SM 05

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition
CHAPTER 5
MERCHANDISING OPERATIONS
LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies.
2. Prepare entries for purchases under a perpetual inventory system.
3. Prepare entries for sales under a perpetual inventory system.
4. Prepare a single-step and a multiple-step statement of income.
5. Calculate the gross profit margin and profit margin.
6. Record purchases and sales under a periodic inventory system (Appendix 5A).
7. Account for sales returns and sales discounts under ASPE (Appendix 5B)
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND

BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 8. 2 C 15. 3 C 22. 4 C 29. 6 C
2. 1 C 9. 2,3 C 16. 3 C 23. 4 C 30. 7 C
3. 1 C 10 2,3 C 17. 3 C 24. 5 C 31. 7 C
4. 1 C 11. 2,3 C 18. 4 C 25. 5 C
5. 1 C 12. 2,3 C 19. 4 C 26. 5 C
6. 2 C 13. 3 C 20. 4 K 27. 6 C
7. 2 AP 14. 3 C 21. 4 C 28. 6 C
Brief Exercises
1. 1 C 5. 2 AP 9. 4 C 13. 4,5 AN 17. 6 AP
2. 1 AN 6. 3 AP 10. 4 AP 14. 6 AP 18. 6 AP
3. 2 AP 7. 3 AP 11. 4 C 15. 6 AP 19. 7 AP
4. 2,3 AP 8. 4 AP 12. 4,5 AN 16. 6 AP
Exercises
1. 1 C 5. 3 AP 9. 4 AP 13. 4,5 AN 17. 6 AN
2. 2,3 AN 6. 2 AN 10. 4 AP 14. 5 AN 18. 6 AP
3. 2,3 AP 7. 2,3,4 AP 11. 4,5 AN 15. 6 AP 19. 7 AP
4. 2 AP 8. 4 AP 12. 4,5 AN 16. 2,3,6 AP
Problems: Set A and B
1. 1,4 AN 5. 2,3,4 AP 9. 4 AP 13. 1,6 AN 17. 6 AP
2. 1,2,3 AN 6. 3 AP 10. 4,5 AN 14. 6 AP
3 2,3,4,5 AP 7. 3 AP 11. 4,5 AN 15. 6 AP
4. 2,3 AP 8. 4 AN 12. 5 AN 16. 5,6 AP
Accounting Cycle Review
1. 2,3,4 AP
Cases
1. 1,4,5 AN 3. 4,5 E 5. 2 C 7. 2,4 AN
2. 5 AN 4. 2,3,5 E 6. 3 C
Solutions Manual 5-1 Chapter 5

Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Legend: The following abbreviations will appear throughout the solutions manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. (a) The operating cycle is the time it takes to go from cash to cash in producing
revenues.
(b) The normal operating cycle for a merchandising company is likely to be longer
than that of a service company because, in a merchandising company, inventory
must first be purchased and sold, and then the receivables must be collected
whereas, in a service company, the services only need to be provided (not
purchased first and then stored until sold) and then the receivables must be
collected.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. (a) The income measurement process of a merchandising company is the same as the
service company in that net income is arrived at by deducting expenses from
revenues.
(b) The income measurement process of a merchandising company differs from that
of a service company in that its revenue is derived from sales revenue, not service
revenue. In addition, cost of goods sold is deducted from sales revenue to
determine gross profit, before operating and other expenses, similar in both types
of companies, are deducted (or other income is added).
3. The company needs to compare the cost of the detailed record keeping required in a
perpetual inventory system to the benefits of having the additional information about
the inventory. One of the benefits of a perpetual inventory system is the ability to
answer questions from customers about merchandise availability. In a used clothing
business, this may not be of much benefit unless each inventory item is unique. Another
benefit is the monitoring of inventory quantities in order to avoid running out of stock.
Again, this may not be of benefit since the company does not order recurring or similar
merchandise, and may not have a supplier to order from. But if the company is selling
used clothing on consignment, it will need to track each item in order to determine
which consignor to pay when an item is sold.
The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system requires more
record keeping and therefore is more expensive to use. For example, a perpetual
inventory system usually requires an investment in a point-of-sale system that is
integrated with the inventory system.
4. A physical count is an important control feature. By using a perpetual inventory system,

a company knows what should be on hand. Performing a physical count and checking it

to the perpetual records is necessary to detect any errors in record keeping and/or
shortages in stock.
5. The key distinction between a periodic inventory system and a perpetual inventory
system is whether or not information on inventory and cost of goods sold (units and
dollars) are always (perpetually) available or only known when inventory counts are
conducted (periodically). Because information on the cost of goods sold is only known
after an inventory count has been carried out under the periodic system, no entry is
made for the cost of goods sold at the time of each sale. Instead, cost of goods sold is a
residual number, determined by subtracting ending inventory (as determined by the
inventory account) from cost of goods available for sale. This means that any goods not
included in ending inventory are assumed to have been sold. In order to arrive at the
cost of goods available for sale, separate accounts are set up in the general ledger to
keep track of the purchases, freight-in, purchase returns and allowances, and purchase
discounts. Under the periodic inventory system, management is not able to look up in
the general ledger accounts for the balance of inventory at a particular point in time. In
order to arrive at the inventory value, a physical count of the inventory must be
performed.
6. The reason for recording the purchase of merchandise for resale in a separate account is
to enable a company to determine its cost of goods sold and gross profit. This
information is useful in managing costs and setting prices.
7. (a) The value of the purchase discount to Butler’s Roofing is $480 ($48,000 × 1%).
(b) Failing to take advantage of the discount terms is like paying the supplier an extra
$480 in order to settle a $47,520 invoice 20 days later. This works out to 1.01%
[$480 ÷ $47,520] every 20 days. On an annual basis this amounts to 18.4% [($480
÷ $47,520 × (365 ÷ 20)]. Butler’s should take advantage of the cash discount
offered.
LO 2 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

8. Once the inventory on hand has been determined from an inventory count, a comparison
is made with the amount reported by the perpetual inventory system. Due to shrinkage
or theft, or possibly even from accounting errors, there is likely to be less inventory on
hand than as per the accounting records. The perpetual record must be adjusted to the
amount according to the inventory count and the difference is charged to Cost of Goods
Sold.
9. (a) Lebel Ltée should record the sale as revenue in June, when the goods are sold to a
customer. When the merchandise was purchased in April, it should be recorded as
an asset, inventory. It should be recorded as cost of goods sold (an expense) in
June when the inventory is sold and the revenue is recognized. This is necessary
in order to match the cost with the related revenue
(b) Lebel’s customer should recognize the purchase in June, when the inventory is
received.
LO 2,3 BT: C Difficulty: C Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10. (a) FOB shipping point means that the goods are placed free on board by the seller at
the point of shipping. The buyer pays the freight costs from the point of shipping
to the buyer’s destination because title passes at shipping point. FOB destination
means the goods are delivered by the seller to their destination, where the title
passes. The seller pays for shipping to the buyer’s destination.
(b) FOB shipping point will result in a debit to the Inventory account by the buyer
because title has transferred at shipping point and the inventory is now owned by
the buyer. FOB destination will result in a debit to Freight Out by the seller
because they are paying for the freight.
LO 2,3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
11. In a perpetual inventory system, purchase returns are credited to Inventory because the
items purchased have been returned to the vendor and are no longer available to be sold
to customers. Sales returns are recorded to the account Refund Liability which was
increased at the time of recording the sale. Sales returns are not debited directly to the
Sales account because this would not provide information about the goods returned.
This information can be useful in making decisions. Debiting returns directly to sales
may also cause problems in comparing sales for different periods

12. (a) A quantity discount gives a reduction in the price according to the volume of the
purchase. A purchase discount is offered by a seller to a buyer for early payment
of an invoice. When the buyer pays the invoice within the discount period, the
amount of the discount decreases the Inventory account.
(b) Quantity discounts are not recorded or accounted for separately but become part
of the recorded sales price. Buyers record purchase discounts taken as a credit to
Inventory under the perpetual system or to Purchase Discounts when using the
periodic system.
13. A contract may have multiple deliverables for goods or services. These deliverables
lead to multiple separate performance obligations for the seller under the contract terms.
Since not all goods or services may be delivered at the same time, whenever a
performance obligation is satisfied from a partial delivery, a calculation must be made
in order to record the corresponding revenue earned for that delivery and corresponding
satisfaction of the performance of obligation.
14. A variable consideration is an amount that will reduce the total contract amount to what
is ultimately collected on a contract. Variable consideration includes expected sales
returns and allowances and rebates. It also includes sales discounts that management
expects will be claimed by customers. In the case of sales returns and allowances, the
amount of sales that is recorded is reduced by the estimated amount that will be
returned or for which a sales allowance will be granted. This amount is recorded to
Refund Liability.
15. Sales discounts are a variable consideration under a sales contract. Sales discounts
reduce the amount of the sales to the amount that is ultimately collected from
customers. At the time of the sale, the amount estimated as a reduction in the sales price
is recorded. If a company considers changing discount terms from 2/10, n/30 to 1/10,
n/30, the amount of sales that will be recorded at the point of sale will be increased by
1%.

16. Under ASPE, If the merchandise is not resaleable, it cannot be included in inventory
since it cannot be resold and it has no value. The cost remains in cost of goods sold
since it is a cost of doing business. If the merchandise is resaleable, it still has value to
the company. In this case, the cost of the merchandise is debited to inventory again and
cost of goods sold is credited. Note that under IFRS returned merchandise that is
saleable is credited to Estimated Inventory Returns because the credit to Cost of Goods
Sold was done when the product was originally sold. Merchandise that is not resaleable
is not included in inventory. Cost of Goods Sold is debited and the Estimated Inventory
Returns account is credited.
17. The sales taxes are collected on behalf of the federal and provincial governments, and
must be periodically remitted to these authorities. Sales taxes that are collected from
selling a product or service are not recorded as revenue, instead they are recorded as a
liability until they are paid to the government.
18. Unrealized gains and losses that are not included in net income are included in
comprehensive income.
19. In a single-step statement of income, all data are classified into two categories: (1)
revenues and (2) expenses. It is referred to as a single-step statement of income because
only a single step—subtracting expenses from revenues—is needed to determine
income before income tax. A multiple-step statement of income requires several steps to
determine income before income tax. First, cost of goods sold is deducted from sales to
determine gross profit. Operating expenses are then deducted to calculate income from
operations. Finally, other income and expenses are added or deducted to determine
income before income tax. The deduction of income tax to calculate net income (loss) is
the same under both formats. In addition, both formats produce the same profit amount
for the period.
20. North West Company uses a multiple-step statement of income.
LO 4 BT: K Difficulty: S Time: 2 min. AACSB: None CPA: cpa-t001 CM: Reporting

21. (a) When classifying expenses by their nature, they are reported in accordance with
their natural classification (for example, salaries, depreciation, and so on). When
classifying expenses by their function, they are reported according to the activity
(business function) for which they were incurred (for example, cost of goods sold,
administrative, selling).
(b) It does not matter whether a single-step or multiple-step statement of income is

prepared, expenses must be classified either by nature or by function.
22. Because Overwaitea is a private enterprise, it can follow Accounting Standards for
Private Enterprises (ASPE). Companies following ASPE can classify their expenses in
whatever manner is useful to them. Loblaws, which follows IFRS, must classify its
expenses by their nature or their function.
23. Interest expense is a non-operating expense because it relates to how a company’s

operations are financed, not to the company’s main operations.
24. The difference between gross profit margin and profit margin is that the gross profit
margin measures the amount by which the selling price exceeds the cost of goods sold
while the profit margin measures the extent to which sales cover all expenses (including
the cost of goods sold).
25. Factors affecting a company’s gross profit margin include the selling price and the cost
of the merchandise. Recall that gross profit = sales  cost of goods sold. Selling
products with a higher price or “mark-up” or selling products with a lower cost would
result in an increased gross profit margin. Selling products with a lower price (perhaps
due to increased competition that results in lower selling prices) or selling products with
a higher cost (perhaps due to price increases from suppliers and shippers) would result
in a lower gross profit margin.

