CH 6 - Solution

CHAPTER 6
ACCOUNTING FOR MERCHANDISING BUSINESSES
DISCUSSION QUESTIONS
1. Merchandising businesses acquire merchandise for resale to customers. It is the selling of

merchandise, instead of providing a service, that makes the activities of a merchandising
business different from the activities of a service business.
2. Yes. Gross profit is the excess of sales over cost of merchandise sold. A net loss arises when
operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur
operating expenses in excess of this gross profit and end up with a net loss.
3. The date of sale as shown by the date of the invoice or bill.
4. a. 1% discount allowed if paid within 15 days of date of invoice; entire amount of invoice
due within 60 days of date of invoice.
b. Payment due within 30 days of date of invoice with no discount.
c. Payment due by the end of the month in which the sale was made with no discount.
5. Sales to customers who use MasterCard or VISA cards are recorded as cash sales.
6. a. A credit memo issued by the seller of merchandise indicates the amount for which the
buyer’s account is to be credited (credit to Accounts Receivable) and the reason for the
sales return or allowance.
b. A debit memo issued by the buyer of merchandise indicates the amount for which the
seller’s account is to be debited (debit to Accounts Payable) and the reason for the
purchases return or allowance.
7. a. The buyer
b. The seller
8. Sales, Cost of Merchandise Sold, Merchandise Inventory, Estimated Returns Inventory
9. Cost of Merchandise Sold would be debited; Merchandise Inventory would be credited.
10. Loss from Merchandise Inventory Shrinkage would be debited.
6-1
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CHAPTER 6 Accounting for Merchandising Businesses
PRACTICE EXERCISES
PE 6-1A
a. $665,800 ($315,800 + $1,225,000 – $875,000)
PE 6-1B
a. $126,000 ($18,300 + $295,700 – $188,000)
PE 6-2A
a. $13,328. Purchase of $18,228 [$18,600 – ($18,600 × 2%)] less the return of
$4,900 [$5,000 – ($5,000 × 2%)]
b. Merchandise Inventory
PE 6-2B
a. $56,925. Purchase of $64,350 [$65,000 – ($65,000 × 1%)] less the return of
$7,425 [$7,500 – ($7,500 × 1%)]
b. Accounts Payable—Hoffman Company
PE 6-3A
a. Accounts Receivable [$72,500 – ($72,500 × 2%)] 71,050
Sales 71,050
Cost of Merchandise Sold 43,500

Merchandise Inventory 43,500
b. Cash 71,050
Accounts Receivable 71,050
c. Customer Refunds Payable 2,300


Estimated Returns Inventory 1,600
6-2
PE 6-3B
a. Accounts Receivable [$92,500 – ($92,500 × 1%)] 91,575
Sales 91,575

b. Cash 91,575
c. Customer Refunds Payable 10,400


PE 6-4A
a. $75,250. Purchase of $89,100 [$90,000 – ($90,000 × 1%)] less return of
$14,850 [($15,000 – ($15,000 × 1%)] plus $1,000 of shipping.
b. $99,470. Purchase of $107,800 [$110,000 – ($110,000 × 2%)] less return of
$8,330 [$8,500 – ($8,500 × 2%)].
PE 6-4B
a. $31,680. Purchase of $35,640 [$36,000 – ($36,000 × 1%)] less return of
$3,960 [$4,000 – ($4,000 × 1%)].
b. $42,025. Purchase of $44,002 [$44,900 – ($44,900 × 2%)] less return of
$2,352 [$2,400 – ($2,400 × 2%)] plus $375 of shipping.
6-3
PE 6-5A
Sather Co. journal entries:
Accounts Receivable—Boone Co. 31,164
Sales 31,164
[$31,800 – ($31,800 × 2%)]

Cash 31,164
Accounts Receivable—Boone Co. 31,164
Boone Co. journal entries:
Merchandise Inventory [$31,800 – ($31,800 × 2%)] 31,164
Accounts Payable—Sather Co. 31,164
Accounts Payable—Sather Co. 31,164

Cash 31,164
PE 6-5B
Shore Co. journal entries:
Accounts Receivable—Blue Star Co. 109,760
Sales 109,760
[$112,000 – ($112,000 × 2%)]


Cash 1,800
Cash 111,560
($109,760 + $1,800)
Blue Star Co. journal entries:

Accounts Payable—Shore Co. 111,560
[$112,000 – ($112,000 × 2%)] + $1,800
Accounts Payable—Shore Co. 111,560

Cash ($109,760 + $1,800) 111,560
6-4
PE 6-6A
Nov. 30 Cost of Merchandise Sold 11,600
Inventory shrinkage.
($675,400 – $663,800)
PE 6-6B
Dec. 31 Cost of Merchandise Sold 23,250
Inventory shrinkage.
($1,333,150 – $1,309,900)
PE 6-7A
a. Sales ($3,600,000 × 0.008) 28,800
Customer Refunds Payable 28,800
b. Estimated Returns Inventory 15,000

PE 6-7B
a. Sales ($1,750,000 × 0.006) 10,500

PE 6-8A
a. 2019 2018
Asset turnover 3.4* 3.5**
* $1,734,000 ÷ [($480,000 + $540,000) ÷ 2]
** $1,645,000 ÷ [($460,000 + $480,000) ÷ 2]
b. The decrease from 3.5 to 3.4 indicates an unfavorable change in using assets to
generate sales.
PE 6-8B
a. 2019 2018
Asset turnover 2.4* 2.2**
* $1,884,000 ÷ [($770,000 + $800,000) ÷ 2]
** $1,562,000 ÷ [($650,000 + $770,000) ÷ 2]
b. The increase from 2.2 to 2.4 indicates a favorable change in using assets to
generate sales.
6-5
EXERCISES
Ex. 6-1
a. $7,644,000 ($31,850,000 – $24,206,000)
b. 24% ($7,644,000 ÷ $31,850,000)
c. No. If operating expenses are less than gross profit, there will be a net
income. On the other hand, if operating expenses exceed gross profit, there
will be a net loss.
Ex. 6-2
$31,292 million ($40,339 million – $9,047 million)
Ex. 6-3
Balance Sheet Accounts Income Statement Accounts
100 Assets 400 Revenues
110 Cash 410 Sales
112 Accounts Receivable 500 Expenses
114 Merchandise Inventory 510 Cost of Merchandise Sold
115 Estimated Returns Inventory 520 Sales Salaries Expense
116 Store Supplies 521 Advertising Expense
117 Office Supplies 522 Depreciation Expense—
118 Prepaid Insurance Store Equipment
120 Land 523 Store Supplies Expense
123 Store Equipment 524 Delivery Expense
124 Accumulated Depreciation— 529 Miscellaneous Selling
Store Equipment Expense
125 Office Equipment 530 Office Salaries Expense
126 Accumulated Depreciation— 531 Rent Expense
Office Equipment 532 Depreciation Expense—
200 Liabilities Office Equipment
210 Accounts Payable 533 Insurance Expense
211 Customer Refunds Payable 534 Office Supplies Expense
212 Salaries Payable 539 Miscellaneous
213 Notes Payable Administrative Expense
300 Owner’s Equity 600 Other Expense
310 Kailey Garner, Capital 610 Interest Expense
311 Kailey Garner, Drawing
Note: The order and number of some of the accounts within subclassifications is
somewhat arbitrary, as in accounts 116–118, accounts 210–213, accounts 520–524,
and accounts 530–534. For example, in a new business, the order of magnitude of
expense account balances often cannot be determined in advance. The magnitude
may also vary from period to period.
6-6
Ex. 6-4
a. $21,780. Purchase of $29,700 [$30,000 – ($30,000 × 1%)], less return of $7,920
[$8,000 – ($8,000 × 1%)]
b. Merchandise Inventory
Ex. 6-5
The offer of Supplier Two is lower than the offer of Supplier One. Details are as follows:
Supplier One Supplier Two
List price $20,000 $19,500
Discount (200) (390)
Price net of discount $19,800 $19,110
Freight 500
Final price $19,800 $19,610
Ex. 6-6
(1) Purchased merchandise on account at a cost of $39,200, which is $40,000 less
the 2% discount of $800.
(2) Paid freight, $450.
(3) An allowance or return of merchandise was granted by the creditor, $4,900,
which is a $5,000 invoice amount less the 2% discount of $100.
(4) Paid the balance due within the discount period: debited Accounts Payable,
$34,300, which is $39,200 less the return of $4,900.
Ex. 6-7
a. Merchandise Inventory [$75,000 – ($75,000 × 2%)] 73,500
Accounts Payable 73,500
b. Accounts Payable [$9,000 – ($9,000 × 2%)] 8,820

c. Accounts Payable 64,680

Cash 64,680
6-7
Ex. 6-8
a. Merchandise Inventory [$90,000 – ($90,000 × 2%)] 88,200
Accounts Payable—Wright Co. 88,200
b. Accounts Payable—Wright Co. 88,200

