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appendix C
Periodic Inventory Systems for
Merchandising Businesses
In this text, we emphasize the perpetual inventory system of accounting for pur-
chases and sales of merchandise. Not all merchandise businesses, however, use per-
petual inventory systems. For example, some managers/owners of small merchandise
businesses, such as locally owned hardware stores, may feel more comfortable us-
ing manually kept records. Because a manual perpetual inventory system is time-
consuming and costly to maintain, the periodic inventory system is often used in
these cases.

Merchandise Transactions in a
Periodic Inventory System
In a periodic inventory system, the revenues from sales are recorded when sales are
made in the same manner as in a perpetual inventory system. However, no attempt
is made on the date of sale to record the cost of the merchandise sold. Instead, the
merchandise inventory on hand at the end of the period is counted. This physical
inventory is then used to determine (1) the cost of merchandise sold during the pe-
riod and (2) the cost of merchandise on hand at the end of the period.
In a periodic inventory system, purchases of inventory are recorded in a pur-
chases account rather than in a merchandise inventory account. No attempt is made
to keep a detailed record of the amount of inventory on hand at any given time.
The purchases account is normally debited for the amount of the invoice before
considering any purchases discounts. Purchases discounts are normally recorded in
a separate purchases discounts account.1 The balance of this account is reported
as a deduction from the amount initially recorded in Purchases for the period. Thus,
the purchases discounts account is viewed as a contra (or offsetting) account to
Purchases.
Purchases returns and allowances are recorded in a similar manner as purchases
discounts. A separate account is used to keep a record of the amount of purchases
returns and allowances during a period. Purchases returns and allowances are re-
ported as a deduction from the amount initially recorded as Purchases. Like Pur-
chases Discounts, the purchases returns and allowances account is a contra (or
offsetting) account to Purchases.
When merchandise is purchased FOB shipping point, the buyer is responsible for
paying the freight charges. In a periodic inventory system, freight charges paid when
purchasing merchandise FOB shipping point are debited to Transportation In, Freight
In, or a similarly titled account.
To illustrate the recording of merchandise transactions in a periodic system, we
will use the following selected transactions for Taylor Co. We will also explain how
the transaction would have been recorded under a perpetual system.

June 5. Purchased $30,000 of merchandise on account from Owen Clothing,


terms 2/10, n/30.

Purchases 30,000
Accounts PayableOwen Clothing 30,000

Under the perpetual inventory system, such purchases would be recorded in the mer-
chandise inventory account at their cost, $30,000.

1Some businesses prefer to credit the purchases account. If this alternative is used, the balance of the purchases ac-
count will be a net amountthe total purchases less the total purchases discounts for the period.
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C-2 Appendix C Periodic Inventory Systems for Merchandising Businesses

June 8. Returned merchandise purchased on account from Owen Clothing on


June 5, $500.

Accounts PayableOwen Clothing 500


Purchases Returns and Allowances 500

Under the perpetual inventory system, returns would be recorded as a credit to the
merchandise inventory account at their cost of $500.

June 15. Paid Owen Clothing for purchase of June 5, less return of $500 and
discount of $590 [($30,000  $500)  2%].

Accounts PayableOwen Clothing 29,500


Cash 28,910
Purchases Discounts 590

Under a perpetual inventory system, a purchases discount account is not used. Instead
the merchandise inventory account is credited for the amount of the discount, $590.

June 18. Sold merchandise on account to Jones Co., $12,500, 1/10, n/30. The cost of
the merchandise sold was $9,000.

Accounts ReceivableJones Co. 12,500


Sales 12,500

The entry to record the sale is the same under both systems. Under the perpetual in-
ventory system, the cost of merchandise sold and the reduction in merchandise in-
ventory would also be recorded on the date of sale.

June 21. Received merchandise returned on account from Jones Co., $4,000.
The cost of the merchandise returned was $2,800.

