Financial Accounting Testbank Part 6

^a 6. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

^a 7. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

TRUE-FALSE STATEMENTS

1. Retailers and wholesalers are both considered merchandisers.

Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

2. The steps in the accounting cycle are different for a merchandising company than for a service company.

Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Sales minus operating expenses equals gross profit.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

5. A periodic inventory system requires a detailed inventory record of inventory items.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

6. Freight terms of FOB Destination means that the seller pays the freight costs.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

8. Sales revenues are earned during the period cash is collected from the buyer.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

11. Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

13. A company's unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. A merchandising company has different types of adjusting entries than a service company.

Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17. Operating expenses are different for merchandising and service enterprises.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

18. Net sales appears on both the multiple-step and single-step forms of an income statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

19. A multiple-step income statement provides users with more information about a company’s income performance.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

20. The multiple-step form of income statement is easier to read than the single-step form.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

21. Inventory is classified as a current asset in a classified balance sheet.

Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

27. Gross profit represents the merchandising profit of a company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

28. Gross profit is a measure of the overall profitability of a company.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. Gross profit rate is computed by dividing cost of goods sold by net sales.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

^a 30. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to determine net purchases.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

Ans: F, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 34. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 35. The steps in preparing a worksheet for a merchandising company are different than for a service company.

Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 36. A merchandising company generally has the same types of adjustments as a service company.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 37. The major difference between the balance sheet of a service company and a merchandiser is inventory.

Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

38. Inventory is reported as a long-term asset on the balance sheet.

Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

39. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

40. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

41. Sales revenue should be recorded in accordance with the matching principle.

Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

42. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

43. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

44. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

45. The single-step income statement is so named because only one step, subtracting total expenses from total revenues, is required in determining net income or net loss.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

46. Income from operations is gross profit less

a. financing expenses.

b. operating expenses.

c. other expenses and losses.

d. other expenses.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

47. An enterprise which sells goods to customers is known as a

a. proprietorship.

b. corporation.

c. retailer.

d. service firm.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

48. Which of the following would not be considered a merchandising company?

a. Retailer

b. Wholesaler

c. Service firm

d. Dot Com firm

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

49. A merchandising company that sells directly to consumers is a

a. retailer.

b. wholesaler.

c. broker.

d. service company.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

50. Two categories of expenses for merchandising companies are

a. cost of goods sold and financing expenses.

b. operating expenses and financing expenses.

c. cost of goods sold and operating expenses.

d. sales and cost of goods sold.

Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

51. The primary source of revenue for a wholesaler is

a. investment income.

b. service fees.

c. the sale of merchandise.

d. the sale of fixed assets the company owns.

Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

52. Sales revenue less cost of goods sold is called

a. gross profit.

b. net profit.

c. net income.

d. marginal income.

Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53. After gross profit is calculated, operating expenses are deducted to determine

a. gross margin.

b. net income.

c. gross profit on sales.

d. net margin.

Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

54. Cost of goods sold is determined only at the end of the accounting period in

a. a perpetual inventory system.

b. a periodic inventory system.

c. both a perpetual and a periodic inventory system.

d. neither a perpetual nor a periodic inventory system.

Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

55. Which of the following expressions is incorrect?

a. Gross profit – operating expenses = net income

b. Sales revenue – cost of goods sold – operating expenses = net income

c. Net income + operating expenses = gross profit

d. Operating expenses – cost of goods sold = gross profit

Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

56. Crain Department Store uses a perpetual inventory system. At year-end, the balance in the Merchandise inventory account is $1,500,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory

a. is unnecessary.

b. is required to determine the cost of goods sold for the period.

c. probably will indicate more than $1,500,000 in merchandise on hand.

d. probably will indicate less than $1,500,000 in merchandise on hand.

Ans: D, LO: 1, BT: K, Difficulty: Easy, TOT: 1.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

57. The freight cost incurred by the seller on outgoing merchandise

a. reduces gross profit.

b. is used in the calculation of net sales.

c. is an operating expense.

d. is part of cost of goods sold.

Ans: C, LO: 2, BT: K, Difficulty: Easy, TOT: 1.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

58. Audio Express Co. uses a perpetual inventory system and records purchases of merchandise at net cost. The company recently purchased 200 CDs at an invoice price of
$6,000 and term of 2/10, n/30. Half of these discs were incorrectly labeled and were returned immediately to the supplier, If the discount period has expired, the journal entry to record payment of this invoice includes a

a. debit to Merchandise Inventory for $3,000.

b. credit to Cash for $3,000.

c. debit to an expense account for $60.

d. credit to cash for $2,940.

Ans: B, LO: 2, BT: K, Difficulty: Easy, TOT: 1.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

59. Greyson Manufacturing purchased switches at an invoice price of $4,000 and term of 2/10, n/30. Half of the switches were labeled inaccurately and were returned immediately to the supplier. If Greyson pay the remaining amount of the invoice within the discount period, what should that amount be?

a. $2,080.

b. $1,960.

c. $1,920.

d. $1,200.

Ans: B, LO: 2, BT: K, Difficulty: Easy, TOT: 1.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

60. Detailed records of goods held for resale are not maintained under a

a. perpetual inventory system.

b. periodic inventory system.

c. double entry accounting system.

d. single entry accounting system.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

61. A perpetual inventory system would likely be used by each of the following except a(an)

a. candy store.

b. hardware store.

c. grocery store.

d. automobile dealership.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

62. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.

b. Perpetual inventory systems require more detailed inventory records.

c. A periodic system requires cost of goods sold be determined after each sale.

d. A perpetual system determines cost of goods sold only at the end of the accounting period.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

63. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.

b. on a monthly basis.

c. on an annual basis.

d. with each sale.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

64. If a company determines cost of goods sold each time a sale occurs, it

a. must have a computer accounting system.

b. uses a combination of the perpetual and periodic inventory systems.

c. uses a periodic inventory system.

d. uses a perpetual inventory system.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

65. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

a. Inventory account.

b. Purchases account.

c. Supplies account.

d. Cost of Goods Sold account.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

66. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

a. Accounts Payable.

b. Purchase Returns and Allowances.

c. Sales Revenue.

d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

67. The Inventory account is used in each of the following except the entry to record

a. goods purchased on account.

b. the return of goods purchased.

c. payment of freight on goods sold.

d. payment within the discount period.

Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

68. A buyer would record a payment within the discount period under a perpetual inventory system by crediting

a. Accounts Payable.

b. Inventory.

c. Purchase Discounts.

d. Sales Discounts.

Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

69. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

a. Inventory account will be increased.

b. Inventory account will not be affected.

c. seller will bear the freight cost.

d. carrier will bear the freight cost.

Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

70. Freight costs paid by a seller on merchandise sold to customers will cause an increase

a. in the selling expense of the buyer.

b. in operating expenses for the seller.

c. to the cost of goods sold of the seller.

d. to a contra-revenue account of the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

71. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the

a. seller.

b. buyer.

c. transportation company.

d. buyer and the seller.

Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

72. Glenn Company purchased merchandise inventory with an invoice price of $7,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?

a. $6,300

b. $6,440

c. $6,860

d. $7,000

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

73. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

a. 20%

b. 24%

c. 36%

d. 72%

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

74. If a company is given credit terms of 2/10, n/30, it should

a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.

b. pay within the discount period and recognize a savings.

c. pay within the credit period but don't take the trouble to invest the cash while waiting to pay the bill.

d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.

Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

75. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

a. Inventory.

b. Purchase Discounts.

c. Purchase Allowance.

d. Sales Discounts.

Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

76. Jake’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $50,000, terms 2/10, n/30.

Returned $1,000 of the shipment for credit.

Paid $250 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory increased by

a. $48,020.

b. $48,265.

c. $48,270.

d. $49,250.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

77. Costner’s Market recorded the following events involving a recent purchase of merchandise:

Received goods for $20,000, terms 2/10, n/30.

Returned $400 of the shipment for credit.

Paid $100 freight on the shipment.

Paid the invoice within the discount period.

As a result of these events, the company’s inventory

a. increased by $19,208.

b. increased by $19,306.

c. increased by $19,308.

d. increased by $19,700.

Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

78. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods are recorded in

a. Freight Expense

b. Freight - In

c. Inventory

d Freight - Out

Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

79. Glover Co. returned defective goods costing $4,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:

a. Accounts Payable................... 4,000

Inventory 4,000

b. Accounts Payable................... 4,000

Inventory......... 120

Cash....... 4,120

c. Accounts Payable................... 4,000

Purchase Discounts....... 120

Inventory 3,880

d. Accounts Payable................... 4,000

Inventory 120

Cash....... 3,880

Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

80. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $8,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:

a. Accounts Payable................... 8,000

Cash....... 8,000

b. Accounts Payable................... 7,760

Cash....... 7,760

c. Accounts Payable................... 8,000

Purchase Returns and Allowances...... 240

Cash....... 7,760

d. Accounts Payable................... 8,000

Inventory 240

Cash....... 7,760

Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

81. On July 9, Sheb Company sells goods on credit to Wooley Company for $3,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:

a. Cash................ 3,000

Accounts Receivable..... 3,000

b. Cash................ 3,000

Sales Discounts............. 30

Accounts Receivable..... 2,970

c. Cash................ 2,970

Sales Discounts...................... 30

Accounts Receivable..... 3,000

d. Cash................ 3,030

Sales Discounts............. 30

Accounts Receivable..... 3,000

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

82. On November 2, 2012, Kasdan Company has cash sales of $4,500 from merchandise having a cost of $2,700. The entries to record the day's cash sales will include:

a. a $2,700 credit to Cost of Goods Sold.

b. a $4,500 credit to Cash.

c. a $2,700 credit to Inventory.

d a $4,500 debit to Accounts Receivable.

