CHAPTER 5

EXERCISES: SET B
E5-1B Mrs. Stephens has prepared the following list of statements about service compa- Answer general questions on
nies and merchandisers. inventory.
1. Measuring net income for a merchandiser is conceptually different from measuring (LO 1)
net income for a service company.
2. For a merchandiser, sales less cost of goods sold is called gross profit.
3. For a merchandiser, the primary source of revenues is the sale of services.
4. Interest is an example of an operating expense.
5. The operating cycle of a merchandiser is the same as that of a service company.
6. In a perpetual inventory system, detailed inventory records of goods on hand are
maintained.
7. In a periodic inventory system, the cost of goods sold is determined only at the end of
the accounting period.
8. A periodic inventory system provides better control over inventories than a perpetual
system.

Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

E5-2B Information related to Grey Co. is presented below. Journalize purchases

1. On April 5, purchased merchandise from Never Company for $25,000 terms 2/10, transactions.
net/30, FOB shipping point. (LO 2)
2. On April 6 paid freight costs of $700 on merchandise purchased from Never.
3. On April 7, purchased equipment on account for $29,000.
4. On April 8, returned damaged merchandise to Never Company and was granted a
$3,000 credit for returned merchandise.
5. On April 15 paid the amount due to Never Company in full.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Grey Co. under
a perpetual inventory system.
(b) Assume that Grey Co. paid the balance due to Never Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.

E5-3B On September 1, Chen Business Supply had an inventory of 40 calculators at a cost Journalize perpetual
of $18 each. The company uses a perpetual inventory system. During September, the fol- inventory entries.
lowing transactions occurred. (LO 2, 3)
Sept. 6 Purchased 70 calculators at $20 each from Markowitz Co. for cash.
9 Paid freight of $70 on calculators purchased from Markowitz Co.
10 Returned 2 calculators to Markowitz Co. for $42 credit (including freight)
because they did not meet specifications.
12 Sold 40 calculators costing $21 (including freight) for $34 each to Karl Book
Store, terms n/30.
14 Granted credit of $34 to Karl Book Store for the return of one calculator that
was not ordered.
20 Sold 20 calculators costing $21 (including freight) for $35 each to Sayed’s Card
Shop, terms n/30.

Instructions
Journalize the September transactions.

E5-4B On June 10, Rothlisberger Company purchased $12,000 of merchandise from Lester Prepare purchase and sale
Company, FOB shipping point, terms 2/10, n/30. Rothlisberger pays the freight costs of entries.
$500 on June 11. Damaged goods totaling $700 are returned to Lester for credit on June 12. (LO 2, 3)
The fair value of these goods is $300. On June 19, Rothlisberger pays Lester Company in
full, less the purchase discount. Both companies use a perpetual inventory system.

Instructions
(a) Prepare separate entries for each transaction on the books of Rothlisberger Company.
(b) Prepare separate entries for each transaction for Lester Company. The merchandise
purchased by Rothlisberger on June 10 had cost Powell $7,200.
2 5 Accounting for Merchandising Operations

Journalize sales transactions. E5-5B Presented below are transactions related to Sweetwood Company.
(LO 3) 1. On December 3, Sweetwood Company sold $400,000 of merchandise to Reyes Co.,
terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $240,000.
2. On December 8, Reyes Co. was granted an allowance of $20,000 for merchandise pur-
chased on December 3.
3. On December 13, Sweetwood Company received the balance due from Reyes Co.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Sweetwood
Company using a perpetual inventory system.
(b) Assume that Sweetwood Company received the balance due from Reyes Co. on Janu-
ary 2 of the following year instead of December 13. Prepare the journal entry to record
the receipt of payment on January 2.

Prepare sales revenues section E5-6B The adjusted trial balance of Grimmett Company shows the following data pertain-
and closing entries. ing to sales at the end of its fiscal year October 31, 2017: Sales Revenue $940,000, Freight-
(LO 4, 5) Out $20,000, Sales Returns and Allowances $31,000, and Sales Discounts $18,000.

Instructions
(a) Prepare the sales revenues section of the income statement.
(b) Prepare separate closing entries for (1) sales, and (2) the contra accounts to sales.

Prepare adjusting and closing E5-7B Trowbridge Company owned by Jerry Uttey, had the following account balances at
entries. year-end: Cost of Goods Sold $90,000; Inventory $23,000; Operating Expenses $44,000;
(LO 4) Sales Revenue $165,000; Sales Discounts $2,000; and Sales Returns and Allowances
$3,000. A physical count of inventory determines that merchandise inventory on hand is
$21,800.

Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries.

Prepare adjusting and closing E5-8B Presented is information related to Garcia Co. for the month of January 2017.
entries.
(LO 4) Ending inventory per Salaries and wages expense $ 95,000
perpetual records $ 43,400 Sales discounts 15,000
Ending inventory actually Sales returns and allowances 19,000
on hand 42,000 Sales revenue 550,000
Cost of goods sold 332,000
Freight-out 11,000
Insurance expense 18,000
Rent expense 29,000

Instructions
(a) Prepare the necessary adjusting entry for inventory.
(b) Prepare the necessary closing entries.

Prepare multiple-step income E5-9B Presented below is information for Oakley Company for the month of March 2017.
statement.
Cost of goods sold $212,000 Rent expense $ 32,000
(LO 5), AP
Freight-out 7,000 Sales discounts 8,000
Insurance expense 6,000 Sales returns and allowances 13,000
Salaries and wages expense 53,000 Sales revenue 360,000

Instructions
(a) Prepare a multiple-step income statement.
(b) Compute the gross profit rate.
 Exercises: Set B 3

E5-10B In its income statement for the year ended December 31, 2017, Krueger Company Prepare multiple-step
reported the following condensed data. and single-step income
Operating expenses $647,000 Interest revenue $ 20,000 statements.
Cost of goods sold 922,000 Loss on disposal of equipment 7,000 (LO 5)
Interest expense 49,000 Net sales 1,650,000

Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.

E5-11B An inexperienced accountant for Praeger Company made the following errors in Prepare correcting entries for
recording merchandising transactions. sales and purchases.
1. A $205 refund to a customer for faulty merchandise was debited to Sales Revenue $205 (LO 2, 3)
and credited to Cash $205.
2. A $300 cash purchase of supplies was debited to Inventory $300 and credited to Accounts
Payable $300.
3. A $130 sales discount was debited to Sales Returns and Allowances.
4. A cash payment of $30 for freight on merchandise purchases was debited to Freight-
Out $300 and credited to Cash $300.

Instructions
Prepare separate correcting entries for each error, assuming that the incorrect entry is not
reversed. (Omit explanations.)

E5-12B In 2017, Hanlon Company had net sales of $1,000,000 and cost of goods sold of Compute various income
$670,000. Operating expenses were $200,000, and interest expense was $10,000. Hanlon measures.
prepares a multiple-step income statement. (LO 5)

Instructions
(a) Compute Hanlon’s gross profit.
(b) Compute the gross profit rate. Why is this rate computed by financial statement users?
(c) What is Hanlon’s income from operations and net income?
(d) If Hanlon prepared a single-step income statement, what amount would it report for
net income?
(e) In what section its classified balance sheet should Hanlon report inventory?

E5-13B Presented below is financial information for two different companies. Compute missing amounts
and compute gross profit rate.
Doty Ramos
Company Company (LO 5)

Sales revenue $210,000 (d)

Sales returns (a) $ 5,000
Net sales 200,000 95,000
Cost of goods sold 120,000 (e)
Gross profit (b) 42,000
Operating expenses 50,000 (f)
Net income (c) 20,000

Instructions
(a) Determine the missing amounts.
(b) Determine the gross profit rates. (Round to one decimal place.)

E5-14B Financial information is presented below for three different companies. Compute missing amounts.

Millikan Jin Choi (LO 5), AN

Cosmetics Grocery Wholesalers
Sales revenue $90,000 $ (e) $127,000
Sales returns and allowances (a) 5,000 12,000
Net sales 88,000 93,000 (i)
Cost of goods sold 56,000 (f) (j)
Gross profit (b) 33,000 31,000
4 5 Accounting for Merchandising Operations

Operating expenses 15,000 (g) 18,000

Income from operations (c) (h) (k)
Other expenses and losses 4,000 7,000 (l)
Net income (d) 6,000 10,000

Instructions
Determine the missing amounts.

Complete worksheet. Using a *E5-15B Presented below are selected accounts for Mann Company as reported in the
perpetual inventory system. worksheet at the end of May 2017.
(LO 6)
Adjusted Income
Accounts Trial Balance Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 11,000
Inventory 93,000
Sales Revenue 550,000
Sales Returns and Allowances 12,000
Sales Discounts 13,000
Cost of Goods Sold 370,000

Instructions
Complete the worksheet by extending amounts reported in the adjusted trial balance to
the appropriate columns in the worksheet. Do not total individual columns.