26. High gross profit Low gross profit

Computer services and Low-price retail companies such as
software companies Walmart
Pharmaceutical manufacturers Grocery stores
Luxury goods retailers Forestry and wood products
*27.
(a) (b)
Accounts Added/Deducted Normal Balance
Purchase Returns and Allowances Deducted Credit
Purchase Discounts Deducted Credit
Freight In Added Debit
*28. Periodic System

Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases –
Purchase Discounts – Purchase Returns and Allowances + Freight In) – Ending
Inventory
Ending inventory and cost of goods sold for the period are calculated at the end of the
period.
Perpetual System
Cost of Goods Sold = the cost of the item(s) sold
Cost of goods sold is calculated at the time of each sale and recorded as an increase
(debit) to the Cost of Goods Sold account and a decrease (credit) to the Inventory
account.

*29. The calculation of cost of goods sold is shown in detail in the statement of income of a
company using the periodic system. In a perpetual system, it is one line and amount
only.
Periodic System
Cost of Goods Sold =
1. Add the cost of goods purchased (where the cost of goods purchased is equal to
purchases less purchases discounts, and purchases returns and allowances plus freight
in) to the cost of goods on hand at the beginning of the period (beginning inventory).
The result is the cost of goods available for sale.
2. Subtract the cost of goods on hand at the end of the period (ending inventory) from
the cost of goods available for sale. The result is the cost of goods sold.
Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as previously
determined and recorded for all sales.
*30. Under ASPE, the account that is used for sales returns is Sales Returns. Sales Returns is
a contra revenue account to Sales and is shown immediately after sales on the statement
of income. When deducted from sales we arrive at the result known as net sales.
*31. Under ASPE sales discounts are recorded when the supplier offers terms such as 1/10,
n/30 and the buyer takes advantage of these terms to pay within the discount period,
which in this case is 10 days from the invoice date. When paid within the discount
period, 1% of the invoice amount is recorded to the account Sales Discount which is a
contra revenue account to Sales and is shown immediately after sales on the statement
of income. When deducted from sales we arrive at the result known as net sales.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5.1
a. The company with the most efficient operating cycle is Company A as it uses the fewest
number of days in its cycle to obtain cash.
b. The company which is most likely a service company is Company A as it does not have
to manufacture or deliver inventory and consequently takes the fewest number of days
to obtain cash. Company C, with the highest number of days in its operating cycle, is
likely the manufacturing company, and the merchandising company would be in the
middle (Company B), with neither the highest nor the lowest number of days in its
operating cycle.
BRIEF EXERCISE 5.2

a. [1] Income before tax = $100 – $65 = $35
[2] Net income = $35 (from [1]) – $9 = $26
[3] Cost of goods sold = $100 – $60 = $40
[4] Operating expenses = $60 – $35 = $25
[5] Income tax expense = $35 – $26 = $9
b. Company A is the service company, since it has no cost of goods sold. Company B is
the merchandising company, since it has cost of goods sold.
LO 1 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.3

a.
Inventory
Beginning Balance 55,000
Purchases 220,000
26,000 Purchase returns
9,700 Purchase discounts
Freight in 2,700
218,000 Cost of goods sold
Ending Balance 24,000
Although not required, the following are the journal entries of the transactions.
Purchases Inventory........................................................................... 220,000

Accounts Payable........................................................ 220,000
PurchaseAccounts Payable........................................................................ 26,000

Returns Inventory..................................................................... 26,000
PurchaseAccounts Payable ($220,000 – $26,000).................................... 194,000

Discounts Inventory ($194,000 × 5%)......................................... 9,700
Cash............................................................................. 184,300
Freight In Inventory........................................................................... 2,700

Cost of Cost of Goods Sold............................................................ 218,000

Sales Inventory..................................................................... 218,000
b.
Cost of Goods Sold............................................................ 2,000
Inventory ($24,000 - $22,000).................................... 2,000
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.4

Pocras Corporation (Buyer):
Aug. 24 Inventory ......................................................................... 32,000
Wydell Inc. (Seller):

Aug. 24 Accounts Receivable......................................................... 32,000
Sales............................................................................. 32,000
24 Cost of Goods Sold............................................................ 14,400

Inventory..................................................................... 14,400
LO 2,3 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 5.5

Jan. 2 Inventory ......................................................................... 45,000
5 No entry necessary – Freight costs paid by Fundy Corp.
6 Accounts Payable.............................................................. 6,000

Inventory..................................................................... 6,000
11 Accounts Payable ($45,000 - $6,000)............................... 39,000

Cash............................................................................. 39,000
LO 2 BT: AP Difficulty: S Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.6
Jan. 2 Accounts Receivable......................................................... 45,000

Refund Liability ($45,000 x 15%).............................. 6,750
Sales............................................................................. 38,250
2 Cost of Goods Sold............................................................ 21,420

Estimated Inventory Returns ($25,200 x 15%)................. 3,780
Inventory..................................................................... 25,200
5 Freight Out........................................................................ 900

Cash............................................................................. 900
6 Refund Liability ............................................................... 6,000

Accounts Receivable................................................... 6,000
6 Inventory........................................................................... 3,360
Estimated Inventory Returns ...................................... 3,360
11 Cash................................................................................... 39,000
Accounts Receivable ($45,000 - $6,000).................... 39,000

BRIEF EXERCISE 5.7
Allocate the transaction price in proportion of the stand-alone selling prices:
Stand-alone
Selling price
Excavator $220,000 ($220,000 ÷ $250,000 = 88%)
Grapple bucket 30,000 ($30,000 ÷ $250,000 = 12%)
Total $250,000
Allocated
Selling price
Excavator sale $202,400 ($230,000 x 88%)
Accessory sale 27,600 ($230,000 x 12%)
Total $230,000

BRIEF EXERCISE 5.8
a. Sales .................................................................................. $1,070,000

Less: Cost of goods sold.................................................... 658,000
Gross profit........................................................................... $ 412,000
b. Gross profit........................................................................... $412,000

Less: Administrative expenses.......................................... $160,000
Selling expenses....................................................... 110,000 270,000
Income from operations....................................................... $142,000
c. Income from operations....................................................... $142,000

Add: Other income............................................................ $26,000
Less: Other expenses......................................................... (35,000) _ (9,000
Income before income tax.................................................... $133,000
d. Income before income tax.................................................... $133,000

Less: Income tax expense.................................................. 27,000
Net income .......................................................................... $106,000
BRIEF EXERCISE 5.9

As the name suggests, numerous steps are required in determining net income in a multiple-
step statement.
a. b.
Item Single-Step Multiple-Step
Depreciation expense Expenses Operating expenses

Cost of goods sold Expenses Cost of goods sold
Freight out Expenses Operating expenses
Income tax expense Income tax expense Income tax expense
Interest expenseExpenses Other income and expenses
Interest income Revenues Other income and expenses
Rent income Revenues Other income and expenses
Salaries expenseExpenses Operating expenses
Sales Revenues Sales

BRIEF EXERCISE 5.10

a.
KAI CORPORATION
Statement of Income (Single-Step)
Year Ended December 31, 2021
Revenues
Sales.................................................................................... $3,980,000
Expenses
Cost of goods sold............................................................... $1,925,000
Salaries expense.................................................................. 921,000
Depreciation expense.......................................................... 278,000
Insurance expense............................................................... 128,000 3,252,000
Income before income tax......................................................... 728,000
Income tax expense 132,000
Net income $ 596,000
b.
KAI CORPORATION
Statement of Income (Multiple-Step)
Sales....................................................................................................................... $3,980,000
Cost of goods sold................................................................................................. 1,925,000
Gross profit............................................................................................................ 2,055,000
Operating expenses
Salaries expense..................................................................... $921,000
Depreciation expense............................................................. 278,000
Insurance expense.................................................................. 128,000
Total operating expenses........................................................................... 1,327,000
Income before income tax..................................................................................... 728,000
Income tax expense............................................................................................... 132,000
Net income............................................................................................................. $ 596,000
(Revenues – Cost of goods sold – Operating expenses = Income from operations)

BRIEF EXERCISE 5.11
a. The company is using a multiple-step form of statement of income.
b. The company is classifying its expenses by their function. They are reported according
to the activity (business function) for which they were incurred (for example, cost of
goods sold, administrative, selling).
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 5.12
a.
2021 2020
Sales $250,000 $200,000
Cost of goods sold 137,500 114,000
Gross profit 112,500 86,000
Operating expenses 50,000 40,000
Income from operations 62,500 46,000
Other income ______ 10,000
Income before income taxes 62,500 56,000
Income tax expense 20,000 15,000
Net income $42,500 $41,000
b.
2021 2020
Gross profit $112,500 $86,000

margin = 45.0% = 43.0%
$250,000 $200,000
Profit
$42,500 = 17.0% $41,000 = 20.5%
margin
$250,000 $200,000
c. Modder Corporation’s gross profit margin increased in 2021 indicating an increase in the
percentage mark-up, or a reduction in the cost of goods sold, or both. On the other hand,
in 2021, the company’s profit margin dropped. The decrease in profit margin is caused
by other income in 2020 that was not available in 2021. Operating expenses were 20%
of sales in both years. The income tax rate also increased in 2021 (32% vs 26.8%).
LO 4,5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 and : cpa-t005CM: Reporting and Finance

BRIEF EXERCISE 5.13
a.
($ in millions) 2018 2017
Gross profit = =
$4,711.3 $4,480.2
$14,058.7 – $9,347.4 $13,276.7 – $8,796.5
($ in millions) 2018 2017
Gross profit $4,711.3 $4,480.2

margin = 33.5% = 33.7%
$14,058.7 $13,276.7
Profit $783.0 $818.8

= 5.6% = 6.2%
margin $14,058.7 $13,276.7
b. Canadian Tire Corporation’s gross profit margin decreased in 2018. Although sales
increased 5.9%, [($14,058.7 - $13,276.7) ÷ $13,276.7] cost of goods sold increased
6.3% [($9,347.4 - $8,796.5) ÷ $8,796.5] which lead to the decreased gross profit
margin. The profit margin also decreased in 2018. Operating expenses or interest or
income tax expense must have increased as a percentage of sales.
LO 4,5 BT: AN Difficulty: M Time: 15 min. AACSB: Analytic CPA: cpa-t001 and cpa-t005 CM: Reporting and Finance
*BRIEF EXERCISE 5.14
Jan. 2 Purchases .....................................................................45,000