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

83. A credit sale of $2,000 is made on April 25, terms 2/10, n/30, on which a return of $125 is granted on April 28. What amount is received as payment in full on May 4?

a. $1,837.50

b. $1,875.00

c. $1,960.00

d $2,000.00

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

84. The entry to record the receipt of payment within the discount period on a sale of $1,000 with terms of 2/10, n/30 will include a credit to

a. Sales Discounts for $20.

b. Cash for $980.

c. Accounts Receivable for $1,000.

d. Sales Revenue for $1,000.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

85. The collection of a $4,000 account within the 2 percent discount period will result in a

a. debit to Sales Discounts for $80.

b. debit to Accounts Receivable for $3,920.

c. credit to Cash for $3,920.

d. credit to Accounts Receivable for $3,920.

Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

86. Company X sells $600 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check?

a. $420

b. $480

c. $540

d. $588

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

87. Cleese Company sells merchandise on account for $3,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $2,352

b. $2,400

c. $2,940

d. $2,952

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

88. The collection of a $1,200 account after the 2 percent discount period will result in a

a. debit to Cash for $1,176.

b. debit to Accounts Receivable for $1,200.

c. debit to Cash for $1,200.

d. debit to Sales Discounts for $24.

Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

89. The collection of a $800 account after the 2 percent discount period will result in a

a. debit to Cash for $784.

b. credit to Accounts Receivable for $800.

c. credit to Cash for $800.

d. debit to Sales Discounts for $16.

Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

90. In a perpetual inventory system, the Cost of Goods Sold account is used

a. only when a cash sale of merchandise occurs.

b. only when a credit sale of merchandise occurs.

c. only when a sale of merchandise occurs.

d. whenever there is a sale of merchandise or a return of merchandise sold.

Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

91. Sales revenues are usually considered earned when

a. cash is received from credit sales.

b. an order is received.

c. goods have been transferred from the seller to the buyer.

d. adjusting entries are made.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

92. A sales invoice is a source document that

a. provides support for goods purchased for resale.

b. provides evidence of incurred operating expenses.

c. provides evidence of credit sales.

d. serves only as a customer receipt.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

93. Sales revenue

a. may be recorded before cash is collected.

b. will always equal cash collections in a month.

c. only results from credit sales.

d. is only recorded after cash is collected.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

94. The journal entry to record a credit sale is

a. Cash

Sales Revenue

b. Cash

Service Revenue

c. Accounts Receivable

Service Revenue

d. Accounts Receivable

Sales Revenue

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

95. A credit memorandum is prepared when

a. an employee does a good job.

b. goods are sold on credit.

c. goods that were sold on credit are returned.

d. customers refuse to pay their accounts.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

96. The Sales Returns and Allowances account is classified as a(n)

a. asset account.

b. contra asset account.

c. expense account.

d. contra revenue account.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

97. A credit memorandum is used as documentation for a journal entry that requires a debit to

a. Sales Revenue and a credit to Cash.

b. Sales Returns and Allowances and a credit to Accounts Receivable.

c. Accounts Receivable and a credit to a contra-revenue account.

d. Cash and a credit to Sales Returns and Allowances.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

98. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales

a. discount.

b. return.

c. contra asset.

d. allowance.

Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

99. A credit sale of $2,700 is made on July 15, terms 2/10, n/30, on which a return of $150 is granted on July 18. What amount is received as payment in full on July 24?

a. $2,499

b. $2,550

c. $2,646

d $2,700

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

100. When goods are returned that relate to a prior cash sale,

a. the Sales Returns and Allowances account should not be used.

b. the cash account will be credited.

c. Sales Returns and Allowances will be credited.

d. Accounts Receivable will be credited.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

101. The Sales Returns and Allowances account does not provide information to management about

a. possible inferior merchandise.

b. the percentage of credit sales versus cash sales.

c. inefficiencies in filling orders.

d. errors in overbilling customers.

Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

102. A Sales Returns and Allowances account is not debited if a customer

a. returns defective merchandise.

b. receives a credit for merchandise of inferior quality.

c. utilizes a prompt payment incentive.

d. returns goods that are not in accordance with specifications.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

103. As an incentive for customers to pay their accounts promptly, a business may offer its customers

a. a sales discount.

b. free delivery.

c. a sales allowance.

d. a sales return.

Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

104. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that

a. the customer must pay the bill within 10 days.

b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.

c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.

d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.

Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

105. A sales discount does not

a. provide the purchaser with a cash saving.

b. reduce the amount of cash received from a credit sale.

c. increase a contra-revenue account.

d. increase an operating expense account.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

106. Company A sells $1,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check?

a. $1,050

b. $1,200

c. $1,350

d. $1,470

Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

107. Kern Company sells merchandise on account for $6,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,200 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

a. $4,704

b. $4,800

c. $5,880

d. $5,904

Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

108. Carter Company sells merchandise on account for $3,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $450 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?

a. Cash................ 2,550

Accounts Receivable..... 2,550

b. Cash................ 2,499

Sales Returns and Allowances..................... 501

Accounts Receivable..... 3,000

c. Cash................ 2,499

Sales Returns and Allowances..................... 450

Sales Discounts...................... 51

Accounts Receivable..... 3,000

d. Cash................ 2,940

Sales Discounts...................... 60

Sales Returns and Allowances............ 450

Accounts Receivable..... 2,550

Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

109. Which of the following would not be classified as a contra account?

a. Sales Revenue

b. Sales Returns and Allowances

c. Accumulated Depreciation

d. Sales Discounts

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

110. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances

b. Sales Discounts

c. Sales Revenue

d. Selling Expense

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

111. With respect to the income statement,

a. contra-revenue accounts do not appear on the income statement.

b. sales discounts increase the amount of sales.

c. contra-revenue accounts increase the amount of operating expenses.

d. sales discounts are included in the calculation of gross profit.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

112. When a seller grants credit for returned goods, the account that is credited is

a. Sales Revenue.

b. Sales Returns and Allowances.

c. Inventory.

d. Accounts Receivable.

Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

113. The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are

a. credit, credit, credit.

b. debit, credit, debit.

c. credit, debit, debit.

d. credit, debit, credit.

Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

114. All of the following are contra revenue accounts except

a. sales revenue.

b. sales allowances.

c. sales discounts.

d. sales returns.

Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

115. A merchandising company using a perpetual system will make

a. the same number of adjusting entries as a service company does.

b. one more adjusting entry than a service company does.

c. one less adjusting entry than a service company does.

d. different types of adjusting entries compared to a service company.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

116. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of

a. sales revenue.

b. inventory.

c. sales discounts.

d. freight-out.

Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

117. A merchandising company using a perpetual system may record an adjusting entry by

a. debiting Income Summary.

b. crediting Income Summary.

c. debiting Cost of Goods Sold.

d. debiting Sales Revenue.

Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

118. The operating cycle of a merchandiser is

a. always one year in length.

b. generally longer than it is for a service company.

c. about the same as for a service company.

d. generally shorter than it is for a service company.

Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

119. When the physical count of Rosanna Company inventory had a cost of $4,300 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:

a. Cost of Goods Sold................ 200

Inventory 200

b. Inventory......... 200

Cost of Goods Sold....... 200

c. Income Summary................... 200

Inventory 200

d. Cost of Goods Sold................ 4,500

Inventory 4,500

Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

120. Arquette Company's financial information is presented below.

Sales $ ???? Cost of Goods Sold 270,000

Sales Returns and Allowances 20,000 Gross Profit ????

Net Sales 450,000

The missing amounts above are:

Sales Gross Profit

a. $470,000 $180,000

b. $430,000 $180,000

c. $470,000 $210,000

d. $430,000 $210,000

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

121. The sales revenue section of an income statement for a retailer would not include

a. Sales discounts.

b. Sales revenue.

c. Net sales.

d. Cost of goods sold.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

122. The operating expense section of an income statement for a wholesaler would not include

a. freight-out.

b. utilities expense.

c. cost of goods sold.

d. insurance expense.

Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

123. Income from operations will always result if

a. the cost of goods sold exceeds operating expenses.

b. revenues exceed cost of goods sold.

c. revenues exceed operating expenses.

d. gross profit exceeds operating expenses.

Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

124. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.

a. Gross profit

b. Operating expenses

c. Sales revenues

d. Cost of goods sold

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

125. Conrad Company reported the following balances at June 30, 2013:

Sales $10,800

Sales Returns and Allowances 400

Sales Discounts 200

Cost of Goods Sold 5,000

Net sales for the month is

a. $5,200.

b. $10,200.

c. $10,400.

d. $10,800.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

126. Income from operations appears on

a. both a multiple-step and a single-step income statement.

b. neither a multiple-step nor a single-step income statement.

c. a single-step income statement.

d. a multiple-step income statement.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

127. Gross profit does not appear

a. on a multiple-step income statement.

b. on a single-step income statement.

c. to be relevant in analyzing the operation of a merchandiser.

d. on the income statement if the periodic inventory system is used because it cannot be calculated.

Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

128. Which of the following is not a true statement about a multiple-step income statement?

a. Operating expenses are similar for merchandising and service enterprises.

b. There may be a section for nonoperating activities.

c. There may be a section for operating assets.

d. There is a section for cost of goods sold.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129. Which one of the following is shown on a multiple-step but not on a single-step income statement?

a. Net sales

b. Net income

c. Gross profit

d. Cost of goods sold

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

130. All of the following items would be reported as other expenses and losses except

a. freight-out.

b. casualty losses.

c. interest expense.

d. loss from employees' strikes.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. During 2013, merchandise inventory for Falcon Supplies Company decreased by $50,000. If the income statement for 2013 reported cost of goods sold of $650,000, purchases during the year must have been

a. $700,000.

b. $600,000.

c. $650,000.

d. There is not enough information given to determine the amount.

Ans: B, LO: 5, BT: AP, Difficulty: Easy, TOT: 2.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

132. At the beginning of 2013, Ralston Mills has an inventory of $300,000. Because sales growth was strong during 2013, the company wants to increase inventory on hand to $350,000 at December 31, 2013. If net sales for 2013 are expected to be $1,500,000, and the gross profit rate is expected to be 30%, what is the cost of the merchandise the company should expect to purchase during 2013?

a. $1,700,000.

b. $1,050,000.

c. $1,100,000.

d. $1,500,000.

Ans: C, LO: 5, BT: AP, Difficulty: Easy, TOT: 2.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

133. If cost of goods sold is $420,000 and the gross profit rate is 40%, what is the gross profit?

a. $280,000.

b. $252,000.

c. $700,000.

d. $168,000.

Ans: a, LO: 5, BT: AP, Difficulty: Easy, TOT: 2.0 Min. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting

134. If a company has net sales of $700,000 and cost of goods sold of $490,000, the gross profit percentage is

a. 15%.

b. 30%.

c. 70%.

d. 100%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

135. A company shows the following balances:

Sales Revenue $2,000,000

Sales Returns and Allowances 360,000

Sales Discounts 40,000

Cost of Goods Sold 1,120,000

What is the gross profit percentage?

a. 30%

b. 44%

c. 56%

d. 70%

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

136. The gross profit rate is computed by dividing gross profit by

a. cost of goods sold.

b. net income.

c. net sales.

d. sales revenue.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. In terms of liquidity, inventory is

a. more liquid than cash.

b. more liquid than accounts receivable.

c. more liquid than prepaid expenses.

d. less liquid than store equipment.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

138. On a classified balance sheet, inventory is classified as

a. an intangible asset.

b. property, plant, and equipment.

c. a current asset.

d. a long-term investment.

Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

139. Gross profit for a merchandiser is net sales minus

a. operating expenses.

b. cost of goods sold.

c. sales discounts.

d. cost of goods available for sale.

Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

140. During 2013, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000.

Parker’s gross profit is

a. $16,000.

b. $18,000.

c. $30,000.

d. $60,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

141. During 2013, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000.

Parker’s income from operations is

a. $12,000.

b. $18,000.

c. $30,000.

d. $60,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

142. During 2013, Parker Enterprises generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $30,000, operating expenses of $12,000 and a loss on the sale of equipment of $2,000.

Yoder’s net income is

a. $16,000.

b. $18,000.

c. $30,000.

d. $60,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

143. Financial information is presented below:

Operating Expenses $ 40,000

Sales Revenue 150,000

Cost of Goods Sold 90,000

Gross profit would be

a. $20,000.

b. $60,000.

c. $110,000.

d. $150,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

144. Financial information is presented below:

Operating Expenses $ 40,000

Sales Revenue 150,000

Cost of Goods Sold 90,000

The gross profit rate would be

a. .133.

b. .400.

c. .600.

d. .733.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

145. Financial information is presented below:

Operating Expenses $ 45,000

Sales Returns and Allowances 13,000

Sales Discounts 6,000

Sales 150,000

Cost of Goods Sold 79,000

Gross profit would be

a. $52,000.

b. $58,000.

c. $65,000.

d. $71,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

146. Financial information is presented below:

Operating Expenses $ 45,000

Sales Returns and Allowances 13,000

Sales Discounts 6,000

Sales Revenue 150,000

Cost of Goods Sold 79,000

The gross profit rate would be

a. .347.

b. .397.

c. .473.

d. .542.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

147. Financial information is presented below:

Operating Expenses $ 45,000

Sales Returns and Allowances 9,000

Sales Discounts 6,000

Sales Revenue 160,000

Cost of Goods Sold 87,000

The amount of net sales on the income statement would be

a. $145,000.

b. $151,000.

c. $154,000.

d. $160,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

148. Financial information is presented below:

Operating Expenses $ 45,000

Sales Returns and Allowances 9,000

Sales Discounts 6,000

Sales Revenue 160,000

Cost of Goods Sold 87,000

Gross profit would be

a. $13,000.

b. $58,000.

c. $64,000.

d. $67,000.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

149. Financial information is presented below:

Operating Expenses $ 45,000

Sales Returns and Allowances 9,000

Sales Discounts 6,000

Sales Revenue 160,000

Cost of Goods Sold 87,000

The gross profit rate would be

a. .363.

b. .400.

c. .456.

d. .503.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

150. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $378,000, the gross profit rate is

a. 37%.

b. 40%

c. 60%.

d. 63%.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

151. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of

a. $39,000 and $23,400.

b. $39,000 and $24,000.

c. $40,000 and $23,400.

d. $40,000 and $24,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

152. During August, 2013, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

Baxter’s gross profit for August, 2013 is

a. $10,000.

b. $10,500.

c. $11,500.

d. $12,000.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

153. During August, 2013, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

Baxter’s nonoperating income (loss) for the month of August, 2013 is

a. $0.

b. $500.

c. $1,000.

d. $1,500.

Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

154. During August, 2013, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

Baxter’s operating income for the month of August, 2013 is

a. $10,000.

b. $10,500.

c. $11,500.

d. $12,000.

Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

155. During August, 2013, Baxter’s Supply Store generated revenues of $30,000. The company’s expenses were as follows: cost of goods sold of $18,000 and operating expenses of $2,000. The company also had rent revenue of $500 and a gain on the sale of a delivery truck of $1,000.

Baxter’s net income for August, 2013 is

a. $10,000.

b. $10,500.

c. $11,500.

d. $12,000.

Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 156. Cobb Company's accounting records show the following at the year ending on December 31, 2013:

Purchase Discounts $ 5,600

Freight - in 7,800

Purchases 201,000

Beginning Inventory 23,500

Ending Inventory 28,800

Purchase Returns 6,400

Using the periodic system, the cost of goods purchased is

a. $189,000.

b. $191,500.

c. $196,800.

d. $202,100.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 157. Cobb Company's accounting records show the following at the year ending on December 31, 2013:

Purchase Discounts $ 5,600

Freight - in 7,800

Purchases 201,000

Beginning Inventory 23,500

Ending Inventory 28,800

Purchase Returns 6,400

Using the periodic system, the cost of goods sold is

a. $189,000.

b. $191,500.

c. $196,800.

d. $202,100.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 158. The following information is available for Dennehy Company:

Sales $260,000 Freight-in $20,000

Ending Inventory 25,000 Purchase Returns and Allowances 10,000

Purchases 180,000 Beginning Inventory 30,000

Dennehy's cost of goods sold is

a. $175,000.

b. $190,000.

c. $195,000.

d. $230,000.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 159. At the beginning of September, 2013, Stella Company reported Inventory of $4,000. During the month, the company made purchases of $17,800. At September 31, 2013, a physical count of inventory reported $4,200 on hand. Cost of goods sold for the month is

a. $17,600.

b. $17,800.

c. $18,000.

d. $21,800.

Ans: A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 160. At the beginning of the year, Hunt Company had an inventory of $500,000. During the year, the company purchased goods costing $1,600,000. If Hunt Company reported ending inventory of $600,000 and sales of $2,500,000, the company’s cost of goods sold and gross profit rate must be

a. $1,000,000 and 66.7%.

b. $1,500,000 and 40%.

c. $1,000,000 and 40%.

d. $1,500,000 and 60%.

Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a 161. During the year, Slick’s Pet Shop’s inventory decreased by $20,000. If the company’s cost of goods sold for the year was $400,000, purchases must have been

a. $380,000.

b. $400,000.

c. $420,000.

d. Unable to determine.

