Chapter 7

Inventory: Merchandising Transactions

learning OBJECTIVES
LO 1 Define a merchandising business LO 7 Identify inventory controls
LO 2 Differentiate between the perpetual and the periodic Appendix
inventory systems
LO 8 Record journal entries under the periodic inventory
LO 3 Record journal entries under the perpetual system
inventory system
LO 9 Calculate cost of goods sold under the periodic
LO 4 Calculate gross profit and gross profit margin
inventory system
percentages
LO 5 Prepare the income statement under the perpetual
LO 10 Prepare a multi-step income statement under the
inventory system periodic inventory system

LO 6 Prepare other adjustments and closing entries for LO 11 Prepare closing entries for a merchandising business
a merchandising business under the perpetual under the periodic inventory system
inventory system

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Assessment Questions

AS-1 LO 1

What is a merchandiser?
A merchandiser is any business that buys and sells products, called merchandise or goods, for the purpose of
making a profit.

AS-2 LO 1

Chai Canine Care operates several stores nationwide. They purchase one brand of pet food from Krong Company,
who purchases this product line direct from the factory where it is produced by Mulo Pet Food. Explain which
company (Chai Canine Care, Krong Company or Mulo Pet Food) acts as a manufacturer, wholesaler and retailer.
Mulo Pet Food is the manufacturer because they produce (or manufacture) products. They sell to Krong
Company, who is considered as a wholesaler as they sell to many different retailers like Chai Canine Care.

AS-3 LO 1

What is merchandise inventory?

Merchandise inventory is a collection of physical goods that a company has purchased or manufactured to sell
to its customers.

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AS-4 LO 1

What does a merchandiser’s operating cycle usually involve?

A merchandiser’s operating cycle generally involves using cash to buy merchandise inventory, selling the
inventory to customers, and collecting cash from customers.

AS-5 LO 1

What is COGS and what type of account is it?

COGS stands for cost of goods sold. It is an expense account that tracks the cost of inventory that has been sold
during a particular period.

AS-6 LO 1

How is gross profit calculated?

Gross Profit = Sales Revenue – Cost of Goods Sold

AS-7 LO 2

In a perpetual inventory system, how often are inventory levels updated?

A perpetual inventory system updates inventory levels after every purchase and sale.

AS-8 LO 2

In a periodic inventory system, how often are inventory levels updated?

A periodic inventory system only updates the inventory and cost of goods sold once the items on hand are
physically counted.

AS-9 LO 2

What is the benefit to a company of using a perpetual inventory system?

Managing inventory is an important part of many businesses. If there is too much inventory, capital is
unnecessarily tied up that could be used more productively in other areas. If there is too little inventory (and
the business is unaware of the inventory level) and a customer places a large order, the order cannot be fulfilled.
This can result in a loss in market credibility. A perpetual inventory system keeps track of how much inventory
there is on hand because it maintains a continuous record of the changes to inventory.

AS-10 LO 3

What are some reasons purchase returns occur?

Goods often need to be returned for reasons such as incorrect products, over-shipments and inferior product
quality.

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AS-11 LO 3

When does a purchase allowance occur?

Purchase allowances occur when the buyer agrees to keep undesirable goods at a reduced cost.

AS-12 LO 3

Indicate a possible incentive for a seller to give a sales discount.

Sellers may give sales discounts to encourage customers to purchase more and to encourage early payments.

AS-13 LO 3

What is a trade discount?

A trade discount is the discount from the manufacturer’s suggested retail price that is usually given by
manufacturers to merchandisers to resell their products.

AS-14 LO 3

If a cash discount term is written as 3/10, n/30, what does this mean?
A 3% discount is applied if paid within 10 days; otherwise, the full amount is due within 30 days.

AS-15 LO 3

Explain the difference between a sales allowance and a sales discount.

A sales allowance occurs when a reduction to the original selling price is given to the customer for keeping
undesirable goods (e.g. goods sold were damaged during shipping and the customer agrees to hold on to
the goods). A sales discount is an offer made to a customer if certain criteria are met. For example, if an early
payment is made or a specified number of goods are bought in one purchase.

AS-16 LO 3

What are the two possible Freight on Board (FOB) points?

FOB shipping and FOB destination

AS-17 LO 3

What does FOB shipping point indicate?

FOB shipping point indicates that ownership of items being purchased changes when the goods leave the
seller’s place of business. The buyer pays for shipping.

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AS-18 LO 3

What does FOB destination indicate?

FOB destination indicates that ownership of items being purchased changes when the goods arrive at the
buyer’s place of business. The seller pays for shipping.

AS-19 LO 3

What type of account is sales returns and allowances, and what is it used for?
Sales returns and allowances is a contra-revenue account. It is used to track the amount of sales returns or
allowances given to customers.

AS-20 LO 3

In a perpetual inventory system, describe the transaction(s) required to record the sale of merchandise inventory.
Two transactions are required. One is to record the sale and the other is to record the removal of inventory.

AS-21 LO 3

What is inventory shrinkage? How is it journalized under the perpetual inventory system?
When the amount of merchandise inventory in the accounting records exceeds the amount of inventory based
on a physical count, the difference is referred to as inventory shrinkage. It is journalized by debiting cost of
goods sold and crediting merchandise inventory for the difference.

AS-22 LO 4

What is the formula for gross profit margin?

Gross Profit Margin (%) = Gross Profit ÷ Net Sales

AS-23 LO 5

Define operating expenses.

Operating expenses are the expenses incurred in promoting and selling products or services and in running the
operations that make and sell the products or services.

AS-24 LO 5

What is one difference between a single-step income statement and a multi-step income statement?
A single-step income statement groups all revenue accounts together and lists all expenses together without
any further categorizations. A multi-step income statement breaks down revenues and expenses further to
show subtotals such as gross profit, operating expenses and income from operations.

AS-25 LO 5

What are selling expenses? What are some examples of selling expenses?
Selling expenses are the expenses related to selling merchandise inventory. Examples of selling expenses include
salaries of salespeople, rent for retail space and advertising.

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AS-26 LO 5

What are administrative expenses? What are some examples of administrative expenses?
Administrative expenses are expenses related to running the business, which are not directly tied to selling
inventory. Examples of administrative expenses include salaries of administrative personnel, office supplies and
depreciation of office equipment.

AS-27 LO 5

In a typical multi-step income statement, which category do items such as interest revenue and loss from a
lawsuit fall under?
Items such as interest revenue and loss from a lawsuit fall under a separate category called other income and
expenses.

AS-28 LO 5

What is the difference between the income statement under a periodic inventory system and the income
statement under a perpetual inventory system?
An income statement under the periodic inventory system shows a multiple-line calculation of cost of goods
sold. An income statement under the perpetual inventory system presents cost of goods sold as a single-line
item.

AS-29 LO 6

Explain why the inventory account is not debited or credited as a part of the closing entries when a perpetual
inventory system is used.
Since the inventory account is constantly being updated to account for the cost of purchases and goods sold,
the ending balance should reflect what is on hand at the end of the accounting period.

AS-30 LO 7

Provide an example of how an accountant can manage inventory to ensure the economical and efficient use of
resources.
An accountant can calculate financial ratios to determine if there is too much or too little inventory on hand.
An accountant can also regularly check the physical condition of the inventory to make sure that damaged or
expired inventory is sold or disposed of in a timely fashion so that valuable storage space can be maximized.

AS-31 LO 7

List two safety measures that can be taken to avoid inventory losses through theft.
To avoid theft, inventory facilities are locked up after closing. The more valuable the inventory, the more
elaborate the security measures needed to protect it. Safety measures can include anything from fences and
guard dogs to alarm systems, security guards, security cameras, or even hiring an inventory custodian who is
charged specifically with protecting the inventory.

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AS-32 LO 8

In a periodic inventory system, describe the transaction(s) required to record the sale of merchandise inventory.
One transaction is required to record the sale. Merchandise inventory is not updated after every sale.

AS-33 LO 9

Explain how cost of goods available for sale is calculated in a periodic inventory system.
Cost of goods available for sale in a periodic inventory system is calculated by adding the beginning inventory
and net purchases together. It shows the cost of the units in merchandise inventory.

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Application Questions Group A

AP-1A LO 2

Suppose that on March 15, 2019, both Company A and Company B sold inventory with a cost of $40,000. The
updated balance of merchandise inventory as at March 1 for both companies was $90,000. Company A uses the
perpetual inventory system. Company B uses the periodic inventory system and performs an inventory count
at the end of each month. What is the value of merchandise inventory on record as at March 15 for each of
Company A and Company B?
The value of merchandise inventory for Company A as at March 15 is $50,000. The value of merchandise
inventory for Company B as at March 15 is $90,000.

AP-2A LO 3

Super Shirt Wholesalers spent $10,000 to purchase 1,000 shirts from a shirt manufacturer as inventory. Hip Top
Retailers paid $15,000 for the 1,000 shirts from Super Shirt Wholesalers on March 15, 2019. Payment is due on
April 15. Both companies use the perpetual inventory system.

Required
a) Prepare the journal entry for Hip Top Retailers on March 15.
Date Account Title and Explanation Debit Credit
2019
Mar 15 Merchandise Inventory 15,000
Accounts Payable 15,000
Purchased inventory

b) Prepare the journal entries for Super Shirt Wholesalers on March 15.
Date Account Title and Explanation Debit Credit
2019
Mar 15 Accounts Receivable 15,000
Sales Revenue 15,000
Sold inventory on account

Mar 15 Cost of Goods Sold 10,000

Merchandise Inventory 10,000
Cost of goods sold for above sale

AP-3A LO 3

JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on May 10, 2019. On
May 11, JB’s bookkeeper was informed that $200 worth of tomatoes was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
May 11 Accounts Payable 200
Merchandise Inventory 200
Record the purchase return

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AP-4A LO 3

On January 12, 2019, Corner-Mart received a shipment of T-shirts from Promo Novelties for an event. The
invoice amounted to $5,000 and was recorded in the accounting system. Soon after the delivery was made,
the marketing manager discovered that the logo was printed incorrectly. The goods were returned to Promo
Novelties on January 31. Prepare the journal entry for Corner-Mart to record the return using the perpetual
inventory system.

Date Account Title and Explanation Debit Credit

2019
Jan 31 Accounts Payable 5,000
Merchandise Inventory 5,000
Record the purchase return

AP-5A LO 3

a) Beds Unlimited received a shipment of bed sheets on April 3, 2019. The value of the bed sheets was $8,000,
and the sheets were shipped FOB shipping point. Freight charges came to $100. Prepare the journal entry to
record the receipt of goods by Beds Unlimited, assuming payment will be made in May, using the perpetual
inventory system.

Date Account Title and Explanation Debit Credit

2019
Apr 3 Merchandise Inventory 8,100
Accounts Payable 8,100
Purchased inventory

b) The bed sheets delivered to Beds Unlimited were the wrong material. After some negotiation, the
manager agreed to keep the products with a 10% allowance. Prepare the entry on April 10, 2019, to
record the purchase allowance. (Assume all bed sheets were still in inventory.) Allowances are not
granted on freight charges.

Date Account Title and Explanation Debit Credit

2019
Apr 10 Accounts Payable 800
Merchandise Inventory 800
Purchase allowance

c) Journalize the transaction for Beds Unlimited when the payment is made on May 3, 2019.

Date Account Title and Explanation Debit Credit

2019
May 3 Accounts Payable 7,300
Cash 7,300
Payment for the goods

AP-6A LO 3

The following is written on an invoice relating to goods that were purchased: 5/10, n/30. What does it mean?
It means a 5% discount is applied if the invoice is paid within 10 days. Otherwise, the full amount owing is due
in 30 days.

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AP-7A LO 3

Shoe Retailers uses the perpetual inventory system. It purchased $10,000 worth of shoes from Runner Wear
Supplies on March 1, 2019. Runner Wear’s invoice shows terms of 2/10, n/30.

Required
a) What is the latest date Shoe Retailers can pay the bill and apply the discount?
March 11 is the latest date to take advantage of the discount.

b) As bookkeeper for Shoe Retailers, prepare the journal entry to record the March 1 purchase.

Date Account Title and Explanation Debit Credit

2019
Mar 1 Merchandise Inventory 10,000
Accounts Payable 10,000
Record the purchase

c) Journalize the transaction for payment of the invoice, assuming the payment was made on March 5.

Date Account Title and Explanation Debit Credit

2019
Mar 5 Accounts Payable 10,000
Cash 9,800
Merchandise Inventory 200
Paid invoice owing less discount received

d) Journalize the transaction for payment of the invoice, assuming the payment was made on April 3.

Date Account Title and Explanation Debit Credit

2019
Apr 3 Accounts Payable 10,000
Cash 10,000
Record the payment to Runner Wear Supplies

AP-8A LO 3

On May 1, 2019, Food Wholesalers purchased $3,000 worth of dried fruit inventory plus $100 for freight charges
on account. On May 15, Food Wholesalers sold all of the dried fruit inventory to Retail Grocers for $4,000 on
account. As the bookkeeper for Food Wholesalers, journalize the transactions using the perpetual inventory
system.

Date Account Title and Explanation Debit Credit

2019
May 1 Merchandise Inventory 3,100
Accounts Payable 3,100
Purchased inventory on account

May 15 Accounts Receivable 4,000

Sales Revenue 4,000
Made sales on account

May 15 Cost of Goods Sold 3,100

Merchandise Inventory 3,100
Record cost of goods sold

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AP-9A LO 3

Johnson is a maker of cotton garments that are sold to various retailers. On September 1, 2019, Craig’s Retailers
sent back a shipment of goods that were unsatisfactory. The goods had a cost of $4,620 and were sold on
account for $7,700. Johnson returned the goods to inventory. Johnson uses a perpetual inventory system.

Required
a) As Johnson’s bookkeeper, prepare the journal entries to reflect the return.

Date Account Title and Explanation Debit Credit

2019
Sep 1 Sales Returns & Allowances 7,700
Accounts Receivable 7,700
Record sales returns for unsatisfactory products

Sep 1 Merchandise Inventory 4,620

Cost of Goods Sold 4,620
Restock inventory return

b) Journalize the entry if Craig’s only returned half of the shipment.

