SM Chapter 05

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 5
Merchandising Operations
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Identify the differences 1, 2, 3, 4 1, 2 1 1A, 1B, 2B, 1

between service and 2A,*11A *11B
merchandising
companies.
2. Prepare entries for 5, 6, 7, 8, 3, 4, 5 2, 3, 4, 6, 2A, 3A, 2B, 3B, 4, 5

purchases under a 9, 10 *13 4A, 5A 4B, 5B
perpetual inventory
system.
3. Prepare entries for sales 7, 8, 9, 10, 4, 6 2, 3, 5, 6, 2A, 3A, 2B, 3B, 4

under a perpetual 11, 12 *13 4A, 5A 4B, 5B
inventory system.
4. Prepare a single-step 13, 14, 15, 7, 8, 9 7, 8, 9, 10 5A, 6A, 5B, 6B, 1, 3, 7

and a multiple-step 16, 17 7A, 9A 7B, 9B
income statement.
5. Calculate the gross profit 18, 19, 20, 10, 11 6, 9, 10, 8A, 9A, 8B, 9B, 1, 2, 3,
margin and profit margin. 11 10A, *14A 10B, *14B 4, 6, 7
6. Prepare entries for *21, *22, *12, *13, *12, *13, *11A, *11B,
purchases and sales *23 *14, *15, *14, *15 *12A, *12B,
under a periodic *16 *13A, *13B,
inventory system and *14A, *15A *14B, *15B
calculate cost of goods
sold (Appendix 5A).
Solutions Manual 5-1 Chapter 5

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Identify appropriate inventory system. Moderate 15-20
2A Record purchase and sales transactions. Moderate 20-30
3A Record purchase and sales transactions. Moderate 20-30
4A Record and post purchase and sales transactions; Simple 30-40

prepare trial balance.
5A Record and post transactions and prepare partial Simple 30-40

financial statements.
6A Prepare single- and multiple-step income statements. Moderate 20-30
7A Record and post adjusting entries; prepare adjusted Moderate 35-45

trial balance and financial statements.
8A Calculate profitability ratios and comment. Moderate 15-20
9A Calculate amounts and assess profitability. Complex 30-40
10A Calculate ratios and comment. Simple 20-30
*11A Record purchase and sales transactions; discuss Moderate 20-30

inventory systems.
*12A Record purchase and sales transactions. Moderate 20-30
*13A Record and post purchase and sales transactions; Simple 30-40
*14A Prepare partial income statement; calculate gross Simple 20-30

profit.
*15A Prepare financial statements. Moderate 40-50
1B Identify appropriate inventory system. Moderate 15-20

ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
2B Record purchase and sales transactions. Moderate 20-30
3B Record purchase and sales transactions. Moderate 20-30
4B Record and post purchase and sales transactions; Simple 30-40

5B Record and post transactions and prepare partial Simple 30-40

financial statements.
6B Prepare single- and multiple-step income statements. Moderate 20-30
7B Record and post adjusting entries; prepare adjusted Moderate 35-45

trial balance and financial statements.
8B Calculate profitability ratios and comment. Moderate 15-20
9B Calculate amounts and assess profitability. Complex 30-40
10B Calculate ratios and comment. Simple 20-30
*11B Record purchase and sales transactions; discuss Moderate 20-30

inventory systems.
*12B Record purchase and sales transactions. Moderate 20-30
*13B Record and post purchase and sales transactions; Simple 30-40
*14B Prepare partial income statement; calculate gross Simple 20-30

profit.
*15B Prepare financial statements. Moderate 40-50

ANSWERS TO QUESTIONS
1. (a) The operating cycle is the time it takes to go from cash to cash in producing
revenues.
(b) The normal operating cycle for a merchandising company is likely to be longer than
that of a service company because in a merchandising company inventory must first
be purchased and sold, and then the receivables must be collected whereas in a
service company the services only need to be provided (not purchased first and
then stored until sold) and then the receivables must be collected.
2. (a) The income measurement process of a merchandising company is the same as the
service company in that profit is arrived at by deducting expenses from revenues.
(b) The income measurement process of a merchandising company differs from that of
a service company in that its revenue is derived from sales revenue, not service
revenue. In addition, cost of goods sold is deducted from sales revenue to
determine gross profit, before operating and other expenses similar to both types of
companies are deducted (or other revenues are added).
3. The company needs to compare the cost of the detailed record keeping required in a
perpetual inventory system to the benefits of having the additional information about the
inventory. One of the benefits of a perpetual inventory system is the ability to answer
questions from customers about merchandise availability. In a used clothing business,
this may not be of much benefit unless each inventory item is unique. Another benefit is
the monitoring of inventory quantities in order to avoid running out of stock. Again, this
may not be of benefit since the company does not order recurring or similar
merchandise, and may not have a supplier to order from. But if the company is selling
used clothing on consignment it will need to track each item in order to determine which
consignor to pay when an item is sold.
The company should carefully determine the cost of the detailed record keeping
required, in particular for a new company. A perpetual inventory system requires more
record keeping and therefore is more expensive to use. For example, a perpetual
inventory system usually requires an investment in a point of sale system that is
integrated with the inventory system.
4. A physical count is an important control feature. By using a perpetual inventory system,

a company knows what should be on hand. Performing a physical count and checking it
to the perpetual records is necessary to detect any errors in record keeping and/or
shortages in stock.
5. The reason for recording the purchase of merchandise for resale in a separate account
is to enable a company to determine its cost of goods sold and gross profit. This
information is useful in managing costs and setting prices.

Answers to Questions (Continued)

6. (a) The value of the purchase discount to Butler Roofing is $100.00 ($10,000 × 1%).
(b) Failing to take advantage of the discount terms, is like paying the supplier an extra
$100 in order to settle a $9,900 invoice 20 days later. This works out to 1.01% [$100
÷ $9,900] every 20 days. On an annual basis this amounts to 18.4% [($100 ÷
$9,900 × (365 ÷ 20)].
7. The company should record the sale as revenue in June, when it is sold to a customer.
The merchandise purchased should be recorded as an asset, merchandise inventory, in
April. It should be recorded as cost of goods sold (an expense) in June when the
inventory is sold and the revenue is recognized. This is necessary in order to match the
cost with the related revenue.
8. (a) FOB shipping point means that the goods are placed free on board by the seller at
the point of shipping. The buyer pays the freight costs from the point of shipping to
the buyer’s destination because title passes at shipping point. FOB destination
means the goods are delivered by the seller to their destination where the title
passes. The seller pays for shipping to the buyer’s destination.
(b) FOB shipping point will result in a debit to the Merchandise Inventory account by the
buyer because title has transferred at shipping point and the inventory is now owned
by the buyer. FOB destination will result in a debit to Freight Out by the seller
because they are paying for the freight.
9. In a perpetual inventory system, purchase returns are credited to the Merchandise

Inventory because the items purchased have been returned to the vendor and are no
longer available to be sold to customers. Sales returns are not debited directly to the
Sales account because this would not provide information about the goods returned.
This information can be useful in making decisions. Debiting returns directly to sales
may also cause problems in comparing sales for different periods.
10. (a) A quantity discount gives a reduction in the price according to the volume of the
purchase. A purchase discount is offered by a seller to a buyer for early payment of
an invoice. When the buyer pays the invoice within the discount period, the amount
of the discount decreases the Merchandise Inventory account. A sales discount is
the same as a purchase discount but from the seller’s point of view.
(b) Quantity discounts are not recorded or accounted for separately but become part of
the recorded sales price. When collected within the discount period, the seller
records the discount as a debit to the Sales Discounts account, which is a contra
revenue account to Sales. Buyers record purchase discounts when taken as a credit
to Merchandise Inventory under the perpetual system or Purchase Discounts when
using the periodic system.


11. If the inventory is not resaleable, it cannot be included in inventory since it cannot be
resold and it has no value. The cost remains in cost of goods sold since it is a cost of
doing business. If the inventory is resaleable, it still has value to the company. In this
case, the inventory is debited to inventory again and the cost of goods sold is credited.
12. By shipping more product than was ordered, customers will be annoyed with Agnew
Inc. and there will be damage done to customer relationships. Goods that are returned
will cost additional freight charges. Annoyed customers could possibly refuse the
whole order which will result in a lost sale. It is not an ethical tactic to implement this
procedure as the objective is obviously to manipulate sales results and boost profit in
the current year.
13. In a single-step income statement, all data are classified into two categories: (1)
revenues and (2) expenses. It is referred to as a single-step income statement
because only a single step—subtracting expenses from revenues—is needed to
determine profit before income tax. A multiple-step income statement requires several
steps to determine profit before income tax. First, cost of goods sold is deducted from
sales to determine gross profit. Operating expenses are then deducted to calculate
profit from operations. Finally, other revenues and expenses are added or deducted to
determine profit before income tax. The deduction of income tax to calculate profit
(loss) is the same under both formats. In addition, both formats produce the same
profit amount for the period.
14. Shoppers Drug Mart uses a multiple-step income statement.
15. (a) When classifying expenses by their nature, they are reported in accordance with
their natural classification (for example, salaries, deprecation, and so on). When
classifying expenses by their function, they are reported according to the activity
(business function) for which they were incurred (for example, cost of goods sold,
administrative, selling).
(b) It does not matter whether a single-step or multiple-step income statement is

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

operations are financed. This is not always within the company’s control and is usually
not a decision of the general manager but of the chief financial officer.


18. The difference between gross profit margin and profit margin is that the gross profit
margin measures the amount by which the selling price exceeds the cost of goods sold
while the profit margin measures the extent to which sales cover all expenses
(including the cost of goods sold).
19. Factors affecting a company’s gross profit margin include the selling price and the cost
of the merchandise. Recall that gross profit = net sales − cost of goods sold. Selling
products with a higher price or “mark-up” or selling products with a lower cost would
result in an increased gross profit margin. Selling products with a lower price (perhaps
dues to increased competition that results in lower selling prices) or selling products
with a higher cost (perhaps due to price increases from suppliers and shippers) would
result in a lower gross profit margin.
20. High gross profit Low gross profit

Computer services and Low-price retail companies such as
software companies Walmart
Pharmaceutical manufacturers Grocery stores
Luxury goods retailers Forestry and wood products
*21.
(a) (b)
Accounts Added/Deducted Normal Balance
Purchase Returns and Allowances Deducted Credit
Purchase Discounts Deducted Credit
Freight In Added Debit
*22. Periodic System
Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases –

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


*23. The calculation of cost of goods sold is shown in detail in the income statement of a
company using the periodic system. In a perpetual system, it is one line and amount
only.
Periodic System
Cost of Goods Sold =

1. Add the cost of goods purchased (where the cost of goods purchased is equal to
purchases less purchases discounts and purchases returns and allowances plus
freight in) to the cost of goods on hand at the beginning of the period (beginning
inventory). The result is the cost of goods available for sale.
2. Subtract the cost of goods on hand at the end of the period (ending inventory) from
the cost of goods available for sale. The result is the cost of goods sold.
Perpetual System
Cost of Goods Sold = one number, which is the total of cost of goods sold as
previously determined and recorded for all sales.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 5-1

(a) The company with the most efficient operating cycle is Company A as it uses the
fewest number of days in its cycle to obtain cash.
(b) The company which is most likely a service company is Company A as it does not
have to manufacture or deliver inventory and consequently takes the fewest number of
days to obtain cash. Company C, with the highest number of days in its operating
cycle is likely the manufacturing company and the merchandising company would be
in the middle (Company B) with neither the highest nor the lowest number of days in its
operating cycle.
BRIEF EXERCISE 5-2

(a)
[1] Profit before tax = $100 – $65 = $35
[2] Profit = $35 (from [1]) – $9 = $26
[3] Cost of goods sold = $100 – $60 = $40
[4] Operating expenses = $60 – $35 = $25
[5] Income tax expense = $35 – $26 = $9
(b) Company A is the service company, since it has no cost of goods sold. Company B is
the merchandising company, since it has cost of goods sold.

BRIEF EXERCISE 5-3
Merchandise Inventory
Beginning Balance 25,000
Purchases 100,000
12,000 Purchase returns
4,400 Purchase discounts
Freight in 2,400
93,000 Cost of goods sold
Ending Balance 18,000
Purchases Merchandise Inventory............................................. 100,000

Accounts Payable ............................................... 100,000
Purchase Accounts Payable .................................................... 12,000

Returns Merchandise Inventory ....................................... 12,000
Purchase Accounts Payable ($100,000 – $12,000) ................. 88,000

Discounts Merchandise Inventory ($88,000 × 5%) .............. 4,400
Cash ................................................................... 83,600
Freight In Merchandise Inventory............................................. 2,400

Cost of Cost of Goods Sold .................................................. 93,000

Sales Merchandise Inventory ....................................... 93,000
BRIEF EXERCISE 5-4
Pocras Corporation (Buyer):
Aug. 24 Merchandise Inventory............................................. 900

Accounts Payable ............................................... 900
Wydell Inc. (Seller):
Aug. 24 Accounts Receivable ............................................... 900

Sales .................................................................. 900
24 Cost of Goods Sold .................................................. 590

Merchandise Inventory ....................................... 590

BRIEF EXERCISE 5-5

Jan. 2 Merchandise Inventory............................................. 15,000
5 No entry necessary – Freight costs paid by Fundy Corp.
6 Accounts Payable .................................................... 2,000

Merchandise Inventory ....................................... 2,000

Merchandise Inventory ($13,000 × 2%) .............. 260
Cash ................................................................... 12,740
BRIEF EXERCISE 5-6

Jan. 2 Accounts Receivable ............................................... 15,000
Sales .................................................................. 15,000
2 Cost of Goods Sold .................................................. 11,250

5 Freight Out ............................................................... 300

Cash ................................................................... 300
6 Sales Returns and Allowances ................................ 2,000

Accounts Receivable .......................................... 2,000
6 Merchandise Inventory............................................. 1,500

Cost of Goods Sold ............................................ 1,500
11 Cash ........................................................................ 12,740

Sales Discounts ($13,000 × 2%).............................. 260

BRIEF EXERCISE 5-7

(a) Sales.................................................................................. $650,000
Less: Sales returns and allowances ................................. $25,000
Sales discounts ....................................................... 55,000 80,000
Net sales............................................................................ $570,000
(b) Net sales............................................................................ $570,000

Less: Cost of goods sold .................................................. 320,000
Gross profit ........................................................................ $250,000
(c) Gross profit ........................................................................ $250,000

Less: Administrative expenses ......................................... $100,000
Selling expenses ..................................................... 25,000 125,000
Profit from operations ........................................................ $125,000
(d) Profit from operations ........................................................ $125,000

Add: Other revenues ....................................................... $20,000
Less: Other expenses....................................................... (30,000) (10,000)
Profit before income tax ..................................................... $115,000
(e) Profit before income tax ..................................................... $115,000

Less: Income tax expense ................................................ 25,000
Profit .................................................................................. $ 90,000
BRIEF EXERCISE 5-8

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

Cost of goods sold Expenses Cost of goods sold
Freight out Expenses Operating expenses
Income tax expense Income tax expense Income tax expense
Interest expense Expenses Other revenues and expenses
Interest revenue Revenues Other revenues and expenses
Rent revenue Revenues Other revenues and expenses
Salaries expense Expenses Operating expenses
Sales Revenues Sales revenue
Sales discounts Revenues Sales revenue
Sales returns and allowances Revenues Sales revenue

BRIEF EXERCISE 5-9
(a) The company is using a multiple-step form of income statement.
(b) The company is classifying its expenses by their function, they are reported according
to the activity (business function) for which they were incurred (for example, cost of
goods sold, administrative, selling).
BRIEF EXERCISE 5-10
(a)
2015 2014
Gross profit $250,000 – $137,500 $200,000 – $114,000

margin = 45.0% = 43.0%
$250,000 $200,000
$200,000 – $114,000 –
Profit
$250,000 – $137,500 – $40,000 + $10,000 –
margin = 17.0% = 20.5%
$50,000 – $20,000 $15,000
$250,000 $200,000
(b) The Modder Corporation’s gross profit margin increased significantly in 2015 indicating
an increase in the percentage mark-up, or a reduction in the cost of goods sold, or
both. On the other hand, in 2015, the company’s profit margin had dropped
significantly. The decrease in profit margin indicates that in spite of an increase in
gross profit, the increase operating expenses overtook this increase in gross profit,
leaving a decline in profit margin.

