Accounting Principles (13th edition)

Chapter-05: Accounting for Merchandising Operations (Solution of selected problems)

E5.13, E5.14, E5.18, E5.19,E5.20, E5.21 P5.1A, P5.6A

E5.13 (LO 5) Presented below is financial information for two different companies.
Summer Company Winter Company
Sales revenue $92,000 (d)
Sales returns (a) $ 5,000
Net sales 87,000 102,000
Cost of goods sold 56,000 (e)
Gross profit (b) 41,500
Operating expenses 15,000 (f)
Net income (c) 18,000
Instructions
a. Determine the missing amounts.
b. Determine the gross profit rates. (Round to one decimal place.)

Solution:
a.
Summer Company Winter Company
Sales revenue $92,000 (d) $ 107000
Sales returns (a) 5000 $ 5,000
Net sales 87,000 102,000
Cost of goods sold 56,000 (e) 60500
Gross profit (b) 31000 41,500
Operating expenses 15,000 (f) 23500
Net income (c) 16000 18,000

b. Gross profit rate= Gross profit/Net sales

Summer company= 16000/87000= 18.4%
Winter company=18000/102000= 17.6%
E5.14 (LO 5) Financial information is presented below for three different companies.

Hardy Cosmetics Yee Grocery Wang Wholesalers

Sales revenue $90,000 $ (e) $122,000
Sales returns and allowances (a) 5,000 12,000
Net sales 86,000 95,000 (i)
Cost of goods sold 56,000 (f) (j)
Gross profit (b) 38,000 24,000
Operating expenses 15,000 (g) 18,000

Income from operations (c) (h) (k)

Other expenses and losses 4,000 7,000 (l)
Net income (d) 11,000 5,000

Instructions
Determine the missing amounts.

Solution:
Hardy Cosmetics Yee Grocery Wang Wholesalers
Sales revenue $90,000 $ (e) 100000 $122,000
Sales returns and allowances (a) 4000 5,000 12,000
Net sales 86,000 95,000 (i) 110000
Cost of goods sold 56,000 (f) 57000 (j) 86000
Gross profit (b) 30000 38,000 24,000
Operating expenses 15,000 (g)20000 18,000
Income from operations (c) 15000 (h)18000 (k) 6000
Other expenses and losses 4,000 7,000 (l) 1000
Net income (c) 11000 11,000 5,000
E 5.18 (LO 7) On January 1, 2020, Brooke Hanson Corporation had inventory of $50,000. At
December 31, 2020, Brooke Hanson had the following account balances.
Freight-in $ 4,000
Purchases 509,000
Purchase discounts 6,000
Purchase returns and allowances 2,000
Sales revenue 840,000
Sales discounts 5,000
Sales returns and allowances 10,000
At December 31, 2020, Brooke Hanson determines that its ending inventory is $60,000.
Instructions
a. Compute Brooke Hanson’s 2020 gross profit.
b. Compute Brooke Hanson’s 2020 operating expenses if net income is $130,000 and there are
no non-operating activities.

Solution:
a.
Sales Revenue $ 840000
Less: Sales discounts 5000
Less: Sales return and allowance 10000
Net sales 825000
Less: Cost of Goods Sold
Beginning Inventory $50000
Purchase 509000
Freight in 4000
Purchase discount (6000)
Purchase return (2000)
Net purchase 505000
Ending Inventory (60000)
Cost of goods sold 495000
Gross Profit 320000

b. Operating expense= Gross profit- net profit=320000-130000= 190000

*E 5.19 (LO 7) Below is a series of cost of goods sold sections for companies B, F, L, and R.

B F L R
Beginning inventory $ 180 $ 70 $1,000 $ (j)
Purchases 1,620 1,060 (g) 43,590
Purchase returns and allowances 40 (d) 290 (k)
Net purchases (a) 1,030 6,210 41,090
Freight-in 110 (e) (h) 2,240
Cost of goods purchased (b) 1,280 7,940 (l)
Cost of goods available for sale 1,870 1,350 (i) 49,530
Ending inventory 250 (f) 1,450 6,230
Cost of goods sold (c) 1,230 7,490 43,300

Instruction
Fill in the lettered blanks to complete the cost of goods sold sections.

Solution:

B F L R
Beginning inventory $ 180 $ 70 $1,000 $ (j) 6200
Purchases 1,620 1,060 (g) 6500 43,590
Purchase returns and allowances 40 (d) 30 290 (k)2500
Net purchases (a) 1580 1,030 6,210 41,090
Freight-in 110 (e) 250 (h) 1730 2,240
Cost of goods purchased (b) 1690 1,280 7,940 (l) 43330
Cost of goods available for sale 1,870 1,350 (i) 8940 49,530
Ending inventory 250 (f) 120 1,450 6,230
Cost of goods sold (c) 1620 1,230 7,490 43,300
E 5.20 (LO 7) This information relates to Nandi Co.
1. On April 5, purchased merchandise on account from Dion Company for $25,000, terms 2/10,
net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from Dion Company.
3. On April 7, purchased equipment on account for $30,000.
4. On April 8, returned some of April 5 merchandise, which cost $2,800, to Dion Company.
5. On April 15, paid the amount due to Dion Company in full.
Instructions
a. Prepare the journal entries to record these transactions on the books of Nandi Co. using a
periodic inventory system.
b. Assume that Nandi Co. paid the balance due to Dion Company on May 4 instead of April 15.
Prepare the journal entry to record this payment.