Date Account Title and Explanation Debit Credit

2019
Sep 1 Sales Returns & Allowances 3,850
Accounts Receivable 3,850
Record sales returns for unsatisfactory products

Sep 1 Merchandise Inventory 2,310

Cost of Goods Sold 2,310
Restock inventory return

AP-10A LO 3

The following information was presented by the bookkeeper for Switch Company for the month of January 2019.

Jan 5 Purchased merchandise for $12,000 on credit from Outdoor Pursuits, terms 1/10, n/30, FOB shipping point
Jan 5 Switch Company paid $25 to have the merchandise purchased from Outdoor Pursuits delivered
Jan 12 Purchased merchandise for $7,000 on credit from Cambleback, terms 2/10, n/30
Jan 14 Returned $300 of the merchandise purchased on January 5 from Outdoor Pursuits as it was defective
Jan 15 Paid for merchandise purchased from Outdoor Pursuits on January 5
Jan 26 Paid for merchandise purchased from Cambleback on January 12

Journalize the above transactions assuming that Switch Company uses a perpetual inventory system. Round all
calculations to the nearest dollar.

Date Account Title and Explanation Debit Credit

2019
Jan 5 Merchandise Inventory 12,000
Accounts Payable 12,000
Purchased inventory on account

Jan 5 Merchandise Inventory 25

Cash 25
Paid shipping costs

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Date Account Title and Explanation Debit Credit

2019
Jan 12 Merchandise Inventory 7,000
Accounts Payable 7,000
Purchased inventory on account

Jan 14 Accounts Payable 300

Merchandise Inventory 300
Returned defective goods

Jan 15 Accounts Payable 11,700

Merchandise Inventory 117
Cash 11,583
Paid supplier less discount

Jan 26 Accounts Payable 7,000

Cash 7,000
Paid supplier

AP-11A LO 3

The following transactions took place at Science Supplies during May 2019.

May 14 Sold merchandise on credit to Elements for $10,000, terms 2/10, n/30, FOB destination; cost of
goods was $8,500
May 14 Science Supplies paid $50 to ship the goods to Elements
May 16 Elements returned $500 (sales price) worth of merchandise purchased on May 14; cost of goods was
$375; goods were returned to inventory
May 17 Received payment from Elements for the May 14 sale
May 18 Sold merchandise on credit to Litmus for $6,000, terms 2/10, n/30; cost of goods was $3,600
May 26 Litmus kept the merchandise purchased on May 18; however, some of it was defective so Science
Supplies agreed to a 50% allowance on the total sale
May 31 Received payment from Litmus for the May 18 sale
Journalize the above transactions assuming that Science Supplies uses a perpetual inventory system. Round all
calculations to the nearest dollar.

Date Account Title and Explanation Debit Credit

2019
May 14 Accounts Receivable 10,000
Sales Revenue 10,000
Record sales on account

May 14 Cost of Goods Sold 8,500

Merchandise Inventory 8,500
Record cost of sales

May 14 Shipping Expense 50

Cash 50
Paid shipping costs

May 16 Sales Returns & Allowances 500

Accounts Receivable 500
Record sales return on account

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Date Account Title and Explanation Debit Credit

May 16 Merchandise Inventory 375
Cost of Goods Sold 375
Record inventory from sales return

May 17 Cash 9,310

Sales Discount 190
Accounts Receivable 9,500
Received payment from customer less discount

May 18 Accounts Receivable 6,000

Sales Revenue 6,000
Record sales on account

May 18 Cost of Goods Sold 3,600

Merchandise Inventory 3,600
Record sales on account and cost of sales

May 26 Sales Returns & Allowances 3,000

Accounts Receivable 3,000
Record sales allowance on account

May 31 Cash 3,000

Accounts Receivable 3,000
Received payment from customer

AP-12A LO 3

Shirley’s Wraps operates as a sandwich and wrap shop. Its customers can pay by cash, debit or credit card. For
each debit transaction, Shirley pays $0.20. For credit cards, she pays 2% of the total of credit card transactions.
On May 13, 2019, Shirley compiled the following summary for the work day.

Transaction Type Total Number of

Transactions
Cash $425 52
Debit Card 327 43
Credit Card 0 0
Required

a) Calculate the total debit/credit card expense for May 13.

Number of debit transactions × amount per transaction = 43 transactions × $0.20 = $8.60

b) Record the journal entry for the day’s sales. (Ignore COGS.)

Date Account Title and Explanation Debit Credit

2019
May 13 Debit/Credit Card Expense 8.60
Cash 743.40
Sales Revenue 752.00
To record sales

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AP-13A LO 3

Tom’s Bistro operates as a restaurant. Its customers can pay by cash, debit or credit card. For each debit
transaction, Tom pays $0.15. For credit cards, he pays 3% of the total of credit card transactions. On March 22,
2019, Tom compiled the following summary for the work day.

Transaction Type Total Number of

Transactions
Cash $2,203 49
Debit Card 0 0
Credit Card 3,731 83

Required
a) Calculate the total debit/credit card expense for March 22.
Total credit card amount × percentage of total = $3,731 × 0.03 = $111.93

b) Record the journal entry for the day’s sales. (Ignore COGS.)

Date Account Title and Explanation Debit Credit

2019
Mar 22 Debit/Credit Card Expense 111.93
Cash 5,822.07
Sales Revenue 5,934.00
To record sales

AP-14A LO 3

Leslie and Ben run a dry cleaners together, called Pawny Cleaners. Their customers can pay by cash, debit or
credit card. For each debit transaction, they pay $0.35. For credit cards, they pay 1.5% of the total of credit card
transactions. On August 20, 2019, Ben compiled the following summary for the work day.

Transaction Type Total Number of

Transactions
Cash $741 35
Debit Card 4,376 120
Credit Card 2,883 68

Required
a) Calculate the total debit/credit card expense for August 20.
Number of debit transactions × amount per transaction = 120 transactions × $0.35 = $42.00
Total credit card amount × percentage of total = $2,883 × 0.015 = $43.25
Total debit/credit card expense = $42 + 43.25 = $85.25

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b) Record the journal entry for the day’s sales. (Ignore COGS.)

Date Account Title and Explanation Debit Credit

2019
Aug 20 Debit/Credit Card Expense 85.25
Cash 7,914.75
Sales Revenue 8,000.00
To record sales

AP-15A LO 3

Assume you are the bookkeeper for Moira’s Wholesalers, a distributor of kitchen furniture. Your sales manager
informed you that Ted’s Retailers is unhappy with the quality of some tables delivered on August 12, 2019,
and will be shipping back all the goods. The original invoice amounted to $1,500 and the goods cost Moira’s
$1,000. Using a perpetual inventory system, complete the journal entries for Moira’s Wholesalers for each of the
following independent scenarios.

Required
a) Rather than taking back the tables, your sales manager allows Ted’s Retailers a 10% discount if it agrees
to keep the goods. Record Ted’s payment in settlement of the invoice on September 12 assuming the
allowance is not recorded until the settlement date.

Date Account Title and Explanation Debit Credit

2019
Sep 12 Cash 1,350
Sales Returns & Allowances 150
Accounts Receivable 1,500
Collected outstanding accounts receivable

b) Suppose that Ted’s shipped back all the goods on August 15 and the inventory was put back on the
sales floor. Journalize the transactions.

Date Account Title and Explanation Debit Credit

2019
Aug 15 Sales Returns & Allowances 1,500
Accounts Receivable 1,500
Record sales returns from Ted’s Retailers

Aug 15 Merchandise Inventory 1,000

Cost of Goods Sold 1,000
Restock inventory returned

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c) Suppose that Ted’s shipped back half the goods on August 15 and kept the other half with a 10%
allowance. Journalize the transactions that took place on August 15.

Date Account Title and Explanation Debit Credit

2019
Aug 15 Sales Returns & Allowances 825
Accounts Receivable 825
Record sales returns from Ted’s Retailers

Aug 15 Merchandise Inventory 500

Cost of Goods Sold 500
Restock inventory returned

d) Continue from part b). Since all the goods were sold and returned in the same period, what happened
to Moira’s gross profit? (Disregard the additional shipping and administration costs.) Explain your answer.

Moira’s gross profit increased by $500 when goods were sold and decreased by the same amount when
goods were returned.

AP-16A LO 3 4

The following information pertains to Wicked Kitchen Supplies for March 2019.

Mar 1 Purchased merchandise for $16,000 on credit from Hotel Supplies, terms 1/20, n/30, FOB shipping point
Mar 1 Wicked paid $35 cash to have the merchandise from Hotel Supplies delivered
Mar 5 Sold merchandise on credit to Four Boars Restaurant for $8,000, terms 2/10, n/30; cost of goods was
$5,500
Mar 5 Paid $25 cash to ship the goods to Four Boars Restaurant (FOB destination)
Mar 8 Four Boars returned $1,900 (sales price) worth of merchandise purchased on March 5; cost of goods
was $800; there was nothing wrong with the merchandise and it will be resold
Mar 12 Returned $500 of the merchandise purchased on March 1 as it was the wrong design
Mar 15 Received payment from Four Boars Restaurant for the March 5 sale
Mar 15 Paid for merchandise purchased from Hotel Supplies on March 1
Mar 23 Sold merchandise on credit to Black Kettle Kitchen for $4,000, terms 2/10, n/30; cost of goods was $2,000
Mar 26 Black Kettle Kitchen returned $200 (sales price) of merchandise purchased on March 23; cost of goods
was $50. Merchandise was returned to inventory
Mar 31 Received payment from Black Kettle Kitchen for the March 23 sale
Journalize the above transactions assuming that Wicked Kitchen Supplies uses a perpetual inventory system.
Round all calculations to the nearest whole dollar.

Date Account Title and Explanation Debit Credit

2019
Mar 1 Merchandise Inventory 16,000
Accounts Payable 16,000
Purchased inventory on account

Mar 1 Merchandise Inventory 35

Cash 35
Paid shipping costs

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Date Account Title and Explanation Debit Credit

Mar 5 Accounts Receivable 8,000
Sales Revenue 8,000
Sold inventory on account

Mar 5 Cost of Goods Sold 5,500

Merchandise Inventory 5,500
Record cost of sale

Mar 5 Shipping Expense 25

Cash 25
Paid shipping costs

Mar 8 Sales Returns & Allowances 1,900

Accounts Receivable 1,900
Record sales return on account

Mar 8 Merchandise Inventory 800

Cost of Goods Sold 800
Record inventory from the return

Mar 12 Accounts Payable 500

Merchandise Inventory 500
Returned incorrect goods

Mar 15 Cash 5,978

Sales Discounts 122
Accounts Receivable 6,100
Received payment from customer less discount

Mar 15 Accounts Payable 15,500

Merchandise Inventory 155
Cash 15,345
Paid supplier less discount

Mar 23 Accounts Receivable 4,000

Sales Revenue 4,000
Record sales on account

Mar 23 Cost of Goods Sold 2,000

Merchandise Inventory 2,000
Record cost of sale

Mar 26 Sales Returns & Allowances 200

Accounts Receivable 200
Record sales return on account

Mar 26 Merchandise Inventory 50

Cost of Goods Sold 50
Record inventory from the return

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Date Account Title and Explanation Debit Credit

Mar 31 Cash 3,724
Sales Discounts 76
Accounts Receivable 3,800
Received payment from customer less discount

Analysis
Calculate Wicked Kitchen Supplies’ gross profit for the month.
Gross Profit = Net Sales – Cost of Goods Sold
Net Sales = Sales Revenue – Sales Returns and Allowances – Sales Discounts
= ($8,000 + $4,000) – ($1900 + $200) – ($122 + $76)
= $9,702
Cost of Goods Sold = $5,500 – $800 + $2,000 – $50
= $6,650
Gross Profit = $9,702 – $6,650
= $3,052

AP-17A LO 4

If net sales is $300,000 and cost of goods sold is $180,000, what is the gross profit and gross margin percentage?
Gross Profit = Net Sales – Cost of Goods Sold
= $300,000 – $180,000
= $120,000

Gross Profit
Gross Margin Percentage (%) =
Net Sales
$120,000
=
$300,000
= 0.40 or 40%

AP-18A LO 4

If a computer company bought computers for $10,000 and sold them for $14,000, how much would the gross
profit be on the entire shipment if the business took advantage of the early cash payment terms of 2/15, n/30
from its supplier?
Gross Profit = Net Sales − Cost of Goods Sold
= $14,000 − ($10,000 × 98%)
= $14,000 − $9,800
= $4,200

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AP-19A LO 5

The following information is for Surplus Direct for the year ended September 30, 2019.

Cost of Goods Sold $26,000

Interest Expense 780
Interest Revenue 550
Maintenance Expense 2,000
Rent Expense 4,000
Salaries Expense 6,000
Sales Discounts 5,000
Sales Returns & Allowances 50
Sales Revenue 90,000
Supplies Expense 600

Using the information provided, prepare a multi-step income statement. Assume that 60% of expenses are for
selling and 40% are for administrative.

Surplus Direct
Income Statement
For the Year Ended September 30, 2019

Sales Revenue $90,000

Less: Sales Returns & Allowances $50
Sales Discounts 5,000 (5,050)
Net Sales 84,950
Cost of Goods Sold (26,000)
Gross Profit 58,950

Operating Expenses
Selling Expenses
Maintenance Expense $1,200
Rent Expense 2,400
Salaries Expense 3,600
Supplies Expense 360
Total Selling Expenses 7,560

Administrative Expenses
Maintenance Expense 800
Rent Expense 1,600
Salaries Expense 2,400
Supplies Expense 240
Total Administrative Expenses 5,040
Total Operating Expenses (12,600)
Income from Operations 46,350

Other Income and Expenses

Interest Revenue 550
Interest Expense (780) (230)
Net Income $46,120

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AP-20A LO 5

Glent Company prepared the following trial balance at its year end of September 30, 2019. The company is
owned by Wayne Glent.

Glent Company
Trial Balance
September 30, 2019
Account Title DR CR
Cash $14,600
Accounts Receivable 6,000
Merchandise Inventory 6,600
Prepaid Expenses 2,000
Store Equipment 40,000
Accumulated Depreciation—Store Equipment $2,500
Accounts Payable 8,000
Unearned Revenue 6,000
Bank Loan 9,000
Glent, Capital 38,750
Glent, Withdrawals 1,000
Sales Revenue 61,750
Gain on Sale of Equipment 4,000
Cost of Goods Sold 30,000
Depreciation Expense—Store Equipment 500
Interest Expense 600
Advertising Expense 1,200
Rent Expense—Retail Space 10,000
Rent Expense—Office Space 5,000
Sales Salaries Expense 8,000
Office Salaries Expense 4,500
Total $130,000 $130,000

Notes:
1. Assume the balance of owner’s equity is the opening balance.
2. The bank loan is payable over the next nine years in equal annual installments.

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Required
a) Prepare a multi-step income statement using the trial balances.

Glent Company
Income Statement
For the Year Ended September 30, 2019
Sales Revenue $61,750
Cost of Goods Sold 30,000
Gross Profit 31,750

Operating Expenses
Selling Expenses
Depreciation Expense—Store Equipment $500
Advertising Expense 1,200
Rent Expense—Retail Space 10,000
Sales Salaries Expense 8,000
Total Selling Expenses $19,700

Administrative Expenses
Rent Expense—Office Space 5,000
Office Salaries Expense 4,500
Total Administrative Expenses 9,500
Total Operating Expenses 29,200
Income from Operations 2,550

Other Income and Expenses

Gain on Sale of Equipment 4,000
Interest Expense (600) 3,400
Net Income $5,950

b) Prepare a statement of owner’s equity.

Glent Company
Statement of Owner’s Equity
For the Year Ended September 30, 2019
Glent, Capital, October 1, 2018 $38,750
Add: Net Income $5,950
Less: Glent, Withdrawals 1,000 4,950
Glent, Capital, September 30, 2019 $43,700

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c) Prepare a classified balance sheet using the trial balances.

Glent Company
Balance Sheet
As at September 30, 2019
Assets
Current Assets
Cash $14,600
Accounts Receivable 6,000
Merchandise Inventory 6,600
Prepaid Expenses 2,000
Total Current Assets $29,200
Property, Plant & Equipment
Equipment 40,000
Accumulated Depreciation (2,500)
Total Property, Plant & Equipment 37,500
Total Assets $66,700

Liabilities
Current Liabilities
Accounts Payable $8,000
Unearned Revenue 6,000
Bank Loan, Current Portion 1,000
Total Current Liabilities $15,000
Long-Term Liabilities
Bank Loan, Long-Term Portion 8,000
Total Long-Term Liabilities 8,000
Total Liabilities 23,000

Owner’s Equity
Glent, Capital 43,700
Total Owner’s Equity 43,700
Total Liabilities and Owner’s Equity $66,700

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AP-21A LO 5 6

The following is Glueman Industries’ adjusted trial balance in account order for the year ended September 30,
2019.

Glueman Industries
Adjusted Trial Balance
September 30, 2019
Account Title DR CR
Cash $3,800
Accounts Receivable 2,800
Prepaid Insurance 4,500
Prepaid Rent 8,100
Equipment 43,800
Accumulated Depreciation—Equipment $1,000
Accounts Payable 2,330
Unearned Revenue 2,000
Wages Payable 2,820
Kiefer, Capital 48,800
Sales Revenue 79,000
Sales Discounts 1,750
Sales Returns & Allowances 430
Cost of Goods Sold 36,780
Rent Expense 9,300
Utilities Expense 8,240
Wages Expense 15,800
Depreciation Expense 650
Total $135,950 $135,950

Required
a) Prepare a single-step income statement.

Glueman Industries
Income Statement
For the Year Ended September 30, 2019
Revenues
Net Sales ($79,000 - $1,750 - $430) $76,820

Expenses
Cost of Goods Sold $36,780
Depreciation Expense 650
Rent Expense 9,300
Utilities Expense 8,240
Wages Expense 15,800
Total Expenses 70,770
Net Income $6,050

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b) Prepare the journal entries to close the appropriate accounts using the income summary method.

Date Account Title and Explanation Debit Credit

2019
Sep 30 Sales Revenue 79,000
Income Summary 79,000
Clear the revenue accounts

Sep 30 Income Summary 72,950

Sales Discounts 1,750
Sales Returns & Allowances 430
Cost of Goods Sold 36,780
Rent Expense 9,300
Utilities Expense 8,240
Wages Expense 15,800
Depreciation Expense 650
Clear the expense accounts

Sep 30 Income Summary 6,050

Kiefer, Capital 6,050
Clear income summary

c) Prepare journal entries to close appropriate accounts directly to the capital account.

Date Account Title and Explanation Debit Credit

2019
Sep 30 Sales Revenue 79,000
Kiefer, Capital 79,000
Clear the revenue account

Sep 30 Kiefer, Capital 72,950

Sales Discounts 1,750
Sales Returns & Allowances 430
Cost of Goods Sold 36,780
Rent Expense 9,300
Utilities Expense 8,240
Wages Expense 15,800
Depreciation Expense 650
Clear the expense accounts

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AP-22A LO 5 7

A Bit of Fit operates several retail stores that specialize in products for a healthy lifestyle. Some of its financial
information is shown below for its fiscal year ended December 31, 2019.

Cost of Goods Sold $60,000

Depreciation Expense—Store Equipment 10,000
Gain on Sale of Equipment 3,000
Interest Expense 500
Insurance Expense 7,000
Office Salaries Expense 10,000
Sales Discounts 2,500
Sales Returns & Allowances 6,500
Sales Revenue 154,000
Sales Salaries Expense 40,000
Office Supplies Expense 2,000
Utilities Expense—Retail Space 6,750
Utilities Expense—Office Space 2,250

Required
a) Create a single-step income statement for A Bit of Fit.

A Bit of Fit
Income Statement
For the Year Ended December 31, 2019
Revenues
Net Sales ($154,000 − $2,500 − $6,500) $145,000
Gain on Sale of Equipment 3,000
Total Revenues 148,000
Expenses
Cost of Goods Sold $60,000
Depreciation Expense 10,000
Interest Expense 500
Insurance Expense 7,000
Salaries Expense 50,000
Office Supplies Expense 2,000
Utilities Expense 9,000
Total Expenses 138,500
Net Income $9,500

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b) Create a multi-step income statement for A Bit of Fit.

A Bit of Fit
Income Statement
For the Year Ended December 31, 2019
Sales Revenue $154,000
Less: Sales Returns & Allowances $6,500
Sales Discounts 2,500 (9,000)
Net Sales 145,000
Cost of Goods Sold 60,000
Gross Profit 85,000

Operating Expenses
Selling Expenses
Depreciation Expense—Store Equipment $10,000
Utilities Expense—Retail Space 6,750
Sales Salaries Expense 40,000
Total Selling Expenses 56,750

Administrative Expenses
Insurance Expense 7,000
Office Supplies Expense 2,000
Utilities Expense—Office Space 2,250
Office Salaries Expense 10,000
Total Administrative Expenses 21,250
Total Operating Expenses 78,000
Income from Operations 7,000

Other Income and Expenses

Gain on Sale of Equipment 3,000
Interest Expense (500) 2,500
Net Income $9,500

Analysis
Give a reason why income and expenses are categorized into “operating”—and further, by “selling” and
“administrative”—and “other” on the multi-step income statement. Your response should consider impact on
controls related to financial reporting.
Operating income and expenses usually indicate items that are likely to repeat year after year. Further separation
between “selling” and “administrative” provides more control over managing allocation between the two areas.
For example, a review of the breakdown of salaries expense may reveal that more needs to be allocated to the
sales category than office or vice versa. Other income and expenses are not part of regular operations of the
business and may not appear on the income statement each year. Separating regular revenues and expenses
from those that are not regular allows management and users to see how much profit was generated from
regular activities. This provides management with the ability to make decisions involving costs over which they
have control. For example, a large gain or loss on the sale of a building occurred during the year but this does
not happen every year. Therefore, readers can easily see what the profit would have been without the building
sale.

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AP-23A LO 3 7

CD Wholesalers had the following business transactions during the month of June 2019.

June 10 CD purchased $4,800 worth of towels from Taki Towels. The invoice showed payment terms of 2/10, n/30.
June 10 While unpackaging the above shipment, CD's receiving department noticed that some of the boxes of towels
were damaged. The boxes were returned to the supplier. Total value was $800.
June 20 CD paid the balance of the invoice less the return and discount.
June 22 CD sold all of the towels to Metro Merchandise for $8,000 on terms of 3/10, n/45.
June 30 Metro paid CD for the goods purchased.

Required

a) Prepare the journal entries to record the above transactions. Assume CD Wholesalers uses a perpetual
inventory system.

Date Account Title and Explanation Debit Credit

2019
June 10 Merchandise Inventory 4,800
Accounts Payable 4,800
Recorded purchase of inventory on account

June 10 Accounts Payable 800

Merchandise Inventory 800
Goods returned to supplier

June 20 Accounts Payable 4,000

Cash 3,920
Merchandise Inventory 80
Paid remining invoice balance less return and discount

June 22 Accounts Receivable 8,000

Sales Revenue 8,000
Goods sold on account

June 22 Cost of Goods Sold 3,920

Merchandise Inventory 3,920
To record cost of goods sold

June 28 Cash 7,760

Sales Discount 240
Accounts Receivable 8,000
Recorded invoice paid by Metro Merchandise

b) Calculate June’s ending inventory based on the above transactions. Assume that merchandise inventory at
the beginning of June amounted to $2,500.

Ending Inventory = $2,500 + $4,800 − $800 − $80 − $3,920

= $2,500

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c) At the end of June, an inventory count was performed. The balance of inventory according to the count was
$2,000. Management deemed that the difference between the ledger account and physical inventory count was
due to theft (shrinkage). Prepare the journal entry to adjust the merchandise inventory balance on June 30.

Date Account Title and Explanation Debit Credit

2019
June 30 Cost of Goods Sold 500
Merchandise Inventory 500
To adjust merchandise inventory to actual per the physical count.

d) Explain how use of sales discounts and sales returns and allowances accounts supports internal controls for
a merchandising type of business.

Use of sales discounts and sales returns and allowances accounts allows management to see how effective their
credit policies are so far as the amount reported in sales discounts reflects the extent to which customers are
paying their accounts within the discount period. If the balance in this account either increased or decreased
from what year to the next, management may want to change their credit policies. Where sales returns and
allowances are concerned, management is able to monitor the dollar amount and investigate any significant
fluctuations. By debiting amounts to separate accounts instead of directly to the Sales Revenue account for either
of the above, management is able to see the total for each and compare from one period to the next.

AP-24A LO 8

JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on May 10, 2019. On
May 11, JB’s bookkeeper was informed that $200 worth of tomatoes was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the periodic inventory system.

Date Account Title and Explanation Debit Credit

2019
May 11 Accounts Payable 200
Purchase Returns & Allowances 200
Record the purchase return

AP-25A LO 8

On July 18, 2019, the Maple Trees received a shipment of jerseys from Norton Supplies for their hockey team.
The invoice was for $6,000 and was recorded in the accounting system. When the box was opened, the team
manager discovered the jerseys were the wrong colour. The goods were returned to Norton Supplies on July 31.
Prepare the journal entry for the Maple Trees to record the return using the periodic inventory system.
Date Account Title and Explanation Debit Credit
2019
July 31 Accounts Payable 6,000
Purchase Returns & Allowances 6,000
Record the purchase return

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AP-26A LO 2 3 8

For each business transaction in the table below, identify which accounts are debited and credited. Do this for
both the perpetual and periodic inventory systems.
Perpetual Inventory Periodic Inventory
Transaction System System
DR CR DR CR
1. Purchased inventory on account • Merchandise • Accounts • Purchases • Accounts
Inventory Payable Payable
2. Returned a portion of the inventory • Accounts • Merchandise • Accounts • Purchase
purchased in transaction 1 Payable Inventory Payable Returns &
Allowances
3. Paid for remaining invoice balance after • Accounts • Cash • Accounts • Cash
taking advantage of the early payment Payable • Merchandise Payable • Purchase
discount Inventory Discounts
4. Sold inventory on account • Accounts • Sales • Accounts • Sales
Receivable • Merchandise Receivable
• Cost of Inventory
Goods Sold
5. Customer found that a portion of goods • Sales Returns • Accounts • Sales Returns • Accounts
sold in transaction 4 were of lower quality; & Allowances Receivable & Allowances Receivable
however, she agreed to keep them at a 10%
discount
6. Customer paid the remaining invoice • Cash • Accounts • Cash • Accounts
balance after taking advantage of an early • Sales Receivable • Sales Receivable
payment discount Discounts Discounts

AP-27A LO 9 11

The following information was taken from the financial records of Redmond Distribution, owned by Marcus
Redmond, at its year end of December 31, 2019. The company uses the periodic inventory system.
Freight-In $1,400
Interest Expense 3,200
Merchandise Inventory, January 1, 2019 150,000
Merchandise Inventory, December 31, 2019 120,000
Purchase Returns & Allowances 13,800
Purchases 100,000
Rent Expense 30,000
Salaries Expense 44,000
Sales Discounts 9,200
Sales Revenue 250,000

Required
a) Calculate the cost of goods sold for Redmond Distribution for 2019.

Merchandise Inventory, January 1, 2019 $150,000

Purchases $100,000
Less: Purchase Returns & Allowances 13,800
Net Purchases 86,200
Freight-In 1,400 87,600
Cost of Goods Available for Sale 237,600
Merchandise Inventory, December 31, 2019 120,000
Cost of Goods Sold $117,600

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b) Prepare the closing entries for Redmond Distribution for 2019 using the income summary method.

Date Account Title and Explanation Debit Credit

2019
Dec 31 Sales Revenue 250,000
Merchandise Inventory 120,000
Purchase Returns & Allowances 13,800
Income Summary 383,800
Close revenue and credit accounts, update inventory

Dec 31 Income Summary 337,800

Merchandise Inventory 150,000
Sales Discounts 9,200
Purchases 100,000
Freight-In 1,400
Interest Expense 3,200
Rent Expense 30,000
Salaries Expense 44,000
Close expense and debit accounts, update merchandise inventory

Dec 31 Income Summary 46,000

Redmond, Capital 46,000
Close income summary

AP-28A LO 8 9 10 11

Crystal Crockery, owned by Crystal Kleer, has provided you with the following information about the transactions
occurring in March 2019.
Mar 2 Crystal Crockery received a shipment of gift mugs for resale from Cup Makers. The amount on the invoice
is $7,000 and the stated terms are 2/15, n/45.
Mar 2 Crystal Crockery paid $400 cash for shipping charges.
Mar 5 The manager of Crystal Crockery checked the shipped cups and found that goods worth $700 were
defective. The defective goods were returned to the supplier.
Mar 13 Crystal Crockery paid the remaining invoice balance and, in doing so, took advantage of the early
payment discount.
Mar 20 Crystal Crockery sold the goods costing $6,174 to EatFresh Supermarket for $9,500.
Mar 22 EatFresh Supermarket found 10% worth of items to be defective and returned these to Crystal Crockery.
The goods cannot be resold.
Mar 28 The invoice showed terms 2/10, n/60. EatFresh Supermarket paid the remaining invoice balance after
taking advantage of the early settlement discount
The opening inventory balance was $500 and the closing inventory balance was $847.
Assume Crystal Crockery uses the periodic inventory system.

Required
a) Prepare the journal entries to record the purchase and sales transactions.
Date Account Title and Explanation Debit Credit
2019
Mar 2 Purchases 7,000
Accounts Payable 7,000
Recorded purchase of inventory on account

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Date Account Title and Explanation Debit Credit

2019
Mar 2 Freight-In 400
Cash 400
Record freight-in charges

Mar 5 Accounts Payable 700

Purchase Returns & Allowances 700
Returned defective goods to supplier

Mar 13 Accounts Payable 6,300

Cash 6,174
Purchase Discount 126
Paid remaining invoice balance less discount received for
early payment

Mar 20 Accounts Receivable 9,500

Sales Revenue 9,500
Goods sold on account

Mar 22 Sales Returns & Allowances 950

Accounts Receivable 950
Defective goods returned by the buyer

Mar 28 Cash 8,379

Sales Discount 171
Accounts Receivable 8,550
Recorded invoice paid by EatFresh Supermarket less discount

b) Prepare the journal entries to record the closing entries for the month using the income summary method.
Assume that the accounting period for Crystal Crockery is one month.
Date Account Title and Explanation Debit Credit
2019
Mar 31 Sales Revenue 9,500
Merchandise Inventory 847
Purchase Returns & Allowances 700
Purchase Discounts 126
Income Summary 11,173
To close revenue and other income statement credit balance
accounts and to set up ending inventory balance for the period

Mar 31 Income Summary 9,021

Merchandise Inventory 500
Sales Returns & Allowances 950
Sales Discounts 171
Purchases 7,000
Freight-In 400
To close expense and other debit balance income statement
accounts and to remove beginning inventory for the period

Mar 31 Income Summary 2,152

Kleer, Capital 2,152
To close income summary

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c) Prepare the net purchases section of the income statement.

Purchases $7,000
Less: Purchase Returns & Allowances $700
Purchase Discounts 126 826
Net Purchases 6,174

d) Prepare the cost of goods sold section of the income statement.

Cost of Goods Sold
Beginning Inventory $500
Net Purchases $6,174
Freight- In 400 6,574
Cost of Goods Available for Sale 7,074
Less: Ending Inventory 847
Cost of Goods Sold $6,227

AP-29A LO 9 10 11

The following information was taken from the records of Arc Suppliers on December 31, 2019. Assume all
accounts have normal balances.

Accounts Payable $6,000

Accounts Receivable 12,000
Beginning Inventory 22,500
Cash 34,500
Depreciation Expense 13,400
Ending Inventory 46,575
Freight-In 3,000
Insurance Expense 2,400
Interest Revenue 2,000
Purchase Discounts 11,000
Purchase Returns & Allowances 6,500
Purchases 142,545
Rent Expense 12,000
Sales Discounts 1,875
Sales Returns & Allowances 4,200
Sales Revenue 224,350
J. Arc, Withdrawals 15,000
J. Arc, Capital 35,600

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Required
a) Prepare a partial multi-step income statement up to and including gross profit assuming a periodic
inventory system is used.

Arc Suppliers
Income Statement (partial)
For the Year Ended December 31, 2019
Sales Revenue $224,350
Less: Sales Returns & Allowances $4,200
Sales Discounts 1,875 6,075
Net Sales 218,275

Cost of Goods Sold

Beginning Inventory 22,500
Purchases $142,545
Less: Purchase Returns & Allowances $6,500
Purchase Discounts 11,000 17,500
Net Purchases 125,045
Freight-In 3,000
Cost of Goods Available for Sale 150,545
Less:Ending Inventory 46,575
Cost of Goods Sold 103,970
Gross Profit $114,305

b) Prepare a multi-step income statement up to and including gross profit assuming a perpetual inventory
system is used.

Arc Suppliers
Income Statement (partial)
For the Year Ended December 31, 2019
Sales Revenue $224,350
Less: Sales Returns & Allowances $4,200
Sales Discounts 1,875 6,075
Net Sales 218,275
Cost of goods sold 103,970
Gross Proft $114,305

c) Calculate net income.

Net Income = $114,305 - $13,400 - $2,400 - $12,000 + $2,000 = $88,505

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d) Prepare the closing entries assuming a periodic inventory system was used.

Date Account Title and Explanation Debit Credit

2019
Dec 31 Sales Revenue 224,350
Purchase Discounts 11,000
Purchase Returns & Allowances 6,500
Inventory (ending balance) 46,575
Interest Revenue 2,000
Income Summary 290,425
To close all credit balance income statement accounts

Dec 31 Income Summary 201,920

Purchases 142,545
Freight-In 3,000
Sales Returns & Allowances 4,200
Sales Discounts 1,875
Depreciation Expense 13,400
Insurance Expense 2,400
Rent Expense 12,000
Beginning Inventory 22,500
To close all debit balance income statement accounts

Dec 31 Income Summary 88,505

J. Arc Capital 88,505
To transfer net income to owner's capital account

Dec 31 J. Arc, Capital 15,000

J. Arc. Withdrawals 15,000
To close owner withdrawals to capital account

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Application Questions Group B

AP-1B LO 2

A group of friends has just started a business selling computers. They are seeking advice regarding accounting
for their inventory.

Required
a) Which inventory system should they use if they plan to track purchases and sales using a scanner and point
of sale terminal?

They should use a perpetual inventory system, as it will be easy to track all costs associated with the buying
and selling of the inventory. They will also be able to determine the cost and number of units on hand at
any time, since the inventory record is updated each time a purchase of sale occurs.

b) Which inventory system should they use if they plan to keep costs down by using a manual accounting
system to record transactions?

They should use a periodic inventory system as they will not update the inventory records or cost of goods
sold until the end of the accounting period when a physical count is taken.

AP-2B LO 3

On September 1, 2019, Fruit Wholesalers purchased $3,700 worth of dried fruit inventory and paid $120 for
freight charges on account. On September 16, Fruit Wholesalers sold all of the dried fruit inventory to Retail
Grocers for $5,920 on account. As the bookkeeper for Fruit Wholesalers, journalize the transactions under the
perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Sep 1 Merchandise Inventory 3,820
Accounts Payable 3,820
Purchased inventory on account

Sep 16 Accounts Receivable 5,920

Sales Revenue 5,920
Made sales on account

Sep 16 Cost of Goods Sold 3,820

Merchandise Inventory 3,820
Record cost of goods sold

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AP-3B LO 3

JB Supermarkets bought $2,140 worth of groceries on account from a produce supplier on December 8, 2019.
On December 9, JB’s bookkeeper was informed that 15% of the produce was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Dec 9 Accounts Payable 321
Merchandise Inventory 321
Returned items to supplier

AP-4B LO 3

Top Mop Retailers bought $12,900 worth of mops from Super Mop Wholesalers Ltd. on March 15, 2019. Payment
is due in April.

Required
a) Prepare the journal entry for Top Mop Retailers using the perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Mar 15 Merchandise Inventory $12,900
Accounts Payable $12,900
Purchased inventory on account

b) Prepare the journal entry for Top Mop Retailers for the payment of $12,900 made to Super Mop Wholesalers
Ltd. on April 15.

Date Account Title and Explanation Debit Credit

2019
Apr 15 Accounts Payable $12,900
Cash $12,900
Paid amount owing

AP-5B LO 3

a) Signs Unlimited received a shipment of plastic sheets on February 15, 2019. The sheets were shipped FOB
shipping point. The value of the plastic was $9,000, and the shipping charges totalled $110. Prepare the
journal entry to record the receipt of goods by Signs Unlimited, assuming the payments for the inventory
and freight will be made in March, using the perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Feb 15 Merchandise Inventory $9,110
Accounts Payable $9,110
Purchased inventory on account

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b) The plastic sheets delivered to Signs Unlimited were the wrong colour. After some negotiation, the manager
agreed to keep the products with a 6% allowance on the value of the inventory. Prepare the entry on
February 22 to record the purchase allowance. (Assume all items were still in inventory.) Allowances are not
granted on freight charges.

Date Account Title and Explanation Debit Credit

2019
Feb 22 Accounts Payable $540
Merchandise Inventory $540
Received discount from supplier for incorrect items

c) Journalize the transaction for Signs Unlimited when the payment is made on March 15.

Date Account Title and Explanation Debit Credit

2019
Mar 15 Accounts Payable $8,570
Cash $8,570
Paid amount owing

AP-6B LO 3

a) Sandal Retailers purchased $8,100 worth of sandals from Comfy Wear Supplies on April 10, 2019. Comfy
Wear’s invoice shows terms of 2/15, n/30. What is the latest date Sandal Retailers can pay the bill to take
advantage of the discount?

The latest date to pay the bill and take advantage of the discount is April 25.

b) As the bookkeeper for Sandal Retailers, prepare the journal entry to record the purchase on April 10, using a
perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Apr 10 Merchandise Inventory $8,100
Accounts Payable $8,100
Purchased inventory on account

c) Journalize the transaction for payment of the invoice, assuming the payment was made on April 18.

Date Account Title and Explanation Debit Credit

2019
Apr 18 Accounts Payable $8,100
Cash $7,938
Merchandise Inventory $162
Paid amount in full and took discount

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d) Journalize the transaction for payment of the invoice, assuming the payment was made on April 26.

Date Account Title and Explanation Debit Credit

2019
Apr 26 Accounts Payable $8,100
Cash $8,100
Paid amount in full

AP-7B LO 3

Rock Retailers purchased $11,200 worth of shoes from Runner Wear Supplies on April 4, 2019. Runner Wear’s
invoice shows terms of 2/10, n/30. What is the latest date that Rock Retailers can pay the bill to take advantage
of the discount? How much cash is exchanged if the full discount is taken advantage of?
The latest date to take advantage of the discount is April 14. The full discount results in a payment of $10,976
cash.

AP-8B LO 3

On March 20, 2019, Cup-A-Java received a shipment of gift mugs for resale from Cup Makers in the amount of
$5,000. The terms stated on the invoice from Cup Makers were 3/15, n/60. Under a perpetual inventory system,
journalize the following scenarios for Cup-A-Java.

Required
a) As the bookkeeper for Cup-A-Java, record the purchase of inventory.
Date Account Title and Explanation Debit Credit
2019
Mar 20 Merchandise Inventory 5,000
Accounts Payable 5,000
Record the purchase of inventory on account

b) If Cup-A-Java decides to take advantage of the early payment cash discount, by when should the
payment be made to qualify for the discount?

The payment should be made by April 4.

c) The payment by Cup-A-Java to Cup Makers was made on March 31. Prepare the journal entry for the
payment of goods.

Date Account Title and Explanation Debit Credit

2019
Mar 31 Accounts Payable 5,000
Cash 4,850
Merchandise Inventory 150
Paid invoice owing less discount received for early payment

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d) Journalize the entry if payment had instead been made on May 20.

Date Account Title and Explanation Debit Credit

2019
May 20 Accounts Payable 5,000
Cash 5,000
Record the payment to Cup Makers Inc.

e) On March 25, 20% of the shipment was returned because the mugs were the wrong size. The invoice
has not yet been paid. Prepare the journal entry for this transaction.
Date Account Title and Explanation Debit Credit
2019
Mar 25 Accounts Payable 1,000
Merchandise Inventory 1,000
Record the purchase return

f) Continue from e). Journalize the entry if Cup-A-Java took advantage of the early payment cash discount
when paying for the balance of the mugs on March 31.

Date Account Title and Explanation Debit Credit

2019
Mar 31 Accounts Payable 4,000
Cash 3,880
Merchandise Inventory 120
Paid invoice less discount

AP-9B LO 3

Macks makes garments that are sold to retailers. On June 1, 2019, Cory’s Retailers sent back a shipment of
goods. The goods sold on account for $6,000 and cost Macks $4,000 to make. Macks put the returned goods
back into inventory for resale. Macks uses a perpetual inventory system.

Required
a) As Macks’ bookkeeper, prepare the journal entries to reflect the return.

Date Account Title and Explanation Debit Credit

2019
Jun 1 Sales Returns & Allowances 6,000
Accounts Receivable 6,000
Record sales return for unsatisfactory products

Jun 1 Merchandise Inventory 4,000

Cost of Goods Sold 4,000
Restock inventory return

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b) Journalize the entry if Cory’s only returned half of the shipment.

Date Account Title and Explanation Debit Credit

2019
Jun 1 Sales Returns & Allowances 3,000
Accounts Receivable 3,000
Record sales returns for unsatisfactory products

Jun 1 Merchandise Inventory 2,000

Cost of Goods Sold 2,000
Restock inventory return

c) What happened to the value of Macks’ owner’s equity when Cory’s returned the merchandise? Did it
increase, decrease or stay the same? Explain your answer.

Owner’s equity decreased because sales returns and allowances is a contra-revenue account, which
decreases revenue (i.e. owner’s equity). Although the decrease to cost of goods sold will increase equity,
equity will ultimately decrease because the sales returns and allowances is a larger value.

d) Explain the logic behind debiting the sales returns and allowances as a contra account instead of
debiting the revenue account directly.

Debiting a contra account allows one to effectively track and separate total sales from returns.

AP-10B LO 3

Pete’s Wholesalers imports and distributes towels. It sells products to various retailers throughout the country
and offers payment terms of 2/10, n/30. On October 1, 2019, Pete’s sold Ernie’s Bathroom Retailers $15,000 of
goods, which cost Pete’s $9,000. Pete’s uses a perpetual inventory system. Complete the following.

Required

a) Journalize the sale that was made on account for Pete’s Wholesalers.

Date Account Title and Explanation Debit Credit

2019
Oct 1 Accounts Receivable 15,000
Sales Revenue 15,000
Made sales on account

Cost of Goods Sold 9,000

Merchandise Inventory 9,000
Record cost of goods sold

b) By what date must Ernie’s pay the invoice to qualify for the early cash payment discount?

Ernie’s must pay by October 11 to qualify for the discount.

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c) Assume Ernie’s paid the bill on October 5. Record the journal entry for Pete’s Wholesalers.

Date Account Title and Explanation Debit Credit

2019
Oct 5 Cash 14,700
Sales Discounts 300
Accounts Receivable 15,000
Collected accounts receivable less discount allowed

d) If Ernie’s had returned half the shipment and paid for the balance owing on October 5, how would
the transactions be journalized by Pete’s Wholesaler’s? Assume the inventory was restocked by Pete’s
Wholesalers.

Date Account Title and Explanation Debit Credit

2019
Oct 5 Sales Returns & Allowances 7,500
Accounts Receivable 7,500
Record sales returns from Ernie’s

Oct 5 Merchandise Inventory 4,500

Cost of Goods Sold 4,500
Restock inventory returned

Oct 5 Cash 7,350

Sales Discounts 150
Accounts Receivable 7,500
Collected accounts receivable less discount allowed

e) Suppose instead that Ernie’s found the goods unsatisfactory and agreed to keep the goods with a 10%
allowance. Prepare the journal entries for Pete’s Wholesalers to record the sales allowance and Ernie’s
payment on October 20.

Date Account Title and Explanation Debit Credit

2019
Oct 20 Sales Returns & Allowances 1,500
Accounts Receivable 1,500
Allowance provided to Ernie’s for unsatisfactory goods

Oct 20 Cash 13,500

Accounts Receivable 13,500
Collected outstanding accounts receivable

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AP-11B LO 3

The folowing transactions took place at Art Supplies during March 2019.

Mar 14 Sold merchandise on credit to Graphic Arts for $15,000; terms 3/15, n/30; cost of goods sold was
$12,000
Mar 14 Art Supplies paid $75 to ship the goods to Graphic Arts (FOB destination)
Mar 16 Graphic Arts returned $1,000 (sales price) worth of merchandise purchased on March 14; cost of
goods was $650; goods were returned to inventory
Mar 17 Received payment from Graphic Arts for March 14 sale
Mar 18 Sold merchandise on credit to Canvas Retailers for $8,000, terms 2/10, n/30; cost of goods was $5,500
Mar 26 Canvas kept the merchandise purchased on March 18; however, some of it was defective so Art
Supplies agreed to a 40% allowance on the total sale
Mar 31 Received payment from Canvas for the March 18 sale

Journalize the above transactions assuming that Art Supplies uses a perpetual inventory system. Round all
calculations to the nearest dollar.

Date Account Title and Explanation Debit Credit

2019
Mar 14 Accounts Receivable 15,000
Sales Revenue 15,000
Record sales on account

Mar 14 Cost of Goods Sold 12,000

Merchandise Inventory 12,000
Record cost of sales

Mar 14 Shipping Expense 75

Cash 75
Paid shipping costs

Mar 16 Sales Returns & Allowances 1,000

Accounts Receivable 1,000
Record sales return on account

Mar 16 Merchandise Inventory 650

Cost of Goods Sold 650
Record inventory from sale return

Mar 17 Cash 13,580

Sales Discount 420
Accounts Receivable 14,000
Received payment from customer less discount

Mar 18 Accounts Receivable 8,000

Sales Revenue 8,000
Record sale on account

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Date Account Title and Explanation Debit Credit

Mar 18 Cost of Goods Sold 5,500
Merchandise Inventory 5,500
Record cost of sale

Mar 26 Sales Returns & Allowances 3,200

Accounts Receivable 3,200
Record sales allowance on account

Mar 31 Cash 4,800

Accounts Receivable 4,800
Received payment from customer

Analysis
What was the gross profit earned by Art Supplies during the month of March? Show calculations.
$1,530 = $15,000 − $12,000 − $1,000 + $650 − $420 + $8,000 − $5,500 − $3,200

AP-12B LO 3

Brad Chang runs his own restaurant. Customers can pay by cash, debit or credit card. For each debit transaction,
Brad pays $0.25. For credit cards, he pays 2% of the total of credit card transactions. On May 9, 2019, Brad
compiled the following summary for the work day.

Transaction Type Total Number of

Transactions
Cash $1,459 23
Debit Card 4,632 72
Credit Card 0 0

Required
a) Calculate the total debit/credit card expense for May 9.
Number of debit transactions × amount per transaction = 72 transactions × $0.25 = $18

b) Record the journal entry for the day’s sales. (Ignore COGS.)

Date Account Title and Explanation Debit Credit

2019
May 9 Debit/Credit Card Expense 18
Cash 6,073
Sales Revenue 6,091
To record sales

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AP-13B LO 3

Burt Mecklin operates a large pet store. Customers can pay by cash, debit or credit card. For each debit
transaction, Burt pays $0.15. For credit cards, he pays 2% of the total of credit card transactions. On November
15, 2019, Burt compiled the following summary for the work day.
Transaction Type Total Number of
Transactions
Cash $2,640 33
Debit Card 0 0
Credit Card 5,440 68

Required
a) Calculate the total debit/credit card expense for November 15.

Total credit card amount × percentage of total = $5,440 × 0.02 = $108.80

b) Record the journal entry for the day’s sales. (Ignore COGS.)

Date Account Title and Explanation Debit Credit

2019
Nov 15 Debit/Credit Card Expense 108.80
Cash 7,971.20
Sales Revenue 8,080.00
To record sales

AP-14B LO 3

Ron runs his own butcher shop. His customers can pay by cash, debit or credit card. For each debit transaction,
Ron pays $0.25. For credit cards, Ron pays 3% of the total of credit card transactions. On April 3, 2019, Ron
compiled the following summary for the work day.

Transaction Type Total Number of

Transactions
Cash $836 27
Debit Card 1,298 40
Credit Card 1,366 32

Required
a) Calculate the total debit/credit card expense for April 3.

Number of debit transactions × amount per transaction = 40 transactions × $0.25 = $10.00

Total credit card amount × percentage of total = $1,366 × 0.03 = $40.98
Total debit/credit card expense = $10 + 40.98 = $50.98

b) Record the journal entry for the day’s sales. (Ignore COGS.)
Date Account Title and Explanation Debit Credit
2019
Apr 3 Debit/Credit Card Expense 50.98
Cash 3,449.02
Sales Revenue 3,500.00
To record sales

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AP-15B LO 1 3 4

Suppose that SCOOP Pet Supplies’ gross profit margin is 40% and that all sales are cash sales. Prepare any
journal entries required to record sales for the year ended December 31, 2019, assuming that the company had
$846,500 in sales revenue for the year and uses a perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Dec 31 Cash 846,500
Sales Revenue 846,500
Record cash sales for the year

Dec 31 Cost of Goods Sold 507,900

Merchandise Inventory 507,900
Record cost of products sold for the year

AP-16B LO 3 4

Wilde Wilderness Supplies had the following transactions during January 2019.

Jan 1 Sold merchandise on credit to Merril for $15,000, terms 2/10, n/30; cost of goods was $8,500
Jan 1 Wilde paid $50 to ship the goods to Merril
Jan 5 Purchased inventory for $12,000 on credit from Outdoor Experts, terms 1/10, n/30, FOB shipping
point
Jan 5 Wilde paid $25 to have the merchandise from Outdoor Experts delivered
Jan 8 Merril returned $1,200 (sales price) of merchandise purchased on January 1; the cost of goods sold
was $800. The inventory will be resold.
Jan 12 Some of the merchandise purchased on January 5 was the wrong size. Wilde decided to keep the
merchandise in exchange for a 25% allowance on the purchase. Allowances are not granted on
shipping charges.
Jan 15 Received payment from Merril for the January 1 sale
Jan 18 Sold merchandise on credit to Forest Outfitters for $5,000, terms 2/15, n/30; cost of goods was $2,600
Jan 23 Paid for merchandise purchased from Outdoor Experts on January 5
Jan 26 Wilde granted Forest Outfitters a 20% allowance on the January 18 sale due to defective products
Jan 31 Received payment from Forest Outfitters for the January 18 sale

Journalize the above transactions assuming that Wilde Wilderness Supplies uses a perpetual inventory system.
Round all calculations to the nearest whole dollar.

Date Account Title and Explanation Debit Credit

2019
Jan 1 Accounts Receivable 15,000
Sales Revenue 15,000
Record sales on account

Jan 1 Cost of Goods Sold 8,500

Merchandise Inventory 8,500
Record cost of sales

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Date Account Title and Explanation Debit Credit

Jan 1 Shipping Expense 50
Cash 50
Paid shipping costs

Jan 5 Merchandise Inventory 12,000

Accounts Payable 12,000
Purchased inventory on account

Jan 5 Merchandise Inventory 25

Cash 25
To record shipping costs

Jan 8 Sales Returns & Allowances 1,200

Accounts Receivable 1,200
Record sales return on account

Jan 8 Merchandise Inventory 800

Cost of Goods Sold 800
Record inventory from sales return

Jan 12 Accounts Payable 3,000

Merchandise Inventory 3,000
Allowance from Outdoor Experts

Jan 15 Cash 13,800

Accounts Receivable 13,800
Received payment from customer

Jan 18 Accounts Receivable 5,000

Sales Revenue 5,000
Record sales on account and cost of sales

Jan 18 Cost of Goods Sold 2,600

Merchandise Inventory 2,600
Record inventory from sales return

Jan 23 Accounts Payable 9,000

Cash 9,000
Paid supplier

Jan 26 Sales Returns & Allowances 1,000

Accounts Receivable 1,000
Record sales return on account

Jan 31 Cash 3,920

Sales Discounts 80
Accounts Receivable 4,000
Received payment from customer less discount

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Analysis
Calculate Wilde Wilderness Supplies’ gross profit margin for the month.

Net Sales = Sales – Sales Returns and Allowances – Sales Discounts

= ($15,000 + $5,000) – ($1,200 + $1,000) – $80
= $17,720

Cost of Goods Sold = $8,500 – $800 + $2,600

= $10,300

Gross Profit = Net Sales – Cost of Goods Sold

= $17,720 – $10,300
= $7,420

Gross Profit
Gross Profit Margin (%) = ——————
Net Sales
$7,420
= ——————
$17,720
= 0.42 or 42%

AP-17B LO 4

If sales are $290,000 and cost of goods sold is $130,000, what are the gross profit and gross margin percentage?
Gross Profit = Net Sales − Cost of Goods Sold
= $290,000 − $130,000
= $160,000
Gross Profit
Gross Profit Margin (%) = ——————
Net Sales
$160,000
= ——————
$290,000
= 0.55 or 55%

AP-18B LO 4

If a cell phone retail business bought cell phones for $10,800 and sold them for $14,500, how much would the
gross profit be on the entire shipment, assuming the business took advantage of the early cash payment terms
of 3/10, n/30 from its supplier?
Cost of Goods Sold = $10,800 − ($10,800 × 0.03)
= $10,800 − $324
= $10,476

Gross Profit = Net Sales − Cost of Goods Sold

= $14,500 − $10,476
= $4,024

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AP-19B LO 5

Let’s Talk Shop sells cell phone accessories. The following information is available for the year ending June 30, 2019.

Cost of Goods Sold $11,200

Interest Expense 1,000
Advertising Expense 800
Office Salaries Expense 12,000
Sales Revenue 49,000
Sales Salaries Expense 26,000
Rent Expense—Retail Space 2,000
Rent Expense—Office Space 1,000

Prepare the multi-step income statement for June 2019.

Let’s Talk Shop

Income Statement
For the Year Ended June 30, 2019
Sales Revenue $49,000
Cost of Goods Sold 11,200
Gross Profit 37,800

Operating Expenses
Selling Expenses
Advertising Expense $800
Rent Expense—Retail Space 2,000
Sales Salaries Expense 26,000
Total Selling Expenses $28,800

Administrative Expenses
Rent Expense—Office Space 1,000
Office Salaries Expense 12,000
Total Administrative Expenses 13,000
Total Operating Expenses 41,800
Income (Loss) from Operations (4,000)

Other Income and Expenses

Interest Expense (1,000)
Net Income (Loss) ($5,000)

Analysis
Let’s Talk Shop sold 3,500 phone cases at an average price of $14 each during the year. The company buys
phone case inventory at an average price of $3.20 each. If Let’s Talk Shop had sold 4,000 phone cases instead,
would it have a positive net income? Assume operating expenses would remain the same. Show your work.

Revenue at 4,000 $56,000

Cost of Goods Sold at 4,000 (12,800)
Operating Expenses (41,800)
Other Income and Expenses (1,000)
Net Income $400

Let’s Talk Shop would have made a profit of $400 if 4,000 cases were sold.

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AP-20B LO 5

Bugle News operates by selling newspaper and magazines to consumers. Peter has prepared the income
statement and balance sheet for Bugle News as shown below.

The bank loan is due in annual payments of $50,000.

Bugle News
Income Statement
For the Year Ended December 31, 2019
Revenues
Sales Revenue $975,000
Interest Revenue 25,000
Total Revenues $1,000,000
Expenses
Cost of Goods Sold 150,000
Advertising Expense 50,200
Rent Expense—Newsstand 50,000
Rent Expense—Office Space 5,800
Office Salaries Expense 125,000
Sales Salaries Expense 160,000
Loss on Property Damage 59,000
Total Expenses 600,000
Net Income $400,000

Bugle News
Balance Sheet
As at December 31, 2019
Assets
Cash $121,000
Accounts Receivable 5,000
Prepaid Insurance 514,000
Merchandise Inventory 310,000
Equipment 800,000
Accumulated Depreciation (250,000)
Total Assets $1,500,000

Liabilities
Accounts Payable $15,000
Unearned Revenue 530,000
Bank Loan 300,000
Total Liabilities $845,000

Owner’s Equity
Parker, Capital 655,000
Total Owner’s Equity 655,000
Total Liabilities and Owner’s Equity $1,500,000

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Required
a) Prepare the multi-step income statement for Bugle News.

Bugle News
Income Statement
For the Year Ended December 31, 2019
Sales Revenue $975,000
Cost of Goods Sold 150,000
Gross Profit 825,000

Operating Expenses
Selling Expenses
Advertising Expense $50,200
Rent Expense—Newsstand 50,000
Sales Salaries Expense 160,000
Total Selling Expenses $260,200

Administrative Expenses
Rent Expense—Office Space 5,800
Office Salaries Expense 125,000
Total Administrative Expenses 130,800
Total Operating Expenses 391,000
Income (Loss) from Operations 434,000

Other Income and Expenses

Interest Revenue 25,000
Loss on Property Damage (59,000) (34,000)
Net Income (Loss) $400,000

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b) Prepare the classified balance sheet for Bugle News.

Bugle News
Balance Sheet
As at December 31, 2019
Assets
Current Assets
Cash $121,000
Accounts Receivable 5,000
Prepaid Insurance 514,000
Merchandise Inventory 310,000
Total Current Assets $950,000
Property, Plant and Equipment
Equipment 800,000
Accumulated Depreciation (250,000)
Total Property, Plant and Equipment 550,000
Total Assets $1,500,000

Liabilities
Current Liabilities
Accounts Payable $15,000
Unearned Revenue 530,000
Bank Loan, Current Portion 50,000
Total Current Liabilities $595,000
Long-Term Liabilities
Bank Loan, Long-Term Portion 250,000
Total Long-Term Liabilities 250,000
Total Liabilities 845,000

Owner’s Equity
Parker, Capital 655,000
Total Owner’s Equity 655,000
Total Liabilities and Owner’s Equity $1,500,000

Analysis
Calculate and interpret the current ratio for Bugle News.

Current Assets
Current Ratio =
Current Liabilities
$950,000
=
$595,000
= 1.60

The current ratio indicates that Bugle News has $1.60 in current assets for every $1.00 in current liabilities. This
is a healthy ratio since it has enough current assets to cover upcoming debt payments. Comparing this ratio to
the industry (if available) would give us a more accurate picture on the liquidity of this company.

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AP-21B LO 5 6

The following is the adjusted trial balance in alphabetical order for LCP Construction for the year ended
December 31, 2019.
LCP Construction
Adjusted Trial Balance
December 31, 2019
Account Title DR CR
Accounts Payable $2,330
Accumulated Depreciation—Equipment 1,140
Cash $10,800
Cost of Goods Sold 28,660
Depreciation Expense 9,080
Equipment 27,766
Insurance Expense 5,260
Interest Revenue 7,650
Pohler, Capital 48,060
Prepaid Insurance 4,675
Prepaid Rent 18,100
Rent Expense 9,300
Sales Discounts 440
Sales Returns & Allowances 1,749
Sales Revenue 60,945
Unearned Revenue 1,000
Utilities Expense 2,240
Wages Expense 5,800
Wages Payable 2,745
Total $123,870 $123,870

Required
a) Prepare a multi-step income statement.

LCP Construction
Income Statement
For the Year Ended December 31, 2019
Sales $60,945
Less: Sales Discounts $440
Sales Returns & Allowances 1,749 2,189
Net Sales 58,756
Cost of Goods Sold 28,660
Gross Profit 30,096

Operating Expenses
Depreciation Expense 9,080
Insurance Expense 5,260
Rent Expense 9,300
Utilities Expense 2,240
Wages Expense 5,800
Total Operating Expenses 31,680
Income from Operations (1,584)

Other Revenue & Expense

Interest Revenue $7,650
Net Income $6,066

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b) Prepare the journal entries to close the appropriate accounts using the income summary method.

Date Account Title and Explanation Debit Credit

2019
Dec 31 Sales Revenue 60,945
Interest Revenue 7,650
Income Summary 68,595
Clear the revenue accounts

Dec 31 Income Summary 62,529

Cost of Goods Sold 28,660
Depreciation Expense 9,080
Insurance Expense 5,260
Rent Expense 9,300
Sales Discounts 440
Sales Returns & Allowances 1,749
Utilities Expense 2,240
Wages Expense 5,800
Clear the expense accounts

Dec 31 Income Summary 6,066

Pohler, Capital 6,066
Clear income summary

AP-22B LO 5 7

Rita Retail is a merchandising business. The store’s building contains a large selling area with merchandise
displays and shelves, and a smaller back office area where administrative tasks are performed, such as payroll,
marketing and HR. Excess inventory is stored at the sales manager’s house, which is located an hour’s drive away
from the main office. The following information is available.

• Salaries are for the salespeople, as well as the office staff. Office staff salaries totalled $80,000 for the year.
• The office area is allocated 20% of the utility costs.
• Depreciation is charged on the merchandise displays only.

Rita Retail
Income Statement
For the Year Ended December 31, 2019
Sales Revenue $1,400,000
Expenses
Cost of Goods Sold $890,000
Salaries Expense 210,000
Office Supplies Expense 12,000
Insurance Expense 42,000
Utilities Expense 7,000
Depreciation Expense 5,000
Total Expenses 1,166,000
Net Income $234,000

Prepare a multi-step income statement for Rita Retail.

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Rita Retail
Income Statement
For the Year Ended December 31, 2019
Sales Revenue $1,400,000
Cost of Goods Sold 890,000
Gross Profit 510,000

Operating Expenses
Selling Expenses
Depreciation Expense $5,000
Sales Salaries Expense 130,000
Utilities Expense 5,600
Total Selling Expenses $140,600

Administrative Expenses
Insurance Expense 42,000
Office Supplies Expense 12,000
Office Salaries Expense 80,000
Utilities Expense 1,400
Total Administrative Expenses 135,400
Total Operating Expenses 276,000
Net Income $234,000

Analysis
a) Give a reason why it is useful to separate expenses into selling and administrative categories on the income
statement.

Companies can use this information to better track where costs come from within the organization. This
allows managers of different departments to budget resources more efficiently to reduce the costs they are
responsible for.

b) Discuss the control implications of storing inventory at the manager’s home instead of at the store’s
location.

As with other assets, merchandise inventory should be safeguarded against loss due to theft or damage.
The fact that inventory is being stored at an off-site location does not support good inventory controls as
i) it is not accessible for shipping and receiving, ii) it can’t be easily verified against the purchase order or
supplier’s invoice, and iii) there may be no assurance that it is secured from damage or theft.

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AP-23B LO 3 6 7

AB Retailers had the following business transactions during the month of April 2019.

Apr 10 AB Retailers bought $3,500 worth of T-shirts from Unique Designers. The invoice showed
payment terms of 2/10, n/30.
Apr 10 Soon after AB Retailers received the products, it was discovered that $500 worth of T-shirts
did not meet quality standards. These goods were returned to the supplier.
Apr 20 AB Retailers paid the remaining invoice balance.
Apr 22 AB Retailers sold all the goods for $4,500 to SK Stores on terms 3/10, n/45.
Apr 28 SK Stores paid for the goods purchased.

Required
a) Prepare the journal entries to record the above transactions. Assume AB Retailers uses the perpetual
inventory system.

Date Account Title and Explanation Debit Credit

2019
Apr 10 Merchandise Inventory 3,500
Accounts Payable 3,500
Recorded purchase of inventory on account

Apr 10 Accounts Payable 500

Merchandise Inventory 500
Goods returned to supplier

Apr 20 Accounts Payable 3,000

Cash 2,940
Merchandise Inventory 60
Paid remaining invoice balance less discount received for early
payment

Apr 22 Accounts Receivable 4,500

Sales Revenue 4,500
Goods sold on account

Apr 22 Cost of Goods Sold 2,940

Merchandise Inventory 2,940
Recorded cost of goods sold for above sale

Apr 28 Cash 4,365

Sales Discount 135
Accounts Receivable 4,500
Recorded invoice paid by SK Stores less discount

b) Calculate April’s ending inventory based on the above transactions. Assume that merchandise inventory at
the beginning of April amounted to $1,500.

Ending April Inventory = Beginning (April Inventory) + Purchases – Returns – Discount – COGS
= $1,500 + $3,500 – $500 – $60 – $2,940
= $1,500

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c) At the end of April, an inventory count was performed. The balance of inventory according to the count was
$1,300. Management deemed that the difference between the ledger account and physical inventory count
was due to theft (shrinkage). Prepare the journal entry to adjust the merchandise inventory balance on April
30.

Date Account Title and Explanation Debit Credit

2019
Apr 30 Cost of Goods Sold 200
Merchandise Inventory 200
To adjust merchandise inventory to the actual physical count

d) What are some controls used to safeguard inventory against shrinkage?

i) taking a physical inventory count and comparing to values reported in the accounts
ii) keeping inventory stored under lock and key in a safe location
iii) inspecting inventory when received and comparing total received with what was ordered and billed

AP-24B LO 8

a) Boards Unlimited received a shipment of skateboards on April 3, 2019. The value of the skateboards was
$8,000, and they were shipped FOB shipping point. Freight charges came to $100. Prepare the journal entry
to record the receipt of goods by Boards Unlimited, assuming payment will be made in May, using the
periodic inventory system.

Date Account Title and Explanation Debit Credit

2019
Apr 3 Purchases 8,000
Freight-in 100
Accounts Payable 8,100
Record the purchasing of Inventory

b) The skateboards delivered to Boards Unlimited were the wrong colour. After some negotiation, the manager
agreed to keep the products with a 10% discount. Prepare the entry on April 10 to record the purchase
allowance. (Assume all skateboards were still in inventory.)

Date Account Title and Explanation Debit Credit

2019
Apr 10 Accounts Payable 800
Purchase Returns & Allowances 800
Allowance for goods with wrong colour

c) Journalize the transaction for Boards Unlimited when the payment is made on May 3.

Date Account Title and Explanation Debit Credit

2019
May 3 Accounts Payable 7,300
Cash 7,300
Payment for the goods

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AP-25B LO 8

Footloose Retailers uses the periodic inventory system. It purchased $10,000 worth of shoes from Jogger Wear
Supplies on March 1, 2019. Jogger Wear’s invoice terms are 2/15, n/30.

Required
a) What is the latest date Footloose Retailers can pay the bill to apply the discount?

March 16 is the latest date to take advantage of the discount.

b) As Footloose Retailers’ bookkeeper, prepare the journal entry to record the March 1 purchase.

Date Account Title and Explanation Debit Credit

2019
Mar 1 Purchases 10,000
Accounts Payable 10,000
Record the purchase

c) Journalize the transaction for payment of the invoice on March 5.

Date Account Title and Explanation Debit Credit

2019
Mar 5 Accounts Payable 10,000
Cash 9,800
Purchase Discount 200
Paid invoice owing less discount received

d) Journalize the transaction for payment of the invoice on April 3.

Date Account Title and Explanation Debit Credit

2019
Apr 3 Accounts Payable 10,000
Cash 10,000
Record the payment to Jogger Wear Supplies

AP-26B LO 2 3 8

On January 1, 2019, a company purchases 1,000 units of inventory at $12 per unit on account. On January 5, the
company sells 25 units for $50 per unit on account.

Required
a) Write the journal entries to record the transactions under the perpetual inventory system.

Date Account Title and Explanation Debit Credit

2019
Jan 1 Merchandise Inventory 12,000
Accounts Payable 12,000
To record purchase of units on account

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Date Account Title and Explanation Debit Credit

Jan 5 Accounts Receivable 1,250
Sales Revenue 1,250
To record sale of inventory on account

Jan 5 Cost of Goods Sold 300

Merchandise Inventory 300
To record cost of goods sold for above sale

b) Write the journal entries to record the transactions under the periodic inventory system.

Date Account Title and Explanation Debit Credit

2019
Jan 1 Purchases 12,000
Accounts Payable 12,000
To record purchase of units on account

Jan 5 Accounts Receivable 1,250

Sales Revenue 1,250
To record sale of units on account

AP-27B LO 9 11

The following information was taken from the financial records of Bluevale Wholesalers, owned by Betty Bond, at
its year end of December 31, 2019. The company uses the periodic inventory system:

Freight-In $1,200
Interest Expense 2,300
Merchandise Inventory, January 1, 2019 140,000
Merchandise Inventory, December 31, 2019 110,000
Purchase Discounts 2,500
Purchase Returns & Allowances 12,300
Purchases 120,000
Rent Expense 24,000
Salaries Expense 47,000
Sales Discounts 7,500
Sales Revenue 230,000

a) Calculate the cost of goods sold for Bluevale Wholesalers for 2019.

Merchandise Inventory, January 1, 2019 $140,000

Purchases $120,000
Less: Purchase Returns & Allowances 12,300
Purchase Discounts 2,500
Net Purchases 105,200
Freight-in 1,200 106,400
Cost of goods available for sale 246,400
Merchandise Inventory December 31, 2019 110,000
Cost of Goods Sold $136,400

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b) Prepare the closing entries for Bluevale Wholesalers for 2019 using the income summary method.

Date Account Title and Explanation Debit Credit

2019
Dec 31 Sales Revenue 230,000
Purchase Discounts 2,500
Purchase Returns & Allowances 12,300
Merchandise Inventory 110,000
Income Summary 354,800
Close revenue and credit accounts, update Inventory

Dec 31 Income Summary 342,000

Merchandise Inventory 140,000
Freight-In 1,200
Interest Expense 2,300
Purchases 120,000
Rent Expense 24,000
Salaries Expense 47,000
Sales discounts 7,500
Close expense and debit accounts, update inventory

Dec 31 Income Summary 12,800

Betty Bond, Capital 12,800
Close income summary, update owner's capital for net income
earned

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AP-28B LO 9

Tommy Greggson, owner of Greggson Retail, prepared the following adjusted trial balance at its year end of
October 31, 2019.

Greggson Retail
Trial Balance
October 31, 2019
Account Title DR CR
Cash $78,000
Accounts Receivable 30,000
Merchandise Inventory 165,000
Prepaid Expenses 6,000
Store Equipment 250,000
Accumulated Depreciation—Store Equipment $80,000
Accounts Payable 126,000
Unearned Revenue 8,000
Bank Loan 50,000
Greggson, Capital 300,000
Greggson, Withdrawals 20,000
Sales Revenue 360,000
Purchase Returns & Allowances 12,000
Purchase Discounts 5,000
Sales Returns & Allowances 30,000
Sales Discounts 3,000
Purchases 235,000
Freight-In 7,000
Depreciation Expense—Store Equipment 4,000
Interest Expense 1,000
Sales Salaries Expense 62,000
Office Salaries Expense 50,000
Total $941,000 $941,000

A year-end inventory count revealed that $210,000 of inventory is on hand.

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Required
a) Prepare a multi-step income statement for Greggson Retail, assuming a periodic inventory system is used.

Greggson Retail
Income Statement
For the Year Ended October 31, 2019
Sales Revenue $360,000
Less: Sales Returns & Allowances $30,000
Sales Discounts 3,000 (33,000)
Net Sales 327,000

Cost of Goods Sold

Merchandise Inventory, November 1, 2018 165,000
Purchases $235,000
Less: Purchase Returns & Allowances $12,000
Purchase Discounts 5,000 (17,000)
Net Purchases 218,000
Freight-In 7,000 225,000
Cost of Goods Available for Sale 390,000
Merchandise Inventory, October 31, 2019 210,000
Cost of Goods Sold 180,000
Gross Profit 147,000

Operating Expenses
Selling Expenses
Depreciation Expense—Store Equipment 4,000
Sales Salaries Expense 62,000
Total Selling Expenses 66,000

Administrative Expenses
Office Salaries Expense 50,000
Total Administrative Expenses 50,000
Total Operating Expenses 116,000
Income from Operations 31,000

Other Income and Expenses

Interest Expense (1,000)
Net Income $30,000

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b) Prepare the closing entries for Greggson Retail using the income summary method.

Date Account Title and Explanation Debit Credit

2019
Oct 31 Sales Revenue 360,000
Merchandise Inventory 210,000
Purchase Returns & Allowances 12,000
Purchase Discounts 5,000
Income Summary 587,000
Close revenue and credit accounts, update merchandise inventory

Oct 31 Income Summary 557,000

Merchandise Inventory 165,000
Sales Returns & Allowances 30,000
Sales Discounts 3,000
Purchases 235,000
Freight-In 7,000
Depreciation Expense 4,000
Interest Expense 1,000
Salaries Expense 112,000
Close expense and debit accounts, update merchandise inventory

Oct 31 Income Summary 30,000

Greggson, Capital 30,000
Close income summary

Oct 31 Greggson, Capital 20,000

Greggson, Withdrawals 20,000
Close withdrawals account

AP-29B LO 9 10 11

The following information was taken from the records of Greggs Interior Supplies on December 31, 2019.
Assume all accounts have normal balances.

Accounts Payable $8,000

Accounts Receivable 13,500
Beginning Inventory 34,500
Cash 12,345
Depreciation Expense 12,300
Ending Inventory 32,400
Freight-In 1,000
Insurance Expense 3,600
Interest Revenue 3,250
Purchase Discounts 9,000
Purchase Returns & Allowances 3,420
Purchases 154,000
Rent Expense 6,000
Sales Discounts 900
Sales Returns & Allowances 3,200
Sales Revenue 450,000
G. Stone, Withdrawals 30,000
G. Stone, Capital 46,900

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Required
a) Prepare a multi-step income statement up to and including gross profit assuming a periodic inventory
system is used.
Greggs Interior Supplies
Income Statement (partial)
For the Year Ended December 31, 2019
Sales Revenue $450,000
Less: Sales Returns & Allowances $3,200
Sales Discounts 900 4,100
Net Sales $445,900
Cost of Goods Sold:
Beginning Inventory 34,500
Purchases $154,000
Less: Purchase Returns & Allowances $3,420
Purchase Discounts 9,000 12,420
Net Purchases 141,580
Freight-In 1,000
Cost of Goods Available for Sale 177,080
Less:Ending Inventory 32,400
Cost of Goods Sold 144,680
Gross Profit $301,220

b) Prepare a multi-step income statement up to and including gross profit assuming a perpetual inventory
system is used.
Greggs Interior Supplies
Income Statement (partial)
For the Year Ended December 31, 2019
Sales Revenue $450,000
Less: Sales Returns & Allowances $3,200
Sales Discounts 900 4,100
Net Sales 445,900
Cost of goods sold 144,680
Gross Proft $301,220

c) Calculate net income.

Net income = $301,220 − $12,300 − $3,600 − $6,000 + $3,250 = $282,570

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d) Prepare the closing entries using the income summary method and assuming a periodic inventory system
was used.
Date Account Title and Explanation Debit Credit
2019
Dec 31 Sales Revenue 450,000
Purchase Discounts 9,000
Purchase Returns & Allowances 3,420
Ending Inventory 32,400
Interest Revenue 3,250
Income Summary 498,070
To close all credit balance income statement accounts

Dec 31 Income Summary 215,500

Purchases 154,000
Freight-In 1,000
Sales Returns & Allowances 3,200
Sales Discounts 900
Depreciation Expense 12,300
Insurance Expense 3,600
Rent Expense 6000
Beginning Inventory 34,500
To close all debit balance income statement accounts

Dec 31 Income Summary 282,570

G. Stone, Capital 282,570
To transfer net income to owner's capital account

Dec 31 G. Stone, Capital 30,000

G. Stone, Withdrawals 30,000
To close owner withdrawals to capital account

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Case Study
CS-1 LO 3 4 5 7

George K. Connor is the owner and operator of Connor’s Computers, a business that sells computers and other
related merchandise using a perpetual inventory system. During its first month of operations, February 2019, the
following transactions occurred.

Feb 1 Purchased inventory on account for $20,000, terms of 2/10, n/30

Feb 1 Received a deposit of $10,000 from a customer for products to be delivered later
Feb 1 Returned damaged inventory from the February 1 purchase worth $3,500
Feb 5 Sold products for cash of $13,000; the cost of goods was $6,000
Feb 10 Paid the balance owing to the supplier of inventory from February 1
Feb 16 Received an advertising bill for $3,000 which will be paid next month
Feb 21 Sold products on account for $31,000; the cost of goods was $10,000
Feb 22 Paid wages and benefits with $6,000 cash; this amount includes sales salaries of $4,000 and office
salaries of $2,000
Feb 25 Purchased new computers on account for $4,000
Feb 26 A customer agreed to keep a defective product for a 30% allowance; the customer originally paid
$1,000 on account for the product
Feb 27 A customer returned an incorrect product for cash; this product had a sales price of $500 and a cost
of $300; the item was returned to the sales floor for resale
Feb 28 Incurred maintenance expense at the head office of $2,000 on account

The company uses the following chart of accounts to implement its accounting system.

Account Description Account # Account Description Account #

ASSETS REVENUE
Cash 101 Sales Revenue 400
Accounts Receivable 105 Sales Returns & Allowances 455
Merchandise Inventory 115
Computers 120 EXPENSES
Cost of Goods Sold 500
LIABILITIES Advertising Expense 505
Accounts Payable 200 Maintenance Expense 520
Unearned Revenue 215 Salaries Expense 545

OWNER’S EQUITY
Connor, Capital 300
Connor, Withdrawals 310

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Required
a) Prepare the journal entries for the period.

Date Account Title and Explanation PR Debit Credit

2019
Feb 1 Merchandise Inventory 115 20,000
Accounts Payable 200 20,000
Recorded purchase on account

Feb 1 Cash 101 10,000

Unearned Revenue 215 10,000
Recorded unearned revenue

Feb 1 Accounts Payable 200 3,500

Merchandise Inventory 115 3,500
Returned damaged inventory

Feb 5 Cash 101 13,000

Sales Revenue 400 13,000
Recorded cash sales

Feb 5 Cost of Goods Sold 500 6,000

Merchandise Inventory 115 6,000
Recorded cost of goods sold

Feb 10 Accounts Payable 525 16,500

Cash 101 16,170
Merchandise Inventory 115 330
Paid balance owing on inventory within
discount period

Feb 16 Advertising Expense 505 3,000

Accounts Payable 200 3,000
Recorded advertising expense on account

Feb 21 Accounts Receivable 105 31,000

Sales Revenue 400 31,000
Recorded sales on account

Feb 21 Cost of Goods Sold 500 10,000

Merchandise Inventory 115 10,000
Recorded cost of goods sold

Feb 22 Salaries Expense 545 6,000

Cash 101 6,000
Paid salaries and benefits

Feb 25 Computers 120 4,000

Accounts Payable 200 4,000

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Date Account Title and Explanation PR Debit Credit

Purchased computers on account

Feb 26 Sales Returns & Allowances 455 300

Accounts Receivable 105 300
Customer allowance of 10%

Feb 27 Sales Returns & Allowances 455 500

Cash 101 500
Customer returned product

Feb 27 Merchandise Inventory 115 300

Cost of Goods Sold 500 300
Returned inventory to sales floor for resale

Feb 28 Maintenance Expense 520 2,000

Accounts Payable 200 2,000
Recorded maintenance on account

b) Post the entries to the general ledger.

Account: CashGL No: 101
Date Description Pr DR CR Balance
Feb 1 J1 10,000 10,000 DR
Feb 5 J1 13,000 23,000 DR
Feb 10 J1 16,170 6,830 DR
Feb 22 J1 6,000 830 DR
Feb 27 J1 500 330 DR

Account: Accounts ReceivableGL No: 105

Date Description Pr DR CR Balance
Feb 21 J1 31,000 31,000 DR
Feb 26 J1 300 30,700 DR

Account: Merchandise InventoryGL No: 115

Date Description Pr DR CR Balance
Feb 1 J1 20,000 20,000 DR
Feb 1 J1 3,500 16,500 DR
Feb 5 J1 6,000 10,500 DR
Feb 10 J1 330 10,170 DR
Feb 21 J1 10,000 170 DR
Feb 27 J1 300 470 DR

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Account: ComputersGL No: 120

Date Description Pr DR CR Balance
Feb 25 J1 4,000 4,000 DR

Account: Accounts PayableGL No: 200

Date Description Pr DR CR Balance
Feb 1 J1 20,000 20,000 CR
Feb 1 J1 3,500 16,500 CR
Feb 10 J1 16,500 0 CR
Feb 16 J1 3,000 3,000 CR
Feb 25 J1 4,000 7,000 CR
Feb 28 J1 2,000 9,000 CR

Account: Unearned RevenueGL No: 215

Date Description Pr DR CR Balance
Feb 1 J1 10,000 10,000 CR

Account: Connor, CapitalGL No: 300

Date Description Pr DR CR Balance

Account: Connor, WithdrawalsGL No: 310

Date Description Pr DR CR Balance

Account: Sales RevenueGL No: 400

Date Description Pr DR CR Balance
Feb 5 J1 13,000 13,000 CR
Feb 21 J1 31,000 44,000 CR

Account: Sales Returns & AllowancesGL No: 455

Date Description Pr DR CR Balance
Feb 26 J1 300 300 DR
Feb 27 J1 500 800 DR

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Account: Cost of Goods SoldGL No: 500

Date Description Pr DR CR Balance
Feb 5 J1 6,000 6,000 DR
Feb 21 J1 10,000 16,000 DR
Feb 27 J1 300 15,700 DR

Account: Advertising ExpenseGL No: 505

Date Description Pr DR CR Balance
Feb 16 J1 3,000 3,000 DR

Account: Maintenance ExpenseGL No: 520

Date Description Pr DR CR Balance
Feb 28 J1 2,000 2,000 DR
DR

Account: Salaries ExpenseGL No: 545

Date Description Pr DR CR Balance
Feb 22 J1 6,000 6,000 DR

c) Prepare a trial balance.

Connor’s Computers
Trial Balance
February 28, 2019
Account Title DR CR
Cash $330
Accounts Receivable 30,700
Merchandise Inventory 470
Computers 4,000
Accounts Payable $9,000
Unearned Revenue 10,000
Sales Revenue 44,000
Sales Returns & Allowances 800
Cost of Goods Sold 15,700
Advertising Expense 3,000
Maintenance Expense 2,000
Salaries Expense 6,000
Total $63,000 $63,000

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d) Prepare a multi-step income statement for the period.

Connor’s Computers
Income Statement
For the Month Ended February 28, 2019
Sales Revenue $44,000
Less: Sales Returns & Allowances 800
Net Sales 43,200
Cost of Goods Sold 15,700
Gross Profit 27,500

Operating Expenses
Selling Expenses
Advertising Expense $3,000
Sales Salaries Expense 4,000
Total Selling Expenses $7,000

Administrative Expenses
Maintenance Expense 2,000
Office Salaries Expense 2,000
Total Administrative Expenses 4,000
Total Operating Expenses 11,000
Net Income $16,500

e) Prepare a statement of owner’s equity for the period.

Connor’s Computers
Statement of Owner’s Equity
For the Month Ended February 28, 2019
Connor, Capital, February 1, 2019 $0
Add: Net Income 16,500
Connor, Capital, February 28, 2019 $16,500

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f) Prepare a classified balance sheet for the period.

Connor’s Computers
Balance Sheet
As at February 28, 2019
Assets
Current Assets
Cash $330
Accounts Receivable 30,700
Merchandise Inventory 470
Total Current Assets $31,500
Property, Plant, & Equipment
Computers 4,000
Total Property, Plant, & Equipment 4,000
Total Assets $35,500

Liabilities
Current Liabilities
Accounts Payable $9,000
Unearned Revenue 10,000
Total Current Liabilities $19,000
Total Liabilities 19,000

Owner’s Equity
Connor, Capital 16,500
Total Owner’s Equity 16,500
Total Liabilities and Owner’s Equity $35,500

g) Calculate the gross profit margin on product sales.

Gross Profit
Gross Profit Margin (%) = ——————
Net Sales
$27,500
= ————
$43,200
= 0.64 or 64%

h) Calculate the current ratio at the end of the period.

Current Assets
Current Ratio = ————————
Current Liabilities
$31,500
= ————
$19,000
= 1.66

i) What basic economic theory is related to proper management of inventory, and how would a business be
impacted if it was not properly applied?

The basic economic principle of supply and demand can be applied to management of inventory in that, if
a business is not able to supply inventory to meet demand from customers, it will not receive the sales, and
if sales are not recorded, profits will be lost. On the other hand, if demand is not there (i.e. inventory is not

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selling), cash and other resources have been tied up in inventory that could have been used elsewhere by
the business.
Therefore, management should strive to ensure they implement the appropriate buying and selling policies
and procedures related to inventory to meet supply and demand of their merchandise.

CS-2 LO 3 4 5 6 7

Freestyle Fashion, owned by Suzy Styles, is an urban clothing retailer using the perpetual inventory system. Its
balance sheet as at January 1, 2019, is presented below.

Freestyle Fashion
Balance Sheet
As at January 1, 2019
Current Assets
Cash $28,400
Merchandise Inventory 50,000
Prepaid Rent 12,000
Total Current Assets $90,400
Property, Plant & Equipment
Equipment 32,000
Total Property, Plant & Equipment 32,000
Total Assets $122,400

Current Liabilities
Accounts Payable $20,500
Unearned Revenue 12,000
Total Current Liabilities $32,500
Long-Term Liabilities
Bank Loan 60,000
Total Long-Term Liabilities 60,000
Total Liabilities 92,500
Owner’s Equity
Styles, Capital 29,900
Total Liabilities and Owner's Equity $122,400

During January 2019, Freestyle Fashion had the following transactions.

Jan 2 Purchased 490 jackets at $50 each on account (with terms 2/10, n/30)
Jan 5 Sold $50,000 worth of inventory on account; this inventory cost $39,000
Jan 9 Purchased 100 pairs of jeans at $20 each on account (with terms 4/15, n/30)
Jan 11 Paid the balance owed to the supplier for all the jackets purchased on January 2
Jan 16 Paid wages of $2,000
Jan 18 A customer returned products for cash to the store due to a defect; these products were originally
sold for $200 and cost $75
Jan 21 Paid the balance owed to the supplier for jeans purchased on January 9
Jan 24 Received $25,000 cash from sales previously made on account

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Jan 26 Incurred $2,500 in utilities expenses, to be paid next month

Jan 30 Sold $20,000 worth of inventory for cash; this inventory cost $15,000

The company uses the following chart of accounts to implement its accounting system.

Account Description Account # Account Description Account #

ASSETS REVENUE
Cash 101 Sales Revenue 400
Accounts Receivable 105 Sales Returns & Allowances 405
Prepaid Rent 110 Sales Discounts 410
Merchandise Inventory 115
Equipment 120 EXPENSES
Accumulated Depreciation—Equipment 125 Cost of Goods Sold 500
Advertising Expense 505
LIABILITIES
Depreciation Expense 510
Accounts Payable 200
Insurance Expense 515
Interest Payable 205
Interest Expense 520
Salary Payable 210
Maintenance Expense 525
Unearned Revenue 215
Office Supplies Expense 530
Bank Loan 220
Professional Fees Expense 535
OWNER’S EQUITY Rent Expense 540
Styles, Capital 300 Salaries Expense 545
Styles, Withdrawals 310 Utilities Expense 550
Income Summary 315 Travel Expense 555

Required
Suzi is looking to expand her business and as such has arranged a meeting with private investors to review
operating results for the month ended January 31, 2019. Knowing you are currently taking an accounting
course, she has asked you to complete the following.

a) Journalize the transactions for January 2019.

Date Account Title and Explanation PR Debit Credit

2019
Jan 2 Merchandise Inventory 115 24,500
Accounts Payable 200 24,500
Purchased inventory on account

Jan 5 Accounts Receivable 105 50,000

Sales Revenue 400 50,000
Made sales on account

Jan 5 Cost of Goods Sold 500 39,000

Merchandise Inventory 115 39,000
Record cost of goods sold

Jan 9 Merchandise Inventory 115 2,000

Accounts Payable 200 2,000
Purchased inventory on account

Jan 11 Accounts Payable 200 24,500

Cash 101 24,010
Merchandise Inventory 115 490
Paid supplier for inventory purchased on Jan 2

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Date Account Title and Explanation PR Debit Credit

Jan 16 Salaries Expense 545 2,000
Cash 101 2,000
Paid salaries

Jan 18 Sales Returns & Allowances 405 200

Cash 101 200
Record returned sales

Jan 18 Merchandise Inventory 115 75

Cost of Goods Sold 500 75
Record the return of goods

Jan 21 Accounts Payable 200 2,000

Cash 101 1,920
Merchandise Inventory 115 80
Paid supplier for inventory purchased on Jan 9

Jan 24 Cash 101 25,000

Accounts Receivable 105 25,000
Collected accounts receivable

Jan 26 Utilities Expense 550 2,500

Accounts Payable 200 2,500
Incurred utilities expense

Jan 30 Cash 101 20,000

Sales Revenue 400 20,000
Made cash sales

Jan 30 Cost of Goods Sold 500 15,000

Merchandise Inventory 115 15,000
Record cost of goods sold

b) Journalize the following adjustments (to be recorded on January 31, 2019).

Jan 31 Prepaid rent represents one year of retail space rent; one month of prepaid rent has been used
Jan 31 Depreciation of store equipment for the month is $2,000
Jan 31 $1,000 of unearned revenue has now been earned
Jan 31 $100 of interest is accrued and owed on the bank loan

Date Account Title and Explanation PR Debit Credit

2019
Jan 31 Rent Expense 540 1,000
Prepaid Rent 110 1,000
Expense one month of rent

Jan 31 Depreciation Expense 510 2,000

Accumulated Depreciation—Equipment 125 2,000
Depreciate equipment

Jan 31 Unearned Revenue 215 1,000

Sales Revenue 400 1,000
Earned revenue

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Date Account Title and Explanation PR Debit Credit

Jan 31 Interest Expense 520 100
Interest Payable 205 100
Accrued interest on the bank loan

c) Post the transactions to the general ledger.

General Ledger
Account: CashGL No: 101
Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 28,400 DR
Jan 11 J1 24,010 4,390 DR
Jan 16 J1 2,000 2,390 DR
Jan 18 J1 200 2,190 DR
Jan 21 J1 1,920 270 DR
Jan 24 J1 25,000 25,270 DR
Jan 30 J1 20,000 45,270 DR

Account: Accounts Receivable GL No: 105

Date Description PR DR CR Balance
2019
Jan 5 J1 50,000 50,000 DR
Jan 24 J1 25,000 25,000 DR

Account: Prepaid RentGL No: 110

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 12,000 DR
Jan 31 Adjustment J2 1,000 11,000 DR

Account: Merchandise InventoryGL No: 115

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 50,000 DR
Jan 2 J1 24,500 74,500 DR
Jan 5 J1 39,000 35,500 DR
Jan 9 J1 2,000 37,500 DR
Jan 11 J1 490 37,010 DR
Jan 18 J1 75 37,085 DR
Jan 21 J1 80 37,005 DR
Jan 30 J1 15,000 22,005 DR

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Account: EquipmentGL No: 120

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 32,000 DR

Account: Accumulated Depreciation—EquipmentGL No: 125

Date Description PR DR CR Balance
2019
Jan 31 Adjustment J2 2,000 2,000 CR

Account: Accounts PayableGL No: 200

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 20,500 CR
Jan 2 J1 24,500 45,000 CR
Jan 9 J1 2,000 47,000 CR
Jan 11 J1 24,500 22,500 CR
Jan 21 J1 2,000 20,500 CR
Jan 26 J1 2,500 23,000 CR

Account: Interest Payable GL No: 205

Date Description PR DR CR Balance
2019
Jan 31 Adjustment J2 100 100 CR

Account: Unearned RevenueGL No: 215

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 12,000 CR
Jan 31 Adjustment J2 1,000 11,000 CR

Account: Bank LoanGL No: 220

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 60,000 CR

Account: Styles, CapitalGL No: 300

Date Description PR DR CR Balance
2019
Jan 1 Opening Balance 29,900 CR
Jan 31 Closing Entry J3 9,275 39,175 CR

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Account: Income SummaryGL No: 315

Date Description PR DR CR Balance
2019
Jan 31 Closing Entry J3 71,000 71,000 CR
Jan 31 Closing Entry J3 61,725 9,275 CR
Jan 31 Closing Entry J3 9,275 0 CR

Account: Sales RevenueGL No: 400

Date Description PR DR CR Balance
2019
Jan 5 J1 50,000 50,000 CR
Jan 30 J1 20,000 70,000 CR
Jan 31 Adjustment J2 1,000 71,000 CR
Jan 31 Closing Entry J3 71,000 0 CR

Account: Sales Returns & AllowancesGL No: 405

Date Description PR DR CR Balance
2019
Jan 18 J1 200 200 DR
Jan 31 Closing Entry J3 200 0 DR

Account: Cost of Goods SoldGL No: 500

Date Description PR DR CR Balance
2019
Jan 5 J1 39,000 39,000 DR
Jan 18 J1 75 38,925 DR
Jan 30 J1 15,000 53,925 DR
Jan 31 Closing Entry J3 53,925 0 DR

Account: Depreciation ExpenseGL No: 510

Date Description PR DR CR Balance
2019
Jan 31 Adjustment J2 2,000 2,000 DR
Jan 31 Closing Entry J3 2,000 0 DR

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Account: Interest ExpenseGL No: 520

Date Description PR DR CR Balance
2019
Jan 31 Adjustment J2 100 100 DR
Jan 31 Closing Entry J3 100 0 DR

Account: Rent ExpenseGL No: 540

Date Description PR DR CR Balance
2019
Jan 31 Adjustment J2 1,000 1,000 DR
Jan 31 Closing Entry J3 1,000 0 DR

Account: Salaries ExpenseGL No: 545

Date Description PR DR CR Balance
2019
Jan 16 J1 2,000 2,000 DR
Jan 31 Closing Entry J3 2,000 0 DR

Account: Utilities Expense GL No: 550

Date Description PR DR CR Balance
2019
Jan 26 J1 2,500 2,500 DR
Jan 31 Closing Entry J3 2,500 0 DR

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d) Prepare a multi-step income statement for January 2019. Assume that $2,000 of the utilities expense is for
retail space and $500 is for head office. Assume that $1,200 of the salaries expense is for sales and $800 is
for office staff.

Freestyle Fashion
Income Statement
For the Month Ended January 31, 2019
Sales Revenue $71,000
Less: Sales Returns & Allowances 200
Net Sales 70,800
Cost of Goods Sold 53,925
Gross Profit 16,875

Operating Expenses
Selling Expenses
Utilities Expense—Retail Space $2,000
Rent Expense—Retail Space 1,000
Depreciation Expense 2,000
Sales Salaries Expense 1,200
Total Selling Expenses $6,200

Administrative Expenses
Utilities Expense—Head Office 500
Office Salaries Expense 800
Total Administrative Expenses 1,300
Total Operating Expenses 7,500
Income from Operations 9,375

Other Income and Expenses

Interest Expense (100)
Net Income $9,275

e) Prepare a statement of owner’s equity for January 2019.

Freestyle Fashion
Statement of Owner’s Equity
For the Month Ended January 31, 2019
Styles, Capital, January 1 $29,900
Add: Net Income 9,275
Styles, Capital, January 31 $39,175

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f ) Prepare a balance sheet for January 2019.

Freestyle Fashion
Balance Sheet
As at January 31, 2019
Current Assets
Cash $45,270
Merchandise Inventory 22,005
Accounts Receivable 25,000
Prepaid Rent 11,000
Total Current Assets $103,275
Property, Plant & Equipment
Equipment 32,000
Accumulated Depreciation (2,000)
Total Property, Plant & Equipment 30,000
Total Assets $133,275

Current Liabilities
Accounts Payable $23,000
Interest Payable 100
Unearned Revenue 11,000
Total Current Liabilities $34,100
Long-Term Liabilities
Bank Loan 60,000
Total Long-Term Liabilities 60,000
Total Liabilities 94,100

Owner’s Equity
Styles, Capital 39,175
Total Liabilities and Owner's Equity $133,275

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g) Prepare the month-end closing journal entries. Use the income summary account.

Date Account Title and Explanation PR Debit Credit

2019
Jan 31 Sales Revenue 400 71,000
Income Summary 315 71,000
Close revenue accounts

Jan 31 Income Summary 315 61,725

Cost of Goods Sold 500 53,925
Depreciation Expense 510 2,000
Interest Expense 520 100
Salaries Expense 545 2,000
Utilities Expense 550 2,500
Rent Expense 540 1,000
Sales Returns & Allowances 405 200
Close expense accounts

Jan 31 Income Summary 315 9,275

Styles, Capital 300 9,275
Close income summary account

h) Suzi is concerned the investors will question why her inventory levels are less than half of that at the beginning
of the month. Suggest some control measures she could implement to improve on this result in the future.

Suzi should communicate her objectives for maintaining inventory levels to her staff and implement the
necessary changes in procedures and/or processes that will achieve the stated objectives. For example, if
levels of inventory are to be consistent, staff should be aware that once inventory reaches a certain level,
more products should be ordered to prevent shortages. If Suzi finds that even after implementing changes
inventory levels are not being maintained, she may want to re-evaluate this objective.

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