SOLUTIONS TO EXERCISES
Ex. 6–1

a. You are at a significant disadvantage if no information is available about how many of
...
Subsidiary
Ledger
Inv
AP
AP
Inv
AR
Inv
AR
AP
Inv
Inv
Inv
AR

Ex. 6–3
Transaction
a.
b.
c.
d.
e.
f.
g.
h.

Ex. 6–4

a. Jan....
b. Sears’ performance is quite favorable from the standpoint of the overall increase in
revenue and the increase in compar...
c. Year 2
Dec. 31 Cost of Goods Sold............................................................
Inventory (Dec. 31, year ...
Ex. 6–10 a. Entries in the accounts of Golf World:
Accounts Receivable (Mulligans)...........................................
Kmart

Ex. 6–11 a.
Net sales
Cost of goods sold
Gross profit
Gross profit rate

$31,437
24,390
7,047a
22.4%b

Nordstrom
c
...
Ex. 6–12 a.
Cash....................................................................................................
Sales...
Ex. 6–13
a. Computation of the cost of goods sold:
Beginning inventory.......................................................
SOLUTIONS TO PROBLEMS
35 Minutes, Medium

PROBLEM 6–1
CLAYPOOL HARDWARE

a.
General Journal

Nov

5 Accounts Receivable (B...
PROBLEM 6–1
CLAYPOOL HARDWARE (concluded)
c. Claypool seems quite able to pass its extra transportation costs on to its cu...
a.
General Journal

May 10 Inventory
Accounts Payable (Mitsui Corporation)
Purchased five P-500 fax machines @ $300; payme...
PROBLEM 6–2
OFFICE SOLUTIONS (continued)
b.
Item
Item

Mitsui P-500 fax machine

Primary supplier

Description
Description...
PROBLEM 6–2
OFFICE SOLUTIONS (concluded)
c. Eight. The quantity of units on hand at any date may be determined from the in...
a.
General Journal
Date
(1)
June 10 Inventory
Accounts Payable (Mitsu Industries)
To record purchase of 10 TVs at net cost...
LAMPRINO APPLIANCE (concluded)
c. The net cost method provides more useful information for evaluating the company’s effici...
General Journal
a.
Feb

Journal entries by Siogo Shoes:
9 Accounts Receivable (Sole Mates)
Sales
Sold merchandise on accou...
General Journal
Feb 19 Accounts Payable (Siogo Shoes)
Cash
Paid within discount period balance owed to Siogo Shoes
($9,900...
a. The operating cycle of a merchandising company consists of purchasing merchandise, selling that
merchandise to customer...
b.
General Journal
2002
Jan 2 Inventory
Accounts Payable (Sharp)
Purchased merchandise on account; terms, 3/10, n/60.
Net ...
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Solutions to exercises chap 6

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Transcript of "Solutions to exercises chap 6"