Solution:
a)
Date Description Ref Debit Tk. Credit Tk.
April, Purchase A/C $25000 $25000
5 Accounts Payable

6 Freight in 900 900

Cash A/C

7 Equipment A/C 30000 30000

Accounts Payable

8 Accounts Payable 2800 2800

Purchase Return

15 Accounts Payable (25000-2800) 22200 21756

Cash (98%) 444
Purchase discount (2%)

b)
May 4 Accounts Payable (25000-2800) 22200
Cash 22200
E 5.21 (LO 7) Presented below is information related to Chung Co.
1. On April 5, purchased merchandise on account from Jose Company for $21,000, terms 2/10,
net/30, FOB shipping point.
2. On April 6, paid freight costs of $800 on merchandise purchased from Jose.
3. On April 7, purchased equipment on account from Winker Mfg. Co. for $26,000.
4. On April 8, returned merchandise, which cost $4,000, to Jose Company.
5. On April 15, paid the amount due to Jose Company in full.
Instructions
a. Prepare the journal entries to record these transactions on the books of Chung Co. using a
periodic inventory system.
b. Assume that Chung Co. paid the balance due to Jose Company on May 4 instead of April 15.
Prepare the journal entry to record this payment.

Solution
a)
Date Description Ref Debit Tk. Credit Tk.
April, Purchase A/C $21000 $21000
5 Accounts Payable

6 Freight in 800 800

Cash A/C

7 Equipment A/C 26000 26000

Accounts Payable

8 Accounts Payable 4000 4000

Purchase Return

15 Accounts Payable (21000-4000) 17000 16660

Cash (98%) 340
Purchase discount (2%)

b)
May 4 Accounts Payable (21000-4000) 17000
Cash 170000
 P5.1A (LO 2, 3) Kern’s Book Warehouse distributes hardcover books to retail stores and
extends credit terms of 2/10, n/30 to all of its customers. At the end of May, Kern’s inventory
consisted of books purchased for $1,800. During June, the following merchandising transactions
occurred.
June Purchased books on account for $1,600 from Binsfeld Publishers, FOB destination,
1 terms 2/10, n/30. The appropriate party also made a cash payment of $50 for the freight on
this date.
3 Sold books on account to Reading Rainbow for $2,500. The cost of the books sold was
$1,440.
6 Received $100 credit for books returned to Binsfeld Publishers.
9 Paid Binsfeld Publishers in full, less discount.
15 Received payment in full from Reading Rainbow.
17 Sold books on account to Rapp Books for $1,800. The cost of the books sold was $1,080.
20 Purchased books on account for $1,800 from McGinn Publishers, FOB destination, terms
2/15, n/30. The appropriate party also made a cash payment of $60 for the freight on this date.
24 Received payment in full from Rapp Books.
26 Paid McGinn Publishers in full, less discount.
28 Sold books on account to Baeten Bookstore for $1,600. The cost of the books sold was $970.
30 Granted Baeten Bookstore $120 credit for books returned costing $72.

Instructions
Journalize the transactions for the month of June for Kern’s Book Warehouse using a perpetual
inventory system.

Solution
Date Description Ref Debit Tk. Credit Tk.
June, 1 Merchandize Inventory A/C $1600 $1600
Accounts Payable

3 Accounts Receivable 2500 2500

Sales A/C

Cost of Goods Sold 1440 1440

Merchandize Inventory A/C

6 Accounts Payable 100 100

Merchandize Inventory A/C

9 Accounts Payable (1600-100) 1500 1470

Cash A/C (98%) 30
Merchandize Inventory A/C (2%)

15 Cash 2500 2500

 Accounts Receivable

17 Accounts Receivable 1800 1800

Sales A/C

Cost of Goods Sold 1080 1080

Merchandize Inventory A/C

20 Merchandize Inventory A/C 1800

Accounts Payable 1800

24 Cash A/C (98%) 1764 1800

Sales discount (2%) 36
Accounts Receivable
26 Accounts Payable 1800 1764
Cash A/C (98%) 36
Merchandize Inventory A/C (2%)
28 Accounts Receivable 1600 1600
Sales A/C

Cost of Goods Sold 970 970

Merchandize Inventory A/C

30 Sales return and allowance 120 120

Accounts receivable

Merchandize Inventory A/C 72 72

Cost of goods sold
P5.6A (LO 5, 7) At the end of Donaldson Department Store’s fiscal year on November 30, 2020,
these accounts appeared in its adjusted trial balance.
Freight-In $ 7,500
Inventory 40,000
Purchases 585,000
Purchase Discounts 6,300
Purchase Returns and Allowances 2,700
Sales Revenue 1,000,000
Sales Returns and Allowances 20,000

Additional facts:
1. Merchandise inventory on November 30, 2020, is $52,600.
2. Donaldson Department Store uses a periodic system.
Instructions
Prepare an income statement through gross profit for the year ended November 30, 2020.

Solution:
Sales Revenue $ 1000000
Less: Sales return and allowance 20000
Net sales 980000
Less: Cost of Goods Sold
Beginning Inventory $40000
Purchase 585000
Freight in 7500
Purchase discount (6300)
Purchase return (2700)
Net purchase 583500
Ending Inventory (52600)
Cost of goods sold 570900
Gross Profit 409100