Completing the Merchandising Business Accounting Cycle

1. All, except one, could be not found in the post-closing trial balance of a merchandising
entity.
a. Freight in
b. Freight out
c. Merchandise Inventory Beginning
d. Merchandise Inventory End

2. Sales less cost of goods sold is equal to

a. Gross profit
b. Contribution margin
c. Profit
d. No meaningful amount

3. Gross profit will result if

a. Operating expenses are less than net income
b. Net sales are greater than operating expenses
c. Net sales are greater than cost of goods sold
d. Operating expenses are greater than cost of goods sold

4. Closing entries of a merchandising entity would include the following except

a. Crediting Merchandise Inventory Beginning
b. Debiting Purchases Returns and Allowances
c. Debiting Purchase Discounts
d. Crediting Sales Revenue

5. The multi-step income statement for a merchandising company shows each of the following
features except
a. Gross profit
b. Cost of goods sold
c. A sales section
d. An investing activities section

6. In a worksheet using a perpetual inventory system, Inventory is shown in the following

columns:
a. Adjusted trial balance debit and statement of financial position debit.
b. Statement of comprehensive income debit and statement of financial position debit.
c. Statement of comprehensive income credit and statement of financial position debit.
d. Statement of comprehensive income credit and adjusted trial balance debit.

7. In determining cost of goods sold in a periodic system:

a. Purchase discounts are deducted from net purchases
b. Freight out is added to net purchases
c. Purchase returns and allowances are deducted from net purchases
d. Freight in is added to net purchases

8. The steps in the accounting cycle for a merchandising company are the same as those in a
service company except:
 a. An additional adjusting entry for inventory may be needed in a merchandising
company.
b. Closing journal entries are not required for a merchandising company.
c. A post-closing trial balance is not required for a merchandising company.
d. A multi-step income statement is required for merchandising company.

9. Which of the following accounts will normally appear in the ledger of a merchandising
company that uses a perpetual inventory system?
a. Purchases
b. Freight-in
c. Cost of goods sold
d. Purchase discounts

10. Statement 1: Cost of goods sold is a separate account title for companies using the perpetual
inventory system.
Statement 2: Cost of goods sold is derived or computed for companies using periodic
inventory system.
a. True; True
b. False; True
c. False; False
d. True; False

11. If the beginning inventory is P60,000, cost of goods purchased is P380,000, and ending
inventory is P50,000, cost of goods sold is:
a. P390,000
b. P370,000
c. P330,000
d. P420,000

12. When goods purchased are for resale by a company using a periodic inventory system:
a. Purchases on account are debited to inventory
b. Purchases on account are debited to purchases
c. Purchase returns are debited to purchase returns and allowances
d. Freight cost are debited to purchases

13. Statement 1: Journal entries subject to reversals in the next accounting period would be the
same for companies using the periodic and perpetual inventory system.
Statement 2: Journal entries subject to reversals would be dated the same for companies
using the periodic and perpetual inventory system.
a. True; True
b. False; True
c. False; False
d. True; False
Use the following information for questions 14-16.

Financial information is presented below:

Operating Expenses P45,000
Sales Returns and Allowances 13,000
Sales Discounts 6,000
Sales 160,000
Cost of Goods Sold 77,000

14. The amount of net sales on the statement of comprehensive income would be
a. P154,000
b. P141,000
c. P160,000
d. P166,000

15. Gross profit would be

a. P77,000
b. P70,000
c. P64,000
d. P83,000

16. The gross profit rate would be

a. 0.454
b. 0.546
c. 0.500
d. 0.538

17. Which of the following would not be classified as a contra account?

a. Sales
b. Sales Returns and Allowances
c. Purchase Returns and Allowances
d. Sales Discounts

18. In preparing closing entries for a merchandising company, the Income Summary account
will be credited for the balance of
a. Sales
b. Merchandise Inventory
c. Sales Discounts
d. Freight Out

19. A merchandising company using a perpetual system may record an adjusting entry by
a. Debiting Income Summary.
b. Crediting Income Summary.
c. Debiting Cost of Goods Sold.
d. Debiting Sales.

