CHAPTER 5

Accounting for Merchandising Operations

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5-1

(a) Cost of goods sold = $43,500 ($75,000 – $31,500)

Operating expenses = $20,700 ($31,500 – $10,800)

(b) Gross profit = $38,000 ($108,000 – $70,000)

Operating expenses = $8,500 ($38,000 – $29,500)

(c) Sales = $181,500 ($71,900 + $109,600)

Net income = $70,100 ($109,600 – $39,500)

BRIEF EXERCISE 5-6

Aug. 31Cost of Goods Sold (Inventory shrinkage) ................................... 900

Merchandise Inventory
($98,000 – $97,100) .............................................. 900

BRIEF EXERCISE 5-7

July 31Sales ................................................................................. 180,000

Prasad, Capital ..................................................... 180,000

Prasad, Capital ................................................................... 102,000

Sales Returns and Allowances ............................ 2,000

Ending capital balance (not required):

$150,000 + $180,000 - $102,000 = $228,000

Merchandise Inventory is a balance sheet (permanent) account and is not closed.

BRIEF EXERCISE 5-8

HULDA COMPANY
Income Statement (Partial)
For the Month Ended October 31, 2003

Sales revenues
Sales ($300,000 + $100,000)....................................................................... $400,000
Less: Sales returns and allowances ........................................................ 30,000
Net sales ..................................................................................................... $370,000

SOLUTIONS TO EXERCISES

EXERCISE 5-1

1. April 5 Merchandise Inventory ................................................................ 18,000

Accounts Payable ..................................................... 18,000

2. April 6 Merchandise Inventory ................................................................ 900

Cash ........................................................................... 900

3. April 7 Equipment ........................................................................ 26,000

Accounts Payable ..................................................... 26,000

4. April 8 Accounts Payable ........................................................................ 3,000

Merchandise Inventory ...................................... ...... 3,000

5. May 2 Accounts Payable ($18,000 – $3,000) .............................. 15,000

Cash ........................................................................... 15,000

EXERCISE 5-3

Sept. 6Merchandise Inventory (60 X $20) ........................................................... 1,200

Accounts Payable ............................................................... 1,200

10 Accounts Payable (2 X $20) ......................................................... 40

Merchandise Inventory ....................................................... 40

12 Accounts Receivable (26 X $30) .................................................. 780

Sales .................................................................................... 780

Cost of Goods Sold (26 X $20) ..................................................... 520

Merchandise Inventory ....................................................... 520

14 Sales Returns and Allowances .................................................... 30

Accounts Receivable .......................................................... 30

Merchandise Inventory ................................................................. 20

Cost of Goods Sold............................................................. 20
 20 Accounts Receivable (30 X $30) .................................................. 900
Sales .................................................................................... 900

Cost of Goods Sold (30 X $20) ..................................................... 600

Merchandise Inventory ....................................................... 600

EXERCISE 5-5

1. Sales Returns and Allowances ................................................................. 150

Sales .................................................................................................. 150

2. Supplies ...................................................................................................... 250

Cash ..................................................................................................... 250
Accounts Payable ............................................................................. 250
Merchandise Inventory..................................................................... 250

3. Sales ....................................................................................................... 50
Merchandise Inventory..................................................................... 50

4. Cash ..................................................................................................... 270

Merchandise Inventory..................................................................... 270
EXERCISE 5-6

(a) Jun. 10Merchandise Inventory................................................................... 5,000

Accounts Payable ....................................................... 5,000

11 Merchandise Inventory ......................................................... 300

Cash ............................................................................. 300

12 Accounts Payable ................................................................. 500

Merchandise Inventory ............................................... 500

July 7Accounts Payable ($5,000 – $500) ................................................. . 4,500

Cash ............................................................................. 4,500

15 Cash .................................................................................... 8,500

Sales............................................................................. 8,500

15 Cost of Goods Sold ($5,000 + $300 - $500)........................ . 4,800

Merchandise Inventory ............................................... 4,800

(b) July 31 Sales .................................................................................... 8,500

Capital .......................................................................... 8,500

31 Capital .................................................................................. . 4,800

Cost of Goods Sold ..................................................... 4,800

EXERCISE 5-8
Natural Mattar Allied
Cosmetics Grocery Wholesalers
Sales $90,000 (c) $100,000 $144,000
Less: Sales returns (a) 16,000 6,000 12,000
Net sales 74,000 94,000 (f) 132,000
Less: Cost of goods sold 64,000 (d) 72,000 (g) 108,000
Gross profit 10,000 22,000 24,000
Less: Operating expenses 6,000 (e) 12,000 18,000
Net income (b) $ 4,000 $ 10,000 (h) $ 6,000

(a) Sales ............................................................................................... $90,000

*Sales returns .................................................................................. (16,000)
Net sales ......................................................................................... $74,000

(b) Gross profit .................................................................................... $10,000

Operating expenses ....................................................................... (6,000)
*Net income .................................................................................... $ 4,000

(c) *Sales .............................................................................................. $100,000

Sales returns .................................................................................. (6,000)
Net sales ......................................................................................... $ 94,000

(d) Net sales ......................................................................................... $94,000

*Cost of goods sold ....................................................................... (72,000)
Gross profit .................................................................................... $22,000
(e) Gross profit .................................................................................... $22,000
*Operating expenses...................................................................... (12,000)
Net income...................................................................................... $10,000

(f) Sales ................................................................................ $144,000

Sales returns .................................................................................. (12,000)
*Net sales ........................................................................................ $132,000

(g) Net sales ......................................................................................... $132,000

*Cost of goods sold ....................................................................... (108,000)
Gross profit .................................................................................... $ 24,000

(h) Gross profit .................................................................................... $24,000

Operating expenses ....................................................................... (18,000)
*Net income .................................................................................... $ 6,000
 SOLUTIONS TO PROBLEMS

PROBLEM 5-1A
(a)

April 5 Merchandise Inventory–Custom Sedans

(3 x $24,000) .......................................................................... 72,000
Accounts Payable ....................................................... 72,000

13 Merchandise Inventory–Recreation Vehicles

(2 x $28,000) .......................................................................... 56,000
Accounts Payable ....................................................... 56,000

17 Accounts Receivable ............................................................ 114,000

Sales (4 x $28,500) ....................................................... 114,000

Cost of Goods Sold (4 x $24,000)......................................... 96,000

Merchandise Inventory–Custom Sedans ................... 96,000

20 Merchandise Inventory–Convertibles
(2 x $26,000) .......................................................................... 52,000
Accounts Payable ....................................................... 52,000

22 Accounts Payable ................................................................. 26,000

Merchandise Inventory–Convertibles ........................ 26,000

24 Accounts Receivable ............................................................ 102,000

Sales (3 x $34,000) ....................................................... 102,000

Cost of Goods Sold (3 x $28,000)......................................... 84,000

Merchandise Inventory–Recreation Vehicles ............ 84,000

28 Accounts Receivable ............................................................ 31,000

Sales............................................................................. 31,000

Cost of Goods Sold............................................................... 26,000

Merchandise Inventory–Convertibles ........................ 26,000
PROBLEM 5-1A (Continued)

(b)
Merchandise Inventory Merchandise Inventory
–Custom Sedans –Convertibles
Bal. 96,000 96,000 Bal. 78,000 26,000
72,000 52,000 26,000
72,000 78,000

Merchandise Inventory
–Recreation Vehicles Cost of Goods Sold
Bal. 56,000 84,000 96,000
56,000 84,000
28,000 26,000
206,000

PROBLEM 5-2A

GENERAL JOURNAL
Date Account Titles Ref. Debit Credit

July 1 Merchandise Inventory (50 x $30) .............................. 120 1,500

Accounts Payable .............................................. 201 1,500

3 Accounts Receivable (40 x $50) ................................. 112 2,000

Sales ................................................................... 401 2,000

Cost of Goods Sold (40 x $30) .................................... 505 1,200

Merchandise Inventory ...................................... 120 1,200

9 Accounts Payable........................................................ 201 1,500

Cash .................................................................... 101 1,500

12 Cash 101 2,000

Accounts Receivable ......................................... 112 2,000

17 Accounts Receivable (30 x $50) ................................. 112 1,500

Sales ................................................................... 401 1,500

Cost of Goods Sold (30 x $30) .................................... 505 900

Merchandise Inventory ...................................... 120 900
Date Account Titles Ref. Debit Credit
18 Merchandise Inventory ($1,700 + $100)...................... 120 1,800
Accounts Payable .............................................. 201 1,700
Cash .................................................................... 101 100

20 Accounts Payable........................................................ 201 300

Merchandise Inventory ...................................... 120 300

21 Cash 101 1,500

Accounts Receivable ......................................... 112 1,500

PROBLEM 5-2A (Continued)

Date Account Titles Ref. Debit Credit

July 22 Accounts Receivable (40 x $50) ................................. 112 2,000

Sales ................................................................... 401 2,000

Cost of Goods Sold (40 x $30) .................................... 505 1,200

Merchandise Inventory ...................................... 120 1,200

30 Accounts Payable ($1,700 - $300) .............................. 210 1,400

Cash .................................................................... 101 1,400

31 Sales Returns and Allowances ................................... 412 250

Accounts Receivable ......................................... 112 250

Merchandise Inventory................................................ 120 150

Cost of Goods Sold .......................................... 505 150
 PROBLEM 5-5A

(a)
DAIGLE DEPARTMENT STORE
Income Statement
For the Year Ended November 30, 2003

Sales revenues
Sales .............................................................................................................. $850,000
Less: Sales returns and allowances ............................................................ 10,000
Net sales ......................................................................................................... 840,000
Cost of goods sold .................................................................................................. 633,220
Gross profit ..................................................................................................... 206,780
Operating expenses
Selling expenses
Salaries expense ($139,000 X 70%) $97,300
Sales commissions expense .......... ................ 12,750
Delivery expense .............................................. 8,200
Insurance expense ($9,000 x 50%) . 4,500
Amortization expense—delivery equipment 00 4,000
Total selling expenses ............................ $126,750
Administrative expenses
Amortization expense—building .... $9,500
Salaries expense ($139,000 X 30%) ................. 41,700
Utilities expense ............................................... 10,600
Insurance expense ($9,000 x 50%) .................. 4,500
Property tax expense ....................................... 3,500
Total administrative expenses ............... 0 69,800
Total operating expenses .... 196,550
Income from operations .............................................................................. 10,230
Other revenues and gains
Interest revenue ..................................................................... $5,000
Other expenses and losses
Interest expense ....................................................................... 8,000 000 3,000
Net income ................................................................................................... $ 7,230
(a) (Continued)

DAIGLE DEPARTMENT STORE

Statement of Owner's Equity
For the Year Ended November 30, 2003

B. Daigle, Capital, December 1, 2002 ............................................................................. $84,200

Add: Net income ........................................................................................................... 7,230
91,430
Less: Drawings .............................................................................................................. 012,000
B. Daigle, Capital, November 30, 2003........................................................................... $79,430
PROBLEM 5-5A (Continued)

(a) (Continued)

DAIGLE DEPARTMENT STORE

Balance Sheet
November 30, 2003

Assets
Current assets
Cash .................................................................................................... $008,000
Accounts receivable .......................................................................... 11,770
Merchandise inventory ...................................................................... 36,200
Prepaid insurance .............................................................................. 4,500
Total current assets ................................................................. 60,470
Capital assets
Land .................................................................. $50,000
Building ............................................................. $125,000
Less: Accumulated amortization—
building .......................................... 00 41,800 83,200
Delivery equipment ........................................... $57,000
Less: Accumulated amortization—
delivery equipment ............................ 19,680 037,320
Total capital assets ................................. 0170,520
Total assets ......................................................................................... $230,990

Liabilities and Owner's Equity

Current liabilities
Accounts payable .............................................................................. $ 47,310
Property taxes payable ...................................................................... 3,500
Sales commissions payable .............................................................. 4,750
Current portion of mortgage ............................................................. 6,000
Total current liabilities ............................................................. 61,560
Long-term liabilities
Mortgage payable ............................................................................... 0 90,000
Total liabilities .......................................................................... 151,560
Owner's equity
B. Daigle, Capital .............................................................................. 0 79,430
Total liabilities and owner's equity ................................................... $230,990
PROBLEM 5-5A (Continued)

(b) Nov.30Amortization Expense–Delivery Equip .................................... 4,000

Amortization Expense–Building ..................................... 9,500
Accum. Amortiz.–Delivery ..................................... 4,000
Accum. Amortiz.–Building ..................................... 9,500

30 Insurance Expense .......................................................... 9,000

Prepaid Expense .................................................... 9,000

30 Property Tax Expense ..................................................... 3,500

Property Tax Payable ............................................. 3,500

30 Sales Commissions Expense .......................................... 4,750

Sales Commissions Payable ................................. 4,750

(c) Nov.30Sales 850,000

Interest Revenue .............................................................. 5,000
B. Daigle, Capital .................................................... 855,000

Nov.30B. Daigle, Capital ....................................................................... 847,770

Sales Returns and Allowances .............................. 10,000
Cost of Goods Sold ................................................ 633,220
Salaries Expense .................................................... 139,000
Amortization Expense—Delivery
Equipment ............................................................ 4,000
Delivery Expense .................................................... 8,200
Sales Commission Expense .................................. 12,750
Amortization Expense—Store
Equipment ............................................................ 9,500
Insurance Expense ................................................. 9,000
Property Tax Expense ............................................ 3,500
Utilities Expense..................................................... 10,600
Interest Expense..................................................... 8,000

30 B. Daigle, Capital ............................................................... 12,000

B. Daigle, Drawings ................................................. 12,000
 PROBLEM 5-7A

(a)
MCGRATH COMPANY
Income Statement
For the Year Ended December 31, 2002

Sales revenues
Sales ............................................................................................. $800,000
Less: Sales returns and allowances .......................................... 30,000
Net sales ....................................................................................... 770,000
Cost of goods sold ................................................................................ 555,000
Gross profit ............................................................................................ 215,000
Operating expenses
Selling expenses
Sales salaries expense
($80,000 + $16,000) ........................................... $96,000
Delivery expense ............................................... 30,000
Advertising expense ......................................... 10,000
Sales commissions expense ............................ 6,000 $142,000
Administrative expenses
Office salaries expense ..................................... $27,000
Rent expense ..................................................... 24,000
Utilities expense ................................................ 12,000
Amortization expense—office equip. .. 8,000 71,000
Total operating expenses ............................................................ 213,000
Income from operations ........................................................................ 2,000
Other revenues and gains
Rent revenue ................................................................................ $40,000
Other expenses and losses
Interest expense ........................................................................... 2,000 38,000
Net income ............................................................................................. $ 40,000
PROBLEM 5-7A (Continued)

(b)

MCGRATH COMPANY
Income Statement
For the Year Ended December 31, 2002

Revenues
Net sales ....................................................................................... $770,000
Rent revenue ................................................................................ 40,000 $810,000
Expenses
Cost of sales................................................................................. $555,000
Selling expenses
($80,000 + $16,000 + $30,000 + $10,000 + $6,000) ...................... 142,000
Administrative
($27,000 + $24,000 + $12,000 + $8,000) ...................................... 71,000
Interest expense ........................................................................... 2,000 770,000
Net income ............................................................................................. $ 40,000
 PROBLEM 5-8A

(a)

2000 1999

Gross profit margin 19.5% 23.8%

($949,263 - $764,198) ÷ $949,263 ($808,251 – $615,827) ÷ $808,251

Inventory turnover 3.5 times 3.3 times

$764,198 ÷ [($225,958 + $212,382) ÷ $615,827 ÷ [($212,382 +

2] $164,557) ÷ 2]

Days sales in inventory 104.3 days 110.6 days

365 days ÷ 3.5 times 365 days ÷ 3.3 times

(b) IPSCO’s gross profit margin declined in 2000. However, its management of its inventories
improved. It’s inventory turned over (sold) faster in 2000 and the number of days sales in
inventory declined from 110.6 days to 104.3 days. This means that IPSCO is not holding its
inventory for as long in 2000, as it did in 1999. The faster you sell your inventory, the
faster the company will collect cash/receivables, the lower its carrying costs, and the
reduced risk of inventory obsolescence.