Ans: A, LO: 6, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a 162. Cost of goods available for sale is computed by adding

a. beginning inventory to net purchases.

b. beginning inventory to the cost of goods purchased.

c. net purchases and freight-in.

d. purchases to beginning inventory.

Ans: B, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

^a 163. The Freight-in account

a. increases the cost of merchandise purchased.

b. is contra to the Purchases account.

c. is a permanent account.

d. has a normal credit balance.

Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 164. Net purchases plus freight-in determines

a. cost of goods sold.

b. cost of goods available for sale.

c. cost of goods purchased.

d. total goods available for sale.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 165. Goldblum Company has the following account balances:

Purchases $48,000

Sales Returns and Allowances 6,400

Purchase Discounts 4,000

Freight-in 3,000

Delivery Expense 5,000

The cost of goods purchased for the period is

a. $40,400.

b. $44,000.

c. $47,000.

d. $52,000.

Ans: C, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 166. McKendrick Shoe Store has a beginning inventory of $30,000. During the period, purchases were $130,000; purchase returns, $4,000; and freight-in $10,000. A physical count of inventory at the end of the period revealed that $20,000 was still on hand. The cost of goods available for sale was

a. $126,000.

b. $136,000.

c. $146,000.

d. $166,000.

Ans: D, LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 167. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting

a. Accounts Payable.

b. Inventory.

c. Purchases.

d. Purchase Returns and Allowances.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 168. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?

a. Cash received on account with a discount

b. Payment of freight costs on a purchase

c. Return of merchandise purchased

d. Purchase of merchandise on credit

Ans: A, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 169. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be

a. Accounts Payable

Purchase Returns and Allowances

b. Purchase Returns and Allowances

Accounts Payable

c. Accounts Payable

Inventory

d. Inventory

Accounts Payable

Ans: A, LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 170. Under a periodic inventory system, acquisition of merchandise is debited to the

a. Inventory account.

b. Cost of Goods Sold account.

c. Purchases account.

d. Accounts Payable account.

Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

^a 171. Which of the following accounts has a normal credit balance?

a. Purchases

b. Sales Returns and Allowances

c. Freight-in

d. Purchase Discounts

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 172. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are

a. credit, credit, debit.

b. debit, credit, credit.

c. debit, credit, debit.

d. debit, debit, debit.

Ans: C, LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 173. In a worksheet for a merchandising company, Inventory would appear in the

a. trial balance and adjusted trial balance columns only.

b. trial balance and balance sheet columns only.

c. trial balance, adjusted trial balance, and balance sheet columns.

d. trial balance, adjusted trial balance, and income statement columns.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 174. The Inventory account balance appearing in a worksheet represents the

a. ending inventory.

b. beginning inventory.

c. cost of merchandise purchased.

d. cost of merchandise sold.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

175. Ezra Company has sales revenue of $40,000, cost of goods sold of $24,000 and operating expenses of $9,000 for the year ended December 31. Ezra's gross profit is

a. $0.

b. $7,000.

c. $16,000.

d. $31,000.

Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

176. Rae Company made a purchase of merchandise on credit from Tyree Corporation on August 3, for $7,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is

a. Accounts Payable................... 7,000

Cash........ 7,000

b. Accounts Payable................... 6,860

Cash........ 6,860

c. Accounts Payable................... 7,000

Purchase Returns and Allowances........ 140

Cash........ 6,860

d. Accounts Payable................... 7,000

Inventory.. 140

Cash........ 6,860

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

177. Kate Company purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:

a. There is no entry on Kate's books for this transaction.

b. Freight Expense..................... 500

Cash....... 500

c. Freight-out...... 500

Cash....... 500

d. Inventory......... 500

Cash....... 500

Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

178. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting

a. Purchases.

b. Purchase Returns.

c. Purchase Allowance.

d. Inventory.

Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

179. On October 4, 2013, JT Corporation had credit sales transactions of $3,200 from merchandise having cost $1,900. The entries to record the day's credit transactions include a

a. debit of $3,200 to Inventory.

b. credit of $3,200 to Sales Revenue.

c. debit of $1,900 to Inventory.

d. credit of $1,900 to Cost of Goods Sold.

Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

180. Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold

b. Inventory

c. Sales Revenue

d. Sales Discounts

Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

181. In the Augie Company, sales were $500,000, sales returns and allowances were $20,000, and cost of goods sold was $300,000. The gross profit rate was

a. 36%.

b. 37.5%.

c. 40%.

d. 41.7%.

Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

182. Net sales is sales less

a. sales discounts.

b. sales returns.

c. sales returns and allowances.

d. sales discounts and sales returns and allowances.

Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

183. In the balance sheet, ending inventory is reported

a. in current assets immediately following accounts receivable.

b. in current assets immediately following prepaid expenses.

c. in current assets immediately following cash.

d. under property, plant, and equipment.

Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

^a 184. Cost of goods available for sale is computed by adding

a. freight-in to net purchases.

b. beginning inventory to net purchases.

c. beginning inventory to purchases and freight-in.

d. beginning inventory to cost of goods purchased.

Ans: D, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Multiple Choice Questions

BRIEF Exercises

BE 185

Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.

Sales Cost of Gross Operating Net

Revenue Goods Sold Profit Expenses Income

$75,000 (a) $30,000 (b) $17,000

(c) $86,000 $64,000 $48,000 (d)

Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 185 (5 min.)

a. $45,000

b. $13,000

c. $150,000

d. $16,000

BE 186

Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):

(a) Kelly purchased $40,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $3,000 of damaged merchandise for credit.

(c) Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 186 (5 min.)

(a) Inventory.................. 40,000

Accounts Payable................ 40,000

(b) Accounts Payable.... 3,000

Inventory...... 3,000

(c) Accounts Payable ($40,000 – $3,000)................... 37,000

Inventory ($37,000 × .02).... 740

Cash ($37,000 – $740)........ 36,260

BE 187

Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,000. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 187 (3 min.)

Journal entry on Garth’s books:

Accounts Receivable 1,000

Sales................. 1,000

Cost of Goods Sold….. ..................... 600

Inventory…………................... 600

Journal entry on Kyle’s books:

Inventory……………... ..................... 1,000

Accounts Payable.................... 1,000

BE 188

Richter Company sells merchandise on account for $2,000 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 188 (3 min.)

Sales Returns and Allowances......... 200

Sales Discounts ($1,800 × .03)....... 54

Cash ($2,000 – $200 – $54).............. 1,746

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

BE 189

Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.

May 13 Sold 6 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.

May 16 One defective motor was returned to Charlie.

May 23 Received payment in full from Scruffy Brothers.

Instructions

Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 189 (8 min.)

May 13 Accounts Receivable........... 270

Sales Revenue........... 270

Cost of Goods Sold............. 156

Inventory..................... 156

May 16 Sales Returns and Allowances.................. 45

Accounts Receivable.. 45

Inventory...... 26

Cost of Goods Sold.... 26

May 23 Cash............. 216

Sales Discounts ($225 × .04)..................... 9

Accounts Receivable ($270 – $45)... 225

BE 190

The income statement for Pepe Serna Company for the year ended December 31, 2013 is as follows:

PEPE SERNA COMPANY

Income Statement

For the Year Ended December 31, 2013

Revenues

Sales..................... $55,000

Interest revenue.... 3,000

Total revenues 58,000

Expenses

Cost of goods sold $33,000

Salaries and wages expense....... 13,000

Interest expense... 1,000

Total expenses....................... 47,000

Net income $ 11,000

Prepare the entries to close the revenue and expense accounts at December 31, 2012. You may omit explanations for the transactions.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 190 (5 min.)

Dec. 31 Sales Revenue....................... 55,000

Interest Revenue.................... 3,000

Income Summary.......... 58,000

31 Income Summary................... 47,000

Cost of Goods Sold....... 33,000

Salaries and Wages Expense.............. 13,000

Interest Expense............ 1,000

BE 191

Hoyt Company provides this information for the month of November, 2013: sales on credit $150,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 191 (3 min.)

HOYT COMPANY

Income Statement (Partial)

For the Month Ended November 30, 2013

Sales............... $220,000

Less: Sales Returns and Allowances......... $9,000

Sales Discounts.......... 2,000 11,000

Net Sales........ $209,000

BE 192

During October, 2013, Red’s Catering Company generated revenues of $13,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 192 (4 min.)

(1) Gross profit: $5,100 ($13,000 - $200 - $7,700)

(2) Income from operations: $3,100 ($5,100 - $2,000)

^a BE 193

For each of the following, determine the missing amounts.

Beginning Goods Available Cost of Ending

Inventory Purchases for Sale Goods Sold Inventory

1. $10,000 ________ $ 40,000 $25,000 _______

2. ______ $220,000 $245,000 _______ $40,000

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a Solution 193 (4 min.)

1. Purchases $30,000 ($40,000 – $10,000), Ending inventory $15,000 ($40,000 – $25,000)

2. Beginning inventory $25,000 ($245,000 – $220,000), Cost of Goods Sold $205,000 ($245,000 – $40,000)

^a BE 194

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $500,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-in $15,000. Determine net purchases and cost of goods purchased.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 194 (4 min.)