5 No entry necessary - Freight costs paid by Fundy Corp.
6 Accounts Payable.............................................................. 6,000

Purchase Returns and Allowances.............................. 6,000
11 Accounts Payable ($45,000 - $6,000)............................... 39,000

Cash ......................................................................... 39,000


Jan. 2 Accounts Receivable......................................................... 45,000
Refund Liability ($45,000 x 15%).............................. 6,750
Sales............................................................................. 38,250
2 No cost of goods sold entry at time of sale
5 Freight Out........................................................................ 900

Cash............................................................................. 900
6 Refund Liability................................................................ 6,000

Accounts Receivable................................................... 6,000
6 No cost of goods sold entry at the time of sale
11 Cash................................................................................... 39,000
Accounts Receivable ($45,000 - $6,000).................... 39,000

a. Purchases................................................................................ $880,000
Less: Purchase returns and allowances................................ $13,000
Purchase discounts...................................................... 14,000 27,000
Net purchases.......................................................................... $853,000
b. Net purchases.......................................................................... $853,000

Add: Freight in..................................................................... 16,000
Cost of goods purchased......................................................... $869,000
c. Beginning inventory............................................................... $ 96,000

Add: Cost of goods purchased............................................. 869,000
Cost of goods available for sale.............................................. 965,000
Less: Ending inventory........................................................ 82,000
Cost of goods sold.................................................................. $883,000
d. Sales .................................................................................... $1,708,000

Less: Cost of goods sold......................................................... 883,000
Gross profit............................................................................. $825,000


a. Cost of goods sold
Beginning inventory................................................... $105,000
Purchases.................................................................... $195,000
Less: Purchase returns and allowances....................... $ 6,600
Purchase discounts........................................... 20,400 27,000
Net purchases.............................................................. 168,000
Add: Freight In........................................................... 5,250
Cost of goods purchased............................................. 173,250
Cost of goods available for sale.................................. 278,250
Ending inventory........................................................ 120,000
Cost of goods sold...................................................... $158,250
b. There would be no difference in the remainder of the statement of income for Halifax
Limited whether the periodic or perpetual inventory systems were used.
Purchases – Purchase returns and allowances – Purchase discounts + Freight-in = Cost of goods
purchased
(Beginning inventory + Cost of goods purchased – Ending inventory = Cost of goods sold)


Dec. 31 Inventory (ending)............................................................. 68,000
Cost of Goods Sold............................................................ 401,000*
Purchase Discounts............................................................ 6,000
Inventory (beginning).................................................. 75,000
Purchases..................................................................... 388,000
Freight In..................................................................... 12,000
* Cost of goods sold = Beginning inventory + Purchases  Purchase discounts 

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $75,000 + $388,000  $6,000 + $12,000 – $68,000 =
$401,000
EDSON LTD.
Sales....................................................................................................................... $935,000
Less: Sales returns..................................................................... $8,000
Sales discounts................................................................. 7,000 15,000
Net sales................................................................................................................. 920,000
Cost of goods sold................................................................................................. 380,000
Gross profit............................................................................................................ 540,000
Operating expenses
Total operating expenses........................................................................... 240,000
Income from operations......................................................................................... 300,000
Other income and expenses
Interest expense............................................................................................... 10,000
Net income............................................................................................................. $203,000
(Revenues – Contra revenues – Cost of goods sold – Operating expenses = Income from operations)

SOLUTIONS TO EXERCISES
EXERCISE 5.1
a. Toys “R” Us, Inc. is a merchandiser (retailer), Fasken Martineau LLP is a service
company, and Atlantic Grocery Distributors Ltd. is a merchandiser (wholesaler).
b. The operating cycle of these three businesses will be different. The longest operating
cycle will be experienced by the retailer, as the sales of merchandise will be the slowest.
The organization with the shortest operating cycle will be the service firm that does not
sell inventory. The third company, the distributing wholesaler, will have an operating
cycle between that of the retailer and the law firm because its inventory is more likely to
sell faster and the law firm has no inventory to sell.

EXERCISE 5.2
Account Debited Account Credited
Item a. b. c. a. b. c.
1. Asset Inventory +$3,500 Asset Cash –$3,500
2. Liability Accounts Payable –$750 Asset Inventory –$750
3. Asset Inventory +$4,000 Liability Accounts +$4,000
Payable
4. Asset Inventory +$400 Asset Cash –$400
5. Liability Accounts Payable –$3,500 Asset Cash –$3,430
Asset Inventory –$70
6. Asset Accounts +$10,000 Revenue Sales +$9,231
Receivable
Liability Refund +$769
Expense Cost of Goods Sold Liability
Estimated +$3,692 Asset Inventory –$4,000
Asset Inventory Returns +$308
7. Liability Refund +$550 Asset Cash –$550
Liability Asset Estimated
Expense Cost of Goods Sold +$220 Inventory –$220
Returns
8. Expense Freight Out +$600 Asset Cash –$600
9. Liability Refund +$400 Asset Accounts –$400
Liability Receivable
Asset Inventory +$160 Asset Estimated –$160
Inventory
Returns
10. Asset Cash +$8,000 Asset Accounts –$8,000
Receivable
LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.3
a.
Sept. 2 Inventory (750 × $20)........................................................... 15,000
Accounts Payable........................................................... 15,000
10 Accounts Payable (10 × $20)............................................... 200

Inventory........................................................................ 200
11 Accounts Receivable (260 × $30)........................................ 7,800

Refund Liability ($7,800 × 4%)..................................... 312
Sales................................................................................ 7,488
Cost of Goods Sold .............................................................. 4,992

Estimated Inventory Returns ($5,200 × 4%)........................ 208
Inventory (260 × $20)..................................................... 5,200
14 Refund Liability (10 × $30).................................................. 300

Accounts Receivable...................................................... 300
Inventory (10 × $20)............................................................. 200

Estimated Inventory Returns.......................................... 200
29 Accounts Payable ($15,000 – $200)..................................... 14,800

Cash................................................................................ 14,800
30 Cash...................................................................................... 7,500
Accounts Receivable ($7,800 - $300)............................ 7,500

EXERCISE 5.3 (CONTINUED)

b.
Inventory
Sept. 1 Bal. 2,000 Sept.10 200
2 15,000 11 5,200
14 200
Sept. 30 Bal. 11,800
Cost of Goods Sold

Sept. 11 4,992
Sept. 30 Bal. 4,992
c.
Ending Inventory:
Number of calculators at September 30: 100 + 750 – 10 – 260 + 10 = 590
Cost of calculators at September 30: 590 × $20 = $11,800
Cost of Goods Sold:

Number of calculators sold in September: 260 – 10 = 250
Cost of calculators sold in September: 260 x $20 = $5,200 less 4% $208 = $4,992
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.4
April 3 Inventory............................................................... 28,000
Accounts Payable............................................ 28,000
6 Inventory............................................................... 700
Cash................................................................. 700
7 Supplies................................................................. 5,000
Accounts Payable............................................ 5,000
8 Accounts Payable.................................................. 3,500

Inventory......................................................... 3,500
30 Accounts Payable ($28,000 – $3,500)................... 24,500

Cash ................................................................ 24,500

EXERCISE 5.5
April 3 Accounts Receivable............................................. 28,000

Refund Liability ($28,000 x 15%).................. 4,200
Sales................................................................. 23,800
Cost of Goods Sold................................................ 16,150

Estimated Inventory Returns ($19,000 x 15%)...2,850
Inventory......................................................... 19,000
6 No entry necessary - Freight costs paid by Olaf.
7 No entry necessary.
8 Refund Liability.................................................... 3,500

Accounts Receivable....................................... 3,500
Inventory............................................................... 2,300
Estimated Inventory Returns........................... 2,300
30 Cash....................................................................... 24,500
Accounts Receivable ($28,000 – $3,500) ...... 24,500

EXERCISE 5.6
Boyle should choose to borrow cash at 8% 10 days from the date of the invoice. The amount
borrowed could be as little as the amount of the invoice less the purchase discount. This is the
amount needed to settle the payment 10 days from the date of the invoice and earn the purchase
discount of 1%. The loan can then be repaid after 20 days, which would be the date the invoice
would have been paid if the loan had not been obtained. The relevant period is 20 days because
this is the amount of time a loan would be outstanding in order to make the choice to pay
within the discount period.
Converting a 1% discount for 20 days equals an annualized interest rate of 18.43% calculated
as follows (1/99 × 365 ÷ 20) = 18.43%. Paying 8% to the bank to receive 18.25% from the
supplier is the more favourable procedure to follow.
LO 2 BT: AN Difficulty: C Time: 15 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.7
a. Dec. 3 Accounts Receivable................................................... 68,000

Refund Liability ($68,000 x 3%).......................... 2,040
Sales....................................................................... 65,960
3 Cost of Goods Sold...................................................... 34,920

Estimated Inventory Returns ($36,000 x 3%)............. 1,080
Inventory............................................................... 36,000
8 Refund Liability.......................................................... 2,100

Accounts Receivable............................................. 2,100
Inventory..................................................................... 1,150
Estimated Inventory Returns................................. 1,150
11 Cash............................................................................. 65,900
Accounts Receivable ($68,000 – $2,100)............. 65,900
b. Dec. 3 Inventory..................................................................... 68,000

Accounts Payable.................................................. 68,000
7 Inventory..................................................................... 900
Cash....................................................................... 900
8 Accounts Payable........................................................ 2,100

Inventory............................................................... 2,100
11 Accounts Payable ($68,000 – $2,100)......................... 65,900

Cash....................................................................... 65,900
c. Sales............................................................................................... $65,960
Cost of goods sold......................................................................... 34,920
Gross profit.................................................................................... $31,040
LO 2,3,4 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 5.8
Allocate the transaction price in proportion of the stand-alone selling prices:
Stand-alone
Selling price
Laser printers (100 x $400) $40,000 ($40,000 ÷ $50,000 = 80%)
Toner cartridges (125 x $80) 10,000 ($10,000 ÷ $50,000 = 20%)
Total $50,000
Allocated
Selling price
Laser printers $36,800 ($46,000 x 80%)
Toner cartridges 9,200 ($46,000 x 20%)
Total $46,000
The amount of revenue that can be recognized in March when the laser printers are delivered is
$36,800.
March 26 Accounts Receivable................................................... 36,800

Sales....................................................................... 36,800
26 Cost of Goods Sold (100 x $290)................................ 29,000