  1. 1. SOLUTIONS TO EXERCISES Ex. 6–1 a. You are at a significant disadvantage if no information is available about how many of each type of shirt were (1) ordered, (2) sold at full price, (3) sold at the discounted price, and (4) donated to the orphanage. It would be almost impossible to make optimal decisions without this sales information. b. The first step in the process would be to attempt to forecast the sales of shirts for each concert, both at the concert and on the next school day. To forecast sales, you could examine the relationship between sales of each type of shirt and attendance at the concert at which it was sold. By using this relationship in conjunction with the forecasts of ticket sales this year, you could estimate sales of each type of shirt, both at the concert and on the next school day. In making your decisions, consideration would also have to be given to the relationship between the cost of the shirts and their discounted price. If the cost of the shirts is greater than their discounted price, the optimal decision is to order only enough to meet the estimated demand at full price on the night of the concert. On the other hand, if the cost of the shirts is less than the discounted price, the optimal decision is to order enough shirts to meet the estimated demand on both the night of the concert and the next school day. c. To assist the person performing the task next year, you would want to maintain records for each concert of (1) the number of each type of shirt purchased, (2) the number of shirts sold at the concert, (3) the number of shirts sold on the next day on campus, and (4) the number of shirts donated to the orphanage. In addition, you would want to make a record of the attendance at each concert. Ex. 6–2 Transaction a. b. c. d. e. Income Statement Net − Cost of − All Other = Net Sales Goods Sold Expenses Income NE I NE NE NE NE NE I NE I © The McGraw-Hill Companies, Inc., 2002 NE NE NE NE NE NE I D NE D Balance Sheet Assets = Liabilities + Owners’ Equity I I D NE D I NE NE NE NE NE I D NE D 177
  2. 2. Subsidiary Ledger Inv AP AP Inv AR Inv AR AP Inv Inv Inv AR Ex. 6–3 Transaction a. b. c. d. e. f. g. h. Ex. 6–4 a. Jan. 2 Effect upon Subsidiary Account Balance Increase Increase Decrease Decrease Increase Decrease Decrease Decrease Decrease Increase Increase Decrease 106,000 Cash................................................................................... Sales....................................................................... Sale of merchandise for cash. 98,000 Cost of Goods Sold............................................................ Inventory............................................................... To reduce inventory by cost of goods sold. Jan. 3 Inventory........................................................................... Accounts Payable (McNamer Supply)................. To record purchase of merchandise on credit. 75,000 106,000 98,000 75,000 b. The balance of the Inventory account on January 3 was $1,231,000. The starting balance of $1.2 million on January 1 was increased by the $106,000 cost of merchandise purchased on January 2 and decreased by the $75,000 cost of goods sold on January 3 ($1,200,000 + $106,000 − $75,000 = $1,231,000). Ex. 6–5 a. The change in net sales provides an overall measure of the effectiveness of the company in generating revenue. A major limitation of this measure is that sales may have changed largely because of the opening of new stores, the closing of unprofitable ones, or as a result of a shift to merchandise with significantly different gross profit margins. Thus, an increase in net sales is not always “good,” and a decrease is not always “bad.” The change in comparable store sales represents the increase or decrease in the same stores from one period to the next. This statistic provides a better measure of the effectiveness of the company’s marketing strategies because it is not affected by changes in the total number of stores. © The McGraw-Hill Companies, Inc., 2002 178