Prepare a worksheet. Using a *E5-16B The trial balance columns of the worksheet for Lippert Company at June 30,
perpetual inventory system. 2017, are as follows.
(LO 6 )
LIPPERT COMPANY
Worksheet
For the Month Ended June 30, 2017
Trial Balance
Account Titles Debit Credit
Cash $ 4,500
Accounts Receivable 5,000
Inventory 12,000
Accounts Payable $ 2,500
Owner’s Capital 8,000
Sales Revenue 90,000
Cost of Goods Sold 54,000
Operating Expenses 25,000
$100,500 $100,500

Other data:
Operating expenses incurred on account which have not yet been recorded total $2,700.

Instructions
Enter the trial balance on a worksheet and complete the worksheet.

Prepare cost of goods sold *E5-17B The trial balance of Rincon Company at the end of its fiscal year, August 31, 2017,
section. includes these accounts: Inventory $35,000; Purchases $300,000; Sales Revenue $500,000,
(LO 7) Freight-In $8,500; Sales Returns and Allowances $6,000; Freight-Out $5,000, and Pur-
chase Returns and Allowances $4,000. The ending merchandise inventory is $45,000.

Instructions
Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).
Compute various income
statement items. *E5-18B On January 1, 2017, Havenhill Corporation had merchandise inventory of $35,000.
(LO 7) At December 31, 2017, Havenhill had the following account balances.
 Exercises: Set B 5

Freight-in $ 6,000
Purchases 390,000
Purchase discounts 8,000
Purchase returns and allowances 3,000
Sales revenue 650,000
Sales discounts 7,000
Sales returns and allowances 12,000

At December 31, 2017, Havenhill determines that its ending inventory is $41,000.

Instructions
(a) Compute Havenhill’s 2017 gross profit.
(b) Compute Havenhill’s 2017 operating expenses if net income is $120,000 and there are
no nonoperating activities.

*E5-19B Below is a series of cost of goods sold sections for companies M, N, O, and P. Prepare cost of goods sold
section.
M N O P
(LO 7)
Beginning inventory $ 200 $ 100 $ 500 $ (j)
Purchases 2,100 1,100 (g) 11,200
Purchase returns and allowances 50 (d) 150 (k)
Net purchases (a) 1,060 3,100 10,800
Freight-in 70 (e) (h) 610
Cost of goods purchased (b) 1,120 3,250 (l)
Cost of goods available for sale 2,320 1,220 (i) 12,200
Ending inventory 300 (f) 700 1,200
Cost of goods sold (c) 1,090 3,050 11,000

Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.

*E5-20B This information relates to Cedeno Co. Journalize purchase

1. On April 5 purchased merchandise from Fogelberg Company for $30,000, terms 2/10, transactions.
net/30, FOB shipping point. (LO 7)
2. On April 6 paid freight costs of $800 on merchandise purchased from Fogelberg Com-
pany.
3. On April 7 purchased equipment on account for $37,000.
4. On April 8 returned some of April 5 merchandise to Fogelberg Company which cost
$3,000.
5. On April 15 paid the amount due to Fogelberg Company in full.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Cedeno Co.
using a periodic inventory system.
(b) Assume that Cedeno Co. paid the balance due to Fogelberg Company on May 4 instead
of April 15. Prepare the journal entry to record this payment.

*E5-21B Presented below is information related to Cook Co. Journalize purchase

1. On April 5, purchased merchandise from Salas Company for $35,000, terms 2/10, transactions.
net/30, FOB shipping point. (LO 7)
2. On April 6, paid freight costs of $1,000 on merchandise purchased from Salas.
3. On April 7, purchased equipment on account from Lasly Solano Mfg. Co. for $41,000.
4. On April 8, returned damaged merchandise to Salas Company and was granted a $5,000
allowance.
5. On April 15, paid the amount due to Salas Company in full.

Instructions
(a) Prepare the journal entries to record these transactions on the books of Cook Co. using
a periodic inventory system.
(b) Assume that Cook Co. paid the balance due to Salas Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.
6 5 Accounting for Merchandising Operations

Complete worksheet. *E5-22B Presented below are selected accounts for B. Midler Company as reported in the
(LO 6) worksheet at the end of May 2017. Ending inventory is $70,000.

Adjusted Income
Accounts Trial Balance Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,000
Inventory 80,000
Purchases 240,000
Purchase Returns
and Allowances 30,000
Sales Revenue 430,000
Sales Returns and
Allowances 10,000
Sales Discounts 5,000
Rent Expense 42,000

Instructions
Complete the worksheet by extending amounts reported in the adjustment trial balance
to the appropriate columns in the worksheet. The company uses the periodic inventory
system.