
Total property, plant, and 89,900
equipment
Total assets $297,650
========

Liabilities
Current liabilities:
Accounts payable $47,200
Salaries payable 3,700
Total current liabilities $ 50,900
Long-term liabilities:
Note payable (due 2006) 50,000
Total liabilities $100,900

Owner's Equity

Al Russell, capital 196,750

Total liabilities and owner's $297,650
equity
========
DIF: 3 OBJ: 02
4. Using the perpetual inventory method, journalize the entries for the following selected
transactions:
(a) Sold merchandise on account, for $10,000. The cost of the merchandise
sold was $4,500.
(b) Sold merchandise to customers who used MasterCard and VISA, $8,500.

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The cost of the merchandise sold was $4,100.

(c) Sold merchandise to customers who used American Express, $3,500. The
cost of the merchandise sold was $1,600.
(d) Paid an invoice from First National Bank for $255, representing a service
fee for processing MasterCard and VISA sales.
(e) Received $3,325 from American Express Company after a $175 collection
fee had been deducted.
ANS:

(a) Accounts Receivable 10,000

Sales 10,000

Cost of Merchandise Sold 4,500

Merchandise Inventory 4,500

(b) Cash 8,500

Sales 8,500

Cost of Merchandise Sold 4,100

Merchandise Inventory 4,100

(c) Accounts Receivable 3,500

Sales 3,500

Cost of Merchandise Sold 1,600

Merchandise Inventory 1,600

(d) Credit Card Expense 255

Cash 255

(e) Cash 3,325

Credit Card Expense 175
Accounts Receivable 3,500
DIF: 3 OBJ: 03
5. Merchandise with a list price of $3,800 and costing $2,000 is sold on account, subject to the
following terms: FOB destination, 2/10, n/30. The seller prepays the transportation costs of
$50 (debit Transportation Out for the transportation costs). Prior to payment for the goods,
the seller issues a credit memorandum for $800 to the customer for merchandise costing
$500 that is returned. The correct amount is received within the discount period.

Record the foregoing transactions of the seller in the sequence indicated below.

(a) Sold the merchandise, recognizing the sale and cost of merchandise sold.
(b) Paid the transportation charges.
(c) Issued the credit memorandum.
(d) Received payment from the customer.
ANS:

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(a) Accounts Receivable 3,800

Sales 3,800

Cost of Merchandise Sold 2,000

Merchandise Inventory 2,000

(b) Transportation Out 50

Cash 50

(c) Sales Returns and Allowances 800

Accounts Receivable 800

Merchandise Inventory 500

Cost of Merchandise Sold 500

(d) Cash 2,940

Sales Discounts 60
Accounts Receivable 3,000
DIF: 3 OBJ: 03
6. Based on the information below, journalize the entries for the Seller and the Buyer. Both
use a perpetual inventory system.

(a) Seller sells Buyer on account merchandise costing $200 for $450, terms
2/10, net 30, FOB destination. The transportation charge is $35.
(b) Buyer returns as defective $150 worth of the $500 merchandise received.
The seller's cost is $85.
(c) Buyer pays within the discount period.

ANS:
(a)

Seller Buyer
Accounts Receivable 450 Merchandise Inventory 450
Sales 450 Accounts Payable 450

Cost of Merchandise
Sold 200 NA
Merchandise
Inventory 200

Transportation Out 35 NA
Cash 35

(b)

Sales Returns & Accounts Payable 150

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Allow. 150
Accounts Merchandise 150
Receivable 150 Inventory

Merchandise
Inventory 85
Cost of Merchandise
Sold 85

(c)

Cash 294 Accounts Payable 300

Sales 6 Merchandise 6
Discounts Inventory
Accounts 300 Cash 294
Receivable
DIF: 3 OBJ: 03, 04
7. Details of a purchase invoice and related credit memorandum are summarized as follows:

Invoice: Cost of merchandise listed on purchase invoice $5,500

Prepaid transportation charge added to invoice 100
Terms, FOB shipping point, 1/10, n/eom
Credit memo: Cost of merchandise returned $1,500

Assume that the credit memorandum was received prior to payment and that the invoice is
paid within the discount period. Determine the following:

(a) Amount of the cash discount allowed.

(b) Amount to be paid by the purchaser if the discount is taken.
(c) Cost of the merchandise to the purchase if the discount is NOT taken.
ANS:

(a) $40
(b) $4,060
(c) $4,100
DIF: 1 OBJ: 04
8. Forrester Company purchased $1,200 of merchandise on account and payment was made
within the discount period. The credit terms were 2/10,n/30. Journalize Forrester's purchase
and payment.
ANS:

(a) Merchandise Inventory 1,200

Accounts Payable 1,200

(b) Accounts Payable 1,200

Merchandise Inventory 24

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Cash 1176
DIF: 1 OBJ: 04
9. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point,
1/10, n/30. The seller prepaid transportation costs of $200. Prior to payment, $1,500 of the
merchandise is returned. The correct amount is paid within the discount period.

Record the foregoing transactions of the buyer in the sequence indicated below.

(a) Purchased the merchandise.

(b) Recorded receipt of the credit memorandum for merchandise returned.
(c) Paid the amount owed.

ANS:

(a) Merchandise Inventory 4,900

Accounts Payable 4,900

(b) Accounts Payable 1,500

Merchandise Inventory 1,500

(c) Accounts Payable 3,400

Merchandise Inventory 32
Cash 3,368
DIF: 3 OBJ: 04
10. Details of invoices for purchases of merchandise are as follows:

Returns and
Merchandise Transportation Terms Allowances
a. $900 $35 FOB shipping point, 1/10, $100
n/30
b. 5,600 --- FOB destination, n/30 500
c. 2,500 25 FOB shipping point, 2/10, 200
n/30
d. 8,000 --- FOB destination, 1/10,
n/30

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Determine the amount to be paid in full settlement of each of the invoices, assuming that
credit for returns and allowances was received prior to payment and that all invoices were
paid within the discount period.
ANS:

(a) $827 ($900 - $100 - $8 + 35)

(b) $5,100 ($5,600 - $500)
(c) $2,279 ($2,500 - $200 - $46 + $25)
(d) $7,920 ($8,000 - $80)
DIF: 3 OBJ: 05
11. Journalize the entries to record the following selected transactions:

(a) Sold $800 of merchandise on account, subject to 6% sales tax. The cost of
the merchandise sold was $425.
(b) Paid $836 to the state sales tax department for taxes collected.

ANS:

(a) Accounts Receivable 848

Sales 800
Sales Tax Payable 48

Cost of Merchandise Sold 425

Merchandise Inventory 425

(b) Sales Tax Payable 836

Cash 836
DIF: 1 OBJ: 05
12. Using the letter preceding each account, arrange the following selected accounts in the order
they would normally appear in a chart of accounts of a company that uses a multiple-step
income statement.

(a) Accounts Payable

(b) Accounts Receivable
(c) Merchandise Inventory
(d) Miscellaneous Selling Expense
(e) Sales Discounts
(f) Interest Expense
(g) Income Summary
(h) Misc. Admin. Expense
(i) Transportation Out
(j) Sales Returns and Allowances
ANS:
(b) (c) (a) (g) (j) (e) (i) (d) (h) (f)
DIF: 2 OBJ: 07

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13. Prepare a multiple-step income statement for Goodwin Co. from the following data for the
year ended December 31, 2005.

Sales, $925,000; cost of merchandise sold, $560,000; administrative expenses, $30,000;

interest expense, $10,000; rent revenue, $20,000; sales returns and allowances, $55,000;
selling expenses, $110,000.

ANS:

Goodwin Co.
Income Statement
For the Year Ended December 31, 2005

Revenue from sales:

Sales $925,000
Less: Sales returns and allowances 55,000
Net sales $870,000
Cost of merchandise sold 560,000
Gross profit $310,000
Operating expenses:
Selling expenses $110,000
Administrative expenses 30,000
Total operating expenses 140,000
Income from operations $ 170,000
Other income:
Rent revenue $ 20,000
Other expense:
Interest expense 10,000 10,000
Net income $ 180,000
========
DIF: 3 OBJ: 02
14. Compute the net sales to asset ratio for 2006 for the following two companies and tell which
company is doing better. Use average assets in your computation.

Merchandiser Drake
Partial Balance Sheet
December 31, 2005 and 2006

2005 2006

Total assets $9,000 $11,000

====== =======

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Merchandiser Drake
Partial Income Statement
For the Year Ended December 31, 2006

Net sales $14,000

=======

Merchandiser Wells
Partial Balance Sheet
December 31, 2005 and 2006

2005 2006
Total assets $8,000 $10,000
====== =======

Merchandiser Wells
Partial Income Statement
For the Year Ended December 31, 2006

Net sales $14,000

=======

ANS:

Drake: $14,000/[($9,000 + $11,000)/2] = 1.4

Wells: $14,000/[($8,000 + $10,000)/2] = 1.5555

Drake has $1.40 worth of sales for every dollar of assets.

Wells has $1.56 worth of sales for every dollar of assets.
Wells is more efficient.
DIF: 3 OBJ: 09
15. Selected accounts and amounts appear below. Journalize the closing entry, assuming a
perpetual inventory system.

Merchandise Inventory $ 55,500

Cost of Merchandise Sold 512,500
ANS:

Income Summary 512,500

Cost of Merchandise Sold 512,500
DIF: 1 OBJ: App 2

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