  3. 3. b. Sears’ performance is quite favorable from the standpoint of the overall increase in revenue and the increase in comparable store sales. It indicates that the company’s marketing strategies were effective at existing stores and that the company also is opening new locations. Broadway’s performance was not as good. Overall, the company’s net sales decreased. The company, however, was moderately effective in increasing sales at comparable stores. Taken together, it would appear that Broadway reduced the number of stores, but was more effective at generating sales at its remaining locations. (Note: Broadway subsequently was acquired by Macy’s.) Ex. 6–6 a. The reason why an actual physical count is likely to indicate a smaller inventory than does the perpetual inventory records is inventory shrinkage—the normal loss of inventory through theft, breakage, and spoilage. b. Cost of Goods Sold............................................................................. Inventory................................................................................ To reduce inventory to the quantities reflected in the year-end physical count. 4,000 4,000 c. Both portions of the preceding entry should be posted to the general ledger. In addition, the reduction in inventory should be posted to the inventory ledger accounts in which the shortages were determined to exist. Ex. 6–7 a. The amounts of beginning and ending inventory were determined by taking complete physical inventories at (or near) the ends of year 1 and year 2. “Taking a complete physical inventory” means physically counting the number of units of each product on hand and then determining the cost of this inventory by reference to per-unit purchase costs. (The inventory at the end of year 1 serves as the “beginning inventory” for year 2.) b. Computation of the cost of goods sold during year 2: Inventory (December 31, year 1).......................................................................... Add: Purchases...................................................................................................... Cost of goods available for sale during year 2..................................................... Less: Inventory (December 31, year 2)................................................................ Cost of goods sold.................................................................................................. © The McGraw-Hill Companies, Inc., 2002 $ 2,800 30,200 33,000 3,000 $ 30,000 179
  4. 4. c. Year 2 Dec. 31 Cost of Goods Sold............................................................ Inventory (Dec. 31, year 1)................................... Purchases............................................................... To close those temporary accounts that contribute to the cost of goods sold for the year. 31 Inventory (Dec. 31, year 2)............................................... Cost of Goods Sold................................................ To remove from the Cost of Goods Sold account the cost of merchandise still on hand at year-end. d. 33,000 2,800 30,200 3,000 3,000 BOSTON BAIT SHOP Partial Income Statement For the Year Ended December 31, Year 2 Net sales................................................................................................................. Less: Cost of goods sold........................................................................................ Gross profit............................................................................................................ $ 79,600 30,000 $ 49,600 e. Because the business is small, management probably has decided that the benefits of maintaining a perpetual inventory system are not worth the cost. Furthermore, determining a cost of goods sold figure at the point of sale for live bait (e.g., a dozen minnows) may be difficult, if not impossible. Ex. 6–8 a. b. c. d. e. Ex. 6–9 Net Beginning Net Ending Sales Inventory Purchases Inventory 240,000   76,000 104,000   35,200 480,000   72,000 272,000 80,000 630,000 207,000 400,500 166,500 810,000 261,000 450,000 135,000 531,000 156,000 393,000 153,000 Cost of Goods Sold 144,800 264,000 441,000 576,000 396,000 Gross Profit   95,200 216,000 189,000 234,000 135,000 Expenses   72,000 196,000 148,500 270,000 150,000 Net Income or (Loss) 23,200 20,000 40,500 (36,000) (15,000) We cannot provide a specific answer to Exercise 6–9, as the exercise focuses upon local business entities selected by the students. However, the following points should be addressed in students’ answers. Students favoring perpetual inventory systems should explain (1) management’s need for timely information about inventory levels and/or sales of specific products, and (2) why it is practical for the business to maintain such a system. Students preferring a periodic system should explain why such a system can meet the needs of the business and/or why it would be impractical for the business to utilize a perpetual system. © The McGraw-Hill Companies, Inc., 2002 180
  5. 5. Ex. 6–10 a. Entries in the accounts of Golf World: Accounts Receivable (Mulligans)...................................................... Sales........................................................................................ Sold merchandise on account to Mulligans. 10,000 Cost of Goods Sold............................................................................. Inventory................................................................................ To recognize cost of goods sold relating to sale to Mulligans. 6,500 Cash.................................................................................................... Sales Discounts................................................................................... Accounts Receivable (Mulligans).......................................... To record collection of account receivable from Mulligans, less 1% cash discount. 9,900 100 10,000 6,500 10,000 b. Entries in the accounts of Mulligans: Inventory............................................................................................ Accounts Payable (Golf World)............................................ Purchased merchandise from Golf World (net cost, $10,000 × 99% = $9,900). 9,900 Accounts Payable (Golf World)........................................................ Cash........................................................................................ Paid account payable to Golf World within the discount period. 9,900 9,900 9,900 c. Entry by Mulligans if discount not taken: Accounts Payable (Golf World)........................................................ Purchase Discounts Lost.................................................................... Cash........................................................................................ To record payment of account payable to Golf World and loss of purchase discount for failure to pay within discount period. © The McGraw-Hill Companies, Inc., 2002 9,900 100 10,000 181
  6. 6. Kmart Ex. 6–11 a. Net sales Cost of goods sold Gross profit Gross profit rate $31,437 24,390 7,047a 22.4%b Nordstrom c $4,453   3,082   1,371 30.8%d Toys “R” Us $9,232   6,407f   2,825e 30.6% Computations: a $31,437 − $24,390 = $7,047 b $7,047 (from a) ÷ $31,437 = 22.4% c $3,082 + $1,371 = $4,453 d $1,371 ÷ $4,453 (from c) = 30.8% e $9,232 × 30.6% = $2,825 f $9,232 − $2,825 (from e) = $6,407 b. The relative sales volumes and profit margins of Kmart and Toys “R” Us are what one might expect. Kmart is one of the nation’s largest mass merchandisers. It sells many types of everyday merchandise (including toys). Thus, it must compete on a basis of price with other mass merchandisers such as Wal-Mart, Sears, and J.C. Penney. Its gross profit is developed by selling a high volume of merchandise at minimal margins. Toys “R” Us is a big company, but it sells only toys. It logically has a much lower sales volume than one of the country’s largest sellers of general merchandise. Toys “R” Us also has very few large-scale competitors. Most of the competition comes from small toy stores which, because of their low sales volumes, need high margins to survive. Therefore, Toys “R” Us faces less price competition than Kmart. It competes effectively with its smaller competitors by offering a bigger selection and having greater name recognition. In purchasing merchandise, Toys “R” Us also may receive larger volume discounts than its competitors. Lower purchase costs contribute to higher gross profit margins. © The McGraw-Hill Companies, Inc., 2002 182
  7. 7. Ex. 6–12 a. Cash.................................................................................................... Sales........................................................................................ To record sale of telescope to Central State University for cash. 117,000 Cost of Goods Sold............................................................................. Inventory................................................................................ To record cost of telescope sold to Central State University. 90,000 Inventory............................................................................................ Accounts Payable (Lunar Optics)......................................... To record purchase of merchandise on account from Lunar Optics, net 30 days. 50,000 117,000 90,000 50,000 b. Computation of inventory at January 7: Inventory at Dec. 31........................................................................ Deduct: Cost of goods sold............................................................. Add: Cost of merchandise purchased............................................ Inventory at Jan. 7.......................................................................... $250,000 (90,000) 50,000 $210,000 c. Cash.................................................................................................... Sales........................................................................................ To record sale of telescope to Central State University for cash. 117,000 Purchases............................................................................................ Accounts Payable (Lunar Optics)......................................... To record purchase of merchandise on account from Lunar Optics. Terms, net 30 days. 50,000 117,000 50,000 d. Cost of goods sold: Inventory, Jan. 1............................................................................. Purchases......................................................................................... Cost of goods available for sale...................................................... Less: Inventory, Jan. 7 (per part b)............................................... Cost of goods sold......................................................................... $250,000 50,000 $300,000 210,000 $ 90,000 e. The company would probably use a perpetual inventory system because it sells merchandise with a high unit cost and has a relatively small number of sales transactions. © The McGraw-Hill Companies, Inc., 2002 183
  8. 8. Ex. 6–13 a. Computation of the cost of goods sold: Beginning inventory........................................................................................................... Add: Purchases................................................................................................................... Cost of goods available for sale......................................................................................... Less: Ending inventory...................................................................................................... Cost of goods sold............................................................................................................... $ 6,240 74,400 $80,640 4,560 $ 76,080 b. Mountain Mabel’s appears to be a very small business that probably has no external reporting obligations (other than in the owners’ annual income tax return). Also, “management” seems to consist of the owners, who may be in the store every day and therefore do not need an inventory ledger to know what merchandise is in inventory. In a situation such as this, the additional record —keeping required to maintain a perpetual inventory system simply may not be worthwhile. c. A larger business, such as a Sears store, needs to have up-to-date information as to the cost and quantity of merchandise in inventory and also the cost of goods sold. This information is used in quarterly reports to stockholders, reports to corporate management, and monthly reports measuring the profitability of the individual sales departments. In addition, information about the quantities of specific products sold and the quantities currently on hand is needed for such daily decisions as: (1) when to reorder specific products, (2) how much merchandise to order, and (3) which products to advertise in special sales. Also, a store such as Sears uses point-of-sale terminals to simplify the processing of sales transactions. These terminals permit the maintenance of perpetual inventory records at very little cost and with no special effort required of accounting personnel. Ex. 6–14 a. All of the following figures are shown in 000’s: (1) Net sales (2) Gross profit (margin) Gross profit percentage (2) ÷ (1) 1999 $396,750 204,189 1998 $388,659 201,042 1997 $375,594 187,281 51.5% 51.7% 49.9% b. Trends in sales and gross profit include: 1. The company reported its twenty-third consecutive year of record sales. 2. Gross profit increased by 7.3% from 1997 to 1998, and by 1.6% from 1998 to 1999. c. Management seems somewhat optimistic about trends in the company’s sales and gross profit statistics. In Management’s Letter to the Shareholders, the following points are made: 1. The company is encouraged by the continued growth in its niche brands. 2. The company has reported its twenty-third year of record sales. 3. The company’s cost of goods sold increased only slightly in 1999 due to slight inflationary pressures on major ingredient costs. The cost of minor ingredients and packaging remained stable throughout the year. © The McGraw-Hill Companies, Inc., 2002 184