Sales Returns and Allowances 4,000


Accounts ReceivableJones Co. 4,000

The entry to record the sales return is the same under both systems. In addition, the
cost of the merchandise returned would be debited to the merchandise inventory ac-
count and credited to the cost of merchandise sold account under the perpetual in-
ventory system.

June 22. Purchased merchandise from Norcross Clothiers, $15,000, terms FOB
shipping point, 2/15, n/30, with prepaid transportation charges of
$750 added to the invoice.

Purchases 15,000
Transportation In 750
Accounts PayableNorcross Clothiers 15,750

This entry is similar to the June 5 entry for the purchase of merchandise. Since the
transportation terms were FOB shipping point, the prepaid freight charges of $750
must be added to the invoice cost of $15,000. Under the perpetual inventory system,
the purchase is recorded in the merchandise inventory account at the cost of $15,750
(invoice price plus transportation).

June 28. Received $8,415 as payment on account from Jones Co., less return of
June 21 and less discount of $85 [($12,500  $4,000)  1%].

Cash 8,415
Sales Discounts 85
Accounts ReceivableJones Co. 8,500
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-3


This entry is the same under the perpetual inventory system.

June 29. Received $19,600 from cash sales. The cost of the merchandise sold
was $13,800.

Cash 19,600
Sales 19,600

The entry to record the sale is the same under both systems. Under the perpetual in-
ventory system, the cost of merchandise sold and the reduction in merchandise in-
ventory would also be recorded on the date of sale.

The multiple-step income statement under the periodic inventory system is il-
lustrated in Exhibit 1. The multiple-step income statement under a perpetual in-
ventory system is similar, except that the cost of merchandise sold is reported as
a single amount.

Chart of Accounts for a Periodic


Inventory System
Exhibit 2 is the chart of accounts for NetSolutions when a periodic inventory sys-
tem is used. The periodic inventory accounts related to merchandising transactions
are shown in color.

End-of-Period Procedures in a
Periodic Inventory System
The end-of-period procedures are generally the same for the periodic and perpet-
ual inventory systems. In the remainder of this appendix, we will discuss the dif-
ferences in procedures for the two systems that affect the work sheet, the adjusting
entries, and the closing entries. As the basis for illustrations, we will use the data
for NetSolutions, presented in Chapter 6.

Work Sheet
The differences in the work sheet for a merchandising business that uses the periodic
inventory system are highlighted in the work sheet for NetSolutions in Exhibit 3. As
we illustrated earlier, accounts for purchases, purchases returns and allowances, pur-
chases discounts, and transportation in are used in a periodic inventory system.
Under the periodic inventory system, the merchandise inventory account, through-
out the accounting period, shows the inventory at the beginning of the period. The
merchandise inventory on January 1, 2007, $59,700, is a part of the merchandise
available for sale. At the end of the period, the beginning inventory amount in the
ledger is replaced with the ending inventory amount. To update the inventory ac-
count, two adjusting entries are used.2 The first adjusting entry transfers the begin-
ning inventory balance to Income Summary. This entry, shown below, has the effect
of increasing the cost of merchandise sold and decreasing net income.

Dec. 31 Income Summary 59,700


Merchandise Inventory 59,700

2Another method of updating the merchandise inventory account at the end of the period is called the closing method.
This method adjusts the merchandise inventory through the use of closing entries. This method may not be appropriate
for use in computerized accounting systems. Since the financial statements are the same under both methods and since
computerized accounting systems are used by most businesses, the closing method is not illustrated.
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C-4 Appendix C Periodic Inventory Systems for Merchandising Businesses

Exhibit 1 Multiple-Step Income StatementPeriodic Inventory System

NetSolutions
Income Statement
For the Year Ended December 31, 2007
Revenue from sales:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $720,185
Less: Sales returns and allowances . . . . . . . . . . $ 6,140
Sales discounts . . . . . . . . . . . . . . . . . . . . . 5,790 11,930
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $708,255
Cost of merchandise sold:
Merchandise inventory, January 1, 2007 . . . . . $ 59,700
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $521,980
Less: Purchases returns and allowances . . . . . . $9,100
Purchases discounts . . . . . . . . . . . . . . . . . 2,525 11,625
Net purchases . . . . . . . . . . . . . . . . . . . . . . . . . . $510,355
Add transportation in . . . . . . . . . . . . . . . . . . . . 17,400
Cost of merchandise purchased . . . . . . . . . . . . $527,755
Merchandise available for sale . . . . . . . . . . . . . . . $587,455
Less merchandise inventory,
December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . 62,150
Cost of merchandise sold . . . . . . . . . . . . . . . 525,305
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,950
Operating expenses:
Selling expenses:
Sales salaries expense . . . . . . . . . . . . . . . . . $ 56,230
Advertising expense . . . . . . . . . . . . . . . . . . 10,860
Depreciation expensestore equipment . . . 3,100
Miscellaneous selling expense . . . . . . . . . . 630
Total selling expenses . . . . . . . . . . . . . . . $ 70,820
Administrative expenses:
Office salaries expense . . . . . . . . . . . . . . . . $ 21,020
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . 8,100
Depreciation expenseoffice equipment . . . 2,490
Insurance expense . . . . . . . . . . . . . . . . . . . . 1,910
Office supplies expense . . . . . . . . . . . . . . . . 610
Miscellaneous administrative expense . . . . 760
Total administrative expenses . . . . . . . . 34,890
Total operating expenses . . . . . . . . . . . . . . . . . 105,710
Income from operations . . . . . . . . . . . . . . . . . . . . $ 77,240
Other income and expense:
Rent revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 2,440 1,840
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,400

After the first adjusting entry has been recorded and posted, the balance of the
merchandise inventory account is zero. The second adjusting entry records the cost
of the merchandise on hand at the end of the period by debiting Merchandise In-
ventory. Since the merchandise inventory at December 31, 2007, $62,150, is sub-
tracted from the cost of merchandise available for sale in determining the cost of
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-5

Exhibit 2 Chart of AccountsPeriodic Inventory System

Balance Sheet Accounts Income Statement Accounts


100 Assets 400 Revenues
110 Cash 410 Sales
111 Notes Receivable 411 Sales Returns and Allowances
112 Accounts Receivable 412 Sales Discounts
115 Merchandise Inventory
116 Office Supplies 500 Costs and Expenses
117 Prepaid Insurance 510 Purchases
120 Land 511 Purchases Returns and
123 Store Equipment Allowances
124 Accumulated Depreciation 512 Purchases Discounts
Store Equipment 513 Transportation In
125 Office Equipment 520 Sales Salaries Expense
126 Accumulated Depreciation 521 Advertising Expense
Office Equipment 522 Depreciation ExpenseStore
Equipment
200 Liabilities 523 Transportation Out
210 Accounts Payable 529 Miscellaneous Selling Expense
211 Salaries Payable 530 Office Salaries Expense
212 Unearned Rent 531 Rent Expense
215 Notes Payable 532 Depreciation ExpenseOffice
Equipment
300 Owners Equity 533 Insurance Expense
310 Chris Clark, Capital 534 Office Supplies Expense
311 Chris Clark, Drawing 539 Misc. Administrative Expense
312 Income Summary
600 Other Income
610 Rent Revenue
700 Other Expense
710 Interest Expense

merchandise sold, Income Summary is credited. This credit has the effect of de-
creasing the cost of merchandise available for sale during the period, $587,455, by
the cost of the unsold merchandise. The second adjusting entry is shown below.

Dec. 31 Merchandise Inventory 62,150


Income Summary 62,150

After the second adjusting entry has been recorded and posted, the balance of
the merchandise inventory account is the amount of the ending inventory. The ac-
counts for Merchandise Inventory and Income Summary after both entries have been
posted would appear in T account form as follows:

Merchandise Inventory
2007
Jan. 1 Beginning inventory 59,700 Dec. 31 Beginning inventory 59,700
Dec. 31 Ending inventory 62,150

Income Summary
Dec. 31 Beginning inventory 59,700 Dec. 31 Ending inventory 62,150

No separate adjusting entry can be made for merchandise inventory shrinkage


in a periodic inventory system. This is because no perpetual inventory records are
available to show what inventory should be on hand at the end of the period.
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C-6 Appendix C Periodic Inventory Systems for Merchandising Businesses

Exhibit 3 Work SheetPeriodic Inventory System

NetSolutions
Work Sheet
For the Year Ended December 31, 2007
Adjusted Income Balance
Trial Balance Adjustments Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 52,950 52,950 52,950
Accounts Receivable 91,080 91,080 91,080
Merchandise Inventory 59,700 (b) 62,150 (a)59,700 62,150 62,150
Office Supplies 1,090 (c) 610 480 480
Prepaid Insurance 4,560 (d) 1,910 2,650 2,650
Land 20,000 20,000 20,000
Store Equipment 27,100 27,100 27,100
Accum. Depr.Store Equipment 2,600 (e) 3,100 5,700 5,700
Office Equipment 15,570 15,570 15,570
Accum. Depr.Office Equipment 2,230 (f) 2,490 4,720 4,720
Accounts Payable 22,420 22,420 22,420
Salaries Payable (g) 1,140 1,140 1,140
Unearned Rent 2,400 (h) 600 1,800 1,800
Notes Payable (final payment, 2017) 25,000 25,000 25,000
Chris Clark, Capital 153,800 153,800 153,800
Chris Clark, Drawing 18,000 18,000 18,000
Income Summary (a)59,700 (b)62,150 59,700 62,150 59,700 62,150
Sales 720,185 720,185 720,185
Sales Returns and Allowances 6,140 6,140 6,140
Sales Discounts 5,790 5,790 5,790
Purchases 521,980 521,980 521,980
Purchases Returns & Allowances 9,100 9,100 9,100
Purchases Discounts 2,525 2,525 2,525
Transportation In 17,400 17,400 17,400
Sales Salaries Expense 55,450 (g) 780 60,030 60,030
Advertising Expense 10,860 10,860 10,860
Depr. ExpenseStore Equipment (e) 3,100 3,100 3,100
Miscellaneous Selling Expense 630 630 630
Office Salaries Expense 20,660 (g) 360 21,020 21,020
Rent Expense 8,100 8,100 8,100
Depr. ExpenseOffice Equipment (f) 2,490 2,490 2,490
Insurance Expense (d) 1,910 1,910 1,910
Office Supplies Expense (c) 610 610 610
Misc. Administrative Expense 760 760 760
Rent Revenue (h) 600 600 600
Interest Expense 2,440 2,440 2,440
940,260 940,260 131,700 131,700 1,009,140 1,009,140 719,160 794,560 289,980 214,580
Net Income 75,400 75,400
794,560 794,560 289,980 289,980

(a) Beginning merchandise inventory, $59,700. (f) Depreciation of office equipment, $2,490.
(b) Ending merchandise inventory, $62,150. (g) Salaries accrued but not paid (sales salaries,
(c) Office supplies used, $610 ($1,090  $480). $780; office salaries, $360), $1,140.
(d) Insurance expired, $1,910. (h) Rent earned from amount received in
(e) Depreciation of store equipment, $3,100. advance, $600.
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-7

One disadvantage of the periodic inventory system is that inventory shrinkage can-
not be measured.3

Completing the Work Sheet


After all of the necessary adjustments have been entered on the work sheet, the
work sheet is completed in the normal manner. An exception to the usual practice
of extending only account balances is Income Summary. Both the debit and credit
amounts for Income Summary are extended to the Adjusted Trial Balance columns.
Extending both amounts aids in the preparation of the income statement because
the debit adjustment (the beginning inventory of $59,700) and the credit adjustment
(the ending inventory of $62,150) are reported as part of the cost of merchandise
sold.
The purchases, purchases discounts, purchases returns and allowances, and trans-
portation in accounts are extended to the Income Statement Columns of the work
sheet, since they are used in computing the cost of merchandise sold. You should
note that the two merchandise inventory amounts in Income Summary are extended
to the Income Statement columns. After all of the items have been extended to the
statement columns, the four columns are totaled and the net income or net loss is
determined.

Financial Statements
The financial statements for NetSolutions are essentially the same under both the
perpetual and periodic inventory systems. The main difference is that the cost of
goods is reported as a single amount under the perpetual system. Exhibit 1 illus-
trates the manner in which cost of merchandise sold is reported in a multiple-step
income statement when the periodic inventory system is used.4

Adjusting and Closing Entries


The adjusting entries are the same under both inventory systems, except for mer-
chandise inventory. As indicated previously, two adjusting entries for beginning and
ending merchandise inventory are necessary in a periodic inventory system.
The closing entries differ in the periodic inventory system in that there is no cost
of merchandise sold account to be closed to Income Summary. Instead, the pur-
chases, purchases discounts, purchases returns and allowances, and transportation
in accounts are closed to Income Summary.5 To illustrate, the adjusting and closing
entries under a periodic inventory system for NetSolutions are shown at the top of
the following pages.

3Any inventory shrinkage that does exist is part of the cost of merchandise sold and is reported on the income state-
ment, since a smaller ending inventory is deducted from other merchandise available for sale.
4The single-step income statement would be the same for both the perpetual and the periodic inventory systems.
5The balance of Income Summary, after the merchandise inventory adjustments and the first two closing entries have

been posted, is the net income or net loss for the period.
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C-8 Appendix C Periodic Inventory Systems for Merchandising Businesses

JOURNAL Page 16
Post.
Date Description Ref. Debit Credit
1 Adjusting Entries 1
2007
2 Dec. 31 Income Summary 312 59 7 0 0 00 2
3 Merchandise Inventory 115 59 7 0 0 00 3
4 4
5 31 Merchandise Inventory 115 62 1 5 0 00 5
6 Income Summary 312 62 1 5 0 00 6
7 7
8 31 Office Supplies Expense 534 6 1 0 00 8
9 Office Supplies 116 6 1 0 00 9
10 10
11 31 Insurance Expense 533 1 9 1 0 00 11
12 Prepaid Insurance 117 1 9 1 0 00 12
13 13
14 31 Depreciation ExpenseStore Equip. 522 3 1 0 0 00 14
15 Accumulated Depr.Store Equip. 124 3 1 0 0 00 15
16 16
17 31 Depreciation ExpenseOffice Equip. 532 2 4 9 0 00 17
18 Accumulated Depr.Office Equip. 126 2 4 9 0 00 18
19 19
20 31 Sales Salaries Expense 520 7 8 0 00 20
21 Office Salaries Expense 530 3 6 0 00 21
22 Salaries Payable 211 1 1 4 0 00 22
23 23
24 31 Unearned Rent 212 6 0 0 00 24
25 Rent Revenue 610 6 0 0 00 25
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-9

JOURNAL Page 17
Post.
Date Description Ref. Debit Credit
1 Closing Entries 1
2007
2 Dec. 31 Sales 410 720 1 8 5 00 2
3 Purchases Returns and Allowances 511 9 1 0 0 00 3
4 Purchases Discounts 512 2 5 2 5 00 4
5 Rent Revenue 610 6 0 0 00 5
6 Income Summary 312 732 4 1 0 00 6
7 7
8 31 Income Summary 312 659 4 6 0 00 8
9 Sales Returns and Allowances 411 6 1 4 0 00 9
10 Sales Discounts 412 5 7 9 0 00 10
11 Purchases 510 521 9 8 0 00 11
12 Transportation In 513 17 4 0 0 00 12
13 Sales Salaries Expense 520 56 2 3 0 00 13
14 Advertising Expense 521 10 8 6 0 00 14
15 Depreciation Exp.Store Equip. 522 3 1 0 0 00 15
16 Miscellaneous Selling Expense 529 6 3 0 00 16
17 Office Salaries Expense 530 21 0 2 0 00 17
18 Rent Expense 531 8 1 0 0 00 18
19 Depreciation Exp.Office Equip. 532 2 4 9 0 00 19
20 Insurance Expense 533 1 9 1 0 00 20
21 Office Supplies Expense 534 6 1 0 00 21
22 Miscellaneous Administrative Exp. 539 7 6 0 00 22
23 Interest Expense 710 2 4 4 0 00 23
24 24
25 31 Income Summary 312 75 4 0 0 00 25
26 Chris Clark, Capital 310 75 4 0 0 00 26
27 27
28 31 Chris Clark, Capital 310 18 0 0 0 00 28
29 Chris Clark, Drawing 311 18 0 0 0 00 29

E xercises
EXERCISE C-1 Journalize entries for the following related transactions, assuming that Mountain
Purchases-related Gallery, Inc. uses the periodic inventory system.
transactionsperiodic
inventory system a. Purchased $12,000 of merchandise from Yellowstone Co. on account, terms 2/10,
n/30.
b. Discovered that some of the merchandise was defective and returned items with
an invoice price of $2,500, receiving credit.
c. Paid the amount owed on the invoice within the discount period.
d. Purchased $9,000 of merchandise from Glacier, Inc. on account, terms 1/10, n/30.
e. Paid the amount owed on the invoice within the discount period.

EXERCISE C-2 Journalize entries for the following related transactions, assuming that Aveda Com-
Sales-related transactions pany uses the periodic inventory system.
periodic inventory system
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C-10 Appendix C Periodic Inventory Systems for Merchandising Businesses

July 6 Sold merchandise to a customer for $18,500, terms FOB shipping point,
2/10, n/30.
6 Paid the transportation charges of $420, debiting the amount to Accounts
Receivable.
9 Issued a credit memorandum for $4,700 to the customer for merchandise
returned.
16 Received a check for the amount due from the sale.

EXERCISE C-3 Data assembled for preparing the work sheet for Meridian Co. for the fiscal year
Adjusting entries for ended December 31, 2006, included the following:
merchandise inventory
periodic inventory system Merchandise inventory as of January 1, 2006 $475,000
Merchandise inventory as of December 31, 2006 $528,300

Journalize the two adjusting entries for merchandise inventory that would appear
on the work sheet, assuming that the periodic inventory system is used.

EXERCISE C-4 For (a) through (i), identify the items designated by X and Y.
Identification of missing
items from income a. Sales  (X  Y)  Net sales
statementperiodic b. Purchases  (X  Y)  Net purchases
inventory system c. Net purchases  X  Cost of merchandise purchased
d. Merchandise inventory (beginning)  Cost of merchandise purchased  X
e. Merchandise available for sale  X  Cost of merchandise sold
f. Net sales  Cost of merchandise sold  X
g. Gross profit  Operating expenses  X
h. X  Y  Operating expenses
i. Income from operations  X  Y  Net income

EXERCISE C-5 Selected data for Canyon Ferry Stores Company for the year ended December 31,
Multiple-step income 2006, are as follows:
statementperiodic
inventory system Merchandise inventory, January 1 $ 85,760 Sales $1,288,000
Gross profit: $230,560 Merchandise inventory, December 31 102,240 Sales discounts 10,400
Purchases 1,051,200 Sales returns and allowances 13,920
Purchases discounts 12,800 Transportation in 36,000
Purchases returns and allowances 24,800

Prepare a multiple-step income statement through gross profit for Canyon Ferry
Stores Company for the current year ended December 31.

EXERCISE C-6 Selected account titles and related amounts appearing in the Income Statement and
Adjusting and closing Balance Sheet columns of the work sheet of Southern Bell Company for the year
entriesperiodic inventory ended December 31 are listed in alphabetical order as follows:
system
Administrative Expenses $ 72,000 Purchases $ 820,000
Building 312,500 Purchases Discounts 14,000
Cash 58,500 Purchases Returns and Allowances 9,000
Connie Sorum, Capital 433,080 Salaries Payable 4,220
Connie Sorum, Drawing 40,000 Sales 1,450,000
Interest Expense 2,500 Sales Discounts 18,000
Merchandise Inventory (1/1) 300,000 Sales Returns and Allowances 32,000
Merchandise Inventory (12/31) 275,000 Selling Expenses 240,200
Notes Payable 25,000 Store Supplies 7,700
Office Supplies 10,600 Transportation In 21,300

All selling expenses have been recorded in the account entitled Selling Expenses,
and all administrative expenses have been recorded in the account entitled Admin-
istrative Expenses. Assuming that Southern Bell Company uses the periodic inven-
tory system, journalize (a) the adjusting entries for merchandise inventory and (b)
the closing entries.
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-11

Problems
PROBLEM C-1 The following were selected from among the transactions completed by Infinet Shops,
Sales-related and purchase- Inc., during November of the current year:
related transactions
periodic inventory system Nov. 2. Purchased merchandise on account from Loftin Co., list price $24,000,
trade discount 25%, terms FOB destination, 2/10, n/30.
8. Sold merchandise for cash, $8,100.
9. Purchased merchandise on account from Chestnut Co., $12,000, terms
FOB shipping point, 2/10, n/30, with prepaid transportation costs of $180
added to the invoice.
10. Returned $3,000 of merchandise purchased on November 2 from Loftin Co.
11. Sold merchandise on account to Fawcett Co., list price $2,500, trade dis-
count 20%, terms 1/10, n/30.
12. Paid Loftin Co. on account for purchase of November 2, less return of
November 10 and discount.
15. Sold merchandise on nonbank credit cards and reported accounts to the
card company, American Express, $9,850.
19. Paid Chestnut Co. on account for purchase of November 9, less discount.
21. Received cash on account from sale of November 11 to Fawcett Co., less
discount.
25. Sold merchandise on account to Clemons Co., $3,000, terms 1/10, n/30.
28. Received cash from American Express for nonbank credit card sales of
November 15, less $380 service fee.
30. Received merchandise returned by Clemons Co. from sale on November 25,
$1,700.

Instructions
Journalize the transactions for Infinet Shops, Inc., in a two-column general journal.

PROBLEM C-2 The following were selected from among the transactions completed by Copra Sen-
Sales-related and purchase- try Company during July of the current year:
related transactions
periodic inventory system July 3. Purchased merchandise on account from Swanson Co., list price $60,000,
trade discount 30%, terms FOB shipping point, 2/10, n/30, with prepaid
transportation costs of $1,200 added to the invoice.
4. Purchased merchandise on account from Lambert Co., $8,000, terms FOB
destination, 1/10, n/30.
7. Sold merchandise on account to Walsh Co., list price $12,000, trade dis-
count 20%, terms 2/10, n/30.
9. Returned merchandise purchased on July 4 from Lambert Co., $1,300.
13. Paid Swanson Co. on account for purchase of July 3, less discount.
14. Paid Lambert Co. on account for purchase of July 4, less return of July 9
and discount.
17. Received cash on account from sale of July 7 to Walsh Co., less discount.
19. Sold merchandise on nonbank credit cards and reported accounts to the
card company, American Express, $7,450.
22. Sold merchandise on account to Wu Co., $4,420, terms 2/10, n/30.
24. Sold merchandise for cash, $4,350.
25. Received merchandise returned by Wu Co. from sale on July 22, $1,610.
31. Received cash from American Express for nonbank credit card sales of
July 19, less $290 service fee.

Instructions
Journalize the transactions for Copra Sentry Co. in a two-column general journal.
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C-12 Appendix C Periodic Inventory Systems for Merchandising Businesses

PROBLEM C-3 The following selected transactions were completed during May between Simkins
Sales-related and purchase- Company and Burk Co.:
related transactions for
seller and buyerperiodic May 6. Simkins Company sold merchandise on account to Burk Co., $18,500,
inventory system terms FOB destination, 2/15, n/eom.
6. Simkins Company paid transportation costs of $600 for delivery of mer-
chandise sold to Burk Co. on May 6.
10. Simkins Company sold merchandise on account to Burk Co., $15,750,
terms FOB shipping point, n/eom.
11. Burk Co. returned merchandise purchased on account on May 6 from
Simkins Company, $5,500.
14. Burk Co. paid transportation charges of $300 on May 10 purchase from
Simkins Company.
17. Simkins Company sold merchandise on account to Burk Co., $30,000,
terms FOB shipping point, 1/10, n/30. Simkins prepaid transportation costs
of $1,750, which were added to the invoice.
21. Burk Co. paid Simkins Company for purchase of May 6, less discount and
less return of May 11.
27. Burk Co. paid Simkins Company on account for purchase of May 17, less
discount.
31. Burk Co. paid Simkins Company on account for purchase of May 10.
Instructions
Journalize the May transactions for (1) Simkins Company and for (2) Burk Co.

PROBLEM C-4 The accounts and their balances in the ledger of Sunshine Sports Co. on December
Preparation of work sheet, 31, 2006, are as follows:
financial statements, and
adjusting and closing Cash $ 28,000 Sales Discounts $ 7,100
entriesperiodic inventory Accounts Receivable 142,500 Purchases 500,000
system Merchandise Inventory 200,000 Purchases Returns and Allowances 10,100
Prepaid Insurance 9,700 Purchases Discounts 4,900
Store Supplies 4,250 Transportation In 11,200
Office Supplies 2,100 Sales Salaries Expense 81,400
Store Equipment 132,000 Advertising Expense 45,000
Accumulated Depreciation Depreciation Expense
1. Net income: $222,950 Store Equipment 40,300 Store Equipment
Office Equipment 50,000 Store Supplies Expense
Accumulated Depreciation Miscellaneous Selling Expense 1,600
Office Equipment 17,200 Office Salaries Expense 44,000
Accounts Payable 56,700 Rent Expense 26,000
Salaries Payable Insurance Expense
Unearned Rent 1,200 Depreciation Expense
Note Payable (final payment, 2013) 100,000 Office Equipment
Sherri Vogel, Capital 159,600 Office Supplies Expense
Sherri Vogel, Drawing 40,000 Miscellaneous Administrative
Income Summary Expense 1,650
Sales 960,000 Rent Revenue
Sales Returns and Allowances 11,900 Interest Expense 11,600

The data needed for year-end adjustments on December 31 are as follows:

Merchandise inventory on December 31 ....................... $215,000


Insurance expired during the year . . . . . ....................... 4,800
Supplies on hand on December 31:
Store supplies . . . . . . . . . . . . . . . . . . ....................... 1,300
Office supplies . . . . . . . . . . . . . . . . . . ....................... 750
Depreciation for the year:
Store equipment . . . . . . . . . . . . . . . . ....................... 7,500
Office equipment . . . . . . . . . . . . . . . . ....................... 3,800
Salaries payable on December 31:
Sales salaries . . . . . . . . . . . . . . . . . . . ....................... $4,000
Office salaries . . . . . . . . . . . . . . . . . . ....................... 2,000 6,000
Unearned rent on December 31 . . . . . . ....................... 400
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Appendix C Periodic Inventory Systems for Merchandising Businesses C-13

Instructions
1. Prepare a work sheet for the fiscal year ended December 31, listing all accounts
in the order given.
2. Prepare a multiple-step income statement.
3. Prepare a statement of owners equity.
4. Prepare a report form of balance sheet, assuming that the current portion of the
note payable is $10,000.
5. Journalize the adjusting entries.
6. Journalize the closing entries.
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