Calculation of Net Purchases and Cost of Goods Purchased

Purchases....... $500,000

Less: Purchase returns and Allowances..... $14,000

Purchase discounts ... 9,000 23,000

Net Purchases 477,000

Add: Freight-in 15,000

Cost of Goods Purchased...... $492,000

^a BE 195

Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-in $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 195 (6 min.)

Inventory, beginning................ $ 45,000

Purchases....... $600,000

Less: Purchase returns and allowances..... $25,000

Purchase discounts.... 11,000 36,000

Net purchases. 564,000

Add: Freight-in 19,000

Cost of goods purchased........ 583,000

Cost of goods available for sale.................... 628,000

Inventory, ending.................... 55,000

Cost of goods sold.................. $573,000

^a BE 196

Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

May 13 Purchased 6 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.

May 16 Returned 1 defective motor to Charlie.

May 23 Paid Charlie Company in full.

Instructions

Journalize the May transactions for Scruffy Brothers. You may omit explanations.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a Solution 196 (6 min.)

May 13 Purchases.... 270

Accounts Payable....... 270

May 16 Accounts Payable................ 45

Purchase Returns and Allowances... 45

May 23 Accounts Payable ($270 – $45)................. 225

Purchase Discounts ($225 × .04)...... 9

Cash.... 216

Exercises

Ex. 197

For each of the following, determine the missing amounts.

Sales Cost of Operating

Revenue Goods Sold Gross Profit Expenses Net Income

1. $100,000 ________ _______ $25,000 $12,000

2. ________ $135,000 $120,000 _______ $80,000

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 197 (5 min.)

1. Gross Profit = $37,000 ($25,000 + $12,000)

Cost of Goods Sold = $63,000 ($100,000 – $37,000)

2. Sales = $255,000 ($135,000 + $120,000)

Operating Expenses = $40,000 ($120,000 – $80,000)

Ex. 198

On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 30 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.

6 Sold 18 bicycles to Team Wisconsin for $330 each, terms 1/10, n/30.

7 Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.

13 Issued a credit memo to Team Wisconsin for the return of a defective bicycle.

14 Paid Monroe Bicycle Company in full, less discount.

Instructions

Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 198 (20 min.)

Oct. 4 Inventory......... 6,000

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

6 Accounts Receivable.............. 5,940

Sales Revenue.............. 5,940

Cost of Goods Sold................ 3,600

Inventory 3,600

7 Accounts Payable................... 400

Inventory 400

13 Sales Returns and Allowances..................... 330

Accounts Receivable..... 330

Inventory......... 200

Cost of Goods Sold....... 200

14 Accounts Payable ($6,000 – $400)............... 5,600

Cash ($5,600 × .99)....... 5,544

Inventory ($5,600 × .01) 56

Ex. 199

On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 70 backpacks at $25 each from Hunter, terms 2/10, n/30.

Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 4 that were defective.

Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.

Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.

Sept. 14 Paid Hunter in full, less discount.

Instructions

Journalize the September transactions for Reid Supply.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 199 (20 min.)

Sept. 4 Inventory...... 1,750

Accounts Payable....... 1,750

Sept. 6 Accounts Payable................ 150

Inventory..................... 150

Sept. 9 Accounts Receivable........... 1,400

Sales Revenue........... 1,400

Cost of Goods Sold............. 1,000

Inventory..................... 1,000

Sept. 13 Accounts Receivable........... 525

Sales Revenue........... 525

Cost of Goods Sold............. 375

Inventory..................... 375

Sept. 14 Accounts Payable ($1,750 – $150)............ 1,600

Cash ($1,600 × .98).... 1,568

Inventory ($1,600 × .02).................... 32

Ex. 200

Sam Wainwright is a new accountant with Ground Floor Company. Ground Floor purchased merchandise on account for $11,250. The credit terms are 2/10, n/30. Sam has talked with the company's banker and knows that he could earn 8% on any money invested in the company's savings account.

Instructions

(a) Should Sam pay the invoice within the discount period or should he keep the $11,250 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.

(b) If Sam forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $11,250 for 20 days. Calculate the annual rate of interest that this is equivalent to.

Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics

Solution 200 (10 min.)

Dan should pay the invoice within the discount period to save $140:

(a) Discount of 2% on $11,250 $225

Interest received on $11,250 (for 20 days at 8%) 50 ($11,250 × 8% × 20 ÷ 360)

Savings by taking the discount $175

(b) The equivalent annual interest rate is:

2% × 360 ÷ 20 = 36%.

Ex. 201

(a) Karns Company purchased merchandise on account from Bailey Office Suppliers for $87,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $78,400 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record:

(1) the purchase of merchandise.

(2) the return of merchandise.

(3) the payment on account.

(b) Hinds Company sold merchandise to Peter Company on account for $73,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $43,070. During the discount period, Peter Company returned $3,000 of merchandise and paid its account in full (minus the discount) by remitting $68,600 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record:

(1) the sale of merchandise.

(2) the return of merchandise.

(3) the collection on account.

Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 201 (20 min.)

(a) To compute the amount due after returns but before the discount, divide $78,400 by .98 (100% – 2%).

$78,400 ÷ .98 = $80,000.

Subtract $80,000 from $87,000 to determine that $7,000 of merchandise was returned.

(1) Inventory......... 87,000

Accounts Payable.......... 87,000

(2) Accounts Payable................... 7,000

Inventory 7,000

(3) Accounts Payable................... 80,000

Inventory 1,600

Cash....... 78,400

(b) Peter Company returns $3,000 of merchandise and owes $70,000 to Hinds Company.

$68,600 ÷ $70,000 = .98

100% – 98% = 2%

The missing discount percentage is 2%. $70,000 × 2% = $1,400 sales discount.

$70,000 – $1,400 = $68,600 cash received on account.

(1) Accounts Receivable.............. 73,000

Sales Revenue.............. 73,000

Cost of Goods Sold................ 43,070

Inventory 43,070

(2) Sales Returns and Allowances..................... 3,000

Accounts Receivable..... 3,000

Inventory [$3,000 × ($43,070 ÷ $73,000)]..... 1,770

Cost of Goods Sold....... 1,770

(3) Cash................ 68,600

Sales Discounts...................... 1,400

Accounts Receivable..... 70,000

Ex. 202

An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions.

1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270.

2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.

3. A $190 sales return was debited to Sales Revenue.

4. A cash payment of $30 for freight on merchandise purchases was debited to Freight-out $300 and credited to Cash $300.

Instructions

Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.)

Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 202 (6-8 min.)

1. Sales Returns and Allowances....... 270

Sales Revenue....................... 270

2. Supplies .................. 310

Cash . 310

Accounts Payable................... 310

Inventory......... 310

3. Sales Returns and Allowances....... 190

Sales Revenue....................... 190

4. Inventory ............... 30

Cash . 270

Freight-out....... 300

Ex. 203

Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system.

(a) Purchased $30,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $700 of damaged merchandise for credit.

(c) Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 203 (6-8 min.)

(a) Inventory................. 30,000

Accounts Payable.................... 30,000

(b) Accounts Payable... 700

Inventory........... 700

(c) Accounts Payable ($30,000 – $700) 29,300

Inventory ($29,300 × .02) 586

Cash ($29,300 – $586) 28,714

Ex. 204

Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system.

(a) Eustace sells $50,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.

(b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400.

(c) Eustace received the balance due within the discount period.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 204 (7-9 min.)

(a) Accounts Receivable....................... 50,000

Sales Revenue....................... 50,000

Cost of Goods Sold. 30,000

Inventory......... 30,000

(b) Sales Returns and Allowances....... 4,000

Accounts Receivable.............. 4,000

Inventory.................. 2,400

Cost of Goods Sold................ 2,400

(c) Cash ($46,000 – $460).................... 45,540

Sales Discounts ($46,000 × .01)..... 460

Accounts Receivable.............. 46,000

Ex. 205

Newell Company completed the following transactions in October:

Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection

Oct. 3 $ 600 2/10, n/30 Oct. 8

Oct. 11 1,200 3/10, n/30 Oct. 14 $ 400 Oct. 16

Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29

Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27

Oct. 23 1,800 2/10, n/30 Oct. 27 400 Oct. 28

Instructions

(a) Indicate the cash received for each collection. Show your calculations.

(b) Prepare the journal entry for the

(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.

(2) Oct. 23 sales return. The merchandise returned had a cost of $140.

(3) Oct. 28 collection.

Newell uses a perpetual inventory system.

Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 205 (20 min.)

