Exercises
Exercise 4-1 (10 minutes)
Operating cycle of a merchandiser with credit sales follows (chronological):
2(a) inventory made available for sale
5(b) cash collections from customers
3(c) credit sales to customers
1(d) purchases of merchandise
4(e) accounts receivable accounted for
Exercise 4-2 (30 minutes)
Apr. 2Merchandise Inventory...... 4,600
Accounts Payable—Lyon...... 4,600
Purchased merchandise on credit.
3Merchandise Inventory...... 300
Cash...... 300
Paid shipping charges on purchased merchandise.
4Accounts Payable—Lyon...... 600
Merchandise Inventory...... 600
Returned unacceptable merchandise.
17Accounts Payable—Lyon...... 4,000
Merchandise Inventory*...... 80
Cash...... 3,920
*[($4,600 - $600) x 2%]
Paid balance (less 2%) within discount period.
18Merchandise Inventory ...... 8,500
Accounts Payable—Frist...... 8,500
Purchased merchandise on credit.
21Accounts Payable—Frist...... 1,100
Merchandise Inventory ...... 1,100
Received an allowance on purchase.
28Accounts Payable—Frist...... 7,400
Merchandise Inventory*...... 148
Cash...... 7,252
*[($8,500 - $1,100) x 2%]
Paid balance (less 2%) within discount period.
Exercise 4-3 (30 minutes)
1.BUYER- Santa Fe Company
a) Credit Purchase
Merchandise Inventory...... 24,000
Accounts Payable...... 24,000
Purchased merchandise on credit.
b) Cash Payment
Accounts Payable...... 24,000
Merchandise Inventory*...... 720
Cash...... 23,280
*[24,000 x 3%]
Paid account payable within 3% discount period.
2.SELLER – Mesa Company
a) Credit Sale
Accounts Receivable...... 24,000
Sales...... 24,000
Sold merchandise on account.
Cost of Goods Sold ...... 16,000
Merchandise Inventory ...... 16,000
To record cost of sale.
b) Cash Collection
Cash...... 23,280
Sales Discounts...... 720
Accounts Receivable...... 24,000
Collected account receivable.
3.Amount borrowed to pay with discount...... $ 23,280
Annual rate of interest ...... x 8%
Interest per year...... $1,862.40
Interest per day ($1,862.40 / 365 days)...... $5.10*
Savings from discount taken ($24,000 - $23,280)..... $ 720.00
Interest paid on 50-day loan (50 days x $5.10)...... (255.00)
Net savings from borrowing to pay in discount period. $ 465.00
*Rounded; if not rounded, the net savings are $464.88 instead of $465.00.
Exercise 4-4 (30 minutes)
May 5Accounts Receivable ...... 21,000
Sales ...... 21,000
Sold merchandise on credit (1,500 x $14).
5Cost of Goods Sold ...... 15,000
Merchandise Inventory ...... 15,000
To record cost of sale (1,500 x $10).
a.
May 7Sales Returns and Allowances ...... 2,800
Accounts Receivable ...... 2,800
Accepted a return from a customer (200 x $14).
7Merchandise Inventory ...... 2,000
Cost of Goods Sold ...... 2,000
Returned merchandise to inventory (200 x $10).
b.
May 8Sales Returns and Allowances...... 600
Accounts Receivable...... 600
Granted allowance for damaged merchandise.
c.
May 15Sales Returns and Allowances...... 680
Accounts Receivable...... 680
Granted allowance for mis-colored merchandise and accepted a return from a customer for the mis-colored merchandise [$120 + (40 x $14)].
15Merchandise Inventory...... 400
Cost of Goods Sold...... 400
Returned merchandise to inventory (40 x $10).
Exercise 4-5 (15 minutes)
May 5Merchandise Inventory...... 21,000
Accounts Payable...... 21,000
Purchased merchandise on credit (1,500 x $14).
a.
May 7Accounts Payable...... 2,800
Merchandise Inventory...... 2,800
Returned unwanted merchandise (200 x $14).
b.