Cash 88,200
c. Accounts Payable*—Wright Co. [$18,000 – ($18,000 × 2%)] 17,640

d. Merchandise Inventory 10,000

e. Cash 7,640
* Note: The debit of $17,640 to Accounts Payable in entry (c) is the amount of cash refund due
from Wright Co. It is computed as the amount that was paid for the returned merchandise,
$18,000, less the purchase discount of $360 ($18,000 × 2%). The credit to Accounts Payable
of $10,000 in entry (d) reduces the debit balance in the account to $7,640, which is the amount
of the cash refund in entry (e). The alternative entries below yield the same final results.
c. Accounts Receivable—Wright Co. 17,640

d. Merchandise Inventory 10,000

e. Cash 7,640
Accounts Receivable—Wright Co. 17,640
6-8
Ex. 6-9
a. Cash 116,300
Sales 116,300

b. Accounts Receivable 755,000
Sales 755,000

c. Cash 1,950,000
Sales 1,950,000
Cost of Merchandise Sold 1,250,000

Merchandise Inventory 1,250,000
d. Cash 330,000
Sales 330,000

e. Credit Card Expense 81,500
Cash 81,500
Ex. 6-10
a. $27,440 [$28,000 – ($28,000 × 2%)]
b. Customer Refunds Payable 27,440

Cash 27,440

6-9
Ex. 6-11
(1) Sold merchandise on account for $14,850, $15,000 less discount of 1%.
(2) Recorded the cost of the merchandise sold and reduced the merchandise
inventory account, $8,800.
(3) Accepted a return of merchandise of $1,000 and issued a credit memo of
$990, which is $1,000 less the 1% discount.
(4) Updated the merchandise inventory account for the cost of the merchandise
returned, $575.
(5) Received the balance due within the discount period of $13,860; sale of
$14,850 less the return of $990.
Ex. 6-12
a. $55,370 [$56,500 – ($56,500 × 2%)]
b. $57,470 ($55,370 + $2,100)
c. $57,470
Ex. 6-13
a. $10,750 ($14,000 – $3,250)
b. $17,236 [($21,200 – $4,000) – ($17,200 × 2%) + $380]
c. $15,345 [($16,400 – $900) – ($15,500 × 1%)]
d. $6,424 [($7,500 – $1,200) – ($6,300 × 2%) + $250]
e. $28,512 [$28,800 – ($28,800 × 1%)]
6-10
Ex. 6-14
a. Accounts Receivable—Balboa Co. 254,500
Sales 254,500

b. Customer Refunds Payable 30,000

Accounts Receivable—Balboa Co. 30,000

c. Cash 224,500
Accounts Receivable—Balboa Co. 224,500
Ex. 6-15
a. Merchandise Inventory 254,500
Accounts Payable—Showcase Co. 254,500
b. Accounts Payable—Showcase Co. 30,000

c. Accounts Payable—Showcase Co. 224,500

Cash 224,500
6-11
Ex. 6-16
a. At the time of sale
b. $36,000
c. $38,880 [$36,000 + ($36,000 × 8%)]
d. Sales Tax Payable
Ex. 6-17
a. Accounts Receivable 65,940
Sales 62,800
Sales Tax Payable ($62,800 × 5%) 3,140

b. Sales Tax Payable 39,650

Cash 39,650
Ex. 6-18
a. debit
b. credit
c. debit
d. debit
e. debit
f. credit
g. credit
Ex. 6-19
Inventory shrinkage ($2,780,000 – $2,734,800).
Ex. 6-20
a. Sales ($51,600,000 × 1.2%) 619,200

6-12
Ex. 6-21
a. 2019
Dec. 31 Sales ($1,800,000 × 1.5%) 27,000
31 Estimated Returns Inventory 16,000

b. 2020
Feb. 3 Customer Refunds Payable 5,000
Cash 5,000
3 Merchandise Inventory 3,100

Ex. 6-22
a. Gross profit: $76,550,000 ($191,350,000 – $114,800,000)
b. No. There could be other revenue and expense items that affect the amount
of net income.
c. Customer Refunds Payable is a liability account with a normal credit balance.
d. Estimated Returns Inventory is an asset account with a normal debit balance.
Ex. 6-23
a. Selling expense, (1), (2), (7), (8)
b. Administrative expense, (3), (5), (6)
c. Other expense, (4)
Ex. 6-24
a. $379,900 ($463,400 – $83,500)

b. $687,500 ($277,500 + $410,000)
c. $1,020,000 ($1,295,000 – $275,000)
d. $1,500,000 ($900,000 + $600,000)
6-13
Ex. 6-25
a. RACINE FURNISHINGS COMPANY
Income Statement
For the Year Ended March 31, 2019
Sales $2,564,000
Cost of merchandise sold 1,520,000
Gross profit $1,044,000
Expenses:
Selling expenses $286,000
Administrative expenses 216,000
Total expenses 502,000
Income from operations $ 542,000
Other expense:
Interest expense 4,000
Net income $ 538,000
b. The major advantage of the multiple-step form of income statement is that

relationships such as gross profit to sales are indicated. The major disadvantages
are that it is more complex and the total revenues and expenses are not indicated,
as is the case in the single-step income statement.
6-14
Ex. 6-26
1. Deducting the cost of merchandise sold from sales yields gross profit (not income
from operations).
2. Deducting the total expenses from gross profit yields income from operations
(or operating income).
3. Interest revenue should be reported under the caption “Other revenue” and
should be added to income from operations to arrive at net income.
4. The final amount on the income statement should be labeled net income, not
gross profit.
A correct income statement is as follows:

CURBSTONE COMPANY
Income Statement
For the Year Ended August 31, 2019
Sales $8,595,000
Expenses:
Selling expenses $800,000
Delivery expense 425,000
Total expenses 1,800,000
Other revenue:
Interest revenue 45,000
6-15
Ex. 6-27
CUSTOM WIRE & TUBING COMPANY
Income Statement
For the Year Ended April 30, 2019
Revenues:
Sales $9,332,500
Rent revenue 60,000
Total revenues $9,392,500
Expenses:
Cost of merchandise sold $6,100,000
Selling expenses 1,250,000
Net income $1,277,500
Ex. 6-28
(b) Cost of Merchandise Sold
(f) Sales
(h) Supplies Expense
(i) Tim Button, Drawing
(j) Wages Expense
6-16
Ex. 6-29
2019 Closing Entries
Mar. 31 Sales 2,564,000
Selling Expenses 286,000
Administrative Expenses 216,000
Interest Expense 4,000
Kathy Melman, Capital 538,000
31 Kathy Melman, Capital 70,000

Kathy Melman, Drawing 70,000
Ex. 6-30
July 31 Sales 1,437,000
Administrative Expenses 440,000
Selling Expenses 160,000
Store Supplies Expense 21,500
Peter Bronsky, Capital 34,500
31 Peter Bronsky, Capital 15,000

Peter Bronsky, Drawing 15,000
6-17
Ex. 6-31
a. Year 2: 2.07 {$83,176 ÷ [($39,946 + $40,518) ÷ 2]}
Year 1: 1.93 {$78,812 ÷ [($40,518 + $41,084) ÷ 2]}
b. These analyses indicate a slight increase in the effectiveness in the use of the
assets to generate profits. A comparison with similar companies or industry
averages would be helpful in making a more definitive statement on the
effectiveness of the use of the assets.
Ex. 6-32
a. 3.63 {$108,465 ÷ [($30,556 + $29,281) ÷ 2]}
b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry using a
much longer operating cycle than Kroger uses selling groceries. Thus, Kroger is
able to generate $3.63 of sales for every dollar of assets. Tiffany, however, is only
able to generate $0.86 in sales per dollar of assets. This difference is reasonable
when one considers the sales rate for jewelry and the cost of holding jewelry
inventory, relative to groceries. Fortunately, Tiffany is able to offset its longer
operating cycle, relative to groceries, with higher gross profits, relative to
groceries.
Note to Instructors: For a recent year, Kroger’s gross profit percentage (gross
profit divided by revenues) was 21.2%, while Tiffany’s gross profit percentage was
59.7%. Kroger’s ratio of net income to revenues was 1.6%, while Tiffany’s ratio of
net income to revenues was 11.4%.
6-18
Appendix Ex. 6-33

(a) credit
(b) debit
(c) debit
(d) credit
(e) debit
(f) credit
(g) credit
Appendix Ex. 6-34

Jan. 2 Purchases 18,200
Accounts Payable 18,200
5 Freight In 190
Cash 190
6 Accounts Payable 2,750

Purchases Returns and Allowances 2,750
13 Accounts Receivable [$37,300 – ($37,300 × 1%)] 36,927

Sales 36,927
15 Delivery Expense 215

Cash 215
17 Accounts Payable 15,450

Purchases Discounts* 309
Cash 15,141
23 Cash 36,927
* [($18,200 – $2,750) × 2%]
Appendix Ex. 6-35

a. Purchases discounts, purchases returns and allowances
b. Freight in
c. Merchandise available for sale
d. Merchandise inventory (ending)
e. Increase in estimated returns inventory
6-19
Appendix Ex. 6-36

a. Cost of merchandise sold:
Merchandise inventory, May 1, 2018 $ 380,000
Cost of merchandise purchased:
Purchases $3,800,000
Purchases returns and allowances (150,000)
Purchases discounts (80,000)
Net purchases $3,570,000
Freight in 16,600
Total cost of merchandise purchased 3,586,600
Merchandise available for sale $3,966,600
Merchandise inventory, April 30, 2019 (415,000)
Cost of merchandise sold before estimated returns $3,551,600
Increase in estimated returns inventory (11,600)
b. $2,310,000 ($5,850,000 – $3,540,000)
c. No. Gross profit would be the same if the perpetual inventory system was
used.
Appendix Ex. 6-37

Cost of merchandise sold:
Merchandise inventory, November 1 $ 28,000
Purchases $475,000
Net purchases $451,000
Freight in 7,000
Total cost of merchandise purchased 458,000
Merchandise available for sale $486,000
Merchandise inventory, November 30 (31,500)
Cost of merchandise before estimated returns $454,500
Cost of merchandise sold $440,000
6-20
Appendix Ex. 6-38

Merchandise inventory, July 1 $ 190,850
Freight in 17,500
Merchandise inventory available for sale $1,265,350
Merchandise inventory, July 31 (160,450)
Appendix Ex. 6-39

1. The schedule should begin with the June 1, 2017, not the May 31, 2018,
merchandise inventory.
2. Purchases returns and allowances and purchases discounts should be deducted
from (not added to) purchases.
3. Freight in should be added to (not deducted from) purchases.
4. The merchandise inventory at May 31, 2018, should be deducted from inventory
available for sale to yield cost of merchandise sold before estimated returns.
5. The estimated returns for the year of $43,300 should be deducted from cost of
merchandise sold before estimated returns to yield cost of merchandise sold.
A correct cost of merchandise sold section is as follows:
Merchandise inventory, June 1, 2017 $ 91,300
Freight in 22,000
Cost of merchandise purchased 1,047,000
Merchandise inventory, May 31, 2018 (105,000)
Cost of merchandise sold $ 990,000
6-21
Appendix Ex. 6-40

Closing Entries
Dec. 31 Merchandise Inventory (December 31) 460,000
Sales 2,220,000
Purchases Discounts 35,000
Merchandise Inventory (January 1) 375,000
Purchases 1,760,000
Freight In 17,000
Salaries Expense 375,000
Advertising Expense 36,000
Depreciation Expense 13,000
Miscellaneous Expense 9,000
Pat Kirwan, Capital 195,000
31 Pat Kirwan, Capital 65,000

Pat Kirwan, Drawing 65,000
6-22
PROBLEMS
Prob. 6-1A
Oct. 1 Merchandise Inventory 14,448
Accounts Payable—UK Imports Co. 14,448

Accounts Payable—Hoagie Co. 9,971
[$9,950 – ($9,950 × 2%)] + $220

Accounts Payable—Taco Co. 13,377
[$13,650 – ($13,650 × 2%)]
6 Accounts Payable—Taco Co. 4,459

[$4,550 – ($4,550 × 2%)]
13 Accounts Payable—Hoagie Co. 9,971

Cash 9,971

Cash 8,918
($13,377 – $4,459)

Accounts Payable—Veggie Co. 27,300
19 Merchandise Inventory 400

Cash 400

Accounts Payable—Caesar Salad Co. 21,780
[$22,000 – ($22,000 × 1%)]
30 Accounts Payable—Caesar Salad Co. 21,780

Cash 21,780
31 Accounts Payable—UK Imports Co. 14,448

Cash 14,448
31 Accounts Payable—Veggie Co. 27,300

Cash 27,300
6-23
Prob. 6-2A
Mar. 2 Accounts Receivable—Equinox Co. 18,711
Sales 18,711
[$18,900 – ($18,900 × 1%)]
2 Cost of Merchandise Sold 13,300

3 Cash 12,031
Sales 11,350
Sales Tax Payable 681

4 Accounts Receivable—Empire Co. 55,400

Sales 55,400

5 Cash 31,800
Sales 30,000
Sales Tax Payable 1,800

12 Cash 18,711
Accounts Receivable—Equinox Co. 18,711
14 Cash 13,700
Sales 13,700

16 Accounts Receivable—Targhee Co. 27,225

Sales 27,225
[$27,500 – ($27,500 × 1%)]

6-24
Prob. 6-2A (Concluded)

Mar. 18 Customer Refunds Payable 4,752
Accounts Receivable—Targhee Co. 4,752
[$4,800 – ($4,800 × 1%)]

19 Accounts Receivable—Vista Co. 8,085

Sales 8,085
[$8,250 – ($8,250 × 2%)]
19 Accounts Receivable—Vista Co. 75

Cash 75

26 Cash ($27,225 – $4,752) 22,473

Accounts Receivable—Targhee Co. 22,473
28 Cash ($8,085 + $75) 8,160

Accounts Receivable—Vista Co. 8,160
31 Cash 55,400
Accounts Receivable—Empire Co. 55,400
31 Delivery Expense 5,600

Cash 5,600
Apr. 3 Credit Card Expense 940

Cash 940
15 Sales Tax Payable 6,544

Cash 6,544
6-25
Prob. 6-3A
Nov. 3 Merchandise Inventory 62,475
Accounts Payable—Moonlight Co. 62,475
[$85,000 – ($85,000 × 25%)] = $63,750
[$63,750 – ($63,750 × 2%)]
4 Cash 37,680
Sales 37,680


Accounts Payable—Papoose Creek Co. 47,360
[$47,500 – ($47,500 × 2%) + $810]
6 Accounts Payable—Moonlight Co. 13,230

[$13,500 – ($13,500 × 2%)]
8 Accounts Receivable—Quinn Co. 15,600

Sales 15,600


Cash 49,245
($62,475 – $13,230)
14 Cash 236,000
Sales 236,000

15 Accounts Payable—Papoose Creek Co. 47,360

Cash 47,360
23 Cash 15,600
Accounts Receivable—Quinn Co. 15,600
6-26

Nov. 24 Accounts Receivable—Rabel Co. 56,331
Sales 56,331
[$56,900 – ($56,900 × 1%)]

28 Credit Card Expense 3,540

Cash 3,540
30 Customer Refunds Payable 6,000

Cash 6,000

6-27
Prob. 6-4A
1.
Aug. 1 Accounts Receivable—Beartooth Co. 47,040
Sales 47,040
[$48,000 – ($48,000 × 2%)]


Cash 1,150
5 Accounts Receivable—Beartooth Co. 66,000

Sales 66,000


Sales 58,113
[$58,700 – ($58,700 × 1%)]

Cash 1,675

16 Cash 47,040
Accounts Receivable—Beartooth Co. 47,040

Cash 1,800
25 Cash ($58,113 + $1,675) 59,788

31 Customer Refunds Payable

[$6,000 – ($6,000 × 2%)] 5,880

6-28

2.
Aug. 1 Merchandise Inventory 47,040
Accounts Payable—Summit Company 47,040


Cash 2,300

{[$58,700 – ($58,700 × 1%)] + $1,675}
16 Accounts Payable—Summit Company 47,040

Cash 47,040
20 Cash 1,800

Cash 59,788

[$6,000 – ($6,000 × 2%)]
6-29
Prob. 6-5A
1.
CLAIREMONT CO.
Income Statement
For the Year Ended May 31, 2019
Sales $11,343,000
Gross profit $ 3,493,000
Expenses:
Selling expenses:
Sales salaries expense $916,000
Advertising expense 550,000
Depreciation expense—store
equipment 140,000
Miscellaneous selling expense 38,000
Total selling expenses $1,644,000
Administrative expenses:
Office salaries expense $650,000
Rent expense 94,000
Depreciation expense—office
equipment 50,000
Insurance expense 48,000
Office supplies expense 28,100
Miscellaneous administrative
expense 14,500
Total administrative expenses 884,600
Total operating expenses 2,528,600
Other expense:
6-30
Prob. 6-5A (Continued)

2. CLAIREMONT CO.
Statement of Owner’s Equity
Kristina Marble, capital, June 1, 2018 $3,449,100
Net income for the year $ 943,400
Withdrawals (100,000)
Increase in owner’s equity 843,400
Kristina Marble, capital, May 31, 2019 $4,292,500
6-31
Prob. 6-5A (Continued)

3.
CLAIREMONT CO.
Balance Sheet
May 31, 2019
Assets
Current assets:
Cash $ 240,000
Accounts receivable 966,000
Merchandise inventory 1,690,000
Estimated returns inventory 22,500
Office supplies 13,500
Prepaid insurance 8,000
Total current assets $2,940,000
Property, plant, and equipment:
Office equipment $ 830,000
Less accumulated depreciation 550,000 $ 280,000
Store equipment $3,600,000
Less accumulated depreciation 1,820,000 1,780,000
Total property, plant, and equipment 2,060,000
Total assets $5,000,000
Liabilities
Current liabilities:
Accounts payable $ 326,000
Customer refunds payable 40,000
Salaries payable 41,500
Note payable (current portion) 50,000
Total current liabilities $ 457,500
Long-term liabilities:
Note payable (final payment due 2022) 250,000
Total liabilities $ 707,500
Owner’s Equity
Kristina Marble, capital 4,292,500
Total liabilities and owner’s equity $5,000,000
6-32

4. The multiple-step form of income statement contains various sections for
revenues and expenses, with intermediate balances, and concludes with
net income. In the single-step form, the total of all expenses is deducted
from the total of all revenues. There are no intermediate balances.
6-33
Appendix Prob. 6-6A

1. CLAIREMONT CO.
Income Statement
Sales $11,343,000
Expenses:
2. 2019 Closing Entries

May 31 Sales 11,343,000
Sales Salaries Expense 916,000
Depreciation Expense—Store Equipment 140,000
Miscellaneous Selling Expense 38,000
Office Salaries Expense 650,000
Rent Expense 94,000
Depreciation Expense—Office Equipment 50,000
Insurance Expense 48,000
Office Supplies Expense 28,100
Miscellaneous Administrative Expense 14,500
Kristina Marble, Capital 943,400
31 Kristina Marble, Capital 100,000

Kristina Marble, Drawing 100,000
6-34
Appendix Prob. 6-7A

Oct. 1 Purchases 14,448
Accounts Payable—UK Imports Co. 14,448
3 Purchases 9,950
Freight In 220
Accounts Payable—Hoagie Co. 10,170
4 Purchases 13,650
Accounts Payable—Taco Co. 13,650

13 Accounts Payable—Hoagie Co. 10,170

Cash 9,971
Purchases Discounts ($9,950 × 2%) 199

Cash 8,918
Purchases Discounts 182
19 Purchases 27,300
Accounts Payable—Veggie Co. 27,300
19 Freight In 400
Cash 400
20 Purchases 22,000
Accounts Payable—Caesar Salad Co. 22,000
30 Accounts Payable—Caesar Salad Co. 22,000

Cash 21,780
31 Accounts Payable—UK Imports Co. 14,448

Cash 14,448
31 Accounts Payable—Veggie Co. 27,300

Cash 27,300
6-35
Appendix Prob. 6-8A

Nov. 3 Purchases 63,750
Accounts Payable—Moonlight Co. 63,750
[$85,000 – ($85,000 × 25%)]
4 Cash 37,680
Sales 37,680
5 Purchases 47,500
Freight In 810
Accounts Payable—Papoose Creek Co. 48,310

8 Accounts Receivable—Quinn Co. 15,600

Sales 15,600

Cash 49,245
14 Cash 236,000
Sales 236,000
15 Accounts Payable—Papoose Creek Co. 48,310

Cash 47,360
23 Cash 15,600
Accounts Receivable—Quinn Co. 15,600
24 Accounts Receivable—Rabel Co. 56,331

Sales 56,331
[$56,900 – ($56,900 × 1%)]

Cash 3,540

Cash 6,000
6-36
Appendix Prob. 6-9A

1. Wyman Company uses a periodic inventory system because it maintains
accounts for purchases, purchases returns and allowances, purchases discounts,
and freight in.
2. See page 6-38.
6-37
Appendix Prob. 6-9A (Continued)

2.
WYMAN COMPANY
Income Statement
For the Year Ended December 31, 2019
Sales $3,280,000
Merchandise inventory, January 1, 2019 $ 257,000
Freight in 48,000
Merchandise inventory, December 31, 2019 (305,000)
Gross profit $ 790,000
Expenses:
Selling expenses:
Sales salaries expense $ 300,000
Depreciation expense—store equipment 6,000
Total selling expenses $ 372,000
Office salaries expense $ 175,000
Rent expense 28,000
Depreciation expense—office equipment 1,500
Miscellaneous administrative expense 3,500
Total operating expenses 585,000
Other revenue and expense:
Rent revenue $ 7,000
Interest expense (2,000) 5,000
6-38
Appendix Prob. 6-9A (Concluded)

3. Closing Entries
Dec. 31 Merchandise Inventory (December 31) 305,000
Sales 3,280,000
Rent Revenue 7,000
Merchandise Inventory (January 1) 257,000
Purchases 2,650,000
Freight In 48,000
Delivery Expense 9,000
Rent Expense 28,000
Shirley Wyman, Capital 210,000
Shirley Wyman, Capital 25,000

Shirley Wyman, Drawing 25,000
4. $210,000, the same net income as under the periodic inventory system
6-39
Prob. 6-1B
Mar. 1 Merchandise Inventory 43,035
Accounts Payable—Haas Co. 43,035
[$43,250 – ($43,250 × 2%)] + $650

Accounts Payable—Whitman Co. 19,175
10 Accounts Payable—Haas Co. 43,035

Cash 43,035

Accounts Payable—Jost Co. 15,239
[$15,550 – ($15,550 × 2%)]
14 Accounts Payable—Jost Co. 3,675

[$3,750 – ($3,750 × 2%)]

Accounts Payable—Fairhurst Company 13,560

Cash 140

Accounts Payable—Bickle Co. 6,370
[$6,500 – ($6,500 × 2%)]
23 Accounts Payable—Jost Co. ($15,239 – $3,675) 11,564

Cash 11,564
29 Accounts Payable—Bickle Co. 6,370

Cash 6,370
31 Accounts Payable—Fairhurst Company 13,560

Cash 13,560
31 Accounts Payable—Whitman Co. 19,175

Cash 19,175
6-40
Prob. 6-2B
July 1 Accounts Receivable—Landscapes Co. 33,450
Sales 33,450

2 Cash 92,880
Sales 86,000

5 Accounts Receivable—Peacock Company 17,325

Sales 17,325
[$17,500 – ($17,500 × 1%)]

8 Cash 120,960
Sales 112,000

13 Cash 96,000
Sales 96,000

14 Accounts Receivable—Loeb Co. 15,840

Sales 15,840
[$16,000 – ($16,000 × 1%)]

15 Cash 17,325
Accounts Receivable—Peacock Company 17,325
6-41
Prob. 6-2B (Concluded)

July 16 Customer Refunds Payable 2,970
Accounts Receivable—Loeb Co. 2,970
[$3,000 – ($3,000 × 1%)]

18 Accounts Receivable—Jennings Company 11,123

Sales 11,123
[$11,350 – ($11,350 × 2%)]
18 Accounts Receivable—Jennings Company 475

Cash 475

24 Cash ($15,840 – $2,970) 12,870

Accounts Receivable—Loeb Co. 12,870
28 Cash ($11,123 + $475) 11,598

Accounts Receivable—Jennings Company 11,598

Cash 8,550
31 Cash 33,450
Accounts Receivable—Landscapes Co. 33,450
Aug. 3 Credit Card Expense 3,770

Cash 3,770
10 Sales Tax Payable 41,260

Cash 41,260
6-42
Prob. 6-3B
July 3 Merchandise Inventory 61,426
Accounts Payable—Hamling Co. 61,426
[$72,000 – ($72,000 × 15%)] = $61,200
[$61,200 – ($61,200 × 2%)] + $1,450

Accounts Payable—Kester Co. 32,781
[$33,450 – ($33,450 × 2%)]
6 Accounts Receivable—Parsley Co. 36,000

Sales 36,000

7 Accounts Payable—Kester Co. 6,713

[$6,850 – ($6,850 × 2%)]
13 Accounts Payable—Hamling Co. 61,426

Cash 61,426

Cash 26,068
($32,781 – $6,713)
21 Cash 36,000
Accounts Receivable—Parsley Co. 36,000
21 Cash 108,000
Sales 108,000

22 Accounts Receivable—Tabor Co. 16,317

Sales 16,317
[$16,650 – ($16,650 × 2%)]

6-43

July 23 Cash 91,200
Sales 91,200


Cash 7,150


Cash 1,650
6-44
Prob. 6-4B
1.
Apr. 2 Accounts Receivable—Bird Company 31,360
Sales 31,360
[$32,000 – ($32,000 × 2%)]
2 Accounts Receivable—Bird Company 330

Cash 330

8 Accounts Receivable—Bird Company 49,005

Sales 49,005
[$49,500 – ($49,500 × 1%)]

8 Delivery Expense 710

Cash 710
12 Cash ($31,360 + $330) 31,690

Accounts Receivable—Bird Company 31,690

Cash 2,000
23 Cash 49,005
24 Accounts Receivable—Bird Company 67,350

Sales 67,350



6-45

2.
Apr. 2 Merchandise Inventory ($31,360 + $330) 31,690
Accounts Payable—Swan Company 31,690

[$49,500 – ($49,500 × 1%)]
12 Accounts Payable—Swan Company 31,690

Cash 31,690
18 Cash 2,000

Cash 49,005


Cash 875

6-46
Prob. 6-5B
1.
KANPUR CO.
Income Statement
For the Year Ended June 30, 2019
Sales $8,925,000
Expenses:
Selling expenses:
Depreciation expense—store
equipment 33,000
Rent expense 48,000
Depreciation expense—office
equipment 10,000
Income from operations $1,352,000
Other expense:
6-47
Prob. 6-5B (Continued)

2. KANPUR CO.
Gerri Faber, capital, July 1, 2018 $ 431,000
Net income for the year $1,340,000
Increase in owner’s equity 1,040,000
Gerri Faber, capital, June 30, 2019 $1,471,000
6-48
Prob. 6-5B (Continued)

3.
KANPUR CO.
Balance Sheet
June 30, 2019
Assets
Current assets:
Cash $ 92,000
Merchandise inventory 370,000
Office supplies 10,000
Total current assets $ 939,000
Office equipment $220,000
Less accumulated depreciation 58,000 $162,000
Store equipment $650,000
Less accumulated depreciation 87,500 562,500
Total property, plant, and equipment 724,500
Liabilities
Note payable (current portion) 7,000
Total current liabilities $ 59,500
Long-term liabilities:
Note payable (final payment due 2032) 133,000
Owner’s Equity
Gerri Faber, capital 1,471,000
4. The multiple-step form of income statement contains various sections for

revenues and expenses, with intermediate balances, and concludes with
net income. In the single-step form, the total of all expenses is deducted
from the total of all revenues. There are no intermediate balances.
6-49
Prob. 6-6B
1. KANPUR CO.
Income Statement
Sales $8,925,000
Expenses:

June 30 Sales 8,925,000
Rent Expense 48,000
Gerri Faber, Capital 1,340,000
30 Gerri Faber, Capital 300,000

Gerri Faber, Drawing 300,000
6-50
Appendix Prob. 6-7B

Mar. 1 Purchases 43,250
Freight In 650
Accounts Payable—Haas Co. 43,900
5 Purchases 19,175
Accounts Payable—Whitman Co. 19,175
10 Accounts Payable—Haas Co. 43,900

Cash 43,035
Purchases Discounts ($43,250 × 0.02) 865
13 Purchases 15,550
Accounts Payable—Jost Co. 15,550

18 Purchases 13,560
Accounts Payable—Fairhurst Company 13,560
18 Freight In 140
Cash 140
19 Purchases 6,500
Accounts Payable—Bickle Co. 6,500

Cash 11,564
29 Accounts Payable—Bickle Co. 6,500

Cash 6,370
31 Accounts Payable—Fairhurst Company 13,560

Cash 13,560
31 Accounts Payable—Whitman Co. 19,175

Cash 19,175
6-51
Appendix Prob. 6-8B

July 3 Purchases 61,200
Freight In 1,450
Accounts Payable—Hamling Co. 62,650
[$72,000 – ($72,000 × 15%)]
5 Purchases 33,450
Accounts Payable—Kester Co. 33,450
6 Accounts Receivable—Parsley Co. 36,000

Sales 36,000

13 Accounts Payable—Hamling Co. 62,650

Cash 61,426

Cash 26,068
21 Cash 36,000
Accounts Receivable—Parsley Co. 36,000
21 Cash 108,000
Sales 108,000
22 Accounts Receivable—Tabor Co. 16,317

Sales 16,317
[$16,650 – ($16,650 × 2%)]
23 Cash 91,200
Sales 91,200

Cash 7,150

Cash 1,650
Appendix Prob. 6-9B

1. Simkins Company uses a periodic inventory system because it maintains
accounts for purchases, purchases returns and allowances, purchases discounts,
and freight in.
6-52
Appendix Prob. 6-9B (Continued)

2.
SIMKINS COMPANY
Income Statement
Sales $6,590,000
Merchandise inventory, July 1, 2018 $ 415,000
Freight in 45,000
Merchandise inventory, June 30, 2019 (508,000)
Expenses:
Selling expenses:
Sales salaries expense $ 580,000
Depreciation expense—store equipment 12,000
Total selling expenses $ 953,000
Office salaries expense $ 375,000
Rent expense 43,000
Depreciation expense—office equipment 4,000
Income from operations $1,203,000
Other revenue and expense:
Rent revenue $ 32,500
Interest expense (2,500) 30,000
6-53

June 30 Merchandise Inventory (June 30, 2019) 508,000
Sales 6,590,000
Rent Revenue 32,500
Merchandise Inventory (July 1, 2018) 415,000
Purchases 4,100,000
Freight In 45,000
Delivery Expense 18,000
Rent Expense 43,000
Amy Gant, Capital 1,233,000
Amy Gant, Capital 275,000

Amy Gant, Drawing 275,000
4. $1,233,000, the same net income as under the periodic inventory system
6-54
COMPREHENSIVE PROBLEM 2
1., 2., 6., and 9.
Account: Cash Account No. 110
Post. Balance
Date Item Ref. Debit Credit Debit Credit
2019
May 1 Balance  83,600
1 20 5,000
4 20 600
7 20 22,300
10 20 54,000
13 20 35,280
15 20 11,000
16 20 67,130
19 20 18,700
19 20 33,450
20 20 13,230
21 21 2,300
21 21 42,900
26 21 7,500
28 21 85,000
29 21 2,400
30 21 111,200
31 21 82,170 84,500
Account: Accounts Receivable Account No. 112
Post. Balance
2019
6 20 67,130
7 20 22,300
16 20 67,130
20 21 108,900
21 21 2,300
21 21 42,900
30 21 77,175
30 21 111,200 245,875
6-55
Comp. Problem 2 (Continued)

Account: Merchandise Inventory Account No. 115
Post. Balance
2019
3 20 35,280
4 20 600
6 20 41,000
10 20 32,000
19 20 18,700
20 20 8,000
20 21 70,000
21 21 87,120
24 21 4,950
26 21 4,800
30 21 47,000 583,950
31 Adjusting 22 13,950 570,000
Account: Estimated Returns Inventory Account No. 116
Post. Balance
2019
20 20 8,000
26 21 4,800 15,200
31 Adjusting 22 35,000 50,200
Account: Prepaid Insurance Account No. 117
Post. Balance
2019
31 Adjusting 22 12,000 4,800
Account: Store Supplies Account No. 118
Post. Balance
2019
29 21 2,400 13,800
31 Adjusting 22 9,800 4,000
6-56

Account: Store Equipment Account No. 123
Post. Balance
2019
Account: Accumulated Depreciation—Store Equipment Account No. 124
Post. Balance
2019
31 Adjusting 22 14,000 70,700
Account: Accounts Payable Account No. 210
Post. Balance
2019
3 20 35,280
13 20 35,280
19 20 33,450
21 21 87,120
24 21 4,950
31 21 82,170 63,150
Account: Customer Refunds Payable Account No. 211
Post. Balance
2019
20 20 13,230
26 21 7,500 29,270
31 Adjusting 22 60,000 89,270
Account: Salaries Payable Account No. 212
Post. Balance
2019
May 31 Adjusting 22 13,600 13,600
6-57

Account: Lynn Tolley, Capital Account No. 310
Post. Balance
2018
June 1 Balance  685,300
2019
May 31 Closing 23 741,855
31 Closing 23 135,000 1,292,155
Account: Lynn Tolley, Drawing Account No. 311
Post. Balance
2019
31 Closing 23 135,000 — —
Account: Sales Account No. 410
Post. Balance
2019
May 1 Balance  5,069,000
6 20 67,130
10 20 54,000
20 21 108,900
30 21 77,175 5,376,205
31 Adjusting 22 60,000 5,316,205
31 Closing 23 5,316,205 — —
6-58

Account: Cost of Merchandise Sold Account No. 510
Post. Balance
2019
May 1 Balance  2,823,000
6 20 41,000
10 20 32,000
20 21 70,000
30 21 47,000 3,013,000
31 Adjusting 22 13,950
31 Adjusting 22 35,000 2,991,950
31 Closing 23 2,991,950 — —
Account: Sales Salaries Expense Account No. 520
Post. Balance
2019
28 21 56,000 720,800
31 Adjusting 22 7,000 727,800
31 Closing 23 727,800 — —
Account: Advertising Expense Account No. 521
Post. Balance
2019
15 20 11,000 292,000
31 Closing 23 292,000 — —
Account: Depreciation Expense Account No. 522
Post. Balance
2019
May 31 Adjusting 22 14,000 14,000
31 Closing 23 14,000 — —
6-59

Account: Stores Supplies Expense Account No. 523
Post. Balance
2019
May 31 Adjusting 22 9,800 9,800
31 Closing 23 9,800 — —
Account: Miscellaneous Selling Expense Account No. 529
Post. Balance
2019
31 Closing 23 12,600 — —
Account: Office Salaries Expense Account No. 530
Post. Balance
2019
28 21 29,000 411,100
31 Adjusting 22 6,600 417,700
31 Closing 23 417,700 — —
Account: Rent Expense Account No. 531
Post. Balance
2019
1 20 5,000 88,700
31 Closing 23 88,700 — —
Account: Insurance Expense Account No. 532
Post. Balance
2019
May 31 Adjusting 22 12,000 12,000
31 Closing 23 12,000 — —
6-60

Account: Miscellaneous Administrative Expense Account No. 539
Post. Balance
2019
31 Closing 23 7,800 — —
6-61
1. and 2. JOURNAL Page 20
Post.
Date Ref. Debit Credit
2019
May 1 Rent Expense 531 5,000
Cash 110 5,000
3 Merchandise Inventory 115 35,280

Accounts Payable—Martin Co. 210 35,280
[$36,000 – ($36,000 × 2%)]
4 Merchandise Inventory 115 600

Cash 110 600
6 Accounts Receivable—Korman Co. 112 67,130

Sales 410 67,130
[$68,500 – ($68,500 × 2%)]
6 Cost of Merchandise Sold 510 41,000

Merchandise Inventory 115 41,000
7 Cash 110 22,300

Accounts Receivable—Halstad Co. 112 22,300
10 Cash 110 54,000

Sales 410 54,000

13 Accounts Payable—Martin Co. 210 35,280

Cash 110 35,280
15 Advertising Expense 521 11,000

Cash 110 11,000
16 Cash 110 67,130

Accounts Receivable—Korman Co. 112 67,130

Cash 110 18,700
19 Accounts Payable—Buttons Co. 210 33,450

Cash 110 33,450
20 Customer Refunds Payable 211 13,230

Cash 110 13,230
[$13,500 – ($13,500 × 2%)]

Estimated Returns Inventory 116 8,000
6-62

Page 21
Post.
Ref. Debit Credit
2019
May 20 Accounts Receivable—Crescent Co. 112 108,900
Sales 410 108,900
[$110,000 – ($110,000 × 1%)]

21 Accounts Receivable—Crescent Co. 112 2,300

Cash 110 2,300
21 Cash 110 42,900

Accounts Receivable—Gee Co. 112 42,900

Accounts Payable—Osterman Co. 210 87,120
[$88,000 – ($88,000 × 1%)]
24 Accounts Payable—Osterman Co. 210 4,950

26 Customer Refunds Payable 211 7,500

Cash 110 7,500

28 Sales Salaries Expense 520 56,000

Office Salaries Expense 530 29,000
Cash 110 85,000
29 Store Supplies 118 2,400

Cash 110 2,400
30 Accounts Receivable—Turner Co. 112 77,175

Sales 410 77,175
[$78,750 – ($78,750 × 2%)]

30 Cash 110 111,200

Accounts Receivable—Crescent Co. 112 111,200
31 Accounts Payable—Osterman Co. 210 82,170

Cash 110 82,170
($87,120 – $4,950)
6-63

3.
PALISADE CREEK CO.
Unadjusted Trial Balance
May 31, 2019
Account Debit Credit
No. Balances Balances
Cash 110 84,500
Accounts Receivable 112 245,875
Prepaid Insurance 117 16,800
Store Supplies 118 13,800
Store Equipment 123 569,500
Accumulated Depreciation—Store Equipment 124 56,700
Accounts Payable 210 63,150
Customer Refunds Payable 211 29,270
Salaries Payable 212 —
Lynn Tolley, Capital 310 685,300
Lynn Tolley, Drawing 311 135,000
Sales 410 5,376,205
Cost of Merchandise Sold 510 3,013,000
Sales Salaries Expense 520 720,800
Advertising Expense 521 292,000
Depreciation Expense 522 —
Store Supplies Expense 523 —
Miscellaneous Selling Expense 529 12,600
Rent Expense 531 88,700
Insurance Expense 532 —
Miscellaneous Administrative Expense 539 7,800
6,210,625 6,210,625
6-64

4. and 6. JOURNAL Page 22
Post.
2019 Adjusting Entries
May 31 Cost of Merchandise Sold 510 13,950
Inventory shrinkage
($583,950 – $570,000).
31 Insurance Expense 532 12,000

Insurance expired.
31 Store Supplies Expense 523 9,800

Supplies used ($13,800 – $4,000).
31 Depreciation Expense 522 14,000

Accum. Depr.—Store Equipment 124 14,000
Store equipment depreciation.
31 Sales Salaries Expense 520 7,000

Salaries Payable 212 13,600
Accrued salaries.
31 Sales 410 60,000

31 Estimated Returns Inventory 116 35,000

Cost of Merchandise Sold 510 35,000
6-65

7. PALISADE CREEK CO.
Adjusted Trial Balance
May 31, 2019
Cash 110 84,500
Sales 410 5,316,205
Depreciation Expense 522 14,000
Store Supplies Expense 523 9,800
Insurance Expense 532 12,000
Miscellaneous Administrative Expense 539 7,800
6,238,225 6,238,225
6-66

Income Statement
Sales $5,316,205
Expenses:
Selling expenses:
Depreciation expense 14,000
Store supplies expense 9,800
Rent expense 88,700
Miscellaneous administrative
expense 7,800
PALISADE CREEK CO.

Lynn Tolley, capital, June 1, 2018 $ 685,300
Net income for the year $ 741,855
Increase in owner’s equity 606,855
Lynn Tolley, capital, May 31, 2019 $1,292,155
6-67

PALISADE CREEK CO.
Balance Sheet
May 31, 2019
Assets
Current assets:
Cash $ 84,500
Merchandise inventory 570,000
Store supplies 4,000
Total current assets $ 959,375
Store equipment $569,500
Less accumulated depreciation 70,700
Total property, plant, and equipment 498,800
Liabilities
Owner’s Equity
Lynn Tolley, capital 1,292,155
6-68

9. JOURNAL Page 23
Post.
May 31 Sales 410 5,316,205
Depreciation Expense 522 14,000
Store Supplies Expense 523 9,800
Insurance Expense 532 12,000
Miscellaneous Administrative Exp. 539 7,800
31 Lynn Tolley, Capital 310 135,000

6-69

Post-Closing Trial Balance
May 31, 2019
Cash 110 84,500
Lynn Tolley, Capital 310 1,292,155
1,528,875 1,528,875
6-70
Comp. Problem 2 (Concluded)
5. (Optional)*
PALISADE CREEK CO.
End-of-Period Spreadsheet (Work Sheet)
Unadjusted Adjusted Income Balance
Trial Balance Adjustments Trial Balance Statement Sheet
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 84,500 84,500 84,500
Accounts Receivable 245,875 245,875 245,875
Merchandise Inventory 583,950 (a) 13,950 570,000 570,000
Estimated Returns Inventory 15,200 (g) 35,000 50,200 50,200
Prepaid Insurance 16,800 (b) 12,000 4,800 4,800
Store Supplies 13,800 (c) 9,800 4,000 4,000
Store Equipment 569,500 569,500 569,500
Accum. Depr.—Store Equip. 56,700 (d) 14,000 70,700 70,700
Accounts Payable 63,150 63,150 63,150
Customer Refunds Payable 29,270 (f) 60,000 89,270 89,270
Salaries Payable (e) 13,600 13,600 13,600
Lynn Tolley, Capital 685,300 685,300 685,300
Lynn Tolley, Drawing 135,000 135,000 135,000
Sales 5,376,205 (f) 60,000 5,316,205 5,316,205
Cost of Merchandise Sold 3,013,000 (a) 13,950 (g) 35,000 2,991,950 2,991,950
Sales Salaries Expense 720,800 (e) 7,000 727,800 727,800
Advertising Expense 292,000 292,000 292,000
Depreciation Expense (d) 14,000 14,000 14,000
Store Supplies Expense (c) 9,800 9,800 9,800
Miscellaneous Selling Expense 12,600 12,600 12,600
Office Salaries Expense 411,100 (e) 6,600 417,700 417,700
Rent Expense 88,700 88,700 88,700
Insurance Expense (b) 12,000 12,000 12,000
Miscellaneous Admin. Expense 7,800 7,800 7,800
6,210,625 6,210,625 158,350 158,350 6,238,225 6,238,225 4,574,350 5,316,205 1,663,875 922,020
Net income 741,855 741,855
5,316,205 5,316,205 1,663,875 1,663,875
*This solution is applicable only if the end-of-period spreadsheet (work sheet) is used.
6-71
CASES & PROJECTS

CP 6-1
Margie has been placed in a very difficult position. Someone she trusts and respects
has asked her to do something that is clearly unethical. If Margie makes the
adjusting entry, her boss could very well be terminated. Yet, Margie’s primary
responsibility has to be on preparing relevant and representationally faithful financial
information that is useful for decision making. Margie should, therefore, make the
appropriate adjusting entry. Being right, however, doesn’t always make a decision
easy. Margie’s actions could result in the termination of her boss and mentor.
For financial information to be representationally faithful, it must be free of
bias. The company president is clearly trying to pressure the accounting department
to create biased financial statements, which is inappropriate. While Margie should not
bend on the issue of making the adjusting entry, she should bring this issue to the
attention of the internal audit department or the board of directors.
CP 6-2
Standards of Ethical Conduct for Management Accountants requires management
accountants to perform in a competent manner and to comply with relevant laws,
regulations, and technical standards. If Shelby Davey intentionally subtracted
the discount knowing that the discount period had expired, he would have
behaved in an unprofessional manner. Such behavior could eventually jeopardize
Bontanica Company’s buyer/supplier relationship with Whitetail Seed Co.
CP 6-3
A sample solution based on Nike Inc.'s Form 10-K for the fiscal year ended
May 31, 2015, follows:
1. a. $14,067 million in 2015; $12,446 million in 2014; $11,034 million in 2013
b. 46.0% ($14,067 million/$30,601 million) in 2015; 44.8% ($12,446 million/$27,799
million) in 2014; 43.6% ($11,034 million/$25,313 million) in 2013
c. $4,175 ($14,067 – $9,892) million in 2015; $3,680 ($12,446 – $8,766) million in 2014;
$3,238 ($11,034 – $7,796) million in 2013
d. 13.7% increase in 2015 ($505 million/$3,680 million); 13.3% increase in 2014
$432 million/$3,238 million)
e. $3,273 million in 2015; $2,693 million in 2014; $2,451 million in 2013
f. 21.5% increase in 2015 ($580 million/$2,693 million); 9.9% increase in 2014
($242 million/$2,451 million)
2. The company's financial performance has improved between 2013 and 2014 and
again between 2014 and 2015. All of the above measures have improved during
this period.
6-72
CP 6-4
To: Suzi Nomro
President, Watercraft Supply Company
From: A+ student
Re: Proposal to Increase Net Income
If the proposed changes in credit terms increase sales by 10% as expected, and if the
ratio of cost of merchandise sold to sales remails at 60%, this proposal has the potential
to increase net income by $64,200, from $321,000 to $385,200. This increase will be driven
by a $135,000 increase in sales. Cost of merchandise sold is also expected to increase by
60% of the sales increase, or $81,000. While store supplies and miscellaneous selling
expenses will increase proportionally to sales, total selling expenses will decrease
by $10,200 because of the change in freight terms. By shipping goods FOB shipping
point rather than FOB destination, the company will save $12,000 in freight costs. This
will result in an increase in net income of $64,200.
There are several potential risks associated with this type of proposal. First, the
accuracy of the estimates used to project the effects of the proposed changes are not
certain. If the increase in sales does not materialize, Watercraft Supply Company could
incur significant costs of carrying excess inventory stocked in anticipation of increasing
sales. At the same time it is incurring these additional inventory costs, cash collections
from customers will be reduced by the amount of the discounts. This could create a
liquidity problem for Watercraft Supply.
Another potential risk arises from the proposed change in shipping terms. Watercraft
Supply assumes that this change will have no effect on sales. However, customers may
object to this change and seek other vendors with more favorable terms. Hence, an
unanticipated decline in sales could occur because of this change.
While the anticipated outcomes indicate that the company should pursue the proposal,
financial projections are inherently uncertain, and there is no guarantee that the actual
results will match those in the projections. Management should test the proposed
changes with the company's customer base before proceeding. As with any business
decision, risks such as those mentioned above must be considered thoroughly before
final action is taken. Supporting projections are provided on the following page.
6-73
CP 6-4 (Concluded)
1. WATERCRAFT SUPPLY COMPANY
Projected Income Statement
For the Year Ended October 31, 2020
Revenues:
Sales $1,485,000
Interest revenue 15,000
Total revenues $1,500,000
Expenses:
Cost of merchandise sold $891,000
Selling expenses 129,800
Notes:
a. Projected sales
[$1,350,000 + (10% × $1,350,000)]………………………… $1,485,000
b. Projected cost of merchandise sold

($1,485,000 × 60%)…………………………………………… $ 891,000
c. Total selling expenses for year ended October 31, 2020… $ 140,000
Increase in store supplies expense
($12,000 × 10%)…………………………………………… $1,200
Increase in miscellaneous selling expense
($6,000 × 10%)……………………………………………… 600 1,800
Less delivery expenses………………………………………… (12,000)
Projected total selling expenses……………………………… $ 129,800
6-74
CP 6-5
Cam Pfeifer is correct. The accounts payable due to suppliers could be included on
the balance sheet at an amount of $314,500 ($269,500 + $45,000). This is the
amount that will be expected to be paid to satisfy the obligation (liability) to
suppliers. However, this is proper only if Rustic Furniture Co. has a history of
taking all purchases discounts, has a properly designed accounting system to
identify available discounts, and has sufficient liquidity (cash) to pay the accounts
payable within the discount period. In this case, Rustic Furniture Co. apparently
meets these criteria, since it has a history of taking all available discounts, as
indicated by Mitzi Wheeler. Thus, Rustic Furniture Co. could report total accounts
payable of $314,500 on its balance sheet. Merchandise inventory would also need
to be reduced by the discount of $5,500 in order to maintain consistency in
approach.
CP 6-6
1. If Mark doesn’t need the stereo immediately (by the next day), Wholesale Stereo
offers the best buy, as shown below.
Wholesale Stereo:
List price……………………………………………………………………… $1,200.00
Shipping and handling (not including next-day air)…………………… 49.99
Total…………………………………………………………………………… $1,249.99
Tru-Sound Systems:
List price……………………………………………………………………… $1,175.00
Sales tax (9%).……………………………………………………………… 105.75
Total…………………………………………………………………………… $1,280.75
Even if the 2% cash discount offered by Tru-Sound Systems is considered,

Wholesale Stereo still offers the best buy, as shown below.
List price……………………………………………………………………… $1,175.00

Less 2% cash discount.…………………………………………………… 23.50
Subtotal……………………………………………………………………… $1,151.50
Sales tax (9%).……………………………………………………………… 103.64
Total…………………………………………………………………………… $1,255.14
If Mark needs the stereo immediately (the next day), then Tru-Sound Systems has
the best price. This is because a shipping and handling charge of $89.99 would be
added to the Wholesale Stereo, as shown below.
Wholesale Stereo list price………………………………………………… $1,200.00

Next-day freight charge…………………………………………………… 89.99
Total…………………………………………………………………………… $1,289.99
6-75
CP 6-6 (Concluded)
Because both Wholesale Stereo and Tru-Sound Systems will accept Mark’s VISA,
the ability to use a credit card would not affect the buying decision. Tru-Sound
Systems will, however, allow Mark to pay his bill in three installments (the first
due immediately). This would allow Mark to save some interest charges on his
VISA for two months. If we assume that Mark would have otherwise used his VISA
and that Mark’s VISA carries an interest of 1.5% per month on the unpaid balance,
the potential interest savings would be calculated as follows:
Tru-Sound Systems price (see previous page)………………………………… $1,280.75

Less first installment (down payment)………………………………………… 426.92
Remaining balance………………………………………………………………… $ 853.83
Interest for first month at 1.5% ($853.83 × 1.5%)……………………………… $ 12.81
Remaining balance ($853.83 + $12.81)…………………………………………… $ 866.64
Less second installment…………………………………………………………… 426.92
Remaining balance………………………………………………………………… $ 439.72
Interest for second month at 1.5% ($439.72 × 1.5%)………………………… $ 6.60
The total interest savings would be $19.41 ($12.81 + $6.60). This interest
savings still would not be enough to offset the price advantage of Wholesale
Stereo, as shown below.
Tru-Sound Systems price (see above)……………………………………… $1,280.75

Less interest savings…………………………………………………………… 19.41
Total………………………………………………………………………………… $1,261.34
2. Other considerations in buying the stereo include the ability to have the stereo
repaired locally. In addition, Tru-Sound Systems’ employees would presumably
be available to answer questions on the operation and installation of the stereo.
Also, if Mark purchased the stereo from Tru-Sound Systems, he would have
the stereo the same day rather than the next day, which is the earliest
Wholesale Stereo could deliver the stereo.
6-76
CP 6-7
Note to Instructors: The purpose of this activity is to familiarize students with the
variety of possible purchase prices for a fairly common household item. Students
should report several alternative prices when they consider the source of the
purchase and the other factors that affect the purchase (e.g., delivery, financing, and
warranties).
Consider going to www.cnet.com and entering a search for “55 inch LED, LCD TV.”
Pick one TV model that offers a range of prices from different stores and
compare shipping and payment differences among companies. For example, the
Samsung UNJS8500 TV has a range of prices of $1,619.95 to $1,799.99. Some stores
offer free shipping. You might consider offering the student group(s) that comes up
with the lowest price extra credit points for homework.
6-77

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CHAPTER 6

ACCOUNTING FOR MERCHANDISING BUSINESSES

1. Merchandising businesses acquire merchandise for resale to customers. It is the selling of

Cost of Merchandise Sold 43,500

c. Customer Refunds Payable 2,300

Merchandise Inventory 1,600

Cost of Merchandise Sold 55,500

c. Customer Refunds Payable 10,400

Merchandise Inventory 6,500

Cost of Merchandise Sold 19,000

Accounts Payable—Sather Co. 31,164

Cost of Merchandise Sold 67,200

Accounts Receivable—Blue Star Co. 1,800

Blue Star Co. journal entries:

Accounts Payable—Shore Co. 111,560

b. Estimated Returns Inventory 15,000

b. Estimated Returns Inventory 8,000

b. Accounts Payable [$9,000 – ($9,000 × 2%)] 8,820

c. Accounts Payable 64,680

b. Accounts Payable—Wright Co. 88,200

c. Accounts Payable*—Wright Co. [$18,000 – ($18,000 × 2%)] 17,640

d. Merchandise Inventory 10,000

c. Accounts Receivable—Wright Co. 17,640

d. Merchandise Inventory 10,000

Cost of Merchandise Sold 72,000

Cost of Merchandise Sold 400,000

Cost of Merchandise Sold 1,250,000

Cost of Merchandise Sold 230,000

b. Customer Refunds Payable 27,440

Merchandise Inventory 16,800

Cost of Merchandise Sold 152,700

b. Customer Refunds Payable 30,000

Merchandise Inventory 17,500

b. Accounts Payable—Showcase Co. 30,000

c. Accounts Payable—Showcase Co. 224,500

Cost of Merchandise Sold 37,500

b. Sales Tax Payable 39,650

b. Estimated Returns Inventory 400,000

31 Estimated Returns Inventory 16,000

3 Merchandise Inventory 3,100

a. $379,900 ($463,400 – $83,500)

b. The major advantage of the multiple-step form of income statement is that

A correct income statement is as follows:

31 Kathy Melman, Capital 70,000

31 Peter Bronsky, Capital 15,000

Appendix Ex. 6-33

Appendix Ex. 6-34

6 Accounts Payable 2,750

13 Accounts Receivable [$37,300 – ($37,300 × 1%)] 36,927

15 Delivery Expense 215

17 Accounts Payable 15,450

Appendix Ex. 6-35

Appendix Ex. 6-36

b. $2,310,000 ($5,850,000 – $3,540,000)

Appendix Ex. 6-37

Appendix Ex. 6-38

Appendix Ex. 6-39

Appendix Ex. 6-40

31 Pat Kirwan, Capital 65,000