  9. 9. SOLUTIONS TO PROBLEMS 35 Minutes, Medium PROBLEM 6–1 CLAYPOOL HARDWARE a. General Journal Nov 5 Accounts Receivable (Bemidji Construction) Sales Sold merchandise on account. 13390 13390 5 Cost of Goods Sold Inventory To record the cost of goods sold relating to the sales of merchandise to Bemidji Construction. 9 Inventory Accounts Payable (Owatonna Tool Co.) Purchased merchandise on account. Dec 9105 3800 5 Cash 9105 3800 13390 Accounts Receivable (Bemidji Construction) Collected account receivable. 9 Accounts Payable (Owatonna Tool Co.) Cash Paid account payable to supplier. 31 Cost of Goods Sold Inventory To adjust inventory records to reflect the results of the year-end physical count. Inventory per accounting records 183,790 $ Inventory per physical count 182,080 Adjustment for inventory shrinkage $ 1,710 b. 13390 3800 3800 1710 1710 CLAYPOOL HARDWARE Partial Income Statement For the Year Ended December 31, 20__ Net sales Cost of goods sold (1) Gross profit $1 0 2 4 9 0 0 696932 $ 327968 (1) Cost of goods sold prior to adjustment at Dec. 31 Add: Shrinkage adjustment at Dec. 31 Cost of goods sold (adjusted balance) $ 695222 1710 $ 696932 © The McGraw-Hill Companies, Inc., 2002 185
  10. 10. PROBLEM 6–1 CLAYPOOL HARDWARE (concluded) c. Claypool seems quite able to pass its extra transportation costs on to its customers and, in fact, enjoys a significant financial benefit from its remote mountain location. The following data support these conclusions: Annual sales....................................................... Gross profit........................................................ Gross profit rate................................................ Claypool Hardware $1,024,900 327,968 32% (2) Industry Average $1,000,000 250,000 (1) 25% Difference $24,900 77,968 +7% (1) $1,000,000 sales × 25% = $250,000 (2) $327,968 gross profit ÷ $1,024,900 net sales = 32% Claypool earned a gross profit rate of 32%, which is significantly higher than the industry average. Claypool’s sales were almost equal to the industry average, but it earned $77,968 more gross profit than the “average” store of its size. This higher gross profit was earned even though its cost of goods sold was $18,000 to $20,000 higher than the industry average because of the additional transportation charges. To have a higher-than-average cost of goods sold and still earn a much larger-than-average amount of gross profit, Claypool must be able to charge substantially higher sales prices than most hardware stores. Presumably, the company could not charge such prices in a highly competitive environment. Thus, the remote location appears to insulate it from competition and allow it to operate more profitably than hardware stores with nearby competitors. The key question in the company’s future is whether there is enough growth in the area to support another store. If a second store opens, Claypool may face competition and have to cut its prices. If there is not sufficient business to support two stores, however, Claypool has a “captive market,” which will enable it to continue charging premium prices and earning high (gross) profits. (No information is provided in the problem about operating expenses, but with nearly $78,000 more gross profit than the average store of its size, Claypool should be able to earn a net income that is well above average.) 35 Minutes, Medium © The McGraw-Hill Companies, Inc., 2002 PROBLEM 6–2 OFFICE SOLUTIONS 186
  11. 11. a. General Journal May 10 Inventory Accounts Payable (Mitsui Corporation) Purchased five P-500 fax machines @ $300; payment due in 30 days. 1500 1500 23 Accounts Receivable (Foster & Cole) Sales Sold four Mitsui P-500 fax machines on account. Sales price $500 per machine; payment due in 30 days. 23 Cost of Goods Sold Inventory To adjust inventory records for the cost of four P-500 fax machines sold to Foster & Cole ($300 x 4 = $1,200). 1200 24 Inventory Accounts Payable (Mitsui Corporation) Purchased seven P-500 fax machines @ $300; payment due in 30 days. June 2000 2100 9 Accounts Payable (Mitsui Corporation) Cash Paid Mitsui Corporation for purchase on May 10. 19 Cash 2000 1200 2100 1500 1500 1050 Sales Sold two P-500 fax machines for cash; sales price, $525 each. 19 Cost of Goods Sold Inventory To record cost of two P-500 fax machines sold ($300 x 2 = $600). 22 Cash Accounts Receivable (Foster & Cole) Collected account receivable from sale on May 23. © The McGraw-Hill Companies, Inc., 2002 1050 600 600 2000 2000 187
  12. 12. PROBLEM 6–2 OFFICE SOLUTIONS (continued) b. Item Item Mitsui P-500 fax machine Primary supplier Description Description Plain paper fax machine Secondary supplier Location in showroom, remainder in warehouse 1 Date May 10 1 SOLD Maximum 10 BALANCE Total $1,500 7 300 June 19 © The McGraw-Hill Companies, Inc., 2002 Units Unit Cost Total Units 5 Unit Cost $300 4 Units 5 23 24 None Inventory level: Minimum PURCHASED Unit Cost $300 Mitsui Corporation $300 $1,200 1 300 300 8 300 2,400 2 300 600 6 300 1,800 2,100 Balance $1,500
  13. 13. PROBLEM 6–2 OFFICE SOLUTIONS (concluded) c. Eight. The quantity of units on hand at any date may be determined from the inventory subsidiary ledger. d. An inventory subsidiary ledger indicates the quantities, unit costs, and total costs of the units of product purchased, sold, and currently on hand. In addition, the subsidiary ledger accounts usually indicate the location of units in stock, the minimum and maximum quantities desired in inventory, and the names of the major suppliers. Management uses this information to determine which products are selling quickly and which are selling slowly and in setting sales prices. Accounting personnel use the unit cost data in recording the cost of goods sold. Sales personnel refer to this ledger to determine the quantities and location of goods on hand. Employees responsible for purchasing merchandise use the data in this ledger to determine when specific products should be reordered, the quantities to order, and the names of the principal suppliers. 20 Minutes, Medium PROBLEM 6–3 KNAUSS SUPERMARKETS 2001–2002 a. 1. Change in net sales.................................................... 6% (1) 2. Change in net sales per square foot.......................... (1%) (3) 3. Change in comparable store sales............................ (1.8%) (5) (1) (2) (3) (4) (5) (6) 2000–2001 8% (2) (2.7%) (4) (3.5%) (6) ($5,495 − $5,194) ÷ $5,184 = 6% ($5,184 − $4,800) ÷ $4,800 = 8% [($5,495 ÷ 11.9) − ($5,184 ÷ 11.1)] ÷ ($5,184 ÷ 11.1) = (1%) [($5,184 ÷ 11.1) − ($4,800 ÷ 10.0)] ÷ ($4,800 ÷ 10.0) = (2.7%) ($10.8 − $11.0) ÷ $11.0 = (1.8%) ($11.0 − $11.4) ÷ $11.4 = (3.5%) b. While Knauss has increased its overall revenue from sales, several of the statistics indicate problems. Both sales per square foot of selling space and comparable store sales have declined for the last two years. This indicates a downward trend in sales at existing stores. It is apparent that the increase in overall net sales must have resulted from adding new stores. As a result, management should reevaluate its marketing strategies. 30 Minutes, Medium PROBLEM 6–4 LAMPRINO APPLIANCE
  14. 14. a. General Journal Date (1) June 10 Inventory Accounts Payable (Mitsu Industries) To record purchase of 10 TVs at net cost of $294 per unit ($300, less 2%). 15 Cash 2940 2940 450 Sales Sold 1 Mitsu TV for cash. 15 Cost of Goods Sold Inventory To record cost of TV sold. 20 Accounts Payable (Mitsu Industries) Cash Paid account within discount period. (2) June 10 Inventory Accounts Payable (Mitsu Industries) To record purchase of 10 TVs at gross invoice price ($300 per unit). 15 Cash 450 294 294 2940 2940 3000 3000 450 Sales Sold 1 Mitsu TV for cash. 15 Cost of Goods Sold Inventory To record cost of TV sold. 20 Accounts Payable (Mitsu Industries) Cash Purchase Discounts Taken Paid account payable, less 2%. b. (1) July 10 Accounts Payable (Mitsu Industries) Purchase Discounts Lost Cash Made payment after discount period had expired. (2) July 10 Accounts Payable (Mitsu Industries) Cash Made payment after discount period had expired. 450 300 300 3000 2940 60 2940 60 3000 3000 3000 PROBLEM 6–4
  15. 15. LAMPRINO APPLIANCE (concluded) c. The net cost method provides more useful information for evaluating the company’s efficiency in paying its bills. This method clearly indicates the lowest price that the company may pay, and separately records any additional costs incurred as purchase discounts lost. Under the gross price method, the liability is not recorded at the lowest price at which it can be settled. Hence, management is not made aware of available discounts that were not taken. 30 Minutes, Strong PROBLEM 6–5 SIOGO SHOES AND SOLE MATES
  16. 16. General Journal a. Feb Journal entries by Siogo Shoes: 9 Accounts Receivable (Sole Mates) Sales Sold merchandise on account; terms, 1/10, n/30. 9 Cost of Goods Sold Inventory To record cost of merchandise sold (100 pr. x $60/pr.). 12 Delivery Expense Cash Paid delivery charges on outbound shipment. 10000 10000 6000 6000 40 40 13 Sales Returns & Allowances Accounts Receivable (Sole Mates) Customer returned merchandise (10 pr. x $100/pr.). 1000 13 Inventory Cost of Goods Sold Reduce cost of goods sold for cost of merchandise returned (10 pr. x $60/pr.). 600 19 Cash Sales Discount Accounts Receivable (Sole Mates) Collected amount due, less $1,000 return and less 1% cash discount on remaining $9,000 balance ($9,000 x 1% = $90). b. Feb 1000 600 8910 90 9000 Journal entries by Sole Mates: 9 Inventory Accounts Payable (Siogo Shoes) Purchased 100 pairs of boots; terms, 1/10, n/30. Net cost, $99 per pair ($100, less 1%). 12 Transportation-in Cash Paid transportation charge on inbound shipment. 13 Accounts Payable (Siogo Shoes) Inventory Returned 10 pairs of boots to supplier. (Net cost, $99 per pair x 10 pairs = $990.) 9900 9900 40 40 990 990 PROBLEM 6–5 SIOGO SHOES AND SOLE MATES (concluded)
  17. 17. General Journal Feb 19 Accounts Payable (Siogo Shoes) Cash Paid within discount period balance owed to Siogo Shoes ($9,900 - $990 = $8,910). 8910 8910 c. Yes. Sole Mates should take advantage of 1/10, n/30 purchase discounts, even if it must borrow money for a short period of time at an annual rate of 11%. By taking advantage of the discount, the company saves 1% by making payment 20 days early. At an interest rate of 11% per year, the bank charges only 0.6% interest over a 20-day period (11% × 20⁄ 365 = 0.6%). Thus, the cost of passing up the discount is greater than the cost of short-term borrowing. 40 Minutes, Strong Parts a, c, g, and h follow; parts b, d, e, and f are on the next page. PROBLEM 6–6 CPI
  18. 18. a. The operating cycle of a merchandising company consists of purchasing merchandise, selling that merchandise to customers (often on account), and collecting the sales proceeds from these customers. The assets and liabilities involved in this cycle include cash, accounts receivable, inventory, and accounts payable. c. In the January 2 entry, the $24,250 debit to the Inventory controlling account should be allocated among—and posted to—the appropriate product accounts in the inventory subsidiary ledger. The information posted should include the cost and quantities of each type of merchandise purchased. In addition, the credit portion of this entry should be posted to the Sharp account in CPI’s accounts payable subsidiary ledger. In the first entry on January 6, the debit to the Accounts Receivable controlling account should be posted to the Pace Corporation account in CPI’s accounts receivable ledger. In the final entry, the credit to the Inventory controlling account should be allocated among the thirty products sold and posted to the appropriate accounts in the inventory ledger. g. CPI probably would use a perpetual inventory system. The items in its inventory have a high perunit cost. Therefore, management will want to know the costs of the individual products included in specific sales transactions, and also will want to keep track of the items in stock. The company also has a computer-based accounting system, a full-time accountant, and a low volume of transactions. This combination of factors eliminates the potential difficulties of maintaining a perpetual system. h. Computation of profit margin on January 6 sales transaction: Gross profit = Sales price - Cost of goods sold = $10,000 − $6,100 = $3,900 Gross profit margin = Dollar gross profit ÷ Sales revenue = $3,900 ÷ $10,000 = 39% PROBLEM 6–6 CPI (concluded)
  19. 19. b. General Journal 2002 Jan 2 Inventory Accounts Payable (Sharp) Purchased merchandise on account; terms, 3/10, n/60. Net cost, $25,000, less 3%. 6 Accounts Receivable (Pace Corporation) Sales Sale on account; terms, 5/10, n/90. 6 Cost of Goods Sold Inventory To record the cost of merchandise sold to Pace Corporation. d. 24250 10000 10000 6100 6100 Computation of inventory at January 6: Inventory at Dec. 31, 2001 Add: Merchandise purchased on Jan. 2 Less: Cost of goods sold on Jan. 6 Inventory at close of business on Jan. 6 e. Journal entries assuming use of a periodic system: 2002 Jan 2 Purchases Accounts Payable (Sharp) Purchased merchandise on account; terms, 3/10, n/60. Net cost, $25,000, less 3%. 6 Accounts Receivable (Pace Corporation) Sales Sale on account; terms, 5/10, n/90. f. 24250 Computation of cost of goods sold: Inventory (Dec. 31, 2001) Add: Purchases Cost of goods available for sale Less: Inventory (Jan. 6—per part d ) Cost of goods sold $50 2 ( $51 0 4 6 8 0 2 1 1 0 5 0 5 0 0 0) 0 24250 24250 10000 10000 $50 2 $52 51 $ 0 4 4 8 6 0 2 2 1 1 0 5 5 5 0 0 0 0 0 0

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