(a) Oct. 8 $588 [Sales $600 – Sales discount $12 ($600 × .02)]

Oct. 16 $776 [Sales $1,200 – Sales return $400 = $800;

$800 – Sales discount $24 ($800 × .03)]

Oct. 29 $4,000 [Sales $5,000 – Sales return $1,000 = $4,000;

(Discount lapsed)]

Oct. 27 $1,176 [Sales $1,400 – Sales return $200 = $1,200;

$1,200 – Sales discount $24 ($1,200 × .02)]

Oct. 28 $1,372 [Sales $1,800 – Sales return $400 = $1,400;

$1,400 – Sales discount $28 ($1,400 × .02)]

(b) (1) Oct. 17 Accounts Receivable................... 5,000

Sales Revenue................... 5,000

Cost of Goods Sold..................... 3,500

Inventory...... 3,500

(2) Oct. 23 Sales Returns and Allowances... 200

Accounts Receivable.......... 200

Inventory............... 140

Cost of Goods Sold............ 140

(3) Oct. 28 Cash...................... 1,372

Sales Discounts.... 28

Accounts Receivable.......... 1,400

Ex. 206

The following information is available for Moiz Company:

Debit Credit

Retained Earnings $ 50,000

Dividends $ 35,000

Sales Revenue 510,000

Sales Returns and Allowances 20,000

Sales Discounts 7,000

Cost of Goods Sold 290,000

Freight-out 2,000

Advertising Expense 15,000

Interest Expense 19,000

Salaries and Wages Expense 55,000

Utilities Expense 18,000

Depreciation Expense 7,000

Interest Revenue 23,000

Instructions

Using the above information, prepare the closing entries for Moiz Company.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 206 (10 min.)

Dec. 31 Interest Revenue.................... 23,000

Sales Revenue....................... 510,000

Income Summary.......... 533,000

31 Income Summary................... 433,000

Sales Returns and Allowances............ 20,000

Sales Discounts............. 7,000

Cost of Goods Sold....... 290,000

Freight-out...................... 2,000

Advertising Expense...... 15,000

Interest Expense............ 19,000

Salaries and Wages Expense.............. 55,000

Utilities Expense............ 18,000

Depreciation Expense... 7,000

31 Income Summary................... 100,000

Retained Earnings......... 100,000

31 Retained Earnings ................. 35,000

Dividends ...................... 35,000

Ex. 207

The adjusted trial balance of J. W. Hatch Company appears below.

J. W. HATCH

Adjusted Trial Balance

December 31, 2013

Debit Credit

Cash 12,000

Accounts Receivable 25,000

Inventory 35,000

Buildings 150,000

Accumulated Depreciation—

Buildings 20,000

Accounts Payable 12,000

Common stock 100,000

Retained Earnings 44,000

Dividends 30,000

Sales Revenue 310,000

Sales Discounts 6,000

Sales Returns & Allowances 8,000

Cost of Goods Sold 178,000

Operating Expenses 42,000

486,000 486,000

Instructions

Using the information given, prepare the year-end closing entries.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 207 (10 min.)

Dec. 31 Sales............... 310,000

Income Summary.......... 310,000

(To close credit balance accounts)

31 Income Summary................... 234,000

Sales Discounts............. 6,000

Sales Returns and Allowances............ 8,000

Cost of Goods Sold....... 178,000

Operating Expense........ 42,000

(To close accounts with debit balances)

31 Income Summary................... 76,000

Retained Earnings......... 76,000

(To transfer net income to retained earnings)

31 Retained Earnings.................. 30,000

Dividends....................... 30,000

(To close dividends account to retained earnings)

Ex. 208

Kennedy Company had the following account balances at year-end: cost of goods sold $80,000; merchandise inventory $15,000; operating expenses $39,000; sales $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that merchandise inventory on hand is $14,400.

Instructions

(a) Prepare the adjusting entry necessary as a result of the physical count.

(b) Prepare closing entries.

Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 208 (10 min.)

(a) Cost of Goods Sold. 600

Inventory......... 600

(b) Sales Revenue........ 144,000

Income Summary.................. 144,000

Income Summary.... 123,500

Cost of Goods Sold................ 80,600

Operating Expenses............... 39,000

Sales Returns and Allowances..................... 2,300

Sales Discounts...................... 1,600

Income Summary ($144,000 – $123,500).............. 20,500

Retained Earnings.................. 20,500

Ex. 209

Financial information is presented below for two different companies.

Instructions

Determine the missing amounts.

Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 209 (15 min.)

(*Missing amount)

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

Sales returns and allowances......... 2,000*

Net sales.................. $ 88,000

(b) Net Sales................. $ 88,000

Cost of goods sold... 56,000

Gross profit.............. $ 32,000*

(c) and (d)

Gross profit.............. $ 32,000

Operating expenses. 22,000

Income from operations (c)............. $ 10,000*

Other expenses and losses............. 4,000

Net income (d)......... $ 6,000*

(e) Sales. $ 100,000*

Sales returns and allowances......... 3,000

Net sales.................. $ 97,000

(f) Net sales.................. $ 97,000

Cost of goods sold... 61,000*

Gross profit.............. $ 36,000

(g) and (h)

Gross profit.............. $ 36,000

Operating expenses (g)................... 16,000*

Income from operations (h)............. $ 20,000*

Other expenses and losses............. 7,000

Net income .............. $ 13,000

Ex. 210

Presented below is information for Annie Company for the month of March 2013.

Cost of goods sold $235,000 Rent expense $ 30,000

Freight-out 7,000 Sales discounts 8,000

Insurance expense 5,000 Sales returns and allowances 11,000

Salaries and wages expense 63,000 Sales 410,000

Instructions

(a) Prepare a multiple -step income statement.

(b) Compute the gross profit rate.

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 210 (10 min.)

(a)

ANNIE COMPANY

Income Statement

For the Month Ended March 31, 2013

Sales revenues

Sales............... $410,000

Less: Sales returns and allowances........... $11,000

Sales discounts........... 8,000 19,000

Net sales......... 391,000

Cost of goods sold.................. 235,000

Gross profit..... 156,000

Operating expenses

Salary expense........... 63,000

Rent expense.............. 30,000

Freight-out. 7,000

Insurance expense...... 5,000

Total operating expenses................... 105,000

Net income ..... $ 51,000

(b) Gross profit rate = $156,000 ¸ $391,000 = 39.9%.

Ex. 211

In 2013, Brunetti Company had net sales of $650,000 and cost of goods sold of $390,000. Operating expenses were $150,000, and interest expense was $10,000. Brunetti prepares a multiple-step income statement.

Instructions

(a) Compute Brunetti's gross profit.

(b) Compute the gross profit rate.

(c) What is Brunetti's income from operations and net income?

(d) If Brunetti’s prepared a single-step income statement, what amount would it report for net income?

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 211 (10 min.)

(a) $650,000 – $390,000 = $260,000.

(b) $260,000/$650,000 = 40%.

(c) Income from operations is $110,000 ($260,000 – $150,000), and net income is $100,000 ($110,000 – $10,000).

(d) The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Therefore, net income in Brunetti's single-step income statement is also $100,000.

Ex. 212

Argentina Company gathered the following condensed data for the year ended December 31, 2013:

Cost of goods sold $ 750,000

Net sales 1,250,000

Operating expenses 275,000

Interest expense 48,000

Dividend revenue 38,000

Loss from employee strike 185,000

Instructions

1. Prepare a single-step income statement for the year ended December 31, 2013.

2. Prepare a multiple-step income statement for the year ended December 31, 2013.

Ans: N/A, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 212 (25 min.)

1. ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2013

Revenues

Net sales............... $1,250,000

Dividend revenue.. 38,000

Total revenues 1,288,000

Expenses

Cost of goods sold $750,000

Operating expenses...................... 275,000

Loss from employee strike........... 185,000

Interest expense... 48,000

Total expenses....................... 1,258,000

Net income ................. $ 30,000

2. ARGENTINA COMPANY

Income Statement

For the Year Ended December 31, 2013

Net sales....................... $1,250,000

Cost of goods sold........ 750,000

Gross profit................... 500,000

Operating expenses..... 275,000

Income from operations...................... 225,000

Other revenues and gains

Dividend revenue 38,000

Other expenses and losses

Loss from employee strike......... $185,000

Interest expense.. 48,000 233,000 195,000

Net income................... $ 30,000

Ex. 213

Instructions

State the missing items identified by ?.

1. Gross profit – Operating expenses = ?

2. Cost of goods sold + Gross profit on sales = ?

3. Sales Revenue – (? + ?) = Net sales

4. Income from operations + ? – ? = Net income

5. Net sales – Cost of goods sold = ?

Ans: N/A, LO: 5,6, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 213 (5 min.)

1. Income from operations (or Net income)

2. Net sales

3. Sales discounts, Sales returns and allowances

4. Other revenues and gains, Other expenses and losses

5. Gross profit

Ex. 214

The adjusted trial balance of Nick Company contained the following information:

Debit Credit

Sales Revenue $560,000

Sales Returns and Allowances $ 15,000

Sales Discounts 7,000

Cost of Goods Sold 323,000

Freight-out 2,000

Advertising Expense 15,000

Interest Expense 18,000

Salaries and Wages Expense 65,000

Utilities Expense 28,000

Depreciation Expense 7,000

Interest Revenue 27,000

Instructions

1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2013.

2. Prepare a single-step income statement for the year ended December 31, 2013.

Ans: N/A, LO: 5,6, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 214 (20 min.)