Inventory............................................................... 29,000

EXERCISE 5.9
a. Sales $2,624,000
Cost of goods sold 1,114,000
Gross profit $1,510,000
b. Expenses:
Advertising expense $112,000
Depreciation expense 188,000
Interest expense 117,000
Salaries expense 776,000 1,254,000
Net income $ 256,000
c. Current assets:
Accounts receivable $187,000
Cash 71,000
Inventory 232,000
Prepaid expenses 29,000
Total current assets $519,000
Current liabilities:
Accounts payable $134,000
Deferred revenue 32,000
Property tax payable 18,000
Refund liability 21,000
Salaries payable 26,000
Total current liabilities $231,000
d. We know that Swirsky Corporation is in the first year of operations because there was no Retained
Earnings balance.
LO 4 BT: AP Difficulty: S Time: 20 min. AACSB: Analytic CPA:cpa-t001 CM: Reporting

EXERCISE 5.10
a.
BLUE DOOR CORPORATION
Statement of Income (Single-Step)
Revenues
Sales.................................................................................... $2,589,500
Interest income.................................................................... 30,000
Rent income ....................................................................... 24,000
$2,643,500
Expenses
Cost of goods sold............................................................... $1,172,000
Salaries expense.................................................................. 705,000
Depreciation expense.......................................................... 125,000
Interest expense................................................................... 62,000
Advertising expense............................................................ 55,000
Freight out........................................................................... 25,000
Insurance expense............................................................... 23,000
. 2,167,000
Income before income tax.......................................................................................... 476,500
Income tax expense.................................................................................................... 70,000
Net income................................................................................................................. $ 406,500


b.
BLUE DOOR CORPORATION
Sales....................................................................................................................... $2,589,500
Gross profit............................................................................................................ 1,417,500
Operating expenses
Advertising expense............................................................... 55,000
Freight out.............................................................................. 25,000
Insurance expense.................................................................. 23,000
Income from operations......................................................................................... 484,500
Interest income....................................................................... $30,000
Rent income........................................................................... 24,000
Interest expense...................................................................... (62,000)
(8,000)
Net income............................................................................................................. $ 406,500
c. Blue Door Corporation is classifying its expenses by nature, such as salaries,

depreciation, and advertising. There is no classification of expenses into administrative
or selling as would be the case if classifying expenses by functional areas. For smaller
companies such as this one, the difference between classification of items on the
statement of income by function or nature is not significant.

EXERCISE 5.11
a. Young Ltd.
Sales................................................................................................... $89,000
Less: Cost of goods sold.................................................................... 58,750
*Gross profit [1]................................................................................. $30,250
Gross profit......................................................................................... $30,250

Less: Operating expenses................................................................... 19,500
*Income from operations [2].............................................................. $10,750
Income from operations..................................................................... $10,750

Add: Other income............................................................................. 750
*Income before income tax [3].......................................................... $11,500
Income before income tax.................................................................. $11,500

Less: Income tax expense................................................................... 2,300
*Net income [4].................................................................................. $ 9,200
Rioux Ltée
Sales................................................................................................. $100,000
*Less: Cost of goods sold [5]............................................................. 60,000
Gross profit......................................................................................... $ 40,000
Gross profit......................................................................................... $40,000

*Less: Operating expenses [6]........................................................... 22,000

Less: Other expenses.......................................................................... 2,000
*Income before income tax [7].......................................................... $16,000
Income before income tax.................................................................. $16,000

*Less: Income tax expense [8]........................................................... 3,200
Net income......................................................................................... $12,800
* Indicates missing amount

b. Young Rioux
Gross profit margin $30,250 ÷ $89,000 = 34.0% $40,000 ÷ $100,000 = 40.0%
Profit margin $9,200 ÷ $89,000 = 10.3% $12,800 ÷ $100,000 = 12.8%
c. Rioux has the better gross profit margin and the better profit margin.
LO 4,5 BT: AN Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

EXERCISE 5.12
a. Marchant Ltd.
*Sales [1]......................................................................................... $1,432,000

Less: Cost of goods sold.................................................................. 657,000
Gross profit ..................................................................................... $ 775,000
Gross profit...................................................................................... $775,000

Less: Operating expenses................................................................. 580,000
*Income from operations [2]........................................................... $195,000
Income from operations................................................................... $195,000

Add: Other income........................................................................... 3,600
*Income before income tax [3]........................................................ $198,600
Income before income tax................................................................ $198,600

Less: Income tax expense................................................................ 38 600
*Net income [4]............................................................................... $160,000
Dueck Ltd.
Sales................................................................................................. $2,130,000
Less: Cost of goods sold ................................................................. 1,172,000
*Gross profit [5] .............................................................................. $958,000
Gross profit...................................................................................... $958,000

*Less: Operating expenses [6]......................................................... 648,000

Less: Other expenses....................................................................... _ 4,100
*Income before income tax [7]........................................................ $305,900
Income before income tax................................................................ $305,900

*Less: Income tax expense [8]......................................................... 55,000
Net income....................................................................................... $250,900
* Indicates missing amount

b. Marchant Dueck
Gross profit margin $775,000 ÷ $1,432,000 = 54.1% $958,000 ÷ $2,130,000 = 45.0%
Profit margin $160,000 ÷ $1,432,000 = 11.2% $250,900 ÷ $2,130,000 = 11.8%
c. Marchant has the better gross profit margin and Dueck has the better profit margin.

EXERCISE 5.13
a.
MONTMORENCY LTÉE
Statement of Income (Multiple-step)
Year Ended August 31, 2021
Sales ................................................................................................................... $7,090,000

Gross profit............................................................................................................ 3,060,000
Operating expenses
Administrative expenses........................................................ $670,000
Selling expenses..................................................................... 260,000
Income from operations......................................................................................... 2,130,000
Interest expense.............................................................................................. 270,000
Income before income tax..................................................................................... 1,860,000
Net income............................................................................................................. $1,300,000
b. Expenses are classified by function (cost of goods sold, administrative, selling).
c. Gross profit margin $3,060,000 ÷ $7,090,000 = 43.2%
Profit margin $1,300,000 ÷ $7,090,000 = 18.3%

EXERCISE 5.14
(in USD millions)
a. Gross profit margin

2019: ($42,879 – $32,918) ÷ $42,879 = 23.2%
2018: ($42,151 – $32,275) ÷ $42,151 = 23.4%
2017: ($39,403 – $29,963) ÷ $39,403 = 24.0%
Profit margin (using net income)

2019: $1,464 ÷ $42,879 = 3.4%
2018: $999 ÷ $42,151 = 2.4%
2017: $1,207 ÷ $39,403 = 3.1%
b. The gross profit margin has been holding steady, with a slight deterioration over the
three-year period. The trend is different for the profit margin, where the results of 2019
exceeded those of 2017 and 2018.
c. Profit margin (using income from operations)

2019: $1,900 ÷ $42,879 = 4.4%
2018: $1,843 ÷ $42,151 = 4.4%
2017: $1,854 ÷ $39,403 = 4.7%
The profit margin using net income increased dramatically in 2019 while profit margin
using income from operations remained the same. The major elements that are in the
calculation of the profit margin ratio but are not in the profit margin using income from
operations are other income and expenses, and income tax expense. In 2019, there must
have been a significant other income, or possibly a gain that caused a substantial
increase in profit margin compared to 2018.
LO 5 BT: AN Difficulty: C Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

*EXERCISE 5.15
Olaf Corp. (Buyer)
a. Apr. 3 Purchases.............................................................................. 28,000

6 Freight In.............................................................................. 700

Cash................................................................................ 700
7 Supplies................................................................................ 5,000
8 Accounts Payable................................................................. 3,500

Purchase Returns and Allowances................................. 3,500
30 Accounts Payable ($28,000 – $3,500).................................. 24,500

Cash ............................................................................... 24,500
DeVito Ltd. (Seller)
a. Apr. 3 Accounts Receivable............................................................ 28,000

Refund Liability ($28,000 x 15%)................................. 4,200
Sales................................................................................ 23,800
8 Refund Liability................................................................... 3,500

Accounts Receivable...................................................... 3,500
30 Cash ..................................................................................... 24,500

Accounts Receivable ($28,000 – $3,500)...................... 24,500

*EXERCISE 5.16
a. Duvall Ltd. (Seller)
(1) Perpetual Inventory System

June 10 Accounts Receivable.................................................. 5,000
Refund Liability ($5,000 x 10%)......................... 500
Sales..................................................................... 4,500
Cost of Goods Sold.................................................... 2,700

Estimated Inventory Returns ($3,000 x 10%)............ 300
Inventory.............................................................. 3,000
11 No entry
12 Refund Liability......................................................... 500

Accounts Receivable............................................ 500
Cost of Goods Sold.................................................... 300

Estimated Inventory Returns................................ 300
19 Cash............................................................................ 4,500
Accounts Receivable ($5,000 – $500)................. 4,500
(2) Periodic Inventory System

June 10 Accounts Receivable.................................................. 5,000
Refund Liability ($5,000 x 10%)......................... 500
Sales..................................................................... 4,500
11 No entry
12 Refund Liability......................................................... 500

Accounts Receivable............................................ 500
19 Cash............................................................................ 4,500
Accounts Receivable ($5,000 – $500)................. 4,500

*EXERCISE 5.16 (CONTINUED)

b. Pele Ltd. (Buyer)
(1) Perpetual Inventory System

June 10 Inventory..................................................................... 5,000
Accounts Payable.................................................. 5,000
11 Inventory (freight)....................................................... 250

Cash....................................................................... 250
12 Accounts Payable........................................................ 500

Inventory............................................................... 500
19 Accounts Payable ($5,000 – $500).............................. 4,500

Cash....................................................................... 4,500
(2) Periodic Inventory System

June 10 Purchases.................................................................... 5,000
Accounts Payable................................................. 5,000
11 Freight In.................................................................... 250

Cash...................................................................... 250
12 Accounts Payable....................................................... 500

Purchase Returns and Allowances....................... 500
19 Accounts Payable ($5,000 – $500)............................ 4,500

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

*EXERCISE 5.17
[1] $1,420 = ($1,500 – $50 – $30) [10] $7,560 = ($7,210 + $150 + $200)
[2] $1,550 = ($1,420 + $130) [11] $590 = ($7,800 – $7,210)
[3] $1,750 = ($1,550 + $200) [12] $8,800 = ($1,000 + $7,800)
[4] $270 = ($1,750 – $1,480) [13] $7,550 = ($8,800 [12]) – $1,250)
[5] $270 = [4] (same as ending, Yr 1) [14] $1,250 = given (same as ending, Yr 1)
[6] $1,950 = ($100 + $50 + $1,800) [15] $8,050 = ($8,550 – $400 – $100)
[7] $230 = ($2,030 [8] – $1,800) [16] $8,600 = ($8,050 [15] + $550)
[8] $2,030 = ($2,300 – $270 [5]) [17] $9,850 = ($1,250 [14] + $8,600 [16])
[9] $1,950 = ($2,300 – $350) [18] $8,350 = ($9,850 [17] – $1,500)