20. The operating expense section of the statement of comprehensive income for a wholesaler
would not include
a. Freight Out
b. Utilities Expense
 c. Cost of Goods Sold
d. Insurance Expense

21. Which of the following is not true statement about a multi-step income statement?
a. Operating expenses are often classified as selling and administrative expenses.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.

22. Which one of the following is shown on a multiple-step but not on a single-step income
statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold
***
Problems

Problem 1
Big Box Store is located in Manila. During the past several years, net income has been declining
because of suburban shopping centers. At the end of the company’s fiscal year on November 30,
2020, the following accounts appeared in two of its trial balances.

Unadjusted Adjusted Unadjusted Adjusted

Accounts Payable P25,200 25,200 Notes Payable P37,000 P37,000
Accounts Receivable 30,500 30,500 Owner’s Capital 101,700 101,700
Accum. Dep – Equip 34,000 45,000 Owner’s Drawings 10,000 10,000
Cash 26,000 26,000 Prepaid Insurance 10,500 3,500
Cost of goods sold 518,000 518,000 Property Tax Expense 2,500
Freight-Out 6,500 6,500 Property Taxes Payable 2,500
Equipment 146,000 146,000 Rent Expense 15,000 15,000
Depreciation Expense 11,000 Salaries Expense 96,000 96,000
Insurance Expense 7,000 Sales 720,000 720,000
Interest Expense 6,400 6,400 Commission Expense 6,500 11,000
Interest Revenue 2,000 2,000 Commission Payable 4,500
Inventory 32,000 32,000 Sales Returns and Allow 8,000 8,000
Utilities Expense 8,500 8,500

Required:
1. Prepare a multi-step statement of comprehensive income, statement of changes in owner’s
equity and a classified statement of financial position. Notes payable are due 2023.
2. Journalize adjusting entries
3. Journalize the closing entries that are necessary.
Problem 2
You have been engaged to prepare the financial statements for AMV Auto Supply at the close of its
annual calendar period on December 31, 2020. Its general ledger shows the following balances

Cash on hand and in bank P 423,000 Sales P1,004,000

Accounts Receivable 64,000 Sales Discount 16,000
Supplies Inventory 3,000 Purchases 378,000
Merchandise Inventory, Jan 1 165,000 Purchase Discount 4,000
Prepaid Interest 6,000 Freight In 1,000
Store Equipment 144,000 Freight Out 13,000
Office Furniture and Fixtures 50,000 Office Salaries Expense 17,000
Accounts Payable 8,000 Sales Salaries Expense 82,000
Loans Payable 100,000 Utilities Expense 90,000
AMV, Capital 470,000 Rent Expense 108,000
AMV, Drawings 26,000

Additional data for adjustment:

1. Merchandise on hand on December 31, 2020 was 50% of the total available for sale during
the period.
2. Supplies used up amounted to P2,000 of which P1,000 was for office use.
3. The estimated life of store equipment is 10 years, P60,000 of which represented AMV’s
investment on January 1 of the current year with the balance acquired six months after.
4. The office furniture & fixtures has a depreciation rate of 20% per year.
5. The loan from the bank carries an interest rate of 18% dated December 11, 2020.
6. Rent expense represents one and a half year’s rent paid on January 1, 2020. One fourth of
the space was for office use.
7. Unpaid utility bills amounted to P4,000. One fourth was for office use.

Required:
1. Prepare a 10-column worksheet.
2. Prepare a statement of comprehensive income using the function of expense method.
3. Prepare a statement of changes in equity
4. Prepare a statement of financial position.
5. Prepare closing entries.
6. Prepare post-closing trial balance.
7. Prepare reversing entries.
Problem 3
Based on the trial balance and adjusted trial balance of Water Shakers Store:
Based on the trial balance and adjusted trial balance of Water Shakers Store:

1. Reconstruct the adjusting entries that were prepared by the accountant.

2. Compute for gross profit and net profit.

Account Titles Trial Balance Adjusted Trial Balance

Debit Credit Debit Credit
Cash 20,025 20,025
Accounts Receivable 14,000 14,000
Allowance for Bad Debts 1,500 2,000
Supplies 1,900 500
Merchandise Inventory, Jan 1 25,300 25,300
Prepaid Interest 600 500
Prepaid Rent 4,267
Store Equipment 15,000 15,000
Accumulated Depreciation 1,500 2,500
Accounts Payable 7,500 7,500
Salaries Payable 450
Utilities Payable 2,520
Loans Payable 10,000 10,000
Laurel, Capital 67,625 67,625
Laurel, Drawings 3,500 3,500
Sales 91,500 91,500
Sales Discount 1,800 1,800
Purchases 70,000 70,000
Purchase discounts 1,880 1,880
Bad Debts 500
Depreciation Expense 1,000
Supplies Expense 1,400
Salaries Expense 11,600 12,050
Utilities Expense 4,980 7,500
Rent Expense 12,800 8,533
Interest Expense 100
Totals ** ** ** ** Expression
Expressio Expression Expression is faulty **
n is faulty is faulty ** is faulty **
**
Problem 4
The bookkeeper of Alfonso’s Toyland presented the following ledger accounts and their balances as
of June 30, 2020, end of the fiscal period:

Cash in bank P 487,288 Alfonso, Capital P 521,900

Cash on hand 75,200 Alfonso, Drawing 30,000
Accounts Receivable 112,000 Sales 583,200
Allow for Bad Debts 4,000 Sales Returns & Allow 5,020
Notes Receivable 4,800 Sales Discount 2,880
Merchandise Inv., July 1, 2019 89,500 Purchases 242,000
Prepaid Store Insurance 6,300 Freight In 6,000
Store Furniture & Fixtures 16,000 Purchase Returns and Allow 3,000
A/D Store Fur & Fixtures 500 Purchase Discount 2,000
Office Furniture & Fixtures 15,000 Sales Salaries Expense 60,000
A/D Office Fur & Fixtures 900 Office Salaries Expense 33,400
Accounts Payable 54,000 Rent Expense 96,800
Notes Payable 180,000 Taxes Expense 12,000
Unearned Commission 2,400 Utilities Expense 42,400
Gov’t Remittances Payables 1,312 Interest Expense 600
Interest Income 3,000
Gov’t Remittances Expense 10,024
Advertising Expense 9,000

Additional data needed for adjustments:

a. Increase the allowance for doubtful accounts to 5% of accounts receivable.
b. The notes received from customers consists of:
 30-day, 9% for P4,000 dated June 10, 2020
 60-day, P800 note dated June 5, 2020
c. The business has paid on January 1, 2020 insurance premium for a two-year policy effective
on that date.
d. The store furniture and fixtures are depreciated over a useful life of 5 years. Of those on
hand as of June 30, P6,000 were acquired only on June 1, 2020. The office furniture & fixture
are to be depreciated at a rate of 20% per annum.
e. Sales salaries of P550 has accrued as of June 30.
f. On May 1, 2020, the business paid for a three-month advertising contract for P900.
g. The notes payable represents a 60-day, 18% noted dated June 10, 2020 for which no
interest has yet been paid.
h. The business received commission of P2,400 but only one-third of this has been earned by
the company.
i. Merchandise unsold, per physical count of June 30, 2020, amounted to three-fourth of the
beginning inventory.
j. Accrue 3% tax on net sales for December amounting to P47,900.

Required:
1. Prepare a 10-column worksheet.
2. Prepare a statement of comprehensive income and a statement of financial position. Three-
fourth of rent and utilities be allocated to selling expenses.
3. Make the necessary closing entries.
4. Prepare post-closing trial balance.
Problem 5
The following information is available for Siler Company:

Debit Credit
Siler, Capital P50,000
Siler, Drawing P32,000
Sales 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 347,000
Freight Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Store Salaries Expense 45,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 25,000

Required:
Using the above information, prepare the closing entries for Siler Company.