1. NICK COMPANY

Income Statement

For the Year Ended December 31, 2013

Sales revenues

Sales Revenue........... $560,000

Less: Sales returns and allowances....................... $ 15,000

Sales discounts...................... 7,000 22,000

Net sales..................... 538,000

Cost of goods sold...... 323,000

Gross profit................. 215,000

Operating expenses

Salaries and wages expense $65,000

Utilities expense..................... 28,000

Advertising expense.............. 15,000

Depreciation expense............ 7,000

Freight-out....... 2,000

Total operating expenses.................. 117,000

Income from operations..................... 98,000

Other revenues and gains

Interest revenue.... 27,000

Other expenses and losses

Interest expense... 18,000 9,000

Net income $ 107,000

2. NICK COMPANY

Income Statement

For the Year Ended December 31, 2013

Revenues

Net sales............... $538,000

Interest revenue.... 27,000

Total revenues 565,000

Expenses

Cost of goods sold $323,000

Salaries and wages expense............ …………… 65,000

Utilities expense.......... …………… 28,000

Advertising expense... …………… 15,000

Depreciation expense. …………… 7,000

Freight-out................... …………… 2,000

Interest expense... 18,000

Total expenses....................... 458,000

Net income $ 107,000

Ex. 215

The following information is available for Sheldon Leonard Company:

Administrative expenses $ 30,000

Cost of goods sold 200,000

Sales 350,000

Sales returns and allowances 16,000

Selling expenses 55,000

Instructions

Compute each of the following:

(a) Net sales

(b) Gross profit

(c) Income from operations

Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 215 (6 min.)

(a) Net sales = $334,000 ($350,000 – $16,000)

(b) Gross profit = $134,000 ($334,000 – $200,000)

(c) Income from operations = $49,000 ($134,000 – $30,000 – $55,000)

Ex. 216

The income statement of Jue’s Luggage. includes the items listed below:

Net sales $900,000

Gross profit 320,000

Beginning inventory 80,000

Purchase discounts 15,000

Purchase returns and allowances 8,000

Freight-in 10,000

Operating expenses 300,000

Purchases 540,000

Instructions

Use the appropriate items listed above as a basis for determining:

(a) Cost of goods sold.

(b) Cost of goods available for sale.

(c) Ending inventory.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

Solution 216 (15 min.)

(a) Net sales – Cost of goods sold = Gross profit

$900,000 – Cost of goods sold = $320,000

Cost of goods sold = $580,000

(b) Beginning inventory $ 80,000

Purchases $540,000

Less: Purchase discounts $15,000

Purchase returns and allowances 8,000 23,000

Solution 216 (cont.)

Net Purchases 517,000

Add: Freight-in 10,000

Cost of goods purchased 527,000

Cost of goods available for sale $607,000

(c) Cost of goods available for sale – Ending inventory = Cost of goods sold

$607,000 – Ending inventory = $580,000

Ending inventory = $27,000

^a Ex. 217

Three items are missing in each of the following columns and are identified by letter.

Sales revenue $ (a) $840,000

Sales returns and allowances 15,000 22,000

Sales discounts 10,000 15,000

Net sales 420,000 (d)

Beginning inventory (b) 300,000

Cost of goods purchased 220,000 (e)

Ending inventory 170,000 303,000

Cost of goods sold 252,000 555,000

Gross profit (c) (f)

Instructions

Calculate the missing amounts and identify them by letter.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 217 (15 min.)

(a) $445,000 (d) $803,000

(b) $202,000 (e) $558,000

(c) $168,000 (f) $248,000

^a Ex. 218

Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 3 Purchased 80 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.

Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.

Sept. 9 Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.

Sept. 13 Paid Zuzu Company in full.

Instructions

Journalize the September transactions for Reineman Supply Company.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a Solution 218 (12 min.)

Sept. 3 Purchases.... 2,000

Accounts Payable....... 2,000

Sept. 6 Accounts Payable................ 150

Purchase Returns and Allowances... 150

Sept. 9 Accounts Receivable........... 630

Sales Revenue........... 630

Sept. 13 Accounts Payable ($2,000 – $150)............ 1,850

Purchase Discounts ($1,850 × .02)... 37

Cash.... 1,813

^a Ex. 219

The following information is available for Hopkins Company:

Beginning inventory $ 45,000

Ending inventory 70,000

Freight-in 10,000

Purchases 270,000

Purchase returns and allowances 8,000

Instructions

Compute each of the following:

(a) Net purchases

(b) Cost of goods purchased

(c) Cost of goods sold

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a Solution 219 (6 min.)

(a) Net purchases = $262,000 ($270,000 – $8,000)

(b) Cost of goods purchased = $272,000 ($262,000 + $10,000)

(c) Cost of goods sold = $247,000 ($45,000 + $272,000 – $70,000)

^a Ex. 220

The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method.

Instructions

Complete the worksheet below.

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2013

Adjusted

Trial Balance Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit

Cash 11,000

Inventory 21,000

Supplies 3,500

Equipment 80,000

Accum. Depreciation—

Equipment 15,000

Accounts Payable 20,000

Common Stock 50,000

Retained Earnings 42,000

Dividends 8,000

Sales Revenue 39,000

Sales Discounts 2,000

Cost of Goods Sold 23,000

Advertising Expense 7,000

Supplies Expense 6,000

Depreciation Expense 1,000

Rent Expense 2,500

Utilities Expense 1,000

166,000 166,000

Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting

^a Solution 220 (15 min.)

DAILEY MUSIC COMPANY

Worksheet

For the Month Ended April 30, 2013

Adjusted

Trial Balance Income Statement Balance Sheet

Debit Credit Debit Credit Debit Credit

Cash 11,000 11,000

Inventory 21,000 21,000

Supplies 3,500 3,500

Equipment 80,000 80,000

Accum. Depreciation—

Equipment 15,000 15,000

Accounts Payable 20,000 20,000

Common Stock 50,000 50,000

Retained Earnings 42,000 42,000

Dividends 8,000 8,000

Sales 39,000 39,000

Sales Discounts 2,000 2,000

Cost of Goods Sold 23,000 23,000

Advertising Expense 7,000 7,000

Supplies Expense 6,000 6,000

Depreciation Expense 1,000 1,000

Rent Expense 2,500 2,500

Utilities Expense 1,000 1,000

166,000 166,000 42,500 39,000 123,500 127,000

Net Loss 3,500 3,500

42,500 42,500 127,000 127,000

^a Ex. 221

Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:

(a) Purchased $400,000 of merchandise on account, terms 2/10, n/30.

(b) Returned $30,000 of damaged merchandise for credit.

(c) Paid for the merchandise purchased within 10 days.

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

^a Solution 221 (6 min.)

(a) Purchases................ 400,000

Accounts Payable................ 400,000

(b) Accounts Payable.... 30,000

Purchase Returns and Allowances............ 30,000

(c) Accounts Payable ($400,000 – $30,000)............... 370,000

Purchase Discounts ($370,000 × .02)........ 7,400

Cash ($370,000 – $7,400)... 362,600

CHALLENGE EXERCISES

CE 222

Craig Ferguson Company had the following account balances at year-end: cost of goods sold $70,000; inventory $17,300: operating expenses $33,000; sales revenue $121,000; sales discounts $1,400; and sales returns and allowances $1,950. A physical count of inventory determines that merchandise inventory on hand is $16,450.

Instructions

(a) Prepare the adjusting entry necessary as a result of the physical count.

(b) Prepare closing entries

(c) Assume that the physical count of inventory indicated that inventory on hand is $17,800 (the account still shows a balance of $17,300 due to errors made during the year. Prepare the adjusting entry necessary as a result of the physical count.

(d) What is Craig Ferguson Company's net income for the year?

Solution 222

(a) Cost of Goods Sold ($17,300 - $16,450)...................... ........... 850

Inventory..................... 850

(b) Sales Revenue................ .... 121,000

Income Summary. 121,000

Income Summary........... .... 107,400

Cost of Goods Sold 71,050

Operating Expenses...................... 33,000

Sales Returns and Allowances... 1,950

Sales Discounts.... 1,400

Income Summary ($121,000 - $107,400)..................... .... 13,600

Retained Earnings.. 13,600

(c) Merchandise Inventory ($17,300 - $17,800)................. ........... 500

Cost of Goods Sold..... 500

(d) Net income is $13,600 (the amount closed from Income Summary to Retained Earnings).

CE 223

In its income statement for the year ended 12/31/13, Hickman Company reported the following condensed data:

Operating expenses $1,042,000 Interest revenue 35,000

Cost of goods sold 1,600,000 Loss on disposal of plant assets 10,000

Interest Expenses 68,000 Net sales 2,850,000

Instructions

(a) Prepare a multiple-step income statement.

(b) Prepare a single-step income statement.

(c) How did Hickman compute the amount it is reporting as net sales?