*EXERCISE 5.18
a.
LIVELY LIMITED
Statement of Income
Year Ended February 28, 2021
Sales $392,600
Cost of goods sold
Inventory, beginning $ 54,600
Purchases $273,000
Less: Purchase discounts 39,000
Purchase returns and allowances 20,800
Net purchases 213,200
Add: Freight in 8,450
Cost of goods purchased 221,650
Cost of goods available for sale 276,250
Less: Inventory, ending 79,300
Cost of goods sold 196,950
Gross profit 195,650
Operating expenses
Administrative expenses $120,900
Selling expenses 9,100
Total operating expenses 130,000
Income from operations 65,650
Interest expense 7,800
Income before income tax 57,850
Net income $ 48,550
(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)
b.
Feb. 28 Inventory (ending)............................................................. 79,300

Purchase Returns and Allowances.................................... 20,800
Purchases..................................................................... 273,000
Freight In..................................................................... 8,450

*EXERCISE 5.19
a.
May 2 Accounts Receivable................................................................ 20,000
Sales................................................................................... 20,000
Cost of Goods Sold................................................................... 8,000

Inventory............................................................................ 8,000
3 Sales Returns and Allowances.................................................. 1,500

Accounts Receivable.......................................................... 1,500
5 Sales Returns and Allowances.................................................. 2,000

Inventory.................................................................................. 1,200
7 Cash ......................................................................................... 16,170

Sales Discounts [($20,000 - $1,500 - $2,000) x 2%]................ 330
Accounts Receivable ($20,000 - $1,500 - $2,000)............. 16,500
b. If Resistant received the payment on May 27 instead of May 7, the sales discount would not
apply as the payment was received after the terms given of 2/10, n/30. The payment received
would be recorded as follows:
May 27 Cash.......................................................................................... 16,500


SOLUTIONS TO PROBLEMS
PROBLEM 5.1A
a. A company’s operating cycle is the average time it takes to go from cash to cash in
producing revenues. The operating cycle for a merchandising company covers the
period of time between when you purchase your inventory, to when you sell it, and to
when you eventually collect the accounts receivable from a sale.
The hair salon is having problems paying for its products because it purchases a two-
month supply, paying for it immediately, with cash flow from the current month’s
operations. There is an insufficient cash float available to purchase two months of
supply at one time, and to pay immediately rather than taking advantage of the 30-day
payment period.
The hair salon’s inventory is contributing to the problem of reduced cash flow and gross
profit because some items have been in stock for a long period of time. This further
extends the operating cycle for those items.
b. The physical inventory count comparison with the perpetual inventory record has
flagged discrepancies. There is an issue concerning the way in which the perpetual
record is being maintained and updated because staff members sometimes forget to scan
the products that they use on customers. There may also be a possibility that goods are
being stolen by customers or employees. Accounting errors could also be the source of
the discrepancy, in which case the company’s procedures should be reviewed, and if
necessary, internal controls should be strengthened. Possible solutions could be having
the system require that items be scanned before a product sale can be rung in. In
addition, the procedures taken to perform the physical inventory count should be
reviewed to determine if the count is the source of the discrepancies. The count should
be performed more frequently, not necessarily for all inventory items but particularly
for those items that had discrepancies from the count performed at the end of six
months. The results of the more frequent counts should be monitored to see if the
discrepancies with the perpetual inventory records are diminishing.

PROBLEM 5.1A (CONTINUED)
b. (continued)
The hair salon should use the perpetual inventory system to help determine which
inventory items are out-of-stock and which items are taking a long time to sell. By
managing what inventory is purchased, fewer markdowns of the selling price will be
required, and sales should increase as there will be less chance for a stock-out. Finally,
the full 30 days should be taken on the terms with your supplier, in order to have more
cash on hand when needed.
c. For control reasons, a physical inventory count must always be taken at least once a
year, and ideally more often under the perpetual inventory system. By using a perpetual
inventory system, a company knows what inventory should be on hand. Performing a
physical count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock. The staff may be forgetting to scan
intentionally. Enforcing the scanning procedure will strengthen internal control over
cash receipts. If staff can avoid scanning product, they may also attempt to avoid
recording a cash sale altogether, pocketing the extra cash. This theft would lead to
unrecorded revenues and would reduce the gross profit performance of the salon.
d. Data analytics could assist Karen in determining the sales trends of those products that
are the most popular with customers that often cause stock-outs and those products that
are not selling well and may need to be written down. Seasonal trends might be detected
using data analytics along with statistics of which price point is most popular when
selling jewellery. With the information in hand, Karen can buy products more
efficiently and possibly at a lower cost. Reduced stock-outs will lead to increased sales.
LO 1,4 BT: AN Difficulty: C Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

PROBLEM 5.2A
a. Phantom Book Warehouse Ltd. is a wholesaler. Its suppliers are publishers and its
customers are book stores.
b.
June 1 Inventory (180 × $16)........................................................ 2,880
Accounts Payable...................................................
3 Accounts Receivable (220 × $25)..................................... 5,500

Refund Liability ($5,500 x 15%)...........................
Sales.......................................................................

Estimated Inventory Returns ($3,740 x 15%)................... 561
Inventory (220 × $17)............................................
5 Accounts Payable............................................................... 160

Inventory (10 × $16)..............................................
8 Accounts Receivable (80 × $22)....................................... 1,760

Refund Liability ($1,760 x 15%)...........................
Sales.......................................................................

Inventory (80 × $17)..............................................
9 Refund Liability................................................................. 264

Accounts Receivable (12 × $22)...........................
Cost of Goods Sold (12 x $17).......................................... 204

Estimated Inventory Returns.................................
11 Inventory (130 × $15)........................................................ 1,950

Accounts Payable...................................................
12 Cash ............................................................................... 5,500

Accounts Receivable ............................................
17 Cash ............................................................................... 1,496

Accounts Receivable ($1,760 – $264) ..................


b. (continued)
June 22 Accounts Receivable (125 × $25)..................................... 3,125

Refund Liability ($3,125 x 15%).............................. 469
Sales.......................................................................... 2,656
Cost of Goods Sold (125 × $17)........................................ 1,806

Inventory................................................................... 2,125
25 Refund Liability................................................................. 375

Accounts Receivable (15 × $25).............................. 375
Inventory (15 × $17).......................................................... 255

Estimated Inventory Returns.................................... 255
29 Accounts Payable ($2,880 – $160).................................... 2,720

Cash.......................................................................... 2,720
c.
Inventory
May 31* 4,500 June 3 3,740
June 1 2,880 5 160
11 1,950 8 1,360
25 255 22 2,125
June 30 Bal. 2,200
* (250 × $18)
d.
June 30 Cost of Goods Sold............................................................ 335
Inventory ($2,200 - $1,865)...................................... 335
LO 1,2,3 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.3A
a.
Sept. 2 Equipment..................................................................... 65,000
Accounts Payable..............................................
4 Supplies......................................................................... 4,000
Cash...................................................................
6 Inventory....................................................................... 65,000
Accounts Payable.............................................. 65,000
7 Inventory....................................................................... 1,600
Cash...................................................................
8 Accounts Payable.......................................................... 5,000

Inventory...........................................................
9 Accounts Receivable..................................................... 20,000

Refund Liability ($20,000 x 5%)......................
Sales..................................................................
Cost of Goods Sold....................................................... 14,250

Estimated Inventory Returns ($15,000 x 5%)............... 750
Inventory...........................................................
10 Freight Out.................................................................... 375

Cash...................................................................
17 Cash ............................................................................. 20,000

Accounts Receivable........................................... 20,000
20 Accounts Payable ($65,000 – $5,000)............................ 60,000

Cash ($60,000 – $600)........................................ 59,400
Inventory ($60,000 × 1%)................................... 600

a. (continued)
Sept. 21 Inventory......................................................................... 6,000

Cash..................................................................... 6,000
22 Accounts Receivable....................................................... 27,000

Refund Liability ($27,000 x 5%)......................
Sales....................................................................
Cost of Goods Sold......................................................... 19,000

Estimated Inventory Returns ($20,000 x 5%)............... 1,000
Inventory.............................................................
28 Refund Liability.............................................................. 1,000

Accounts Receivable...........................................
Inventory......................................................................... 750
Estimated Inventory Returns...............................
b. and c.
Sales Cost of Goods Sold Gross profit As a %
Sept. 9 $19,000 $14,250
Sept. 22 25,650 19,000
Total $44,650 $33,250 $11,400 25.5%
LO 2,3,4,5 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

PROBLEM 5.4A
a.
April 3 Inventory........................................................................... 3,200

Accounts Payable.................................................... 3,200
5 Inventory........................................................................... 286
Cash......................................................................... 286
7 Accounts Receivable......................................................... 9,750

Sales........................................................................ 9,555
Cost of Goods Sold........................................................... 5,733

Estimated Inventory Returns ($5,850 x 2%)..................... 117
Inventory................................................................. 5,850
9 Accounts Payable.............................................................. 320

Inventory................................................................. 320
11 Accounts Payable ($3,200 – $320)................................... 2,880

Inventory ($2,880 × 1%)......................................... 29
Cash ($2,880 – $29)................................................ 2,851
14 Cash ................................................................................. 4,150

Accounts Receivable............................................... 4,150
16 Inventory........................................................................... 1,300
17 Accounts Payable.............................................................. 100

Inventory................................................................. 100

Refund Liability ($11,100 x 2%)............................ 222
Sales........................................................................ 10,878
Cost of Goods Sold........................................................... 6,076

Inventory................................................................. 6,200


Inventory ($1,200 × 2%)......................................... 24
Cash ($1,200 – $24)................................................ 1,176
25 Cash ................................................................................. 4,375

b.
Cash Accounts Payable
Apr. 1 Bal. 4,200 Apr. 5 286 Apr. 9 320 Apr. 3 3,200
Apr. 14 4,150 Apr. 11 2,851 Apr. 11 2,880 Apr. 16 1,300
Apr. 25 4,375 Apr. 24 1,176 Apr. 17 100
Apr. 30 Bal. 8,412 Apr. 24 1,200
Apr. 30 Bal. 0
Accounts Receivable
Apr. 7 9,750 Apr. 14 4,150 Refund Liability
Apr. 20 11,100 Apr. 25 4,375 Apr. 7 195
Apr. 20 222
Apr. 30 Bal. 12,325 Apr.30 Bal. 417
Inventory Sales
Apr. 1 Bal. 19,500 Apr. 7 5,850 Apr. 7 9,555
Apr. 3 3,200 Apr. 9 320 Apr. 20 10,878
Apr. 5 286 Apr. 11 29 Apr. 30 Bal. 20,433
Apr. 16 1,300 Apr. 17 100
Apr. 20 6,200 Cost of Goods Sold
Apr. 24 24 Apr. 7 5,733
Apr. 30 Bal. 11,763 Apr. 20 6,076
Apr. 30 Bal. 11,809
Estimated Inventory Returns
Apr. 7 117 Retained Earnings
Apr. 20 124 Apr. 1 Bal. 11,700
April 30 Bal. 241 Apr. 30 Bal. 11,700
Common Shares
Apr. 1 Bal. 12,000
Apr. 30 Bal. 12,000


c.
IN THE PINES GOLF SHOP LIMITED
Trial Balance
April 30, 2021
Debit
Cash.............................................................................................. $ 8,412
Accounts receivable..................................................................... 12,325
Inventory...................................................................................... 11,763
Estimated inventory returns......................................................... 241
Refund liability............................................................................
417
Common shares............................................................................
Retained earnings.........................................................................
Sales.............................................................................................
Cost of goods sold........................................................................ 11,809
00
$44,550
$44,550
(Total debit account balances = Total credit account balances)
LO 2,3 BT: AP Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.5A
a.
May 1 Inventory...........................................................................
5,800
3 Inventory...........................................................................145
Cash......................................................................... 145

Sales........................................................................ 3,430
Cost of Goods Sold...........................................................2,058

Estimated Inventory Returns (2,100 x 2%)....................... 42
Inventory................................................................. 2,100
7 Freight Out........................................................................ 90
Cash......................................................................... 90
8 Accounts Payable..............................................................200
Inventory................................................................. 200

Inventory ($5,600 × 1%)......................................... 56
Cash......................................................................... 5,544
11 Supplies.............................................................................400
Cash......................................................................... 400
14 Cash 3,500
15 Cash .................................................................................
1,000
18 Inventory...........................................................................
2,000


a. (continued)
May 21 No entry required (freight paid by Harlow)
22 Cash .................................................................................
6,500
Refund Liability $6,500 x 2%)............................... 130
Sales........................................................................ 6,370
Cost of Goods Sold...........................................................3,822

Inventory................................................................. 3,900
29 Refund Liability................................................................100
Cash......................................................................... 100
Inventory........................................................................... 60
Estimated Inventory Returns................................... 60
31 Cost of Goods Sold...........................................................149

Inventory................................................................. 149
($5,249* – $5,100 = $149 shortage)
* Unadjusted balance in Inventory account: $3,500 + $5,800 + $145 – $2,100 – $200 –

$56 + $2,000 – $3,900 + $60 = $5,249


b.
Cash
May 1 Bal. 7,000 May 3 145 Accounts Payable
May 14 3,500 May 7 90 May 8 200 May 1 5,800
May 15 1,000 May 9 5,544 May 9 5,600 May 18 2,000
May 22 6,500 May 11 400 May 31 Bal. 2,000
May 29 100
May 31 Bal. 11,721 Refund Liability
May 29 100 May 4 70
Accounts Receivable May 22 130
May 1 Bal. 1,500 May 14 3,500 May 31 Bal. 100
May 4 3,500 May 15 1,000
May 31 Bal. 500 Sales
May 4 3,430
Inventory May 22 6,370
May 1 Bal. 3,500 May 4 2,100 May 31 Bal. 9,800
May 1 5,800 May 8 200
May 3 145 May 9 Freight Out
May 18 2,000 May 22 3,900 May 7 90
May 29 60 May 31 149 May 31 Bal. 90
May 31 Bal. 5,100
Cost of Goods Sold
Estimated Inventory Returns May 4 2,058
May 4 42 May 29 May 22 3,822
May 22 78 May 31 149
May 31 Bal. 60 May 31 Bal. 6,029
Supplies Retained Earnings

May 11 400 May 1 Bal. 4,000
May 31 Bal. 400 May 31 Bal. 4,000
Common Shares
May 1 Bal. 8,000
May 31 Bal. 8,000



c.
EAGLE HARDWARE STORE LTD.
Statement of Income (Partial)
Month Ended May 31, 2021
Sales .................................................................................... $9,800

Cost of goods sold.................................................................. 6,029
Gross profit............................................................................. $ 3,771
d.
EAGLE HARDWARE STORE LTD.
Statement of Financial Position (Partial)
May 31, 2021
Assets
Current assets
Cash............................................................................ $11,721
Accounts receivable.................................................... 500
Inventory..................................................................... 5,100
Estimated inventory returns........................................ 60
Supplies...................................................................... 400
Total current assets......................................... $17,781

PROBLEM 5.6A
a. Allocate the transaction price in proportion of the stand-alone selling prices:
Stand-alone
Selling price
Riding mowers (4 x $12,000) $48,000 ($48,000 ÷ $64,000 = 75%)
Push lawnmowers (20 x $800) 16,000 ($16,000 ÷ $64,000 = 25%)
Total $64,000
Allocated
Selling price
Riding mowers $45,000 ($60,000 x 75%)
Push lawnmowers 15,000 ($60,000 x 25%)
Total $60,000
The amount of revenue that can be recognized in April when 4 riding mowers and 14
lawnmowers
are delivered:
Riding mowers $45,000
Push lawnmowers (14/20 x $15,000) 10,500
Total sales $55,500
Cost of goods sold:

Riding mowers (4 x $8,300) $33,200
Push lawnmowers (14 x $525) 7,350
Total cost of goods sold $40,550
b.
April 26 Accounts Receivable................................................... 55,500
Sales....................................................................... 55,500
26 Cost of Goods Sold...................................................... 40,550

Inventory............................................................... 40,550
May 5 Accounts Receivable ($15,000 - $10,500).................. 4,500

Sales....................................................................... 4,500
5 Cost of Goods Sold (6 x $525).................................... 3,150

Inventory............................................................... 3,150
May 18 Cash............................................................................. 60,000

Accounts Receivable............................................. 60,000


PROBLEM 5.7A
a. Allocate the transaction price in proportion of the stand-alone selling prices:
Stand-alone
Selling price
Trucks (15 x $80,000) $1,200,000 ($1,200,000 ÷ $1,500,000 = 80%)
Campers (15 x $20,000) 300,000 ($300,000 ÷ $1,500,000 = 20%)
Total $1,500,000
Allocated
Selling price
Trucks $1,080,000 ($1,350,000 x 80%)
Campers 270,000 ($1,350,000 x 20%)
Total $1,350,000
The amount of revenue that can be recognized in May when all trucks are delivered is
$1,080,000
The amount of cost of goods sold is (15 x $68,000) $1,020,000
b.
May 5 Accounts Receivable................................................... 1,080,000
Sales....................................................................... 1,080,000
5 Cost of Goods Sold...................................................... 1,020,000

Inventory............................................................... 1,020,000
25 Cash............................................................................. 1,000,000
Accounts Receivable............................................. 1,000,000

PROBLEM 5.8A
a.
CLUB CANADA WHOLESALE INC.
Statement of Income (Single-step)
Revenues
Sales..................................................................................................... $1,061,375
Interest income................................................................................... 2,400
$1,063,775
Expenses
Cost of goods sold.............................................................................. $806,240
Administrative expenses..................................................................... 88,515
Selling expenses................................................................................. 42,100
Interest expense.................................................................................. 12,350 949,205
Income before income tax...................................................................... 114,570
Income tax expense................................................................................ 17,200
Net income............................................................................................. $ 97,370


b.
CLUB CANADA WHOLESALE INC.
Statement of Income (Multiple-step)
Sales ................................................................................................ $1,061,375

Cost of goods sold.............................................................................. 806,240
Gross profit........................................................................................ 255,135
Operating expenses
Administrative expenses........................................................ $88,515
Selling expenses..................................................................... 42,100
Total operating expenses................................................... 0 130,615
Income from operations..................................................................... 124,520
Interest income ............................................................................ $(2,400)
Interest expense............................................................................ 12,350 9,950
Income before income tax.................................................................. 114,570
Income tax expense............................................................................ 17,200
Net income......................................................................................... $ 97,370

(Income from operations + Other income – Other expenses = Income before income taxes)
c. Both statements of income result in the same amount of net income. The
multiple-step statement of income provides the user with more information than
does the single-step statement of income. The multiple-step statement of income
provides information on gross profit and income from operations, which is not
included on the single-step statement of income.
d. Club Canada Wholesale Inc. is classifying its expenses by their function. They are
reported according to the activity (business function) for which they were incurred
(for example, cost of goods sold, administrative, selling).

PROBLEM 5.9A
a.
Dec. 31 Insurance Expense ($3,000 × 11/12)........................................ 2,750

Prepaid Insurance........................................................... 2,750
31 Supplies Expense....................................................................... 2,190

Supplies ($2,940 – $750)............................................... 2,190
31 Depreciation Expense................................................................ 10,500

Accumulated Depreciation—Buildings......................... 6,000
Accumulated Depreciation—Equipment ...................... 4,500
31 Salaries Expense........................................................................ 750

Salaries Payable............................................................. 750
31 Interest Expense........................................................................ 735

Interest Payable.............................................................. 735
31 Deferred Revenue ($4,000 – $975)........................................... 3,025

Sales................................................................................ 3,025
Cost of Goods Sold.................................................................... 2,000

Inventory........................................................................ 2,000
31 Income Tax Expense................................................................. 500

Income Tax Payable....................................................... 500
31 Cost of Goods Sold.................................................................... 2,950

Inventory........................................................................ 2,950
($28,750 – $2,000 = $26,750 – $23,800 = $2,950 shortage)


b.
Cash Accounts Payable
Dec. 31 17,000 Dec. 31 33,735
Dec.31 Bal. 17,000 Dec.31 Bal. 33,735
Accounts Receivable Deferred Revenue

Dec. 31 31,700 Dec. 31 3,025 Dec. 31 4,000
Dec.31 Bal. 31,700 Dec.31 Bal. 975
Inventory Salaries Payable

Dec.31 28,750 Dec. 31 2,000 Dec. 31 750
Dec. 31 2,950 Dec. 31 Bal. 750
Dec. 31 Bal. 23,800
Interest Payable
Supplies Dec. 31 735
Dec. 31 2,940 Dec. 31 2,190 Dec. 31 Bal. 735
Dec. 31 Bal. 750
Income Tax Payable
Prepaid Insurance Dec. 31 500
Dec. 31 3,000 Dec. 31 2,750 Dec. 31 Bal. 500
Dec. 31 Bal. 250
Bank Loan Payable
Land Dec. 31 147,100
Dec. 31 30,000 Dec.31 Bal. 147,100
Dec.31 Bal. 30,000
Buildings
Dec. 31 150,000
Dec.31 Bal. 150,000
Accumulated Depreciation—
Buildings
Dec. 31 24,000
Dec. 31 6,000
Dec. 31 Bal.30,000
Equipment
Dec. 31 45,000
Dec.31 Bal. 45,000
Accumulated Depreciation—
Equipment

b. continued)
Common Shares Salaries Expense

Dec. 31 13,000 Dec. 31 30,950
Dec.31 Bal. 13,000 Dec. 31 750
Dec. 31 Bal. 31,700
Retained Earnings
Dec. 31 31,425
Dec.31 Bal. 31,425
Dividends Declared
Dec. 31 2,000
Dec. 31 Bal. 2,000
Sales
Dec. 31 259,995
Dec. 31 3,025
Dec.31Bal. 263,020
Cost of Goods Sold

Dec. 31 171,225
Dec. 31 2,000
Dec. 31 2,950
Dec.31Bal. 176,175

Depreciation Expense
Dec. 31 10,500
Dec. 31 Bal. 10,500
Utilities Expense
Dec. 31 5,100
Dec. 31 Bal. 5,100
Insurance Expense
Dec. 31 2,750
Dec. 31 Bal. 2,750
Supplies Expense
Dec. 31 2,190
Dec. 31 Bal. 2,190
Interest Expense
Dec. 31 8,090
Dec. 31 735
Dec. 31Bal. 8,825
Income Tax Expense

Dec.31 5,500
Dec. 31 500
Dec.31 Bal. 6,000



c.
MESA INC.
Adjusted Trial Balance
December 31, 2021
Debit Credit
Cash....................................................................................... $ 17,000
Accounts receivable .......................................................... 31,700
Inventory............................................................................... 23,800
Supplies................................................................................. 750
Prepaid insurance.................................................................. 250
Land...................................................................................... 30,000
Buildings............................................................................... 150,000
Accumulated depreciation—buildings.................................. $ 30,000
Equipment............................................................................. 45,000
Accumulated depreciation—equipment................................ 22,500
Accounts payable.................................................................. 33,735
Deferred revenue................................................................... 975
Salaries payable..................................................................... 750
Interest payable..................................................................... 735
Income tax payable............................................................... 500
Bank loan payable................................................................. 147,100
Common shares..................................................................... 13,000
Retained earnings.................................................................. 31,425
Dividends declared................................................................ 2,000
Sales...................................................................................... 263,020
Cost of goods sold................................................................. 176,175
Salaries expense.................................................................... 31,700
Depreciation expense............................................................ 10,500
Utilities expense.................................................................... 5,100
Insurance expense................................................................. 2,750
Supplies expense................................................................... 2,190
Interest expense..................................................................... 8,825
Income tax expense............................................................... 6,000 0000 000
Totals................................................................................ $543,740 $543,740


d.
MESA INC.
Statement of Income
Sales .......................................................................... $263,020

Cost of goods sold................................................. 176,175
Gross profit ...............................................................86,845
Operating expenses
Salaries expense.......................................................... $31,700
Depreciation expense................................................. 10,500
Utilities expense.......................................................... 5,100
Insurance expense....................................................... 2,750
Supplies expense........................................................ 2,190
Total operating expenses............................................. 52,240
Income from operations........................................................ 34,605
Interest expense.......................................................... 8,825
Income before income tax.................................................... 25,780
Income tax expense.............................................................. 6,000
Net income........................................................................... $ 19,780

(Income from operations + Other income – Other expenses = Income before income tax)


d. (continued)
MESA INC.
Statement of Changes in Equity
Common Retained Total

Shares Earnings Equity
Balance, January 1 $10,000 $31,425 $41,425

Issued common shares 3,000 3,000
Net income 19,780 19,780
Dividends declared 0000 00 (2,000) (2,000)
Balance, December 31 $13,000 $49,205 $62,205
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)
MESA INC.
Statement of Financial Position
December 31, 2015
Assets
Current assets
Cash...............................................................................................................$17,000
Accounts receivable ............................................................................... 31,700
Inventory................................................................................................. 23,800
Supplies................................................................................................... 750
Prepaid insurance ................................................................................... 250
Total current assets....................................................................... 73,500
Property, plant, and equipment
Land................................................................ $ 30,000
Buildings........................................................ $150,000
Less: Accumulated depreciation.................... 30,000 120,000
Equipment...................................................... $45,000
Less: Accumulated depreciation.................... 22,500 22,500
Total property, plant, and equipment..... 172,500
Total assets............................................................................................ $246,000


d. (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable.................................................................................. $ 33,735
Deferred revenue................................................................................... 975
Salaries payable..................................................................................... 750
Interest payable...................................................................................... 735
Income tax payable................................................................................ 500
Current portion of bank loan payable.................................................... 9,800
Total current liabilities............................................................... 46,495
Non-current liabilities
Bank loan payable ($147,100 – $9,800)................................................ 137,300
Total liabilities............................................................................. 183,795
Shareholders’ equity
Common shares................................................................ $13,000
Retained earnings............................................................. 49,205
Total shareholders’ equity................................................
Total liabilities and shareholders’ equity.............................................. $246,000

PROBLEM 5.10A
a. Gross profit margin $255,135 ÷ $1,061,375 = 24.0%
Profit margin $97,370 ÷ $1,061,375 = 9.2%
b.
Gross Net
Sales Profit Income
Existing balances $1,061,375 $255,135 $97,370

Increase sales ($1,061,375 × 15%) 159,206
Increase in gross profit 27,000 27,000
Increase in operating expenses (13,500)
Increase in income tax expense (2,700)
Revised amounts $1,220,581 $282,135 $108,170
c. Revised gross profit margin$282,135 ÷ $1,220,581 = 23.1%
Revised profit margin $108,170 ÷ $1,220,581 = 8.9%
Both the gross profit margin and the profit margin have decreased, but the end
result is an increase in net income, so the plan has merit.
LO 4,5 BT: AN Difficulty: C Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

PROBLEM 5.11A
a.
[1] Sales = $540,000 (given)
[8] Accounts receivable = Sales × 30% = $540,000 × 30% = $162,000
b.
[2] Cost of goods sold = 90% × inventory purchased = 90% ×
$300,000 = $270,000
[9] Inventory = 10% × inventory purchased = 10% × $300,000 =
$30,000 or purchases less cost of goods sold =
$300,000 less $270,000 = $30,000
[10] Accounts payable = 20% × inventory purchased = 20%
×$300,000 = $60,000
c.
[3] Gross profit = Sales – Cost of goods sold
= $540,000 – $270,000 = $270,000
[4] Operating expenses = $120,000 (given)
[5] Income before income taxes = Gross profit – Operating expenses = $270,000 –
$120,000 = $150,000
d.
[6] Income tax expense = Income before income taxes × 30% = $150,000
× 30% = $45,000
[7] Net income = Income before income taxes – Income tax
expense = $150,000 – $45,000 = $105,000
[11] Income tax payable = given as equal to income tax expense = $45,000

e.
Gross profit margin = $270,000 ÷ $540,000 = 50.0%
Profit margin = $105,000 ÷ $540,000 = 19.4%
If Psang Inc. has a higher than average gross profit margin, it is either because it is
selling products at a higher price, (which is not the case), or because its cost of goods
sold as a percentage of sales is smaller than its competitors. The resulting higher gross
profit will be a contributing factor to a higher than average profit margin ratio. Other
factors that could contribute to a higher than average profit margin ratio include lower
than average operating expenses.
LO 4,5 BT: AN Difficulty: C Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 5.12A
a. (in $ millions)
2018 2017 2016
Current $1,349.3 $1,207.0 $986.9

ratio = 2.6:1 = 2.3:1 = 2.0:1
$512.2 $519.8 $502.3
Gross ($5,044.4 ($4,563.3 ($4,234.9

= 35.7% = 35.1% = 30.4%
profit – $3,244.5) – $2,959.9) – $2,947.2)
margin $5,044.4 $4,563.3 $4,234.9
Profit $439.0 $393.6 $203.9

= 8.7% = 8.6% = 4.8%
margin $5,044.4 $4,563.3 $4,234.9
b. Canfor’s current ratio increased (improved) over the last two years. Canfor’s
gross profit margin experienced a constant increase (improvement) over the
three-year period as did the profit margin.
c.
2018 2018
Industry Average Canfor Corporation
Current ratio 2.7:1 2.6:1
Gross profit margin 25.3% 35.7%
Profit margin 4.9% 8.7%
Canfor’s current ratio is slightly lower than the industry average, but its gross profit
margin and profit margin are significantly better than those of the industry.
LO 5 BT: AN Difficulty: M Time: 35 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance

*PROBLEM 5.13A
a.
June 1 Purchases (180 × $16)....................................................... 2,880
3 Accounts Receivable (220 × $25)..................................... 5,500

Refund Liability ($5,500 x 15%)............................ 825
Sales........................................................................ 4,675
5 Accounts Payable (10 × $16)............................................ 160

Purchase Returns and Allowances.......................... 160
8 Accounts Receivable (80 × $22)....................................... 1,760

Refund Liability ($1,760 x 15%) 264
Sales........................................................................ 1,496
9 Refund Liability................................................................ 264

Accounts Receivable (12 × $22)............................. 264
11 Purchases (130 × $15)....................................................... 1,950

12 Cash ............................................................................. 5,500

Accounts Receivable .......................................... 5,500
17 Cash ........................................................................... 1,496

Accounts Receivable ($1,760 – $264) ............... 1,496
22 Accounts Receivable (125 × $25)................................... 3,125

Refund liability ($3,125 x 15%).......................... 469
Sales.................................................................... 2,656
25 Refund Liability.............................................................. 375

Accounts Receivable (15 × $25)......................... 375
29 Accounts Payable ($2,880 – $160)................................. 2,720

Cash..................................................................... 2,720

*PROBLEM 5.13A (CONTINUED)

b. The advantages of the periodic inventory system are that it is simpler and
cheaper (in terms of equipment and systems) compared to a perpetual inventory
system. There are fewer accounting entries and cash registers do not need to be
able to read bar codes to apply the appropriate cost as is required in the perpetual
inventory system.
However, a perpetual inventory system enables management to monitor

purchases and sales to make the optimum use of the money available for
stocking inventory. Fewer stock-outs are experienced when using the perpetual
system as reductions in inventory levels can be quickly identified and restocking
done, possibly automatically, before the business runs out of inventory. With the
perpetual system, cost of goods sold can be reported at any time and
consequently, timely reporting of results can be achieved. Perpetual systems
allow management to quantify the cost of goods lost to theft. When customers
make inquiries concerning the availability of stock from a merchant, a quick
reply can be obtained and provided when a perpetual inventory system is used.
Finally, fewer inventory counts are required, saving salary costs and minimizing
lost sales from having to close the business for inventory counts.
LO 1,6 BT: AN Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 5.14A
a.
Sept. 2 Equipment..................................................................... 65,000
Accounts Payable................................................ 65,000
4 Supplies......................................................................... 4,000
Cash..................................................................... 4,000
6 Purchases....................................................................... 65,000
Accounts Payable................................................ 65,000
7 Freight In....................................................................... 1,600

Cash..................................................................... 1,600
8 Accounts Payable.......................................................... 5,000

Purchase Returns and Allowances...................... 5,000
9 Accounts Receivable..................................................... 20,000

Refund Liability ($20,000 x 5%)........................ 1,000
Sales.................................................................... 19,000
10 Freight Out.................................................................... 375

Cash..................................................................... 375
17 Cash ............................................................................. 20,000

Accounts Receivable........................................... 20,000
20 Accounts Payable ($65,000 – $5,000).......................... 60,000

Cash ($60,000 – $600)........................................ 59,400
Purchase Discounts ($60,000 × 1%).............. 600
21 Purchases....................................................................... 6,000
Cash..................................................................... 6,000

a. (continued)

Refund Liability ($27,000 x 5%)............................. 1,350
Sales......................................................................... 25,650
28 Refund Liability................................................................. 1,000

b.
Oct. 3 Accounts Payable ($65,000 – $5,000)............................... 60,000

Cash ...................................................................... 60,000
The cost of missing this purchase discount is the amount recorded in the Purchase
Discounts account when the payment was made within the discount period ($60,000 ×
1%) = $600. Expressing this in terms of an annual interest rate, it would be the
equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use of the money for 15
days.
LO 6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 M: Reporting and Finance

*PROBLEM 5.15A
a.
Apr. 3 Purchases.................................................................................. 3,200

Accounts Payable............................................................ 3200
5 Freight In.................................................................................. 286
Cash................................................................................ 286
7 Accounts Receivable................................................................. 9,750
Refund Liability ($(9,750 x 2%).................................... 195
Sales................................................................................ 9,555
9 Accounts Payable...................................................................... 320
Purchase Returns and Allowances.................................. 320
11 Accounts Payable ($3,200 – $320)........................................... 2,880
Purchase Discounts ($2,880 × 1%)................................. 29
Cash ($2,880 – $29)........................................................ 2,851
14 Cash ........................................................................................ 4,150
Accounts Receivable....................................................... 4,150
16 Purchases.................................................................................. 1,300
Accounts Payable............................................................ 1,300
17 Accounts Payable...................................................................... 100
Purchase Returns and Allowances.................................. 100
20 Accounts Receivable................................................................. 11,100
Refund Liability ($11,100 x 2%).................................... 222
Sales................................................................................ 10,878
24 Accounts Payable ($1,300 – $100)........................................... 1,200
Purchase Discounts ($1,200 × 2%)................................. 24
Cash ($1,200 – $24)........................................................ 1,176
25 Cash…………………………………………………………. 4,375
Accounts Receivable………………………………... 4,375

b.
Cash
Apr. 1 Bal. 4,200 Apr. 5 286 Purchase Returns and Allowances
Apr. 14 4,150 Apr. 11 2,851 Apr. 9 320
Apr. 25 4,375 Apr. 24 1,176 Apr. 17 100
Apr. 30 Bal. 8,412 Apr. 30 Bal. 420
Accounts Receivable Purchase Discounts

Apr. 7 9,750 Apr. 14 4,150 Apr. 11 29
Apr. 20 11,100 Apr. 25 4,375 Apr. 21 24
Apr. 30 Bal. 53
Apr. 30 Bal. 12,325
Freight In
Inventory Apr. 5 286
Apr. 1 Bal. 19,500 Apr. 30 Bal. 286
Apr. 30 Bal. 19,500
Accounts Payable
Apr. 9 320 Apr. 3 3,200
Apr. 11 2,880 Apr. 16 1,300
Apr. 17 100
Apr. 24 1,200
Apr. 30 Bal.
Refund Liability
Apr. 7 195
Apr. 20 222
Apr.30 Bal. 417
Common Shares
Apr. 1 Bal. 12,000
Apr. 30 Bal. 12,000
Retained Earnings
Apr. 1 Bal. 11,700
Apr. 30 Bal. 11,700
Sales
Apr. 7 9,555
Apr. 20 10,878
Apr. 30 Bal. 20,433
Purchases


c.
IN THE PINES GOLF SHOP LIMITED
Trial Balance
April 30, 2021
Debit Credit
Cash................................................................................................... $ 8,412
Accounts receivable........................................................................... 12,325
Inventory............................................................................................ 19,500
Accounts payable $ -
Refund liability 417
Common shares................................................................................. 12,000
Retained earnings.............................................................................. 11,700
Sales................................................................................................... 20,433
Purchases........................................................................................... 4,500
Freight in............................................................................................ 286
Purchase returns and allowances....................................................... 420
Purchase discounts............................................................................. 00 000 53
$45,023 $45,023
d.
Apr. 30 Inventory (ending)............................................................. 11,763
Cost of Goods Sold............................................................ 12,050*
Purchase Returns and Allowances.................................... 420
Purchase Discounts............................................................ 53
Purchases..................................................................... 4,500
Freight In..................................................................... 286
*Cost of goods sold = Beginning inventory + Purchases  Purchase discounts 

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $19,500 + $4,500 – $53 – $420 + $286 – $11,763 = $12,050
Solutions Manual 5-88

Copyright © 2011 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibited.
*PROBLEM 5.16A
a. FEISTY LTD.
Statement of Income (Partial)
Year Ended April 30, 2021
Sales ......................................................................................................................... $9,050,000

Cost of goods sold
Inventory, May 1, 2020................................................................ $ 600,000
Purchases............................................................. $5,900,000
Less: Purchase discounts..................................... 40,000
Net purchases...................................................... 5,860,000
Add: Freight in................................................... 120,000
Cost of goods purchased............................................................... 5,980,000
Cost of goods available for sale.................................................... 6,580,000
Inventory, April 30, 2021............................................................. 700,000
Cost of goods sold........................................................................................ 5,880,000
Gross profit................................................................................................................. $3,170,000
(Beginning inventory + Net purchases + Freight-in = Cost of goods purchased)
b.
Apr. 30 Inventory (ending)............................................................. 700,000
Cost of Goods Sold............................................................ 5,880,000
Purchases..................................................................... 5,900,000
Freight In..................................................................... 120,000
c. Gross profit margin:
$3,170,000 = 35.0%
$9,050,000
Feisty’s gross profit margin of 35% is better than the industry average of 30%. This
indicates that Feisty is making a higher gross profit from each dollar of sales than
the industry average, due to higher selling prices and/or lower costs for its
inventory.
LO 5,6 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001, cpa-t005 CM: Reporting and
Finance

prohibited.
*PROBLEM 5.17A
a.
Dec. 31 Inventory (ending)............................................................. 108,900
Purchase Returns and Allowances.................................... 9,600
Purchases..................................................................... 602,400
Freight In..................................................................... 8,400
b.
ACTIVE ATHLETIC WEAR INC.
Statement of Income
Sales .............................................................................................. $921,000

Cost of goods sold
Inventory, January 1.............................................................................. $ 60,750
Purchases ...................................................$602,400
Less: Purchase discounts............................................... 33,750
Purchase returns and allowances......................... 9,600
Net purchases................................................................. 559,050
Add: Freight in............................................................... 8,400
Cost of goods purchased....................................................................... 567,450
Cost of goods available for sale............................................................ 628,200
Less: Inventory, December 31.............................................................. 108,900
Cost of goods sold.......................................................................... 519,300
Gross profit.................................................................................................. 401,700
Operating expenses
Administrative expenses....................................................................... $271,350
Selling expenses.................................................................................... 11,250
Total operating expenses............................................................... 282,600
Income from operations................................................................................ 119,100
Interest expense..................................................................................... 15,600
Income before income tax............................................................................ 103,500
Income tax expense...................................................................................... 24,000
Net Income .................................................................................................. $ 79,500
(Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale)

prohibited.
*PROBLEM 5-17A (CONTINUED)

b. (continued)
Statement of Changes in Equity
Common Retained Total

Shares Earnings Equity
Balance, January 1 $ 75,000 $102,900 $177,900

Issued common shares 37,500 37,500
Net income 79,500 79,500
Dividends declared 000 0000 (12,000) (12,000)
Balance, December 31 $112,500 $170,400 $282,900
(Ending retained earnings = Beginning retained earnings ± Changes to retained earnings)

Statement of Financial Position
December 31, 2021
Assets
Current assets
Cash........................................................................................................................... $ 25,500
Accounts receivable ................................................................................................. 66,300
Inventory................................................................................................................... 108,900
Prepaid insurance.................................................................................................... 3,600
Total current assets......................................................................................... 204,300
Property, plant, and equipment
Land.............................................................................. $112,500
Buildings....................................................................... $285,000
Less: Accumulated depreciation................................... 77,700 207,300
Equipment..................................................................... $165,000
Less: Accumulated depreciation................................... 64,350 100,650
Total property, plant, and equipment................. 420,450
Total assets.............................................................................................................. $624,750

prohibited.

b. (continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable.................................................................................
Refund liability....................................................................................
Salaries payable...................................................................................
Property tax payable............................................................................
Deferred revenue..................................................................................
Current portion of mortgage payable...................................................
Total current liabilities..............................................................
Non-current liabilities
Mortgage payable ($187,500 – $18,750)............................................
Total liabilities...........................................................................
Shareholders’ equity
Common shares............................................................... $112,500
Retained earnings............................................................ 170,400
Total shareholders’ equity..........................................................
Total liabilities and shareholders’ equity..............................................

prohibited.

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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND

Solutions Manual 5-1 Chapter 5

AACSB Association to Advance Collegiate Schools of Business

CPA CM CPA Canada Competency

Solutions Manual 5-2 Chapter 5

4. A physical count is an important control feature. By using a perpetual inventory system,

Solutions Manual 5-3 Chapter 5

Solutions Manual 5-4 Chapter 5

Solutions Manual 5-5 Chapter 5

Solutions Manual 5-6 Chapter 5

20. North West Company uses a multiple-step statement of income.

Solutions Manual 5-7 Chapter 5

(b) It does not matter whether a single-step or multiple-step statement of income is

23. Interest expense is a non-operating expense because it relates to how a company’s

Solutions Manual 5-8 Chapter 5

26. High gross profit Low gross profit

*28. Periodic System

Solutions Manual 5-9 Chapter 5

Cost of Goods Sold =

Solutions Manual 5-10 Chapter 5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5.2

[2] Net income = $35 (from [1]) – $9 = $26

[3] Cost of goods sold = $100 – $60 = $40

[4] Operating expenses = $60 – $35 = $25

[5] Income tax expense = $35 – $26 = $9

Solutions Manual 5-11 Chapter 5

BRIEF EXERCISE 5.3

Purchases Inventory........................................................................... 220,000

PurchaseAccounts Payable........................................................................ 26,000

PurchaseAccounts Payable ($220,000 – $26,000).................................... 194,000

Freight In Inventory........................................................................... 2,700

Cost of Cost of Goods Sold............................................................ 218,000

Solutions Manual 5-12 Chapter 5

BRIEF EXERCISE 5.4

Wydell Inc. (Seller):

24 Cost of Goods Sold............................................................ 14,400

BRIEF EXERCISE 5.5

5 No entry necessary – Freight costs paid by Fundy Corp.

6 Accounts Payable.............................................................. 6,000

11 Accounts Payable ($45,000 - $6,000)............................... 39,000

Solutions Manual 5-13 Chapter 5

BRIEF EXERCISE 5.6

Jan. 2 Accounts Receivable......................................................... 45,000

2 Cost of Goods Sold............................................................ 21,420

5 Freight Out........................................................................ 900

6 Refund Liability ............................................................... 6,000

Solutions Manual 5-14 Chapter 5

BRIEF EXERCISE 5.7

Allocate the transaction price in proportion of the stand-alone selling prices:

Solutions Manual 5-15 Chapter 5

BRIEF EXERCISE 5.8

a. Sales .................................................................................. $1,070,000

b. Gross profit........................................................................... $412,000

c. Income from operations....................................................... $142,000

d. Income before income tax.................................................... $133,000

BRIEF EXERCISE 5.9

Depreciation expense Expenses Operating expenses

Solutions Manual 5-16 Chapter 5

BRIEF EXERCISE 5.10

(Revenues – Cost of goods sold – Operating expenses = Income from operations)

Solutions Manual 5-17 Chapter 5