May 8Accounts Payable...... 600
Merchandise Inventory...... 600
To record allowance for damaged merchandise.
c.
May 15Accounts Payable...... 680
Merchandise Inventory...... 680
To record allowance for mis-colored goods and return of mis-colored merchandise
$120 + (40 x $14).
Exercise 4-6 (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 4-7 (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11Merchandise Inventory ...... 40,000
Accounts Payable...... 40,000
Purchased merchandise on credit.
11Merchandise Inventory ...... 345
Cash...... 345
Paid shipping charges on purchased merchandise.
12Accounts Payable...... 1,400
Merchandise Inventory ...... 1,400
Returned unacceptable merchandise.
20Accounts Payable...... 38,600
Merchandise Inventory*...... 1,158
Cash...... 37,442
Paid balance within the 3% discount period.
*($38,600 x .03).
2. Entries for Troy Corporation (SELLER):
May 11Accounts Receivable...... 40,000
Sales...... 40,000
Sold merchandise on account.
11Cost of Goods Sold...... 30,000
Merchandise Inventory...... 30,000
To record cost of sale.
13Sales Returns and Allowances...... 1,400
Accounts Receivable...... 1,400
Accepted a return from a customer.
13Merchandise Inventory ...... 800
Cost of Goods Sold...... 800
Returned goods to inventory.
21Cash...... 37,442
Sales Discounts...... 1,158
Accounts Receivable...... 38,600
Collected account receivable.
Exercise 4-8 (30 minutes)
Merchandise InventoryBalance, Dec. 31, 2012...... / 25,000 / Purchase discounts received...... / 1,700
Invoice cost of purchases.... / 192,500 / Purchase returns and allow...... / 4,000
Returns by customers...... / 2,100 / Cost of sales transactions...... / 196,000
Transportation-in...... / 2,900 / Shrinkage...... / 800
Balance, Dec. 31, 2013 / 20,000
Cost of Goods Sold
Cost of sales transactions...
Inventory shrinkage
recorded in December 31,
2013, adjusting entry...... / 196,000
800 / Returns by customers and
restored to inventory...... /
2,100
Balance, Dec. 31, 2013 / 194,700
Exercise 4-9 (25 minutes)
Adjusting entries
Dec. 31Sales Salaries Expense...... 1,700
Salaries Payable...... 1,700
To record accrued salaries.
Dec. 31Selling Expenses...... 3,000
Prepaid Selling Expenses...... 3,000
To record expired prepaid selling expenses.
Dec. 31Cost of Goods Sold...... 1,550
Merchandise Inventory...... 1,550
To record inventory shrinkage
($30,000 - $28,450).
Closing entries
Dec. 31Sales ...... 529,000
Income Summary...... 529,000
To close temporary accounts with credit balances.
Dec. 31Income Summary...... 444,750
Sales Returns and Allowances...... 17,500
Sales Discounts...... 5,000
Cost of Goods Sold ($212,000 + $1,550)... 213,550
Sales Salaries Exp. ($48,000 + $1,700).... 49,700
Utilities Expense...... 15,000
Selling Expenses ($36,000 + $3,000)..... 39,000
Administrative Expenses...... 105,000
To close temporary accounts with debit balances.
Dec. 31Income Summary...... 84,250
Retained Earnings...... 84,250
To close Income Summary account.
Dec. 31Retained Earnings...... 33,000
Dividends...... 33,000
To close the Dividends account.
Exercise 4-10 (30 minutes)
Note: The original missing numbers are blocked.
(a) / (b) / (c) / (d) / (e)Sales...... / $62,000 / $43,500 / $46,000 / $79,000 / $25,600
Cost of goods sold
Merch. inv. (beg.)... / 8,000 / 17,050 / 7,500 / 8,000 / 4,560
Total cost of merch.
purchases...... / 38,000 / 1,950 / 43,750 / 32,000 / 6,600
Merch. inv. (end.)... / (11,950) / (3,000) / (9,000) / (6,600) / (4,160)
Cost of goods sold.. / 34,050 / 16,000 / 42,250 / 33,400 / 7,000
Gross profit...... / 27,950 / 27,500 / 3,750 / 45,600 / 18,600
Expenses...... / 10,000 / 10,650 / 12,150 / 3,600 / 6,000
Net income (loss)... / $17,950 / $16,850 / $ (8,400) / $42,000 / $12,600
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.
- 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.
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 $3,000. 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 $3,000.
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.
Exercise 4-13 (15 minutes)
Case X / Case Y / Case ZCurrent ratio computation
Current assets...... / $5,200 / $3,500 / $7,300
Current liabilities...... / $2,200 / $1,200 / $3,750
Current ratio...... / 2.36 / 2.92 / 1.95
Acid-test ratio computation
Cash...... / $2,000 / $ 110 / $1,000
Short-term investments.... / 0 / 0 / 600
Current receivables...... / 350 / 590 / 700
Quick assets...... / $2,350 / $ 700 / $2,300
Current liabilities...... / $2,200 / $1,200 / $3,750
Acid-test ratio...... / 1.07 / 0.58 / 0.61
Interpretation:
Case X has the highest acid-test ratio and a healthy current ratio. Since Case X has enough current assets to cover its current liabilities by more than two times and enough liquid assets to cover its current liabilities by more than one time, Case X appears to be in the best position to meet its short-term obligations.
Specifically, Case Y exhibits the superior ability to meet current year obligations using the current ratio and Case X has the superior ability to meet near-term obligations using the acid-test ratio. The three companies’ current ratios range from marginally adequate (such as Case Z’s 1.95) to strong (such as Case Y’s 2.92). Further, Case X is the only company whose acid-test ratio exceeds the common benchmark (rule-of-thumb) of 1.0. Although Case Y has a higher current ratio than Case X, Case X would appear to be in a better position to meet its current obligations since it has a higher percentage of its most liquid assets, demonstrated by a higher acid-test ratio.
In summary, Case Z looks the worst for its ability to pay its immediate and current year obligations. Case X looks the strongest. Case Y is in between with a strong current ratio and the lowest acid-test ratio.
Exercise 4-14 (20 minutes)
Perpetual
1)
Nov. 1 Merchandise Inventory...... 1,500
Accounts Payable...... 1,500
To record merchandise purchases on credit.
2)
Nov. 5 Accounts Payable...... 1,500
Merchandise Inventory...... 30
Cash...... 1,470
To record cash payment in discount period.
3)
Nov. 7 Cash...... 196
Merchandise Inventory...... 196
To record check received for return of purchases previously paid for with discount already taken.
4)
Nov. 10 Merchandise Inventory...... 90
Cash...... 90
To record payment of freight charges.
5)
Nov. 13Accounts Receivable...... 1,600
Sales...... 1,600
Torecord sale of merchandise on credit......
Cost of Goods Sold...... 800
Merchandise Inventory...... 800
Torecord cost of merchandise sold.
6)
Nov. 16Sales Returns and Allowances...... 300
Accounts Receivable...... 300
Torecord return of merchandise sold on credit.
Merchandise Inventory...... 130
Cost of Goods Sold...... 130
Torecord return of merchandise to inventory.
Instructor note: This second entry changes if the goods returned are defective. In this case the returned inventory is recorded at its estimated value, not its cost. To illustrate, if the goods (costing $130) returned are defective and estimated to be worth, say, $50, the following entry is made: Dr. Merchandise Inventory for $50, Dr. Loss from Defective Merchandise for $80, and Cr. Cost of Goods Sold for $130.
Exercise 4-15 (10 minutes)
Multiple-Step Income Statement — Sales Related Information Only
Sales (gross)...... $200,000
Less: Sales discounts...... $4,000
Sales returns and allowances...... 16,000 20,000
Net sales...... 180,000
Exercise 4-16A (30 minutes)
Apr. 2Purchases...... 4,600
Accounts Payable—Lyon...... 4,600
Purchased merchandise on credit.
3Transportation-In...... 300
Cash...... 300
Paid shipping charges on purchased merchandise.
4Accounts Payable—Lyon...... 600
Purchases Returns & Allowances..... 600
Returned unacceptable merchandise.
17Accounts Payable—Lyon...... 4,000
Purchases Discounts...... 80
Cash...... 3,920
Paid balance (less 2%) within discount period.
18Purchases...... 8,500
Accounts Payable—Frist...... 8,500
Purchased merchandise on credit
21Accounts Payable—Frist...... 1,100
Purchases Returns & Allowances..... 1,100
Received an allowance on purchase.
28Accounts Payable—Frist...... 7,400
Purchases Discounts...... 148
Cash...... 7,252
Paid balance (less 2%) within discount period.
Exercise 4-17A (30 minutes)
1.BUYER – Santa Fe Company
Credit Purchase
Purchases...... 24,000
Accounts Payable...... 24,000
Purchased merchandise on credit.
Cash Payment
Accounts Payable...... 24,000
Purchases Discounts...... 720
Cash...... 23,280
Paid account payable within 3% discount period.
2.SELLER – Mesa Company
Credit Sale
Accounts Receivable...... 24,000
Sales...... 24,000
Sold merchandise on account.
Cash Collection
Cash...... 23,280
Sales Discounts...... 720
Accounts Receivable...... 24,000
Collected account receivable.
Exercise 4-18A (25 minutes)
1. Entries for Sydney Company (BUYER):
May 11Purchases...... 40,000
Accounts Payable...... 40,000
Purchased merchandise on credit.
11Transportation-In...... 345
Cash...... 345
Paid shipping charges on purchased merchandise.
12Accounts Payable...... 1,400
Purchases Returns and Allowances.. 1,400
Returned unacceptable merchandise.
20Accounts Payable...... 38,600
Purchases Discounts...... 1,158
Cash...... 37,442
Paid balance within the 3% discount period.
2. Entries for Troy Corporation (SELLER):
May 11Accounts Receivable...... 40,000
Sales...... 40,000
Sold merchandise on account.
13Sales Returns and Allowances...... 1,400
Accounts Receivable...... 1,400
Accepted a return from a customer.
21Cash...... 37,442
Sales Discounts...... 1,158
Accounts Receivable...... 38,600
Collected account receivable.
Exercise 4-19A (20 minutes)
Periodic Inventory System
1)
Nov. 1 Purchases...... 1,500
Accounts Payable...... 1,500
To record purchases on credit.
2)
Nov. 5 Accounts Payable...... 1,500
Purchases Discount*...... 30
Cash...... 1,470
To record cash payment in discount period.
* [$1,500 x 2%]
3)
Nov. 7 Cash...... 196
Purchases Returns and Allowances*... 196
To record check received for return of purchases previously paid for with discount already taken.
* [$200 – ($200x2%)]
4)
Nov. 10 Transportation-In...... 90
Cash...... 90
To record payment of freight charges.
5)
Nov. 13Accounts Receivable...... 1,600
Sales...... 1,600
Torecord sale of merchandise on credit......
6)
Nov. 16Sales Returns and Allowances...... 300
Accounts Receivable...... 300
Torecord return of merchandise sold on credit.
Exercise 4-20 (20 minutes)
L´Oréal
Income Statement (€ millions)
For Year Ended December 31, 2011
Net sales...... €20,343.1
Cost of sales...... 5,851.5
Gross profit...... 14,491.6
Research and development expense...... (720.5)
Advertising and promotion expense...... (6,291.6)
Selling, general and administrative expense...... (4,186.9)
Finance costs...... (19.6)
Other income...... 193.7
Profit before tax expense...... 3,466.7
Income tax expense...... 1,025.8
Net profit...... € 2,440.9
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Solutions Manual, Chapter 4