Solution 223

(a)

HICKMAN COMPANY

Income Statement

For the Month Ended December 31, 2013

_______________

Net sales............. $2,850,000

Cost of goods sold..................... 1,600,000

Gross profit......... 1,250,000

Operation expenses.................. 1,042,000

Income from operations............. 208,000

Other revenues and gains

Interest revenue............. $ 35,000

Other expenses and losses

Interest expense............ $68,000

Loss on sale of equipment.................... 10,000 78,000 43,000

Net income ......... $ 165,000

(b) HICKMAN COMPANY

Income Statement

For the Month Ended December 31, 2013

Revenues

Net sales...... $2,850,000

Interest revenue.................. 35,000

Total revenues............... 2,885,000

Expenses

Cost of goods sold.............. $1,600,000

Operating expenses............ 1,042,000

Interest expenses............... 68,000

Loss on sale of equipment.. 10,000

Total expenses.............. 2,720,000

Net income ......... $ 165,000

(c) The net sales amount ($2,850,000) was computed by subtracting Sales Discounts and Sales Returns and Allowances from the gross Sales Revenue amount.

CE 224

Presented below is financial information for two different companies.

Winn Company Maris Company

Sales revenue $190,000 $ (e)

Sales discounts 2,000 2,500

Sales returns (a) 5,000

Net sales 183,000 210,000

Cost of goods sold 103,000 (f)

Gross profit (b) 80,000

Operating expenses 45,000 (g)

Income from operations (c) 55,000

Other revenues (expenses) 4,000 (h)

Net income (d) 49,000

Instructions

(a) Determine the missing amounts above.

(b) Determine the gross profit rates. (Round to one decimal place.)

Solution 224

(a) (*missing amount)

a. Sales revenue................... $190,000

Sales discounts................. (2,000)

*Sales returns.................... (5,000)

Net sales.... $183,000

b. Net sales.... $183,000

Cost of goods sold............ (103,000)

*Gross profit...................... $ 80,000

c. Gross profit $ 80,000

Operating expenses.......... (45,000)

*Income from operations... $ 35,000

d. Income from operations.... $ 35,000

Other revenues................. 4,000

*Net income...................... $ 39,000

e. *Sales revenue.................. 217,500

Sales discounts................. (2,500)

Sales returns..................... (5,000)

Net sales.... $210,000

f. Net sales.... $210,000

*Cost of goods sold........... 130,000

Gross profit $ 80,000

g. Gross profit $ 80,000

*Operating expenses........ 25,000

Income from operations.... $ 55,000

h. Income from operations.... $ 55,000

*Other expenses............... 6,000

Net income. $ 49,000

(b) Winn Company

Gross profit ¸ Net sales = $80,000 ¸ $183,000 = 43.7%

Maris Company

Gross profit ¸ Net sales = $80,000 ¸ $210,000 = 38.1%

COMPLETION STATEMENTS

225. A ________________ buys and sells goods rather than performing services to earn a profit.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

226. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

227. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics

228. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

229. The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.

Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

230. When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

231. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

232. Every sales transaction should be supported by a ________________ that provides written evidence of the sale.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls

233. Gross profit is obtained by subtracting ________________ from ________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

234. Income from operations is determined by subtracting total operating expenses from ________________.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Answers to Completion Statements

225. merchandising company 231. contra revenue, debit

226. gross profit 232. business document

227. perpetual 233. cost of goods sold, net sales

228. Inventory 234. gross profit

229. freight-out

230. Sales Returns and Allowances,

Accounts Receivable

MATCHING

235. Match the items below by entering the appropriate code letter in the space provided.

A. Net Sales F. FOB shipping point

B. Sales discounts G. Freight-out

C. Purchase invoice H. Gross profit

D. Periodic inventory system I. Operating expenses

E. FOB destination J. Income from operations

_____ 1. An incentive to encourage customers to pay their accounts early.

_____ 2. Expenses incurred in the process of earning sales revenue.

_____ 3. Freight terms that require the seller to pay the freight cost.

_____ 4. Sales revenue less sales returns and allowances and sales discounts.

_____ 5. A document that supports each credit purchase.

_____ 6. Net sales less cost of goods sold.

_____ 7. Freight cost to deliver goods to customers reported as a selling expense.

_____ 8. Requires a physical count of goods on hand to compute cost of goods sold.

_____ 9. Gross profit less total operating expenses.

_____ 10. Freight terms that require the buyer to pay the freight cost.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Answers to Matching

1. B 6. H

2. I 7. G

3. E 8. D

4. A 9. J

5. C 10. F

SHORT-ANSWER ESSAY QUESTIONS

S-A E 236

A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA

Solution 236

The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue.

S-A E 237

Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 237

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer's place of business. Thus the seller pays the freight and debits Freight-out.

S-A E 238

Adrland Caselotti believes revenues from credit sales may be recorded before they are collected in cash. Do you agree? Explain.

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 238

Agree. In accordance with the revenue recognition principle, companies record sales revenues when the performance obligation is satisfied. The performance obligation is typically satisfied when the goods transfer from the seller to the buyer. The recording of revenue is not dependent on the collection of credit sales.

S-A E 239

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 239

The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed operating expenses, income from operations, and other revenues and gains, and other expenses and losses.

S-A E 240

You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 240

You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated.

S-A E 241

The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 241

The items reported for a merchandising company that are not reported for a service company are sales, revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold.

S-A E 242 (Ethics)

Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Monya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation "FOB shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes's dock. She did not record the purchase until after month end.

Required:

1. Why are accountants concerned with the timing in the recording of purchases?

2. Was there a violation of ethical standards here? Explain.

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 242

1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.

2. The only ethical principle that may be involved is one of competence. Monya does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Holmes as soon as they left the shipper's dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Monya compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents.

S-A E 243 (Communication)

Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, each made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen's sale was FOB shipping point, and Bryn's was FOB destination. The company "counts" sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Bryn is quite upset. She has asked you to just include it, or to take Ellen's off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method.

Write a memo to Bryn. Explain your position.

Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics

Solution 243

M E M O

TO: Bryn Davis

FROM: Helen Dictison, Accounting

RE: Sales Bonuses

DATE: June 15, 200x

As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $110,000. This total does not include the $19,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else's sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing.

I do understand your disappointment, but this sale does count in June—and it just may make the difference in June's bonus. Please call me if I can be of further help.

IFRS QUESTIONS

244. The Income statement is

a. required under GAAP but not under IFRS.

b. required under IFRS in the same format as under GAAP.

c. required under IFRS but not under GAAP.

d. required under IFRS with some differences as compared to GAAP.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

245. The basic accounting entries for merchandising are

a. the same under GAAP and under IFRS.

b. required under GAAP but not under IFRS.

c. required under IFRS but not under GAAP.

d. required under IFRS with some differences as compared to GAAP.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

246. Under GAAP, companies can choose which inventory system?

Perpetual Periodic

a. Yes No

b. Yes Yes

c. No Yes

d. Yes No

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

247. Under IFRS, companies can choose which inventory system?

Perpetual Periodic

a. Yes No

b. Yes Yes

c. No Yes

d. Yes No

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

248. Companies cannot use the

a. periodic inventory system under GAAP.

b. periodic inventory system under IFRS.

c. perpetual system under IFRS.

d. none of the above; both periodic and perpetual can be used under GAAP and IFRS.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

249. Inventories are defined by IFRS as

a. held-for-sale in the ordinary Assignment of business.

b. in the process of production for sale in the ordinary Assignment of business.

c. in the form of materials or supplies to be consumed in the production process or in the providing of services.

d. all of the above.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

250. Under GAAP, companies generally classify income statement items by

a. function.

b. nature.

c. nature or function

d. date incurred.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

251. Under IFRS, companies must classify income statement items by

a. function.

b. nature.

c. nature or function

d. date incurred.

Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

252. Under GAPP, income statement items are generally described as

a. administration, distribution, manufacturing, etc.

b. salaries, depreciation, utilities, etc.

c. administration, depreciation, manufacturing, etc.

d. salaries, distribution, utilities, etc.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

253. Under IFRS, income statement items are generally described as

a. administration, distribution, manufacturing, etc.

b. salaries, depreciation, utilities, etc.

c. administration, depreciation, manufacturing, etc.

d. salaries, distribution, utilities, etc.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

254. For the income statement, IFRS requires

a. single-step approach.

b. multiple-step approach.

c. single-step approach or multiple-step approach.

d. no specific income statement approach.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

255. Under IFRS, companies can apply revaluation to

a. land, buildings, and intangible assets.

b. land, buildings, but not intangible assets.

c. intangible assets, but not land or beer.

d. no assets.

Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

256. The use of IFRS results in more transactions affecting

a. net income but not other comprehensive income.

b. other comprehensive income, but not net income.

c. but net income and other comprehensive income.

d. neither net income nor other comprehensive income.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

257. Comprehensive income under IFRS

a. includes unrealized gains and losses included in net income, in contrast to GAAP.

b. includes unrealized gains and losses included in net income, similar to GAAP.

c. excludes unrealized gains and losses included in net income, in contrast to GAAP.

d. excludes unrealized gains and losses included in net income, similar to GAAP.

Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

258. The number of years of income statement information to be presented is

a. 2 years under both GAAP and IFRS.

b. 3 years under both GAAP and IFRS.

c. 2 years under GAAP and 3 years under IFRS.

d. 3 years under GAAP and 2 years under IFRS.

Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting