Download Exercise 4-1 (30 minutes) Apr. 2 Merchandise Inventory 3,600

Exercise 4-1 (30 minutes)
Apr. 2
Merchandise Inventory ..................................... 3,600
Accounts Payable—Blue ..........................
3,600
Purchased merchandise on credit.
3 Merchandise Inventory .....................................
Cash ............................................................
200
200
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Blue ..................................
Merchandise Inventory ..............................
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Blue .................................. 3,000
Merchandise Inventory ..............................
Cash ............................................................
60
2,940
Paid balance (less 2%) within discount period.
18 Merchandise Inventory .................................... 7,500
Accounts Payable—Fox ............................
7,500
Purchased merchandise on credit.
21 Accounts Payable—Fox ................................... 2,100
Merchandise Inventory .............................
2,100
Received an allowance on purchase.
28 Accounts Payable—Fox ................................... 5,400
Merchandise Inventory ..............................
Cash ............................................................
108
5,292
Paid balance (less 2%) within discount period.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
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Exercise 4-2 (30 minutes)
1.
BUYER – Taos Company
Credit Purchase
Merchandise Inventory .................................... 22,000
Accounts Payable .....................................
22,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ............................................ 22,000
Merchandise Inventory .............................
Cash ...........................................................
660
21,340
Paid account payable within 3% discount period.
2.
SELLER – Tuscon Company
Credit Sale
Accounts Receivable ....................................... 22,000
Sales...........................................................
22,000
Sold merchandise on account.
Cost of Goods Sold ......................................... 15,000
Merchandise Inventory ............................
15,000
To record cost of sale.
Cash Collection
Cash ................................................................... 21,340
Sales Discounts ................................................
660
Accounts Receivable ................................
22,000
Collected account receivable.
3.
Amount borrowed to pay with discount .......................
Annual rate of interest ...................................................
Interest per year ..............................................................
$ 21,340
x 11%
$2,347.40
Interest per day ($2,347.40 / 365 days) ..........................
$6.43
Savings from discount taken ($22,000 - $21,340) ........
Interest paid on 50-day loan (50 days x $6.43) .............
Net savings from borrowing to pay in discount period ..
$ 660.00
(321.50)
$ 338.50
©McGraw-Hill Companies, 2012
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Financial Accounting, 6th Edition
Exercise 4-3 (10 minutes)
Operating cycle of a merchandiser with credit sales follows (chronological):
1
(a) purchases of merchandise
3
(b) credit sales to customers
2
(c) inventory made available for sale
5
(d) cash collections from customers
4
(e) accounts receivable accounted for
Exercise 4-4 (30 minutes)
May 5
Accounts Receivable ....................................... 8,400
Sales ...........................................................
8,400
Sold merchandise on credit (600 x $14).
5
Cost of Goods Sold .......................................... 6,000
Merchandise Inventory .............................
6,000
To record cost of sale (600 x $10).
a.
May 7
Sales Returns and Allowances ....................... 2,800
Accounts Receivable ................................
2,800
Accepted a return from a customer (200 x $14).
7
Merchandise Inventory .................................... 2,000
Cost of Goods Sold ..................................
2,000
Returned merchandise to inventory (200 x $10).
b.
May 8
Sales Returns and Allowances ........................
Accounts Receivable .................................
300
300
Granted allowance for damaged merchandise.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
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Exercise 4-4 (Concluded)
c.
May 15 Sales Returns and Allowances ........................
Accounts Receivable .................................
92
92
Granted allowance for incorrect merchandise.
15 Sales Returns and Allowances ........................
Accounts Receivable .................................
406
406
Accepted return from a customer (29 x $14).
15 Merchandise Inventory .....................................
Cost of Goods Sold ...................................
290
290
Returned merchandise to inventory (29 x $10).
Exercise 4-5 (15 minutes)
May 5
Merchandise Inventory .................................... 8,400
Accounts Payable .....................................
8,400
Purchased merchandise on credit (600 x $14).
a.
May 7
Accounts Payable ............................................ 2,800
Merchandise Inventory .............................
2,800
Returned unwanted merchandise (200 x $14).
b.
May 8
Accounts Payable ............................................
Merchandise Inventory .............................
300
300
To record allowance for damaged merchandise.
c.
May 15 Accounts Payable ............................................
Merchandise Inventory .............................
92
92
To record allowance for wrong color.
May 15 Accounts Payable ............................................
Merchandise Inventory .............................
406
406
To record return of merchandise. (29 x $14).
©McGraw-Hill Companies, 2012
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Financial Accounting, 6th Edition
Exercise 4-6 (25 minutes)
1. Entries for Smythe Company (BUYER):
May 11 Merchandise Inventory .................................. 30,000
Accounts Payable ....................................
30,000
Purchased merchandise on credit.
11 Merchandise Inventory ..................................
Cash ..........................................................
335
335
Paid shipping charges on purchased
merchandise.
12 Accounts Payable ...........................................
Merchandise Inventory ...........................
1,200
1,200
Returned unacceptable merchandise.
20 Accounts Payable ........................................... 28,800
Merchandise Inventory ............................
Cash ..........................................................
864
27,936
Paid balance within the 3% discount period.
2. Entries for Hope Corporation (SELLER):
May 11 Accounts Receivable ...................................... 30,000
Sales..........................................................
30,000
Sold merchandise on account.
11 Cost of Goods Sold ......................................... 20,000
Merchandise Inventory ............................
20,000
To record cost of sale.
13 Sales Returns and Allowances ......................
Accounts Receivable ...............................
1,200
1,200
Accepted a return from a customer.
13 Merchandise Inventory ..................................
Cost of Goods Sold .................................
800
800
Returned goods to inventory.
21 Cash .................................................................. 27,936
Sales Discounts ...............................................
864
Accounts Receivable ...............................
28,800
Collected account receivable.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
223
Exercise 4-7 (20 minutes)
In today’s competitive world, organizations must concentrate on meeting their
customers’ needs and avoiding dissatisfaction. If these needs are not met and
dissatisfaction grows, the customers will deal with other companies or entities.
One measure of dissatisfaction of customers is the amount of sold goods that
are later returned. Customer dissatisfaction needs to be understood and then
dealt with promptly to encourage them to remain loyal. The reasons for the
return also need to be determined to allow the problem to be avoided in the
future. For example, the returns might arise from product defects, shipping
damage, misleading information provided at the time of sale, or fickle customers.
An important early step in controlling returns is to have information about their
dollar amount. In addition, managers can set goals for reducing the dollar
amount of sales returns. Both objectives can be helped by having the
company’s accounting system record the sales value of returned goods in a
separate contra account instead of the Sales account. This approach captures
the information at the time of the return and allows it to be easily reported.
While a company’s sales return record is important for managers, it is also
valuable information for external decision makers. This information can help
external users identify organizations focusing on customer satisfaction and
product quality. Although management might choose to report the amount of
sales returns as evidence of sales satisfaction, their amount is rarely reported in
financial statements provided to investors, creditors, and other external users.
Exercise 4-8 (30 minutes)
Balance, Dec. 31, 2010 .........
Invoice cost of purchases ...
Returns by customers .........
Transportation-in..................
Balance, Dec. 31, 2011
Merchandise Inventory
27,000
Purchase discounts received .............................................
1,600
190,500
Purchase returns and allow. ..............................................
4,100
2,200
Cost of sales transactions ..................................................
186,000
1,900
Shrinkage .............................................................................
700
29,200
Cost of Goods Sold
Cost of sales transactions ... 186,000
Returns by customers and
Inventory shrinkage
restored to inventory ........................................................
2,200
recorded in Dec. 31,
2011, adjusting entry ..........
700
Balance, Dec. 31, 2011
184,500
©McGraw-Hill Companies, 2012
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Financial Accounting, 6th Edition
Exercise 4-9 (30 minutes)
Note: The original missing numbers are blocked.
Sales ............................
(a)
(b)
(c)
(d)
(e)
$60,000
$42,500
$36,000
$78,000
$23,600
Cost of goods sold:
Merch. inv. (beg.) .......
Total cost of merch.
purchases ................
6,000
17,050
7,500
7,000
2,560
36,000
1,550
33,750
32,000
5,600
Merch. inv. (end.) .......
(7,950)
(2,700)
(9,000)
(6,600)
Cost of goods sold ....
34,050
15,900
32,250
32,400
5,600
Gross profit .................
25,950
26,600
3,750
45,600
18,000
Expenses.....................
9,000
10,650
12,150
2,600
6,000
Net income (loss) .......
$16,950
$15,950
$ (8,400)
$43,000
$12,000
(2,560)
Explanations:
a. Find merchandise inventory (ending) by subtracting cost of goods sold from
goods available for sale. Find gross profit as the difference between the sales
and cost of goods sold. Find net income as the gross profit less the expenses.
b. Find total cost of merchandise purchases by finding the number that makes the
total equal the cost of goods sold. Find gross profit from sales less cost of
goods sold.
c. Find cost of goods sold from sales less gross profit. Find cost of merchandise
purchases by finding the number to make the calculation equal cost of goods
sold.
d. Calculate cost of goods sold as usual. Calculate sales as gross profit plus cost of
goods sold.
e. Find merchandise inventory (ending) by subtracting cost of goods sold from
goods available for sale. Find gross profit from sales less cost of goods sold.
Find net income as gross profit less expenses.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
225
Exercise 4-10 (25 minutes)
Adjusting entries:
Dec. 31 Sales Salaries Expense ................................... 1,600
Salaries Payable........................................
1,600
To record accrued salaries.
Dec. 31 Selling Expenses .............................................. 2,000
Prepaid Selling Expenses ........................
2,000
To record expired prepaid selling expenses.
Dec. 31 Cost of Goods Sold ..........................................
Merchandise Inventory .............................
550
550
To record inventory shrinkage
($28,000 - $27,450).
Closing entries:
Dec. 31 Sales .............................................................. 429,000
Income Summary ...................................
429,000
To close temporary accounts with credit
balances.
Dec. 31 Income Summary .......................................... 426,650
Sales Returns and Allowances .............
Sales Discounts .....................................
Cost of Goods Sold ($211,000 + $550) ........
Sales Salaries Exp. ($47,000 + $1,600) ........
Utilities Expense ....................................
Selling Expenses ($35,000 + $2,000) ...........
Administrative Expenses ......................
16,500
4,000
211,550
48,600
14,000
37,000
95,000
To close temporary accounts with debit
balances.
Dec. 31 Income Summary ..........................................
Retained Earnings .................................
2,350
2,350
To close Income Summary account.
Dec. 31 Retained Earnings .........................................
Dividends ................................................
2,200
2,200
To close the dividends account.
©McGraw-Hill Companies, 2012
226
Financial Accounting, 6th Edition
Exercise 4-11 (20 minutes)
The employee’s oversight in omitting these goods from the physical count
would cause the cost of the physical count of ending inventory to be
understated. Therefore, the comparison of the perpetual inventory records
with the physical count would incorrectly indicate an additional shrinkage of
$2,000. An entry would be made to debit Cost of Goods Sold and credit
Merchandise Inventory for this amount. As a result, the company’s ending
inventory, current assets, total assets, equity, and net income would all be
understated by $2,000.
As a result of this error:
 Return on assets would be understated (numerator impact outweighs the
denominator impact).
 Debt ratio would be overstated because its denominator would be
understated.
 Current ratio would be understated because its numerator would be
understated.
 Acid-test ratio would be unaffected because inventory is not a quick asset.
Exercise 4-12 (20 minutes)
See the solution explanation in Exercise 4-11. As a result of this error:
 Gross margin (gross profit/sales) would be understated because the gross
profit would be understated.
 Profit margin (net income/sales) would be understated because the net
income would be understated.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
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Exercise 4-13 (15 minutes)
Case A
Case B
Case C
Current ratio computation:
Current assets ........................
Current liabilities ....................
Current ratio ............................
$4,000
$2,200
1.82
$3,500
$1,100
3.18
$7,300
$3,650
2.00
Cash .........................................
Short-term investments .........
Current receivables ................
Quick assets ...........................
$ 800
0
0
$ 800
$ 510
0
790
$1,300
$3,200
1,100
800
$5,100
Current liabilities ....................
$2,200
$1,100
$3,650
Acid-test ratio .........................
0.36
1.18
1.40
Acid-test ratio computation:
Interpretation:
Case B exhibits the superior ability to meet current year obligations using the
current ratio, whereas Case C has the superior ability to meet near-term
obligations using the acid-test ratio. Specifically, all three companies’
current ratios are marginally adequate (such as Case A’s 1.82) to strong
(such as Case B’s 3.18). Further, two companies’ acid-test ratios exceed the
common benchmark (rule-of-thumb) of 1.0 (Case C’s is 1.40 and Case B’s is
1.18); whereas Case A falls short of the 1.0 benchmark.
In summary, Case A looks the worst for its ability to pay its immediate and
current year obligations, while both Cases B and C look strong. Moreover,
Case B looks a bit better using the current ratio, which reflects on its ability
to cover current year obligations, whereas Case C looks a bit better using the
acid-test ratio, which reflects on its ability to cover immediate obligations.
©McGraw-Hill Companies, 2012
228
Financial Accounting, 6th Edition
Exercise 4-14 (20 minutes)
Perpetual Inventory System
1)
Nov. 1
Merchandise Inventory .................................... 1,400
Accounts Payable .....................................
1,400
To record merchandise purchases on credit.
2)
Nov. 5 Accounts Payable ............................................ 1,400
Merchandise Inventory .............................
Cash ...........................................................
28
1,372
To record cash payment in discount period.
*$1,400 x 0.02
3)
Nov. 7 Cash ...................................................................
Merchandise Inventory .............................
98
98
To record check received for return of purchases
previously paid for with discount already taken.
*$100 – ($100 x 0.02)
4)
Nov. 10 Merchandise Inventory ....................................
Cash ...........................................................
80
80
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable ....................................... 1,500
Sales...........................................................
1,500
To record sale of merchandise on credit.
Nov. 13 Cost of Goods Sold .........................................
Merchandise Inventory .............................
750
750
To record cost of merchandise sold.
6)
Nov. 16 Sales Returns and Allowances .......................
Accounts Receivable ................................
200
200
To record return of merchandise sold on credit.
Nov. 16 Merchandise Inventory ....................................
Cost of Goods Sold ..................................
100
100
To record cost of merchandise returned.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
229
Exercise 4-15 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only
Sales (gross) ...............................................................
Less: Sales discounts ............................................
Sales returns and allowances .....................
Net sales ......................................................................
$100,000
$2,000
8,000
10,000
90,000
Exercise 4-16A (30 minutes)
Apr. 2
Purchases .......................................................... 3,600
Accounts Payable—Blue ..........................
3,600
Purchased merchandise on credit.
3 Transportation-In ...............................................
Cash ............................................................
200
200
Paid shipping charges on purchased
merchandise.
4 Accounts Payable—Blue ..................................
Purchases Returns & Allowances ............
600
600
Returned unacceptable merchandise.
17 Accounts Payable—Blue .................................. 3,000
Purchases Discounts ................................
Cash ............................................................
60
2,940
Paid balance (less 2%) within discount period.
18 Purchases .......................................................... 7,500
Accounts Payable—Fox ............................
7,500
Purchased merchandise on credit.
21 Accounts Payable—Fox ................................... 2,100
Purchases Returns & Allowances ............
2,100
Received an allowance on purchase.
28 Accounts Payable—Fox ................................... 5,400
Purchases Discounts ................................
Cash ............................................................
108
5,292
Paid balance (less 2%) within discount period.
©McGraw-Hill Companies, 2012
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Financial Accounting, 6th Edition
Exercise 4-17A (30 minutes)
1.
BUYER – Taos Company
Credit Purchase
Purchases .........................................................
Accounts Payable .....................................
22,000
22,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable ............................................
Purchases Discounts ...............................
Cash ...........................................................
22,000
660
21,340
Paid account payable within 3% discount period.
2.
SELLER – Tuscon Company
Credit Sale
Accounts Receivable .......................................
Sales...........................................................
22,000
22,000
Sold merchandise on account.
Cash Collection
Cash ...................................................................
Sales Discounts ................................................
Accounts Receivable ................................
21,340
660
22,000
Collected account receivable.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
231
Exercise 4-18A (25 minutes)
1. Entries for Smythe Company (BUYER):
May 11 Purchases ........................................................ 30,000
Accounts Payable ....................................
30,000
Purchased merchandise on credit.
11 Transportation-In .............................................
Cash ..........................................................
335
335
Paid shipping charges on purchased
merchandise.
12 Accounts Payable ...........................................
Purchases Returns and Allowances ......
1,200
1,200
Returned unacceptable merchandise.
20 Accounts Payable ........................................... 28,800
Purchases Discounts ..............................
Cash ..........................................................
864
27,936
Paid balance within the 3% discount period.
2. Entries for Hope Corporation (SELLER):
May 11 Accounts Receivable ...................................... 30,000
Sales..........................................................
30,000
Sold merchandise on account.
13 Sales Returns and Allowances ......................
Accounts Receivable ...............................
1,200
1,200
Accepted a return from a customer.
21 Cash .................................................................. 27,936
Sales Discounts ...............................................
864
Accounts Receivable ...............................
28,800
Collected account receivable.
©McGraw-Hill Companies, 2012
232
Financial Accounting, 6th Edition
Exercise 4-19A (20 minutes)
Periodic Inventory System
1)
Nov. 1
Purchases ......................................................... 1,400
Accounts Payable .....................................
1,400
To record purchases on credit.
2)
Nov. 5 Accounts Payable ............................................ 1,400
Purchases Discount .................................
Cash ...........................................................
28
1,372
To record cash payment in discount period.
*$1,400 x 2%
3)
Nov. 7 Cash ...................................................................
Purchases Returns and Allowances .......
98
98
To record check received for return of purchases
previously paid for with discount already taken.
*$100 – ($100 x 2%)
4)
Nov. 10 Transportation-In ..............................................
Cash ...........................................................
80
80
To record payment of freight charges.
5)
Nov. 13 Accounts Receivable ....................................... 1,500
Sales...........................................................
1,500
To record sale of merchandise on credit...........
6)
Nov. 16 Sales Returns and Allowances .......................
Accounts Receivable ................................
200
200
To record return of merchandise sold on credit.
©McGraw-Hill Companies, 2012
Solutions Manual, Chapter 4
233
Exercise 4-20 (20 minutes)
L´Oréal
Income Statement (€ millions)
For Year Ended December 31, 2009
Net sales ...................................................................................
€17,472.6
Cost of sales .............................................................................
5,161.6
Gross profit..........................................................................
12,311.0
Research and development expense ....................................
(609.2)
Advertising and promotion expense......................................
(5,388.7)
Selling, general and administrative expense ........................
(3,735.5)
Finance costs ...........................................................................
(76.0)
Other expense ..........................................................................
(30.6)
Profit before tax expense ...................................................
2,471.0
Income tax expense .................................................................
676.1
Net profit ...................................................................................
€ 1,794.9
©McGraw-Hill Companies, 2012
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Financial Accounting, 6th Edition