BRIEF EXERCISE 5-11

(a)
($ in millions) 2012 2011
Gross profit $11,427.2 – $7,929.3 $10,387.1 – $7,326.4

margin = 30.6% = 29.5%
$11,427.2 $10,387.1
Profit $499.2 $467.0

= 4.4% = 4.5%
margin $11,427.2 $10,387.1
(b) The Canadian Tire Corporation’s gross profit margin increased marginally in 2012
indicating a slight increase in the percentage mark-up it has been able to command, or
a lowering of the costs of goods sold, or both. On the other hand, the profit margin
decreased slightly in 2012. This decrease is due to operating expenses or interest or
income tax expense increasing at a greater pace than the increase in gross profit.
*BRIEF EXERCISE 5-12

Jan. 2 Purchases ................................................................ 15,000
5 No entry necessary - Freight costs paid by Fundy Corp.

Purchase Returns and Allowances ..................... 2,000

Purchase Discounts ($13,000 × 2%) .................. 260
Cash .................................................................. 12,740


Jan. 2 Accounts Receivable ............................................... 15,000
Sales .................................................................. 15,000
5 Freight Out ............................................................... 300

Cash ................................................................... 300

11 Cash ........................................................................ 12,740

Sales Discounts ....................................................... 260

(a) Sales.................................................................................. $750,000
Sales discounts ....................................................... 25,000 100,000
Net Sales ........................................................................... $650,000
(b) Purchases.......................................................................... $425,000

Less: Purchase returns and allowances ........................... $11,000
Purchase discounts................................................. 9,000 20,000
Net purchases ................................................................... $405,000
(c) Net purchases ................................................................... $405,000

Add: Freight in ................................................................. 10,000
Cost of goods purchased ................................................... $415,000
(d) Beginning merchandise inventory...................................... $ 60,000

Add: Cost of goods purchased ........................................ 415,000
Cost of goods available for sale......................................... 475,000
Less: Ending merchandise inventory ................................ 100,000
Cost of goods sold ............................................................. $375,000
(e) Net sales............................................................................ $650,000

Less: Cost of goods sold ................................................... 375,000
Gross profit ........................................................................ $275,000

(a) Cost of goods sold

Beginning merchandise inventory.............................. $105,000
Purchases.................................................................. $195,000
Less: Purchase returns and allowances .................... $ 6,600
Purchase discounts .......................................... 20,400 27,000
Net purchases ........................................................... 168,000
Add: Freight In ........................................................... 5,250
Cost of goods purchased ........................................... 173,250
Cost of goods available for sale................................. 278,250
Ending merchandise inventory .................................. 120,000
Cost of goods sold ..................................................... $158,250
(b) There would be no difference in the remainder of the income statement for Halifax
Limited whether the periodic or perpetual inventory systems were used.
Dec. 31 Merchandise Inventory (ending) .............................. 24,000

Cost of Goods Sold .................................................. 271,000*
Purchase Discounts ................................................. 4,000
Merchandise Inventory (beginning) .................... 30,000
Purchases........................................................... 262,000
Freight In ............................................................ 7,000
* Cost of goods sold = Beginning inventory + Purchases − Purchase discounts −

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $30,000 + $262,000 − $4,000 + $7,000 – $24,000 =
$271,000

SOLUTIONS TO EXERCISES
EXERCISE 5-1
(a) Toys’ R Us, Inc. is a retailer, Fasken Martineau Dumoulin LLP is a service firm, and
Atlantic Grocery Distributors Ltd. is a wholesaler.
(b) The operating cycle of these three businesses will be different. The longest operating
cycle will be experienced by the retailer, as the sales of merchandise will be the
slowest. The organization with the shortest operating cycle will be the law firm that
does not sell inventory. The third company, the distributing wholesaler, will have an
operating cycle between that of the retailer and the service firm because its inventory
is more likely to sell faster.
EXERCISE 5-2
Account Debited Account Credited

Item (a) (b) (c) (a) (b) (c)
1. Asset Merchandise +$3,500 Asset Cash –$3,500
Inventory
2. Asset Merchandise +$4,000 Liability Accounts +$4,000
Inventory Payable
3. Asset Merchandise +$400 Asset Cash –$400
Inventory
4. Liability Accounts –$750 Asset Merchandise –$750
Payable Inventory
5. Liability Accounts –$3,500 Asset Cash –$3,430
Payable Asset Merchandise
Inventory –$70
6. Asset Accounts +$10,000 Revenue Sales +$10,000
Receivable
Expense Cost of Goods +$4,000 Asset Merchandise –$4,000

Sold Inventory
7. Expense Freight Out +$600 Asset Cash –$600
8. Contra Sales Returns +$1,000 Asset Accounts –$1,000
Sales and Allowances Receivable
Asset Merchandise +$400 Expense Cost of –$400

Inventory Goods Sold
9. Contra Sales Returns +$750 Asset Cash –$750
Sales and Allowances
10. Asset Cash +$6,000 Asset Accounts –$6,000

Receivable

EXERCISE 5-3
(a)
Sept. 2 Merchandise Inventory (75 × $20) .............................. 1,500
Accounts Payable ................................................. 1,500
10 Accounts Payable ....................................................... 40

Merchandise Inventory .......................................... 40
11 Accounts Receivable (26 × $30) ................................. 780

Sales ..................................................................... 780
Cost of Goods Sold (26 × $20) ................................... 520

14 Sales Returns and Allowances ................................... 30

Accounts Receivable ............................................. 30
Merchandise Inventory ............................................... 20

Cost of Goods Sold ............................................... 20
21 Accounts Receivable (30 × $30) ................................. 900

Sales ..................................................................... 900
Cost of Goods Sold (30 × $20) ................................... 600

29 Accounts Payable ($1,500 – $40)............................... 1,460

Cash ...................................................................... 1,460
30 Cash ($900 – $9) ........................................................ 891

Sales Discounts ($900 × 1%) ..................................... 9
Accounts Receivable ............................................. 900

EXERCISE 5-3 (Continued)

(b)
Sept. 1 Bal. 200 Sept.10 40
2 1,500 11 520
14 20 21 600
Sept. 30 Bal. 560
Cost of Goods Sold

Sept. 11 520 Sept. 14 20
21 600
Sept. 30 Bal. 1,100
(c)
Number of calculators at September 30: 10 + 75 – 2 – 26 + 1 – 30 = 28
Cost of calculators at September 30: 28 × $20 = $560

EXERCISE 5-4
(a) April 3 Merchandise Inventory .................................. 28,000
Accounts Payable .................................... 28,000
6 Merchandise Inventory .................................. 700

Cash ........................................................ 700
7 Supplies ........................................................ 5,000

Accounts Payable .................................... 5,000
8 Accounts Payable ......................................... 3,500

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

Cash ....................................................... 24,500
(b) April 12 Accounts Payable ($28,000 – $3,500) .......... 24,500

Cash ($24,500 – $245) ............................ 24,255
Merchandise Inventory ($24,500 × 1%) ... 245

EXERCISE 5-5
(a) April 3 Accounts Receivable ..................................... 28,000
Sales ........................................................ 28,000
Cost of Goods Sold ....................................... 19,000

Merchandise Inventory............................. 19,000
6 No entry necessary - Freight costs paid by Olaf.
7 No entry necessary.
8 Sales Returns and Allowances...................... 3,500

Accounts Receivable ............................... 3,500
Merchandise Inventory .................................. 2,300

Cost of Goods Sold .................................. 2,300
30 Cash .............................................................. 24,500

Accounts Receivable ($28,000 – $3,500) 24,500
(b) April 12 Cash ($28,000 − $3,500 – $245)................... 24,255

Sales Discounts [($28,000 – $3,500) × 1%] .. 245
Accounts Receivable ($28,000 – $3,500) 24,500

EXERCISE 5-6
(a) Dec. 3 Accounts Receivable .......................................... 18,000
Sales ............................................................. 18,000
3 Cost of Goods Sold ............................................ 10,000

8 Sales Returns and Allowances ........................... 1,200

Accounts Receivable ..................................... 1,200
Merchandise Inventory ....................................... 650

Cost of Goods Sold ....................................... 650
11 Cash ($16,800 – $336) ....................................... 16,464

Sales Discounts [($18,000 – $1,200) × 2%] ....... 336
Accounts Receivable ($18,000 – $1,200) ..... 16,800
(b) Dec. 3 Merchandise Inventory ....................................... 18,000

Accounts Payable ......................................... 18,000
7 Merchandise Inventory ....................................... 450

Cash .............................................................. 450
8 Accounts Payable ............................................... 1,200

11 Accounts Payable ($18,000 – $1,200)................ 16,800

[($18,000 – $1,200) × 2%]......................... 336
Cash ($16,800 – $336) ................................. 16,464
(c) Sales................................................................................... $18,000

Less: Sales returns and allowances .................................. $1,200
Sales discounts ........................................................ 336 1,536
Net sales............................................................................. 16,464
Cost of goods sold ($10,000 – $650).................................. 9,350
Gross profit ......................................................................... $7,114

EXERCISE 5-7
Account Statement Classification
Accounts payable Statement of financial position Current liabilities

Accounts receivable Statement of financial position Current assets
Accumulated depreciation Statement of financial position Property, plant, and equipment
(contra account)
Administrative expenses Income statement Operating expenses
Buildings Statement of financial position Property, plant, and equipment
Cash Statement of financial position Current assets
Common shares Statement of financial position Shareholders’ equity
Equipment Statement of financial position Property, plant, and equipment
Income tax expense Income statement Income tax expenses
Interest expense Income statement Other revenues and expenses
Interest payable Statement of financial position Current liabilities
Land Statement of financial position Property, plant, and equipment
Merchandise inventory Statement of financial position Current assets
Mortgage payable Statement of financial position Non-current liabilities
Prepaid insurance Statement of financial position Current assets
Property tax payable Statement of financial position Current liabilities
Salaries payable Statement of financial position Current liabilities
Sales Income statement Revenue
Sales discounts Income statement Revenue (contra account)
Sales returns and allowances Income statement Revenue (contra account)
Unearned revenue Statement of financial position Current liabilities

EXERCISE 5-8
(a)
BLUE DOOR CORPORATION
Income Statement (Single-Step)
Year Ended December 31, 2015
Revenues
Sales ................................................................................ $2,400,000
Less: Sales returns and allowances .................. $41,000
Sales discounts ........................................ 8,500 49,500
Net sales .......................................................................... 2,350,500
Interest revenue .............................................................. 30,000
Rent revenue .................................................................. 24,000 $2,404,500
Expenses
Cost of goods sold ........................................................... $1,085,000
Salaries expense ............................................................. 675,000
Depreciation expense ...................................................... 125,000
Interest expense .............................................................. 70,000
Advertising expense ......................................................... 55,000
Freight out ........................................................................ 25,000
Insurance expense........................................................... 15,000 2,050,000
Profit before income tax ............................................................................... 354,500
Income tax expense ..................................................................................... 70,000
Profit ............................................................................................................. $ 284,500


(b)
BLUE DOOR CORPORATION
Income Statement (Multiple-Step)
Sales ........................................................................................................ $2,400,000

Sales discounts ...................................................... 8,500 49,500
Net sales .................................................................................................. 2,350,500
Cost of goods sold.................................................................................... 1,085,000
Gross profit ............................................................................................... 1,265,500
Operating expenses
Salaries expense ......................................................... $675,000
Depreciation expense .................................................. 125,000
Advertising expense ..................................................... 55,000
Freight out .................................................................... 25,000
Insurance expense....................................................... 15,000
Total operating expenses .............................................................. 895,000
Profit from operations ............................................................................... 370,500
Other revenues and expenses
Interest revenue .......................................................... $30,000
Rent revenue ............................................................... 24,000
Interest expense .......................................................... (70,000) (16,000)
Profit before income tax ........................................................................... 354,500
Income tax expense ................................................................................. 70,000
Profit ......................................................................................................... $ 284,500
(c) The Blue Door Corporation is classifying its expenses by function, which is a method
of classifying expenses by functional areas. For smaller companies such as this one,
the difference between classification of items on the income statement by function or
nature is not significant although if listed by nature, cost of goods sold would typically
be shown in two parts: goods purchased and changes in inventory.

EXERCISE 5-9
(a) Young Ltd.
Sales ............................................................................................ $99,000

*Less: Sales returns and allowances [1].................................. 10,000
Net sales ...................................................................................... $89,000
Net sales ...................................................................................... $89,000

Less: Cost of goods sold .............................................................. 58,750
*Gross profit [2].......................................................................... $30,250
Gross profit .................................................................................. $30,250

Less: Operating expenses ........................................................... 19,500
*Profit from operations [3] ........................................................ $10,750
Profit from operations................................................................... $10,750

Add: Other revenues .................................................................... 750
*Profit before income tax [4] ..................................................... $11,500
Profit before income tax ............................................................... $11,500

Less: Income tax expense ........................................................... 2,300
*Profit [5] ..................................................................................... $ 9,200
Rioux Lteé
*Sales [6]..................................................................................... $105,000

Less: Sales returns and allowances............................................. 5,000
Net sales ...................................................................................... $100,000
Net sales ...................................................................................... $100,000

*Less: Cost of goods sold [7] ................................................... 60,000
Gross profit .................................................................................. $ 40,000
Gross profit .................................................................................. $40,000

*Less: Operating expenses [8].................................................. 22,000

Less: Other expenses .................................................................. 2,000
*Profit before income tax [9] ..................................................... $16,000
Profit before income tax ............................................................... $16,000

*Less: Income tax expense [10] ................................................ 3,200
Profit ............................................................................................ $12,800
* Indicates missing amount


(b) Young Rioux
Gross profit margin $30,250 ÷ $89,000 = 34.0% $40,000 ÷ $100,000 = 40.0%
Profit margin $9,200 ÷ $89,000 = 10.3% $12,800 ÷ $100,000 = 12.8%
EXERCISE 5-10
(a)
MONTMORENCY LTÉE
Income Statement (Multiple-step)
Year Ended August 31, 2015
Net sales .................................................................................................. $7,090,000

Cost of goods sold.................................................................................... 4,030,000
Gross profit ............................................................................................... 3,060,000
Operating expenses
Administrative expenses .............................................. $670,000
Selling expenses .......................................................... 260,000
Total operating expenses .............................................................. 930,000
Profit from operations ............................................................................... 2,130,000
Other expenses................................................................................... 270,000
Profit before income tax ........................................................................... 1,860,000
Income tax expense ................................................................................. 560,000
Profit ......................................................................................................... $1,300,000
(b) Expenses are classified by function (cost of goods sold, administrative, selling) and not
by nature.
(c) Gross profit margin $3,060,000 ÷ $7,090,000 = 43.2%
Profit margin $1,300,000 ÷ $7,090,000 = 18.3%

EXERCISE 5-11
(in USD millions)
(a) Gross profit margin

2012: ($50,705 – $38,132) ÷ $50,705 = 24.8%
2011: ($49,747 – $37,197) ÷ $49,747 = 25.2%
2010: ($49,694 – $37,534) ÷ $49,694 = 24.5%
Profit margin (using profit)

2012: $(1,231) ÷ $50,705 = –2.4%
2011: $1,003 ÷ $49,747 = 2.0%
2010: $1,317 ÷ $49,694 = 2.7%
(b) While the gross profit margin has been holding steady, with a slight deterioration from
in 2012, the profit margin deteriorated slightly in 2011 and then deteriorated
significantly and turned negative in 2012.
(c) Profit margin (using profit from operations)

2012: $1,085 ÷ $50,705 = 2.1%
2011: $2,374 ÷ $49,747 = 4.8%
2010: $2,235 ÷ $49,694 = 4.5%
The profit margin using profit from operations has followed the same trend in 2010 and
2012 when compared to profit margin using profit from operations. On the other hand,
profit margin using profit decreased in 2011 while profit margin using profit from
operations increased in 2011. The major element that is in the profit margin ratio but is
not in the gross profit margin is operating expenses. In 2011, the increased profit
margin is likely due to lower operating expenses relative to sales but in 2012, because
the profit margin deteriorated so much, it is likely due to increased operating expenses
relative to sales.

*EXERCISE 5-12
Olaf Corp. (Buyer)
(a) Apr. 3 Purchases................................................................... 28,000

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

Cash ...................................................................... 700
7 Supplies ...................................................................... 5,000

8 Accounts Payable ....................................................... 3,500

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

Cash ..................................................................... 24,500
(b) Apr. 12 Accounts Payable ($28,000 – $3,500)........................ 24,500

Cash ($24,500 – $245).......................................... 24,255
Purchase Discounts ($24,500 × 1%) ..................... 245
Devito Ltd. (Seller)
(a) Apr. 3 Accounts Receivable .................................................. 28,000

Sales ..................................................................... 28,000
8 Sales Returns and Allowances ................................... 3,500

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

Accounts Receivable ($28,000 – $3,500).............. 24,500
(b) Apr. 12 Cash ($24,500 – $245) ............................................... 24,255

Sales Discounts [($28,000 – $3,500) × 1%] ............... 245
Accounts Receivable ($28,000 – $3,500).............. 24,500

*EXERCISE 5-13
(a) Duvall Ltd. (Seller)
(1) Perpetual Inventory System
June 10 Accounts Receivable ......................................... 5,000

Sales ............................................................ 5,000
Cost of Goods Sold ........................................... 3,000

Merchandise Inventory ................................. 3,000
11 No entry
12 Sales Returns and Allowances .......................... 500

Accounts Receivable .................................... 500
19 Cash ($4,500 – $45) .......................................... 4,455

Sales Discounts ($4,500 × 1%) ......................... 45
Accounts Receivable ($5,000 – $500) ......... 4,500
(2) Periodic Inventory System
June 10 Accounts Receivable ......................................... 5,000

Sales ............................................................ 5,000
11 No entry
12 Sales Returns and Allowances .......................... 500

19 Cash ($4,500 – $45) .......................................... 4,455

Sales Discounts ($4,500 × 1%) ......................... 45

*EXERCISE 5-13 (Continued)

(b) Pele Ltd. (Buyer)
(1) Perpetual Inventory System
June 10 Merchandise Inventory ....................................... 5,000

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

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

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

Merchandise Inventory ($4,500 × 1%) .......... 45
Cash ($4,500 – $45) ..................................... 4,455
(2) Periodic Inventory System
June 10 Purchases.......................................................... 5,000

Accounts Payable ........................................ 5,000
11 Freight In ........................................................... 250

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

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

Purchase Discounts ($4,500 × 1%) .............. 45
Cash ($4,500 – $45) .................................... 4,455

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

*EXERCISE 5-15
(a)
LIVELY LIMITED
Income Statement
Year Ended February 28, 2015
Sales revenue
Sales $435,500
Less: Sales discounts $27,300
Sales returns and allowances 15,600 42,900
Net sales 392,600
Cost of goods sold
Merchandise inventory, beginning $ 54,600
Purchases $273,000
Less: Purchase discounts 39,000
Purchase returns and allowances 20,800
Net purchases 213,200
Add: Freight in 8,450
Cost of goods purchased 221,650
Cost of goods available for sale 276,250
Less: Merchandise inventory, ending 79,300
Cost of goods sold 196,950
Gross profit 195,650
Operating expenses
Administrative expenses $120,900
Selling expenses 9,100
Total operating expenses 130,000
Profit from operations 65,650
Interest expense 7,800
Profit before income tax 57,850
Income tax expense 9,300
Profit $ 48,550
(b)
Feb. 28 Merchandise Inventory (ending) .............................. 79,300

Cost of Goods Sold .................................................. 196,950
Purchase Returns and Allowances .......................... 20,800
Purchases........................................................... 273,000
Freight In ............................................................ 8,450

SOLUTIONS TO PROBLEMS
PROBLEM 5-1A
(a) A company’s operating cycle is the average time it takes to go from cash to cash in
producing revenues. The operating cycle for a merchandising company covers the
period of time between when you purchase your inventory, to when you sell it, and to
when you eventually collect the accounts receivable from a sale.
The hair salon is having problems paying for its products because it purchases a two
month supply, paying for it immediately, with cash flow from the current month’s
operations. There is an insufficient cash float available to purchase two months of
supply at one time, and to pay immediately rather than taking advantage of the 30 day
payment period.
The hair salon’s inventory is contributing to the problem of reduced cash flow and gross
profit because some items have been in stock for a long period of time. This further
extends the operating cycle for those items.
(b) The hair salon should use the perpetual inventory system to help determine which
inventory items are out-of-stock and which items are taking a long time to sell. By
managing what inventory is purchased, fewer markdowns of the selling price will be
required, and sales should increase as there will be less chance for a stock-out. Finally,
the full 30 days should be taken on the terms with your supplier to have more cash on
hand when needed.
(c) For control reasons, a physical inventory count must always be taken at least once a
year, and ideally more often under the perpetual inventory system. By using a perpetual
inventory system, a company knows what inventory should be on hand. Performing a
physical count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock. Since the salon staff and customers are
resisting the process of scanning products at the time of sale, there might be a tendency
for staff not to scan the product, leading to errors in the perpetual inventory record.
Enforcing the scanning procedure will strengthen internal control over cash receipts as
well. If staff can avoid scanning product, they may also attempt to avoid recording a
cash sale altogether, pocketing the extra cash. This theft would lead to unrecorded
revenues, explaining the past’s poor gross profit performance of the salon.

PROBLEM 5-2A
(a) Phantom Book Warehouse Ltd. is a wholesaler. Its suppliers are publishers and its
customers are book stores.
(b)
June 1 Merchandise Inventory (140 × $18) ............................. 2,520
Accounts Payable ............................................. 2,520
3 Accounts Receivable (150 × $22) ................................ 3,300

Sales ................................................................. 3,300
Cost of Goods Sold (150 × $18) .................................. 2,700

Merchandise Inventory ...................................... 2,700
5 Accounts Payable ........................................................ 180

Merchandise Inventory (10 × $18)..................... 180
8 Accounts Receivable (80 × $25) .................................. 2,000

Sales ................................................................. 2,000
Cost of Goods Sold (80 × $18) .................................... 1,440

9 Sales Returns and Allowances .................................... 300

Accounts Receivable ......................................... 300
11 Merchandise Inventory (130 × $15) ............................. 1,950

Accounts Payable ............................................. 1,950
12 Cash ($3,300 – $66) .................................................... 3,234

Sales Discounts ($3,300 × 2%).................................... 66
Accounts Receivable ........................................ 3,300
17 Cash ($1,700 – $34) .................................................... 1,666

Sales Discounts ($1,700 × 2%).................................... 34
Accounts Receivable ($2,000 – $300) ............. 1,700
22 Accounts Receivable (125 × $25) ................................ 3,125

Sales ................................................................. 3,125
Cost of Goods Sold (125 × $15) .................................. 1,875


PROBLEM 5-2A (Continued)

(b) (Continued)
June 25 Sales Returns and Allowances .................................... 375

Accounts Receivable ......................................... 375
Merchandise Inventory (15 × $15) ............................... 225

Cost of Goods Sold ........................................... 225
29 Accounts Payable ($2,520 – $180) .............................. 2,340

Cash .................................................................. 2,340
(c)
May 31 3,150 June 3 2,700
June 1 2,520 5 180
11 1,950 8 1,440
25 225 22 1,875
June 30 Bal. 1,650
(d) Books on hand at June 30 = 175 + 140 – 150 –10 – 80 + 130 – 125 + 15 = 95
Average cost per book
= $1,650 ÷ 95 = $17.37

PROBLEM 5-3A
(a)
Sept. 2 Equipment ....................................................................... 25,000
Accounts Payable ................................................ 25,000
4 Merchandise Inventory.................................................... 65,000

Accounts Payable ................................................ 65,000
5 Supplies .......................................................................... 4,000

Cash ..................................................................... 4,000

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

Merchandise Inventory ......................................... 5,000
9 Accounts Receivable ...................................................... 20,000

Sales .................................................................... 20,000
Cost of Goods Sold ......................................................... 15,000

10 Freight Out ...................................................................... 375

Cash ..................................................................... 375
17 Cash ($20,000 – $400) ................................................... 19,600

Sales Discounts ($20,000 × 2%)..................................... 400
Accounts Receivable ............................................ 20,000
18 Accounts Payable ($65,000 – $5,000) ............................ 60,000

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

Cash ..................................................................... 6,000

Sales .................................................................... 27,000
Cost of Goods Sold ......................................................... 20,000



(a) (Continued)
Sept. 23 No entry necessary.
28 Sales Returns and Allowances ....................................... 10,000

Merchandise Inventory.................................................... 7,500

Cost of Goods Sold .............................................. 7,500
(b)
Oct. 3 Accounts Payable ($65,000 – $5,000) ............................ 60,000

Cash .................................................................... 60,000
The cost of missing this purchase discount is the amount recorded as a reduction to the
Merchandise Inventory account when the payment was made within the discount period of
September 18 ($60,000 × 1%) = $600. Expressing this in terms of an annual interest rate, it
would be the equivalent of paying 24.6% ($600 ÷ $59,400 × 365/15) for the use of the money
for 15 days.

PROBLEM 5-4A
(b)
April 3 Merchandise Inventory ............................................ 4,600

Accounts Payable ........................................... 4,600
6 Merchandise Inventory ............................................ 120

Cash ............................................................... 120
9 Accounts Payable .................................................... 200

Merchandise Inventory ................................... 200
10 Accounts Receivable ............................................... 5,020

Sales .............................................................. 5,020
Cost of Goods Sold ................................................. 2,010

Merchandise Inventory ................................... 2,010
12 Accounts Payable ($4,600 – $200) ......................... 4,400

Merchandise Inventory ($4,400 × 1%) ............ 44
Cash ($4,400 – $44) ....................................... 4,356
14 Cash ....................................................................... 2,125

Accounts Receivable ...................................... 2,125
16 Merchandise Inventory ............................................ 1,300



Sales .............................................................. 3,200



(b) (Continued)
April 24 Accounts Payable ($1,300 – $100) ......................... 1,200

Merchandise Inventory ($1,200 × 2%)............ 24
Cash ($1,200 – $24) ....................................... 1,176
27 Sales Returns and Allowances ................................ 85

Accounts Receivable ...................................... 85
(a) and (b)

Cash Accounts Payable
Apr. 1 Bal. 6,000 Apr. 6 120 Apr. 9 200 Apr. 3 4,600
Apr. 14 2,125 Apr. 12 4,356 Apr. 12 4,400 Apr. 16 1,300
Apr. 24 1,176 Apr. 17 100
Apr. 30 Bal. 2,473 Apr. 24 1,200
Apr. 30 Bal. 0
Accounts Receivable
Apr. 10 5,020 Apr. 14 2,125 Sales
Apr. 20 3,200 Apr. 27 85 Apr. 10 5,020
Apr. 30 Bal. 6,010 Apr. 20 3,200
Apr. 30 Bal. 8,220
Apr. 1 Bal. 2,500 Apr. 9 200 Sales Returns and Allowances
Apr. 3 4,600 Apr. 10 2,010 Apr. 27 85
Apr. 6 120 Apr. 12 44 Apr. 30 Bal. 85
Apr. 16 1,300 Apr. 17 100
Apr. 20 1,285 Cost of Goods Sold
Apr. 24 24 Apr. 10 2,010
Apr. 30 Bal. 4,857 Apr. 20 1,285
Apr. 30 Bal. 3,295
Common Shares
Apr. 1 Bal. 5,100 Retained Earnings
Apr. 30 Bal. 5,100 Apr. 1 Bal. 3,400
Apr. 30 Bal. 3,400


(c)
PINES GOLF SHOP
Trial Balance
April 30, 2015
Debit Credit
Cash .................................................................................. $ 2,473
Accounts receivable .......................................................... 6,010
Merchandise inventory....................................................... 4,857
Common shares ................................................................ $ 5,100
Retained earnings ............................................................. 3,400
Sales.................................................................................. 8,220
Sales returns and allowances ............................................ 85
Cost of goods sold ............................................................. 3,295 00 0 00
$16,720 $16,720

PROBLEM 5-5A
(b)
May 1 Merchandise Inventory ............................................ 5,800


Cash ............................................................... 145

Sales .............................................................. 3,500

7 Freight Out .............................................................. 90

Cash ............................................................... 90


Cash ............................................................... 5,544
11 Supplies................................................................... 400
Cash ............................................................... 400
14 Cash ($3,500 – $70) ................................................ 3,430

Sales Discounts ($3,500 × 2%) ............................... 70
15 Cash ....................................................................... 1,000


21 No entry required (freight paid by Harlow)
22 Cash ....................................................................... 6,500

Sales .............................................................. 6,500



(b) (Continued)
May 29 Sales Returns and Allowances ................................ 100

Cash ............................................................... 100
Merchandise Inventory ............................................ 60

Cost of Goods Sold ........................................ 60
31 Cost of Goods Sold ................................................. 149

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

$200 – $56 + $2,000 – $3,900 + $60 = $5,249


(a) and (b)

May 1 Bal. 7,000 May 3 145 May 8 200 May 1 5,800
May 14 3,430 May 7 90 May 9 5,600 May 18 2,000
May 15 1,000 May 9 5,544 May 31 Bal. 2,000
May 22 6,500 May 11 400
May 29 100 Sales
May31 Bal. 11,651 May 4 3,500
May 22 6,500
Accounts Receivable May 31 Bal. 10,000
May 1 Bal. 1,500 May 14 3,500
May 4 3,500 May 15 1,000 Sales Returns and Allowances
May 31 Bal. 500 May 29 100
May 31 Bal. 100
May 1 3,500 May 4 2,100 Sales Discounts
May 1 5,800 May 8 200 May 14 70
May 3 145 May 9 56 May 31 Bal. 70
May 18 2,000 May 22 3,900
May 29 60 May 31 149 Freight Out
May 31 Bal. 5,100 May 7 90
May 31 Bal. 90
Supplies
May 11 400 Cost of Goods Sold
May 31 Bal. 400 May 4 2,100 May 29 60
May 22 3,900
Common Shares May 31 149
May 1 Bal. 8,000 May 31 Bal. 6,089
May 31 Bal. 8,000
Retained Earnings
May 1 Bal. 4,000
May 31 Bal. 4,000


(c)
EAGLE HARDWARE STORE LTD.
Income Statement (Partial)
Month Ended May 31, 2015
Sales .................................................................................. $10,000

Less: Sales returns and allowances ................................... $100
Sales discounts ......................................................... 70 170
Net sales.............................................................................. 9,830
Cost of goods sold ............................................................... 6,089
Gross profit .......................................................................... $ 3,741
(d)
EAGLE HARDWARE STORE LTD.
Statement of Financial Position (Partial)
May 31, 2015
Assets
Current assets
Cash ......................................................................... $11,651
Accounts receivable .................................................. 500
Merchandise inventory .............................................. 5,100
Supplies .................................................................... 400
Total current assets........................................ $17,651

PROBLEM 5-6A
(a)
CLUB CANADA WHOLESALE INC.

Income Statement (Single-step)
Revenues
Sales ......................................................................................... $922,360
Less: Sales returns and allowances ...................... $17,745
Sales discounts ............................................ 4,615 22,360
Net sales ................................................................................. 900,000
Interest revenue ...................................................................... 2,400 $902,400
Expenses
Cost of goods sold .................................................................. $692,100
Administrative expenses ......................................................... 116,115
Interest expense ..................................................................... 8,830
Selling expenses..................................................................... 5,900 822,945
Profit before income tax ............................................................. 79,455
Income tax expense ................................................................... 15,500
Profit ........................................................................................... $ 63,955


(b)
CLUB CANADA WHOLESALE INC.
Sales .................................................................................... $922,360

Less: Sales returns and allowances ............................... $17,745
Sales discounts .................................................... 4,615 22,360
Net sales ........................................................................... 900,000
Cost of goods sold.................................................................. 692,100
Gross profit ............................................................................. 207,900
Operating expenses
Selling expenses ......................................................... 5,900
Total operating expenses ....................................... 0 122,015
Profit from operations ............................................................. 85,885
Interest revenue ............................................................... ($2,400)
Interest expense ............................................................... 8,830 6,430
Profit before income tax ......................................................... 79,455
Income tax expense ............................................................... 15,500
Profit ....................................................................................... $ 63,955
(c) Both income statements result in the same amount of profit. The multiple-step income
statement provides the user with much more information than the single-step income
statement does. The multiple-step income statement provides information on gross
profit and profit from operations which is not included on the single-step income
statement.
(d) Club Canada Wholesale Inc. is classifying its expenses by their function. They are
reported according to the activity (business function) for which they were incurred (for
example, cost of goods sold, administrative, selling).

PROBLEM 5-7A
(b)
Dec. 31 Insurance Expense ($3,000 × 11/12) ..................................... 2,750

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

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

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

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

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

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

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

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

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


(a) and (b)
Cash Equipment
Dec. 31 17,000 Dec. 31 45,000
Dec.31 Bal. 17,000 Dec.31 Bal. 45,000
Accounts Receivable Accumulated Depreciation—

Dec. 31 31,700 Equipment
Dec.31 Bal. 31,700 Dec. 31 18,000
Dec. 31 4,500
Merchandise Inventory Dec. 31 Bal. 22,500
Dec.31 28,750 Dec. 31 2,000
Dec. 31 2,950 Accounts Payable
Dec. 31 Bal. 23,800 Dec. 31 33,735
Dec.31 Bal. 33,735
Supplies
Dec. 31 2,940 Dec. 31 2,190 Unearned Revenue
Dec. 31 Bal. 750 Dec. 31 3,025 Dec. 31 4,000
Dec.31 Bal. 975
Prepaid Insurance
Dec. 31 3,000 Dec. 31 2,750 Salaries Payable
Dec. 31 Bal. 250 Dec. 31 750
Dec. 31 Bal. 750
Land
Dec. 31 30,000 Interest Payable
Dec.31 Bal. 30,000 Dec. 31 735
Dec. 31 Bal. 735
Buildings
Dec. 31 150,000 Income Tax Payable
Dec.31 Bal. 150,000 Dec. 31 500
Dec. 31 Bal. 500
Accumulated Depreciation—
Buildings Mortgage Payable
Dec. 31 24,000 Dec. 31 147,100
Dec. 31 6,000 Dec.31 Bal. 147,100
Dec. 31 Bal. 30,000


(a) and (b) (Continued)
Salaries Expense
Common Shares Dec. 31 30,950
Dec. 31 13,000 Dec. 31 750
Dec.31 Bal. 13,000 Dec. 31 Bal. 31,700
Retained Earnings Depreciation Expense

Dec. 31 31,425 Dec. 31 10,500
Dec.31 Bal. 31,425 Dec. 31 Bal. 10,500
Dividends Utilities Expense

Dec. 31 2,000 Dec. 31 5,100
Dec. 31 Bal. 2,000 Dec. 31 Bal. 5,100
Sales Insurance Expense

Dec. 31 265,770 Dec. 31 2,750
Dec. 31 3,025 Dec. 31 Bal. 2,750
Dec.31Bal. 268,795
Supplies Expense
Sales Returns and Allowances Dec. 31 2,190
Dec. 31 2,500 Dec. 31 Bal. 2,190
Dec. 31 Bal. 2,500
Interest Expense
Sales Discounts Dec. 31 8,090
Dec. 31 3,275 Dec. 31 735
Dec. 31 Bal. 3,275 Dec. 31Bal. 8,825
Cost of Goods Sold Income Tax Expense

Dec. 31 171,225 Dec.31 5,500
Dec. 31 2,000 Dec. 31 500
Dec. 31 2,950 Dec.31 Bal. 6,000
Dec.31Bal. 176,175

(c)
MESA INC.
Adjusted Trial Balance
December 31, 2015
Debit Credit
Cash .................................................................. $ 17,000
Accounts receivable........................................... 31,700
Merchandise inventory....................................... 23,800
Supplies ............................................................. 750
Prepaid insurance .............................................. 250
Land................................................................... 30,000
Buildings ............................................................ 150,000
Accumulated depreciation—buildings ................ $ 30,000
Equipment ......................................................... 45,000
Accumulated depreciation—equipment ............. 22,500
Accounts payable .............................................. 33,735
Unearned revenue ............................................. 975
Salaries payable ................................................ 750
Interest payable ................................................. 735
Income tax payable............................................ 500
Mortgage payable .............................................. 147,100
Common shares ................................................ 13,000
Retained earnings.............................................. 31,425
Dividends ........................................................... 2,000
Sales.................................................................. 268,795
Sales returns and allowances ............................ 2,500
Sales discounts.................................................. 3,275
Cost of goods sold ............................................. 176,175
Salaries expense ............................................... 31,700
Depreciation expense ........................................ 10,500
Utilities expense................................................. 5,100
Insurance expense ............................................ 2,750
Supplies expense .............................................. 2,190
Interest expense ................................................ 8,825
Income tax expense........................................... 6,000 0000 000
Totals ............................................................ $549,515 $549,515


(d)
MESA INC.
Income Statement
Sales revenue
Sales ................................................................. $268,795
Less: Sales returns and allowances ................. $2,500
Sales discounts ....................................... 3,275 5,775
Net sales ........................................................... 263,020
Cost of goods sold ...................................................... 176,175
Gross profit ................................................................. 86,845
Operating expenses
Salaries expense ............................................... $31,700
Depreciation expense ........................................ 10,500
Utilities expense ................................................. 5,100
Insurance expense............................................. 2,750
Supplies expense ....................................................... 2,190
Total operating expenses ................................... 52,240
Profit from operations ................................................. 34,605
Interest expense ................................................ 8,825
Profit before income tax.............................................. 25,780
Income tax expense ................................................... 6,000
Profit ........................................................................... $ 19,780


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

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

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


(d) (Continued)
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable .......................................................................................... $ 33,735
Unearned revenue ......................................................................................... 975
Salaries payable ............................................................................................ 750
Interest payable ............................................................................................. 735
Income tax payable ....................................................................................... 500
Current portion of mortgage payable ............................................................. 9,800
Total current liabilities .......................................................................... 46,495
Non-current liabilities
Mortgage payable ($147,100 – $9,800) ......................................................... 137,300
Total liabilities ....................................................................................... 183,795
Shareholders’ equity
Common shares ....................................................................... $13,000
Retained earnings .................................................................... 49,205
Total shareholders’ equity .................................................................... 62,205
Total liabilities and shareholders’ equity ........................................................ $246,000

PROBLEM 5-8A
(a) Gross profit margin $207,900 ÷ $900,000 = 23.1%
Profit margin $63,955 ÷ $900,000 = 7.1%
(b)
Net Gross
Sales Profit Profit
Existing balances $ 900,000 $207,900 $63,955
Increase sales ($900,000 × 15%) 135,000
Increase in gross profit 27,000 27,000
Increase in operating expenses (13,500)
Increase in income tax expense (2,700)
Revised amounts $1,035,000 $234,900 $74,755
(c)
Revised gross profit margin $234,900 ÷ $1,035,000 = 22.7%
Revised profit margin $74,755 ÷ $1,035,000 = 7.2%
While the gross profit margin decreases, the profit margin increases slightly from 7.1%
to 7.2%. The plan therefore has marginal merit.

PROBLEM 5-9A
(a)
[1] Sales = $540,000 (given)
[8] Accounts receivable = Sales × 30% = $540,000 × 30% = $162,000
(b)
[2] Cost of goods sold = 90% × inventory purchased = 90% × $300,000 = $270,000
[9] Merchandise inventory = 10% × inventory purchased = 10% × $300,000 = $30,000 or
purchases less cost of goods sold = $300,000 less
$270,000 = $30,000
[10] Accounts payable = 20% × inventory purchased = 20% × $300,000 = $60,000
(c)
[3] Gross profit = Sales – Cost of goods sold
= $540,000 – $270,000 = $270,000
[4] Operating expenses = $120,000 (given)
[5] Profit before income taxes = Gross profit – Operating expenses = $270,000 – $120,000
= $150,000
(d)
[6] Income tax expense = Profit before income taxes × 30% = $150,000 × 30% =
$45,000
[7] Profit = Profit before income taxes – Income tax expense =
$150,000 – $45,000 = $105,000
[11] Income tax payable = given as equal to income tax expense = $45,000
(e)
Gross profit margin = $270,000 ÷ $540,000 = 50.0%
Profit margin = $105,000 ÷ $540,000 = 19.4%
(e) If Psang Inc. has a higher than average gross profit margin, it is either because it is
selling products at a higher price, (which is not the case), or because its cost of goods
sold as a percentage of sales is smaller than its competitors. The resulting higher gross
profit will be a contributing factor to a higher than average profit margin ratio. Other
factors that could contribute to a higher than average profit margin ratio include lower
than average operating expenses.

PROBLEM 5-10A
(a) ($ in thousands)
2012 2011 2010
Current $60,965 $58,948 $54,836

ratio = 5.2:1 = 4.6:1 = 3.1:1
$11,748 $12,838 $17,958
Gross ($148,219 ($157,621 ($164,217

= 51.8% = 54.7% = 52.8%
profit – $71,513) – $71,352) – $77,438)
margin $148,219 $157,621 $164,217
Profit $4,003 $7,568 $7,219

= 2.7% = 4.8% = 4.4%
margin $148,219 $157,621 $164,217
The company’s current ratio keeps climbing higher and higher each year from 2010 to 2012.
The ratio itself is extremely strong, covering current liabilities 5.2 times. Danier Leather’s
gross profit margin improved in 2011 but declined in 2012. This trend is repeated in the profit
margin. After improving slightly in 2011, the profit fell further in 2012.
(b) 2012 2012

Industry Average Danier Leather Inc.
Current ratio 2.0:1 5.2:1
Gross profit margin 37.4% 51.8%
Profit margin 6.1% 2.7%
Danier’s current ratio and gross profit margins are substantially higher than the industry
averages but its profit margin is much lower than the industry average. This indicates that
Danier’s operating expenses are much higher than the industry’s.

*PROBLEM 5-11A
(a)
June 1 Purchases (140 × $18) ............................................ 2,520
3 Accounts Receivable (150 × $22) ............................ 3,300

Sales ............................................................... 3,300

Purchase Returns and Allowances ................. 180
8 Accounts Receivable (80 × $25) .............................. 2,000

Sales ............................................................... 2,000

11 Purchases (130 × $15) ............................................ 1,950

12 Cash ($3,300 – $66) ............................................. 3,234

Sales Discounts ($3,300 × 2%) .............................. 66
Accounts Receivable .................................. 3,300
17 Cash ($1,700 – $34) ........................................... 1,666

Sales Discounts ($1,700 × 2%) .............................. 34
Accounts Receivable ($2,000 – $300) ........ 1,700
22 Accounts Receivable (125 × $25) .......................... 3,125

Sales ........................................................... 3,125
25 Sales Returns and Allowances .............................. 375

Accounts Receivable ................................... 375
29 Accounts Payable ($2,520 − $180) ........................ 2,340

Cash ............................................................ 2,340

*PROBLEM 5-11A (Continued)

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

sales to make the optimum use of the money available for stocking inventory. Fewer
stock-outs are experienced when using the perpetual system as reduction in inventory
levels can be quickly identified and restocking done before the business runs out of
inventory. With the perpetual system, cost of goods sold can be reported at any time and
consequently, timely reporting of results can be achieved. When customers make
inquiries concerning the availability of stock from a merchant, a quick reply can be
obtained and provided when a perpetual inventory system is used.

*PROBLEM 5-12A
(a)
Sept. 2 Equipment ....................................................................... 25,000
Accounts Payable .................................................. 25,000
4 Purchases ....................................................................... 65,000

5 Supplies .......................................................................... 4,000

Cash....................................................................... 4,000
7 Freight In ......................................................................... 1,600

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

Purchase Returns and Allowances ........................ 5,000

Sales ...................................................................... 20,000
10 Freight Out ...................................................................... 375

Cash....................................................................... 375
17 Cash ($20,000 – $400) ................................................... 19,600

Sales Discount ($20,000 × 2%)....................................... 400
Accounts Receivable.............................................. 20,000
18 Accounts Payable ($65,000 – $5,000) ............................ 60,000

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

Cash....................................................................... 6,000

Sales ...................................................................... 27,000
28 Sales Returns and Allowances ....................................... 10,000

Accounts Receivable.............................................. 10,000

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

Cash ......................................................................... 60,000
The cost of missing this purchase discount is the amount recorded in the Purchase Discounts
account when the payment was made within the discount period of September 18 ($60,000 ×
1%) = $600. Expressing this in terms of an annual interest rate, it would be the equivalent of
paying 24.6% ($600 ÷ $59,400 × 365/15) for the use of the money for 15 days.

*PROBLEM 5-13A
(b)
Apr. 3 Purchases ........................................................................ 4,600

Accounts Payable ................................................... 4,600
6 Freight In ......................................................................... 120

Cash ....................................................................... 120
9 Accounts Payable ............................................................ 200

Purchase Returns and Allowances ......................... 200
10 Accounts Receivable ....................................................... 5,020

Sales ....................................................................... 5,020
12 Accounts Payable ($4,600 – $200) .................................. 4,400

Purchase Discounts ($4,400 × 1%) ........................ 44
Cash ($4,400 – $44) ............................................... 4,356
14 Cash ............................................................................... 2,125

Accounts Receivable .............................................. 2,125
16 Purchases ........................................................................ 1,300

Accounts Payable ................................................... 1,300
17 Accounts Payable ............................................................ 100

Purchase Returns and Allowances ......................... 100
20 Accounts Receivable ....................................................... 3,200

Sales ....................................................................... 3,200
24 Accounts Payable ($1,300 – $100) .................................. 1,200

Purchase Discounts ($1,200 × 2%) ........................ 24
Cash ($1,200 – $24) ............................................... 1,176
27 Sales Returns and Allowances ........................................ 85

Accounts Receivable .............................................. 85

(a) and (b)
Cash
Apr. 1 Bal. 6,000 Apr. 6 120 Sales
Apr. 14 2,125 Apr. 12 4,356 Apr. 10 5,020
Apr. 24 1,176 Apr. 20 3,200
Apr. 30 Bal. 2,473 Apr. 30 Bal. 8,220
Accounts Receivable Sales Returns and Allowances

Apr. 10 5,020 Apr. 14 2,125 Apr. 27 85
Apr. 20 3,200 Apr. 27 85 Apr. 30 85
Apr. 30 Bal. 6,010
Purchases
Merchandise Inventory Apr. 3 4,600
Apr. 1 Bal. 2,500 Apr. 15 1,300
Apr. 30 Bal. 2,500 Apr. 30 Bal. 5,900
Accounts Payable Purchase Returns and Allowances

Apr. 9 200 Apr. 3 4,600 Apr. 9 200
Apr. 12 4,400 Apr. 16 1,300 Apr. 17 100
Apr. 17 100 Apr. 30 Bal. 300
Apr. 24 1,200
Apr. 30 Bal. 0
Purchase Discounts
Apr. 12 44
Common Shares Apr. 21 24
Apr. 1 Bal. 5,100 Apr. 30 Bal. 68
Apr. 30 Bal. 5,100
Freight In
Retained Earnings Apr. 6 120
Apr. 1 Bal. 3,400 Apr. 30 Bal. 120
Apr. 30 Bal. 3,400

(c)
PINES GOLF SHOP
Trial Balance
April 30
Debit Credit
Cash ...................................................................................... $ 2,473
Accounts receivable ............................................................... 6,010
Merchandise inventory ........................................................... 2,500
Common shares ..................................................................... $ 5,100
Retained earnings .................................................................. 3,400
Sales ...................................................................................... 8,220
Sales returns and allowances ................................................ 85
Purchases .............................................................................. 5,900
Freight in ................................................................................ 120
Purchase returns and allowances .......................................... 300
Purchase discounts ................................................................ 00 000 68
$17,088 $17,088
(d)
Apr. 30 Merchandise Inventory (ending) .............................. 4,857

Purchase Returns and Allowances .......................... 300
Purchase Discounts ................................................. 68
Purchases........................................................... 5,900
Freight In ............................................................ 120
*Cost of goods sold = Beginning inventory + Purchases − Purchase discounts −

Purchase returns and allowances + Freight in – Ending inventory
Cost of goods sold = $2,500 + $5,900 – $68 – $300 + $120 – $4,857 = $3,295

*PROBLEM 5-14A
(a)
FEISTY LTD.
Year Ended April 30, 2015
Sales revenue
Sales.................................................................................. $9,300,000
Less: Sales returns and allowances. ................................ 250,000
Net sales............................................................................ 9,050,000
Cost of goods sold
Merchandise inventory, May 1, 2014 ................................. $ 600,000
Purchases.................................................... $5,900,000
Less: Purchase discounts ............................ 40,000
Net purchases ............................................. 5,860,000
Add: Freight in ............................................ 120,000
Cost of goods purchased ................................................... 5,980,000
Cost of goods available for sale ......................................... 6,580,000
Merchandise inventory, April 30, 2015............................... 700,000
Cost of goods sold .................................................... 5,880,000
Gross profit ............................................................................ $3,170,000
(b)
Cost of Goods Sold .................................................. 5,880,000
Purchases........................................................... 5,900,000
Freight In ............................................................ 120,000
(c) Gross profit margin:
$3,170,000 = 35.0%
$9,050,000
Feisty’s gross profit margin of 35% is better than the industry average of 30%. This
indicates that Feisty is making a higher gross profit from each dollar of sale than the
industry average due to higher selling prices or lower costs for its inventory.

*PROBLEM 5-15A
ANDREA’S ATHLETIC WEAR INC.

Income Statement
Sales revenue
Sales ......................................................................................... $955,500
Less: Sales discounts .............................................................. $22,500
Sales returns and allowances ......................................... 12,000 34,500
Net sales ................................................................................... 921,000
Cost of goods sold
Merchandise inventory, January 1 ............................................ $ 60,750
Purchases ........................................................... $602,400
Less: Purchase discounts ..................................... 33,750
Purchase returns and allowances................ 9,600
Net purchases ....................................................... 559,050
Add: Freight in....................................................... 8,400
Cost of goods purchased .......................................................... 567,450
Cost of goods available for sale ................................................ 628,200
Less: Merchandise inventory, December 31 ............................. 108,900
Cost of goods sold .............................................................. 519,300
Gross profit ...................................................................................... 401,700
Operating expenses
Administrative expenses ............................................................ $271,350
Selling expenses ....................................................................... 11,250
Total operating expenses ................................................... 282,600
Profit from operations ....................................................................... 119,100
Interest expense ...................................................................... 15,600
Profit before income tax ................................................................... 103,500
Income tax expense ......................................................................... 24,000
Profit ................................................................................................ $ 79,500



Balance, January 1 $ 75,000 $102,900 $177,900

Profit 79,500 79,500
Dividends 000 0000 (12,000) (12,000)
Balance, December 31 $112,500 $170,400 $282,900

December 31, 2015
Assets
Current assets
Cash .............................................................................................................. $ 25,500
Prepaid insurance ......................................................................................... 3,600
Total current assets .............................................................................. 204,300
Land .................................................................... $112,500
Buildings .............................................................. $285,000
Less: Accumulated depreciation.......................... 77,700 207,300
Equipment ........................................................... $165,000
Less: Accumulated depreciation.......................... 64,350 100,650
Total property, plant, and equipment ......... 420,450
Total assets................................................................................................... $624,750

Current liabilities
Accounts payable ......................................................................................... $ 129,450
Salaries payable ........................................................................................... 5,250
Property tax payable .................................................................................... 7,200
Unearned revenue ........................................................................................ 12,450
Current portion of mortgage payable ............................................................ 18,750
Total current liabilities ......................................................................... 173,100
Mortgage payable ($187,500 – $18,750) ..................................................... 168,750
Total liabilities ...................................................................................... 341,850
Common shares ....................................................................... $112,500
Total shareholders’ equity ................................................................... 282,900
Total liabilities and shareholders’ equity ....................................................... $624,750

PROBLEM 5-1B
(a) A company’s operating cycle is the average time it takes to go from cash to cash in
producing revenues. The operating cycle for a merchandising company covers the period
of time between when you purchase your inventory, to when you sell it, and to when you
eventually collect the accounts receivable from a sale. The Fashion Palace is having
problems paying its bills because the period of time between sales and collection of
accounts receivable is lengthened because many customers take more than one month
to pay.
The company’s inventory is contributing to the problem because some items have been
in stock for a long period of time, which means a long operating cycle for those items.
(b) The Fashion Palace should consider switching to a perpetual inventory system where
detailed records of each inventory purchase and sale are maintained. This system
continuously—perpetually—shows the quantity and cost of the inventory purchased,
sold, and on hand. This system will help the company see which inventory items are out-
of-stock, which items are taking a long time to sell, and provide management with the
total inventory on hand each month to prepare its monthly financial statements,
eliminating the need for a monthly count. The company will still need to perform at least
one annual inventory count to ensure its accounting records agree with the physical
inventory count.
(c) For control reasons, a physical inventory count must always be taken at least one a year,
and ideally more often under the perpetual inventory system. By using a perpetual
inventory system, a company knows what inventory should be on hand. Performing a
physical count and checking it to the perpetual records is necessary to detect any errors
in record keeping and/or shortages in stock.

PROBLEM 5-2B
(a) Travel Warehouse Ltd. is a wholesaler. Its suppliers are suitcase manufacturers and its
customers are stores.
(b)
July 2 Merchandise Inventory (55 × $45) .................... 2,475
Accounts Payable .................................. 2,475
3 Accounts Payable ............................................. 225

Merchandise Inventory (5 × $45) ........... 225
6 Accounts Receivable (50 × $80) ....................... 4,000

Sales ...................................................... 4,000
Cost of Goods Sold (50 × $45) ......................... 2,250

Merchandise Inventory ........................... 2,250
7 Sales Returns and Allowances ......................... 400

Accounts Receivable .............................. 400
Merchandise Inventory...................................... 225

Cost of goods Sold (5 × $45) ................. 225
9 Accounts Receivable (5 × $90) ......................... 450

Sales ...................................................... 450
Cost of Goods Sold (5 × $45) ........................... 225

Merchandise Inventory ........................... 225
11 Accounts Payable ($2,475 – $225) ................... 2,250

Merchandise Inventory ($2,250 × 2%) ... 45
Cash ($2,250 – $45) .............................. 2,205
13 Accounts Receivable (25 × $80) ....................... 2,000

Sales ...................................................... 2,000
Cost of Goods Sold (25 × $45) ......................... 1,125

Merchandise Inventory ........................... 1,125
16 Merchandise Inventory...................................... 3,500

Accounts Payable .................................. 3,500

PROBLEM 5-2B (Continued)
(b) (Continued)
July 17 Sales Returns and Allowances ......................... 800

Accounts Receivable .............................. 800
20 Cash ($4,050 – $81) ....................................... 3,969

Sales Discounts ($4,050 × 2%)......................... 81
Accounts Receivable
($4,000 – $400 + $450) .......................... 4,050
27 Cash ($1,200 – $24) ......................................... 1,176

Sales Discounts ($1,200 × 2%)......................... 24
Accounts Receivable ($2,000 – $800) ... 1,200
(c)
July 1 1,350 July 3 225
2 2,475 6 2,250
7 225 9 225
16 3,500 11 45
13 1,125
July 31 Bal. 3,680
(d) Number of suitcases on hand at July 31

= 30 + 55 – 5 – 50 + 5 – 5 – 25 + 70 = 75
$3,680 ÷ 75 = $49.07

PROBLEM 5-3B
(a)
Oct. 1 Merchandise Inventory...................................................... 65,000

1 Merchandise Inventory...................................................... 1,600

Cash ....................................................................... 1,600
5 Accounts Payable ............................................................. 7,000

Merchandise Inventory ........................................... 7,000
8 Accounts Receivable ........................................................ 100,000

Sales ...................................................................... 100,000
Cost of Goods Sold ........................................................... 59,600

9 Freight Out ........................................................................ 2,300

Cash ....................................................................... 2,300
10 Sales Returns and Allowances ......................................... 4,000

12 Supplies ............................................................................ 5,000

Cash ....................................................................... 5,000
15 Merchandise Inventory...................................................... 7,500

Cash ....................................................................... 7,500
17 Cash ($96,000 – $1,920) .................................................. 94,080

Sales Discounts [($100,000 – $4,000) × 2%] .................... 1,920
Accounts Receivable ($100,000 – $4,000)............. 96,000


(a) (Continued)
Oct. 20 Equipment ......................................................................... 45,000

28 Accounts Receivable ........................................................ 30,000

Sales ...................................................................... 30,000
Cost of Goods Sold ........................................................... 18,000

30 Accounts Payable ($65,000 – $7,000) .............................. 58,000

Cash ....................................................................... 58,000
31 Sales Returns and Allowances ......................................... 5,000

Merchandise Inventory...................................................... 3,000

Cost of Goods Sold ................................................ 3,000
(b)

Merchandise Inventory ($58,000 × 1%) ............... 580
Cash ($58,000 – $580) ........................................ 57,420
The cost of missing this purchase discount is the amount recorded as a reduction to the
Merchandise Inventory account when the payment was made within the discount period of
October 14 ($580). Expressing this in terms of an annual interest rate, it would be the
equivalent of paying 24.6% ($580 ÷ $57,420 × 365/15) for the use of the money for 15 days.

PROBLEM 5-4B
(b)
April 2 Merchandise Inventory ............................................ 4,900


Cash ............................................................... 120

11 Accounts Payable ($4,900 – $100) ........................ 4,800

Merchandise Inventory ($4,800 × 2%) ............. 96
Cash ($4,800 – $96) ....................................... 4,704

Cash ............................................................... 920

Cash ............................................................... 15
17 Supplies................................................................... 1,300
Cash ............................................................... 1,300
18 Cash ....................................................................... 110


Sales .............................................................. 6,800


Merchandise Inventory ............................................ 600

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


(b) (Continued)
April 23 Accounts Receivable ............................................... 5,600

Sales .............................................................. 5,600

25 Cash ....................................................................... 8,000

28 Sales Returns and Allowances ............................... 150

30 Equipment ............................................................... 3,600



(a) and (b)
Cash
Apr. 1 Bal. 8,000 Apr. 3 120 Accounts Payable
Apr. 18 110 Apr. 11 4,704 Apr. 7 100 Apr. 2 4,900
Apr. 25 8,000 Apr. 13 920 Apr. 11 4,800 Apr. 30 3,600
Apr. 16 15 Apr. 30 Bal. 3,600
Apr. 17 1,300
Apr. 30 Bal. 9,051
Common Shares
Apr. 1 Bal. 6,000
Accounts Receivable Apr. 30 Bal. 6,000
Apr. 20 6,800 Apr. 21 1,000
Apr. 23 5,600 Apr. 25 8,000
Apr. 28 150 Retained Earnings
Apr. 30 Bal. 3,250 Apr. 1 Bal. 7,400
Apr. 30 Bal. 7,400
Apr. 1 Bal. 5,400 Apr. 7 100 Sales
Apr. 2 4,900 Apr. 11 96 Apr. 20 6,800
Apr. 3 120 Apr. 18 110 Apr. 23 5,600
Apr. 13 920 Apr. 20 4,080 Apr. 30 Bal. 12,400
Apr. 16 15 Apr. 23 3,360
Apr. 21 600
Apr. 30 Bal. 4,209 Sales Returns and Allowances
Apr. 21 1,000
Apr. 28 150
Supplies Apr. 30 Bal. 1,150
Apr. 14 1,300
Apr. 30 Bal. 1,300
Cost of Goods Sold
Apr. 20 4,080 Apr. 21 600
Equipment Apr. 23 3,360
Apr. 30 3,600 Apr. 30 Bal. 6,840
Apr. 30 Bal. 3,600

(c)
GRAND SLAM TENNIS SHOP
Trial Balance
April 30, 2015
Debit Credit
Cash .................................................................................. $ 9,051
Accounts receivable .......................................................... 3,250
Merchandise inventory....................................................... 4,209
Supplies ............................................................................. 1,300
Equipment ......................................................................... 3,600
Accounts payable .............................................................. $ 3,600
Common shares ................................................................ 6,000
Retained earnings ............................................................. 7,400
Sales.................................................................................. 12,400
Sales returns and allowances ............................................ 1,150
Cost of goods sold ............................................................. 6,840 0 0000
$29,400 $29,400

PROBLEM 5-5B
(b)
Apr. 2 Merchandise Inventory ............................................ 8,900


Cash ............................................................... 225

Sales .............................................................. 11,600

9 Freight Out .............................................................. 290

Cash ............................................................... 290

Merchandise Inventory ............................................ 1,030

Cost of Goods Sold ........................................ 1,030

12 No entry necessary

14 Cash ($10,000 – $200) ............................................ 9,800

Sales Discounts ($10,000 × 2%) ............................. 200
Accounts Receivable ($11,600 – $1,600) .......... 10,000

Cash ............................................................... 8,811
20 Accounts Payable ($4,200 – $300)………… 3,900

Cash ($3,900 – $39) ....................................... 3,861


(b) (Continued)
Apr. 23 Cash ........................................................................ 6,400

Sales .............................................................. 6,400


Cash ............................................................... 400

Cash ............................................................... 6,100
30 Cash ........................................................................ 500



(a) and (b)
Cash
Apr. 1 Bal. 4,000 Apr. 3 225 Accounts Payable
Apr. 14 9,800 Apr. 9 290 Apr. 13 300 Apr. 2 8,900
Apr. 23 6,400 Apr. 17 8,811 Apr. 17 8,900 Apr. 11 4,200
Apr. 30 500 Apr. 20 3,861 Apr. 20 3,900
Apr. 24 400 Apr. 30 Bal. 0
Apr. 27 6,100
Apr. 30 Bal. 1,013 Sales
Apr. 6 11,600
Accounts Receivable Apr. 23 6,400
Apr. 1 Bal. 3,500 Apr. 10 1,600 Apr. 30 Bal. 18,000
Apr. 6 11,600 Apr. 14 10,000
Apr. 30 Bal. 3,500 Sales Returns and Allowances
Apr. 10 1,600
Merchandise Inventory Apr. 24 400
Apr. 1 Bal. 2,500 Apr. 6 7,540 Apr. 30 Bal. 2,000
Apr. 2 8,900 Apr. 13 300
Apr. 3 225 Apr. 17 89 Sales Discounts
Apr. 10 1,030 Apr. 20 39 Apr. 14 200
Apr. 11 4,200 Apr. 23 5,200 Apr. 30 Bal. 200
Apr. 27 6,100 Apr. 30 500
Apr. 30 Bal. 9,287 Freight Out
Apr. 6 290
Common Shares Apr. 30 Bal. 290
Apr. 1 Bal. 5,000
Apr. 30 Bal. 5,000 Cost of Goods Sold
Apr. 6 7,540 Apr. 10 1,030
Apr. 23 5,200
Apr. 30 Bal. 11,710
Retained Earnings
Apr. 1 Bal. 5,000
Apr. 30 Bal. 5,000


(c)
NISSON DISTRIBUTING LTD.
Income Statement
Month Ended April 30, 2015
Sales ................................................................................ $18,000

Less: Sales returns and allowances .............................. $2,000
Sales discounts .................................................... 200 2,200
Net sales............................................................................ 15,800
Cost of goods sold ............................................................. 11,710
Gross profit ........................................................................ $ 4,090
NISSON DISTRIBUTING LTD.

Statement of Financial Position (Partial)
April 30, 2015
Assets
Current assets
Cash ........................................................................................... $ 1,013
Accounts receivable .................................................................... 3,500
Merchandise inventory ................................................................ 9,287
Total current assets .............................................................. $13,800

PROBLEM 5-6B
(a)
BRIGUS WHOLESALE LTD.

Income Statement (Single-step)
Year Ended November 30, 2015
Revenues
Sales ......................................................................................... $1,700,600
Less: Sales returns and allowances ...................... $8,400
Sales discounts ............................................ 7,500 15,900
Net sales ................................................................................. 1,684,700
Interest revenue ...................................................................... 3,240 $1,687,940
Expenses
Cost of goods sold .................................................................. $1,095,000
Administrative expenses ......................................................... 341,340
Selling expenses..................................................................... 86,200
Interest expense ..................................................................... 7,400 1,529,940
Profit before income tax ............................................................. 158,000
Income tax expense ................................................................... 31,000
Profit ........................................................................................... $ 127,000


(b)
BRIGUS WHOLESALE LTD.
Sales .................................................................................... $1,700,600

Less: Sales returns and allowances ............................... $8,400
Sales discounts .................................................... 7,500 15,900
Net sales ........................................................................... 1,684,700
Cost of goods sold.................................................................. 1,095,000
Gross profit ............................................................................. 589,700
Operating expenses
Selling expenses ......................................................... 86,200
Total operating expenses ....................................... 427,540
Profit from operations ............................................................. 162,160
Interest revenue ............................................................... ($3,240)
Interest expense ............................................................... 7,400 4,160
Profit before income tax ......................................................... 158,000
Income tax expense ............................................................... 31,000
Profit ....................................................................................... $ 127,000
(c) Both income statements result in the same amount of profit. The multiple-step income
statement provides the user with much more information than the single-step income
statement does. The multiple-step income statement provides information on gross
profit and profit from operations which is not included on the single-step income
statement.
(d) Brigus is classifying its expenses by their function. They are reported according to the
activity (business function) for which they were incurred (for example, cost of goods
sold, administrative, selling).

PROBLEM 5-7B
(b)
Nov. 30 Insurance Expense ($1,800 × 4/12) ................................... 600

Prepaid Insurance...................................................... 600
30 Supplies Expense ............................................................. 700

Supplies ($1,650 – $950) .......................................... 700
30 Depreciation Expense ........................................................ 5,360

Accumulated Depreciation—Equipment .................... 5,360
30 Salaries Expense ............................................................... 1,210

Salaries Payable........................................................ 1,210
30 Interest Expense ................................................................ 175

Interest Payable......................................................... 175
30 Unearned Revenue ............................................................ 2,400

Sales Revenue .......................................................... 2,400
Cost of Goods Sold ............................................................ 1,560

Merchandise Inventory .............................................. 1,560
30 Income Tax Expense ......................................................... 1,100

Income Tax Payable .................................................. 1,100
30 Cost of Goods Sold ............................................................. 940

Merchandise Inventory .............................................. 940
($27,500 – $1,560 = $25,940 – $25,000 = $940 shortage)


(a) and (b)

Nov. 30 22,000 Nov. 30 34,400
Nov.30Bal. 22,000 Nov.30 Bal. 34,400
Accounts Receivable Salaries Payable

Nov.30 30,600 Nov. 30 1,210
Nov.30Bal. 30,600 Nov. 30 Bal. 1,210
Merchandise Inventory Interest Payable

Nov. 30 27,500 Nov. 30 1,560 Nov. 30 175
Nov. 30 940 Nov. 30 Bal. 175
Nov. 30 Bal. 25,000
Income Tax Payable
Supplies Nov.30 1,100
Nov. 30 1,650 Nov. 30 700 Nov. 30 Bal. 1,100
Nov. 30 Bal. 950
Unearned Revenue
Prepaid Insurance Nov. 30 2,400 Nov. 30 3,000
Nov. 30 1,800 Nov. 30 600 Nov. 30 Bal. 600
Nov. 30 Bal. 1,200
Bank Loan Payable
Long-term Investments Nov. 30 35,000
Nov.30 37,000 Nov.30 Bal. 35,000
Nov.30 Bal. 37,000
Equipment
Nov.30 26,800
Nov.30Bal. 26,800
Accumulated Depreciation—
Equipment
Nov. 30 10,720
Nov. 30 5,360
Nov. 30 Bal. 16,080


Common Shares Depreciation Expense

Nov. 30 16,400 Nov. 30 5,360
Nov.30 Bal. 16,400 Nov.30 Bal. 5,360
Retained Earnings Rent Expense

Nov. 30 30,000 Nov. 30 13,850
Nov.30 Bal. 30,000 Nov. 30 Bal. 13,850
Dividends Advertising Expense

Nov.30 10,000 Nov. 30 2,100
Nov.30 Bal. 10,000 Nov. 30 Bal. 2,100
Sales Supplies Expense

Nov. 30 248,500 Nov. 30 700
Nov. 30 2,400 Nov. 30 Bal. 700
Nov.30Bal. 250,900
Insurance Expense
Sales Returns and Allowances Nov. 30 600
Nov. 30 4,600 Nov. 30 Bal. 600
Nov. 30 Bal. 4,600
Interest Expense
Sales Discounts Nov. 30 4,000
Nov. 30 4,520 Nov. 30 175
Nov. 30 Bal. 4,520 Nov. 30 Bal. 4,175
Cost of Goods Sold Income Tax Expense

Nov. 30 157,000 Nov. 30 2,000
Nov. 30 1,560 Nov. 30 1,100
Nov. 30 940 Nov. 30 Bal. 3,100
Nov.30Bal. 159,500
Salaries Expense
Nov. 30 32,600
Nov. 30 1,210
Nov. 30 Bal. 33,810

(c)
FASHION CENTRE LTD.
November 30, 2015
Debit Credit
Cash ............................................................................ $ 22,000
Accounts receivable .................................................... 30,600
Merchandise inventory ................................................ 25,000
Supplies....................................................................... 950
Prepaid insurance........................................................ 1,200
Long-term investments ................................................ 37,000
Equipment ................................................................... 26,800
Accumulated depreciation—equipment ....................... $ 16,080
Accounts payable ........................................................ 34,400
Salaries payable .......................................................... 1,210
Interest payable ........................................................... 175
Income tax payable ..................................................... 1,100
Unearned revenue ....................................................... 600
Bank loan payable ....................................................... 35,000
Common shares .......................................................... 16,400
Retained earnings ....................................................... 30,000
Dividends ..................................................................... 10,000
Sales ........................................................................... 250,900
Sales discounts ........................................................... 4,520
Sales returns and allowances ...................................... 4,600
Cost of goods sold ....................................................... 159,500
Salaries expense ......................................................... 33,810
Rent expense .............................................................. 13,850
Depreciation expense .................................................. 5,360
Supplies expense ........................................................ 700
Insurance expense ...................................................... 600
Interest expense .......................................................... 4,175
Advertising expense .................................................... 2,100
Income tax expense .................................................... 3,100 0000 000
Totals .................................................................... $385,865 $385,865


(d)
FASHION CENTRE LTD.
Income Statement
Sales revenue
Sales ........................................................................................... $250,900
Less: Sales returns and allowances ........................ $4,600
Sales discounts .............................................. 4,520 9,120
Net sales ..................................................................................... 241,780
Cost of goods sold ............................................................................... 159,500
Gross profit ........................................................................................... 82,280
Operating expenses
Salaries expense ..................................................... $33,810
Rent expense............................................................ 13,850
Depreciation expense ............................................... 5,360
Advertising expense ................................................. 2,100
Supplies expense ..................................................... 700
Insurance expense .................................................. 600
Total operating expenses .................................................... 56,420
Profit from operations ........................................................................... 25,860
Interest expense .......................................................................... 4,175
Profit before income tax ....................................................................... 21,685
Income tax expense ............................................................................. 3,100
Profit .................................................................................................... $ 18,585


(d) (Continued)
FASHION CENTRE LTD.


Balance, December 1, 2014 $ 11,400 $30,000 $41,400

Profit 18,585 18,585
Dividends _______ (10,000) (10,000)
Balance, November 30, 2015 $ 16,400 $ 38,585 $ 54,985
FASHION CENTRE LTD.

November 30, 2015
Assets
Current assets
Cash ........................................................................................ $22,000
Accounts receivable ................................................................ 30,600
Merchandise inventory ............................................................. 25,000
Supplies.................................................................................... 950
Prepaid insurance ................................................................... 1,200
Total current assets .............................................................................. $ 79,750
Long-term investments ........................................................................................... 37,000
Equipment ................................................................................ $26,800
Less: Accumulated depreciation............................................... 16,080
Total property, plant, and equipment ................................................... 10,720
Total assets................................................................................................... $127,470


(d) (Continued)
Current liabilities
Accounts payable .......................................................................................... $ 34,400
Salaries payable ............................................................................................ 1,210
Interest payable ............................................................................................. 175
Income tax payable ....................................................................................... 1,100
Unearned revenue ......................................................................................... 600
Current portion of bank loan payable ............................................................ 5,000
Total current liabilities .......................................................................... 42,485
Bank loan payable* ........................................................................................ 30,000
Total liabilities ....................................................................................... 72,485
Common shares ....................................................................... $16,400
Total shareholders’ equity ................................................................... 54,985
*($35,000 – $5,000)

PROBLEM 5-8B
(a) Gross profit margin $589,700 ÷ $1,684,700 = 35.0%
Profit margin $127,000 ÷ $1,684,700 = 7.5%
(b)
Net Gross
Sales Profit Profit
Existing balances $1,684,700 $589,700 $127,000

Increase sales ($1,684,700 × 10%) 168,470
Increase in gross profit 60,000 60,000
Increase in operating expenses (32,000)
Increase in income tax expense (4,000)
Revised amounts $1,853,170 $649,700 $151,000
(c)
Revised gross profit margin $649,700 ÷ $1,853,170 = 35.1%
Revised profit margin $151,000 ÷ $1,853,170 = 8.1%
While the gross profit margin increases slightly, the profit margin increases by from
7.5% to 8.1%. The plan therefore has merit.

PROBLEM 5-9B
(a)
[1] Sales = $400,000 (given)
[8] Accounts receivable = Sales × 20% = $400,000 × 20% = $80,000
(b)
[2] Cost of goods sold = 80% × inventory purchased = 80% × $200,000 = $160,000
[9] Merchandise inventory = 20% × inventory purchased = 20% × $200,000 = $40,000
or purchases less cost of goods sold
= $200,000 less $160,000 = $40,000
[10] Accounts payable = 25% × inventory purchased = 25% × $200,000 = $50,000
(c)
[3] Gross profit = Sales – Cost of goods sold
= $400,000 – $160,000 = $240,000
[4] Operating expenses = $140,000 (given)
[5] Profit before income taxes = Gross profit – Operating expenses = $240,000 – $140,000
= $100,000
(d)
[6] Income tax expense = Profit before income taxes × 30% = $100,000 × 30%
= $30,000
[7] Profit = Profit before income taxes – Income tax expense
= $100,000 – $30,000 = $70,000
[11] Income tax payable = given as equal to income tax expense = $30,000
(e)
Gross profit margin = $240,000 ÷ $400,000 = 60.0%
Profit margin = $70,000 ÷ $400,000 = 17.5%
(e) Although Tsang Inc. may sell its product at the same price as other companies in the
industry, its cost of goods sold percentage may be higher compared with other
companies in the industry. Because the business is new, it might not yet enjoy the
economies of scale and have strong relationships with suppliers which allow them to
buy at competitive prices. Tsang may be unable to negotiate lower purchase prices for
merchandise and therefore experiences lower gross profit margins compared to its
competitors. Similarly, other competitors are likely larger businesses that enjoy cost
savings through economies of scale. Tsang is a new business and does not enjoy this
advantage and experiences higher operating costs yielding a lower profit margin.

PROBLEM 5-10B
(a) (in SEK millions)
2012 2011 2010
152,751 ÷ 131,105 172,659 ÷ 143,679 147,139 ÷ 124,059

Current
ratio
= 1.2:1 = 1.2:1 = 1.2:1
(303,647 – 235,085) (310,367 – 236,685) (264,749 – 201,797)

Gross 303,647 310,367 264,749
profit
margin = 22.6% = 23.7% = 23.8%
11,258 ÷ 303,647 18,115 ÷ 310,367 11,212 ÷ 264,749

Profit
margin
= 3.7% = 5.8% = 4.2%
The company’s current ratio remained consistent at 1.2:1 over the three year period.
Volvo’s gross profit margin decreased slightly in 2011 and experienced a more substantial
decline in 2012. On the other hand, the company’s profit margin improved substantially in
2011 but then declined dramatically in 2012.
(b)
2012 2012
Industry Average AB Volvo
Current ratio 0.9:1 1.2:1
Gross profit margin 13.5% 22.6%
Profit margin (3.8)% 3.7%
The 2012 gross profit margin and profit margin are well above the industry averages,
indicating that the company is performing better than the average company in the
industry. Its 2012 current ratio is also substantially stronger than the average company in
the industry, indicating the company’s liquidity is stronger than most companies in the
industry.

*PROBLEM 5-11B
(a)
July 2 Purchases (55 × $45) ............................................. 2,475
Accounts Payable .......................................... 2,475
3 Accounts Payable ................................................... 225

Purchase Returns and Allowances ................. 225
6 Accounts Receivable (50 × $80) ............................. 4,000

Sales.............................................................. 4,000
7 Sales Returns and Allowances ............................... 400

Accounts Receivable ..................................... 400
9 Accounts Receivable (5 × $90) ............................... 450

Sales.............................................................. 450

Purchase Discounts ($2,250 × 2%) .............. 45
Cash ($2,250 – $45) .................................... 2,205
13 Accounts Receivable (25 × $80) ............................. 2,000

Sales ............................................................ 2,000
16 Purchases ............................................................... 3,500

Accounts Payable ........................................ 3,500

20 Cash ($4,050 – $81) ............................................. 3,969

Sales Discounts ($4,050 × 2%) ............................... 81
Accounts Receivable
($4,000 – $400 + $450) ................................ 4,050
27 Cash ($1,200 – $24) ............................................... 1,176

Sales Discounts ($1,200 × 2%) ............................... 24

*PROBLEM 5-11B (Continued)
(b) The advantages of the periodic inventory system are that it is simpler and cheaper
compared to a perpetual inventory system. There are fewer accounting entries and
cash registers need not be able to read bar codes to apply the appropriate cost as is
required in the perpetual inventory system.
However, a perpetual inventory system enables management to monitor purchases and

sales to make the optimum use of the money available for stocking inventory. Fewer
stock-outs are experienced when using the perpetual system as reduction in inventory
levels can be quickly identified and restocking done before the business runs out of
inventory. With the perpetual system, cost of goods sold can be reported at any time
and consequently, timely reporting of results can be achieved. When customers make
inquiries concerning the availability of stock from a merchant, a quick reply can be
obtained and provided when a perpetual inventory system is used.

*PROBLEM 5-12B
(a)
Oct. 1 Purchases ............................................................................ 65,000

Accounts Payable ........................................................ 65,000
1 Freight In .............................................................................. 1,600

Cash ............................................................................ 1,600
5 Accounts Payable ................................................................. 7,000

Purchase Returns and Allowances .............................. 7,000
8 Accounts Receivable ............................................................ 100,000

Sales ........................................................................... 100,000
9 Freight Out ........................................................................... 2,300

Cash ............................................................................ 2,300
10 Sales Returns and Allowances ............................................. 4,000

Accounts Receivable ................................................... 4,000
12 Supplies................................................................................ 5,000
Cash ............................................................................ 5,000
15 Purchases ............................................................................ 7,500

Cash ............................................................................ 7,500
17 Cash ($96,000 – $1,920) ...................................................... 94,080

Sales Discounts [($100,000 – $4,000) × 2%] ....................... 1,920
Accounts Receivable ($100,000 – $4,000) ................. 96,000
20 Equipment ............................................................................ 45,000

Accounts Payable ........................................................ 45,000
28 Accounts Receivable ............................................................ 30,000

Sales ........................................................................... 30,000
30 Accounts Payable ($65,000 – $7,000) ................................. 58,000

Cash ........................................................................... 58,000
31 Sales Returns and Allowances ............................................. 5,000

Accounts Receivable .................................................. 5,000


(b)

Purchase Discounts ($58,000 × 1%) .................... 580
Cash ($58,000 – $580) ........................................ 57,420
The cost of missing this purchase discount is the amount recorded as a purchase discount
when the payment was made within the discount period of October 14 ($580). Expressing
this in terms of an annual interest rate, it would be the equivalent of paying 24.6% ($580 ÷
$57,420 × 365/15) for the use of the money for 15 days.

*PROBLEM 5-13B
(b)
Apr. 2 Purchases ...................................................................... 4,900

Accounts Payable.................................................. 4,900
3 Freight In ........................................................................ 120

Cash ...................................................................... 120
7 Accounts Payable .......................................................... 100

Purchase Returns and Allowances........................ 100
11 Accounts Payable ($4,900 – $100) ................................ 4,800

Purchase Discounts ($4,800 × 2%) ....................... 96
Cash ($4,800 – $96).............................................. 4,704
13 Purchases ...................................................................... 920

Cash ...................................................................... 920
16 Freight In ........................................................................ 15
Cash ...................................................................... 15
17 Supplies ......................................................................... 1,300

Cash ...................................................................... 1,300
18 Cash .............................................................................. 110

Purchase Returns and Allowances........................ 110

Sales ..................................................................... 6,800
21 Sales Returns and Allowances ...................................... 1,000

23 Accounts Receivable ..................................................... 5,600

Sales .................................................................... 5,600
25 Cash ............................................................................. 8,000

28 Sales Returns and Allowances ...................................... 150

Accounts Receivable ........................................... 150

(b) (Continued)
30 Equipment .................................................................... 3,600

(a) and (b)
Cash Common Shares

Apr. 1 Bal. 8,000 Apr. 3 120 Apr. 1 Bal. 6,000
Apr. 18 110 Apr. 11 4,704 Apr. 30 Bal. 6,000
Apr. 25 8,000 Apr. 13 920
Apr. 16 15
Apr. 17 1,300 Retained Earnings
Apr. 30 Bal. 9,051 Apr. 1 Bal. 7,400
Apr. 30 Bal. 7,400
Accounts Receivable
Apr. 20 6,800 Apr. 21 1,000 Sales
Apr. 23 5,600 Apr. 25 8,000 Apr. 20 6,800
Apr. 28 150 Apr. 23 5,600
Apr.30 Bal. 3,250 Apr. 30 Bal. 12,400
Apr. 1 Bal. 5,400
Apr. 30 Bal. 5,400
Supplies
Apr. 14 1,300
Apr. 30 Bal. 1,300
Equipment
Apr. 27 3,600
Apr. 30 Bal. 3,600
Accounts Payable
Apr. 7 100 Apr. 2 4,900
Apr. 11 4,800 Apr. 27 3,600
Apr. 30 Bal. 3,600

Sales Returns and Allowances

Apr. 21 1,000
Apr. 28 150
Apr. 30 Bal. 1,150
Purchases
Apr. 2 4,900
Apr. 13 920
Apr. 30 Bal. 5,820
Purchase Returns and Allowances

Apr. 7 100
Apr. 18 110
Apr. 30 Bal. 210
Purchase Discounts
Apr. 11 96
Apr. 30 Bal. 96
Freight In
Apr. 3 120
Apr. 16 15
Apr. 30 Bal. 135


(c)
GRAND SLAM TENNIS SHOP
Trial Balance
April 30, 2015
Debit Credit
Cash ....................................................................................... $ 9,051
Accounts receivable ............................................................... 3,250
Merchandise inventory ........................................................... 5,400
Supplies .................................................................................. 1,300
Equipment .............................................................................. 3,600
Accounts payable ................................................................... $ 3,600
Common shares ..................................................................... 6,000
Retained earnings .................................................................. 7,400
Sales ...................................................................................... 12,400
Sales returns and allowances ................................................. 1,150
Purchases............................................................................... 5,820
Purchase returns and allowances........................................... 210
Purchase discounts ................................................................ 96
Freight in ................................................................................ 135 00 000
$29,706 $29,706
(d)

Purchase Returns and Allowances .......................... 210
Purchase Discounts ................................................. 96
Purchases .......................................................... 5,820
Freight In ............................................................ 135
*Cost of goods sold = Beginning inventory + Purchases – Purchase

discounts – Purchase returns and allowances + Freight in – Ending
inventory
Cost of goods sold = $5,400 + $5,820 – $96 – $210 + $135 – $4,209 =
$6,840

*PROBLEM 5-14B
(a)
SEVERN LIMITED
Year Ended June 30, 2015
Sales revenue
Sales ..................................................................................... $7,800,000
Less: Sales discounts ........................................................... 100,000
Net sales................................................................................ 7,700,000
Cost of goods sold
Merchandise inventory, July 1, 2014 ..................................... $ 520,000
Purchases.................................................. $6,280,000
Less: Purchase returns and allowances .... 240,000
Net purchases ........................................... 6,040,000
Add: Freight in .......................................... 80,000
Cost of goods purchased ...................................................... 6,120,000
Cost of goods available for sale............................................ 6,640,000
Merchandise inventory, June 30, 2015 ................................. 600,000
Cost of goods sold ........................................................ 6,040,000
Gross profit ................................................................................ $1,660,000
(b)
June 30 Merchandise Inventory (ending) .............................. 600,000

Cost of Goods Sold .................................................. 6,040,000
Purchase Returns and Allowances .......................... 240,000
Purchases .......................................................... 6,280,000
Freight In ............................................................ 80,000
(c) Gross profit margin:
$1,660,000 = 21.6%
$7,700,000
Severn’s gross profit margin of 21.6% is less than the industry average of 26%.
This indicates that Severn is making less gross profit than the industry average on
its sales.

*PROBLEM 5-15B
THE GOODY SHOP LTD.
Income Statement
Sales revenue
Sales ......................................................................................... $989,000
Less: Sales discounts .............................................................. $15,000
Sales returns and allowances......................................... 10,000 25,000
Net sales ................................................................................... 964,000
Cost of goods sold
Merchandise inventory, December 1, 2014 .............................. $ 34,360
Purchases ........................................................... $684,700
Less: Purchase discounts ..................................... 16,000
Purchase returns and allowances .............. 3,315
Net purchases ....................................................... 665,385
Add: Freight in....................................................... 5,060
Cost of goods purchased .......................................................... 670,445
Cost of goods available for sale ................................................ 704,805
Merchandise inventory, November 30, 2015 ............................ 37,350
Cost of goods sold .............................................................. 667,455
Gross profit...................................................................................... 296,545
Operating expenses
Administrative expenses............................................................ $230,100
Selling expenses ...................................................................... 8,200
Total operating expenses .................................................. 238,300
Profit from operations ...................................................................... 58,245
Interest expense ...................................................................... 11,315
Profit before income tax ................................................................. 46,930
Income tax expense ....................................................................... 10,000
Profit .............................................................................................. $ 36,930

THE GOODY SHOP LTD.


Balance, December 1, 2014 $ 1,000 $ 82,800 $ 83,800

Profit 36,930 36,930
Dividends 000000 (5,000) (5,000)
Balance, November 30, 2015 $26,000 $114,730 $140,730
THE GOODY SHOP LTD.

November 30, 2015
Assets
Current assets
Cash ...................................................................................................... $ 8,500
Accounts receivable ............................................................................. 13,770
Merchandise inventory .......................................................................... 37,350
Prepaid insurance ................................................................................. 4,500
Total current assets ...................................................................... 64,120
Land ................................................................................. $ 85,000
Buildings ...................................................... $175,000
Less: Accumulated depreciation.................. 61,200 113,800
Equipment ................................................... $57,000
Less: Accumulated depreciation.................. 19,880 ....... 37,120
Total property, plant, and equipment ........................................... 235,920
Total assets .......................................................................................... $300,040

Current liabilities
Accounts payable ............................................................................ $ 32,310
Unearned revenue........................................................................... 3,000
Salaries payable .............................................................................. 8,500
Property tax payable ....................................................................... 3,500
Income tax payable ......................................................................... 6,000
Current portion of mortgage payable ............................................... 5,300
Total current liabilities ............................................................ 58,610
Mortgage payable ($106,000 – $5,300)......................................... 100,700
Total liabilities ......................................................................... 159,310
Common shares ......................................................... $ 26,000
Retained earnings ...................................................... 114,730
Total shareholders’ equity ...................................................... 140,730
Total liabilities and shareholders’ equity .......................................... $300,040

BYP 5-1 FINANCIAL REPORTING
(in USD millions)
(a) Shoppers Drug Mart is a merchandising company because it buys products and
resells them to the public.
(b) Shoppers Drug Mart classifies its operating expenses by function since captions
include titles like “operating and administrative” expenses. Furthermore, cost of
goods sold is shown rather than being split into purchases and change in
inventory.
(c) Other non-operating revenues or expenses reported include finance expenses

totalling $57,595,000.
(d) and (e)
($ in thousands) 2012 2011
Gross profit $4,172,619 $4,042,444

margin = 38.7% = 38.7%
$10,781,848 $10,458,652
Profit margin $608,481 $613,934

= 5.6% = 5.9%
$10,781,848 $10,458,652
(f) The company’s profitability deteriorated in 2012. In spite of achieving the same
gross profit margin, Shoppers’ profit margin decreased from 5.9% to 5.6% of
sales. This was due to higher operating expenses.

BYP 5-2 COMPARATIVE ANALYSIS
(a) Jean Coutu Shoppers Drug Mart

(in millions) (in millions)
($2,468.0 – $2,463.2) ($10,782 – $10,459)

Percentage
1. $2,463.2 $10,459
change in sales
= 0.2% = 3.1%
Percentage ($291.3 – $280.8) ($881 – $911)

2. change in operating income $280.8 $911
= 3.7% = (3.3%)
3. Gross profit margin ($2,468.0 – $2,169.0) $4,173

$2,468.0 $10,782
= 12.1% = 38.7%
4. Profit margin $558.4 $608

$2,468.0 $10,782
= 22.6% = 5.6%
(b) Although Jean Coutu appears to be profitable based on its profit margin, that
ratio needs to be adjusted to exclude the unrealized gain related to the
investment in Rite Aid, in order to measure a normalized profit margin. This
revised profit margin would have the net profit of $558.4 reduced by $265.2.
When divided by sales of $2,468.0 the calculation yields a revised profit margin
of 11.9%. Even at the revised profit margin of 11.9%, the profit margin for Jean
Coutu is more than double that of Shoppers Drug Mart.
On the other hand, the gross profit margin for Shoppers is more than three times
that of Jean Coutu. Shoppers’ sales are increasing at a greater pace than Jean
Coutu. However, the operating profit of Shoppers is declining.

BYP 5-3 COMPARING IFRS AND ASPE
(a) The main difference between these two income statements is that Happy Coffee
presents its expense items by function (such as general and administrative
expenses) while Country Coffee presents its expenses by nature of the expense
item. Under IFRS, Happy Coffee is required to also disclose the total depreciation
expense and salaries and benefits expense in the notes to the financial
statements.
(b) Under IFRS both formats of expense presentation, by nature or by function, are
acceptable. ASPE does not have a requirement on how to report expenses.
Expenses under ASPE can be classified in any manner that would be useful to the
key stakeholders.
The method which classifies expenses by function can require a higher degree of
judgement since expenses have to be allocated to each of the functional
categories (depending on how many functional categories are present). In the case
of Happy Coffee, there are only two categories—cost of goods sold and general
administrative expenses. In some other cases, for example, depreciation expense
may have to be allocated to store operating expenses and general and office
expense.
(c) The difference in format could make it difficult to compare expense items. For
example, expense items as a percentage of sales would not be comparable.
However, Country Coffee can still easily compare the key profitability measures of
gross profit margin and profit margin. These profitability ratios are not dependent
on the expense classifications.
(d) No, comparability of the gross profit margin and profit margin will not be impacted.
The definition of gross profit and profit and therefore the related amounts do not
change when preparing the income statement with a different format.
(e) Country Coffee can change the presentation of its income statement and begin
classifying its expenses by function. This would be an acceptable presentation
under ASPE.
Under IFRS if a company chooses to report its expenses by function it must still
disclose total depreciation and salaries and benefit expense in the note
disclosures. Country Coffee could use this additional information from the notes of
Happy Coffee for improved comparability.

BYP 5-4 CRITICAL THINKING CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present
section of WileyPLUS.
(a) The CEO asked for three inappropriate adjustments to be made to the financial
statements. By recording a purchase return as an increase in sales revenue, the
sales revenue is now overstated and cost of goods sold is also overstated. By
recording freight-in relating to inventory that has now been sold as an operating
expense, it overstates operating expense while understating cost of goods sold.
Finally by recording a sales return as an operating expense, it overstates sales and
overstates operating expenses. All of these adjustments were designed to boost
gross profit in order to increase the bonus of the CEO.
If we reverse the adjustments made, we get:
2015 Draft Adjustments 2015 Revised

$(7,000)
Net sales $113,000 (6,000) $100,000
5,000
Cost of goods sold 62,000 (7,000) 60,000
Gross profit 51,000 (11,000) 40,000
(6,000)
Operating expenses 21,000 (5,000) 10,000
Profit from operations 30,000 0 30,000
Income tax expense 9,000 0 9,000
Profit $ 21,000 $ 0 $ 21,000
Gross profit margin: $51,000 ÷ $113,000 45.1%

Gross profit margin: $40,000 ÷ $100,000 40.0%
When we calculate the gross profit margin using the revised amounts, we can see
that it has not risen by more than 3% compared to the prior year and because of
this, the CEO will not obtain a bonus.
(b) The profit margin in 2015 is 21.0% ($21,000 ÷ $100,000) which is unchanged from
the prior year ($16,800 ÷ $80,000). However, in the first draft of the income
statement, the profit margin was 18.6% ($21,000 ÷ $113,000), which is lower than
the 21.0% determined using the correct amounts. This is because net sales were
overstated even though overall profit was not.

BYP 5-4 (Continued)

(c) Harm was done to the users of the financial statements. Assuming no corrections
were made, the income statement would have been adjusted for the bonus due to
the CEO. Many of the elements except for income tax expense reported in the
statement are false and misleading. Users of the financial statements would not
have obtained a true reflection of the performance trends of Peshawar Retailers
Ltd. and may have made inappropriate decisions based on misleading financial
statements. Furthermore, the CEO would have been awarded a bonus that he did
not deserve thereby taking assets away from the company and its shareholders.

BYP 5-5 ETHICS CASE
(a) Rita Pelzer, as a new employee, is placed in a position of responsibility and is

pressured by her supervisor to continue an unethical practice previously
performed by him. The unethical practice is taking unearned cash discounts. Her
dilemma is either to follow her boss’s unethical instructions or offend her boss and
maybe lose the job she just assumed.
(b) The stakeholders (affected parties) are:

Rita Pelzer, the assistant controller
Jamie Caterino, the controller (he looks good to superiors because of his
unethical behaviour)
Zaz Stores Ltd., the company benefited
Creditors of Zaz Stores Ltd. (suppliers harmed)
Canada Post employees (those blamed harmed)
(c) Ethically Rita should not continue the practice started by Jamie. She has several
choices in that she could:
1. Tell the controller (her boss) that she will attempt to take every allowable cash
discount by preparing and mailing cheques within the discount period—the
ethical thing to do. This will offend her boss and may jeopardize her continued
employment.
2. Comply with Jamie’s directions and continue the unethical practice of taking
unearned cash discounts.
3. Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to Jamie. The company may
not condone this practice. Rita definitely has a choice, but probably not
without consequence. To continue the practice is definitely unethical. If Rita
submits to this request, she may be asked to perform other unethical tasks. If
Rita stands her ground and refuses to participate in this unethical practice,
she probably won’t be asked to do other unethical things—if she isn’t fired.
Maybe nobody has ever challenged Jamie’s unethical behaviour and his
reaction may be one of respect rather than anger and retribution. Being
ethically compromised is no way to start a new job.

BYP 5-6 “ALL ABOUT YOU” ACTIVITY
(a) The gross profit margin would remain the same for both alternatives. Costs of
purchasing merchandise would remain the same. Cost to have the merchandise
shipped from the supplier to your place of business would likely not change
(assuming that the location will remain the same).
(b) The profit margin may change depending upon the alternative that is chosen. If
another store is opened then additional costs incurred would include rent for
premises, utilities for the premises, depreciation on the capital costs incurred to
purchase additional equipment, as well as the hiring of additional staff members. If
a website is the alternative chosen then additional costs may include the hiring of
staff to fill orders, costs of having orders shipped, costs to maintain the website up
to date, depreciation on the capital costs to set up the website, costs of renting
additional premises if the current premises are not large enough to hold the
additional inventory required.
(c) Other issues that must be considered include availability of inventory (can I buy
more inventory from my suppliers?), customer demand, customer loyalty, type of
customer (do they own a computer?), cash flow (how are you going to finance one
of these alternatives?), availability of staff in your neighbourhood, availability of
space and location.

BYP 5-7 SERIAL CASE
For (a) and (b)

Note to instructors: June balances were taken from the answer to BYP 4-7.
(a)
June 30 Merchandise Inventory.......................................... 1,750
Cost of Goods Sold ...................................... 1,750
($18,000 physical count – $16,250 perpetual record = $1,750 overage)
30 Income Tax Expense ............................................ 937

Income Tax Payable .................................... 937

BYP 5-7 (Continued)

(b)
Vehicles
Cash June Bal. 52,500 (Ch. 4)
June Bal. 18,674 (Ch. 4)
Accounts Receivable Accumulated Depreciation—Vehicles

June Bal. 12,090 (Ch. 4) (Ch. 4) June Bal. 5,250
Accounts Payable
(Ch. 4) June Bal. 7,165
June Bal. 16,250 (Ch. 4)
30 AJE 1,750
June Bal. 18,000
Unearned Revenue
(Ch. 4) June Bal. 500
Supplies
June Bal. 3,775 (Ch. 4)
Salaries Payable
Prepaid Insurance
June Bal. 20,080 (Ch. 4)
Interest Payable
Land
June Bal. 100,000 (Ch. 4)
Income Tax Payable
June 30 AJE 937
Buildings
June Bal. 165,000 (Ch. 4)
Bank Loan Payable
(Ch. 4) June Bal. 22,500
Accumulated Depreciation—Buildings
(Ch. 4) June Bal. 143,000 Mortgage Payable
(Ch. 4) June Bal. 53,200
Equipment
June Bal. 44,520 (Ch. 4) Common Shares
Accumulated Depreciation—Equipment
(Ch. 4) Bal. 21,035

BYP 5-7 (Continued)

(b) (Continued)
Retained Earnings
Depreciation Expense
(Ch. 4) June Bal. 66,788
June Bal. 17,785 (Ch. 4)
Dividends
June Bal. 30,000 (Ch. 4) Freight Out
June Bal. 18,000 (Ch. 4)
Rent Revenue
(Ch. 4) June Bal. 6,000 Utilities Expense
June Bal. 13,125 (Ch. 4)
Sales
(Ch. 4) June Bal. 645,358 Advertising Expense
June Bal. 9,600 (Ch. 4)
Sales Returns and Allowances Insurance Expense

June Bal. 5,000 (Ch. 4) June Bal. 7,280 (Ch. 4)
Cost of Goods Sold Property Tax Expense

June Bal. 102,386 (Ch. 4) June Bal. 5,950 (Ch. 4)
June 30 AJE 1,750
June Bal. 100,636
Interest Expense
June Bal. 5,354 (Ch. 4)
Salaries Expense
June Bal. 290,990 (Ch. 4)
Income Tax Expense
June Bal. 33,000 (Ch. 4)
30 AJE 937
June Bal. 33,937

BYP 5-7 (Continued)

(c)
KOEBEL’S FAMILY BAKERY LTD.
June 30, 2014
Debit Credit
Cash $ 18,674
Accounts receivable 12,090
Merchandise inventory 18,000
Supplies 3,775
Prepaid insurance 20,080
Land 100,000
Buildings 165,000
Accumulated depreciation—buildings $143,000
Equipment 44,520
Accumulated depreciation—equipment 21,035
Vehicles 52,500
Accumulated depreciation—vehicles 5,250
Accounts payable 7,165
Unearned revenue 500
Salaries payable 208
Interest payable 55
Income tax payable 937
Bank loan payable 22,500
Mortgage payable 53,200
Common shares 300
Retained earnings 66,788
Dividends 30,000
Rent revenue 6,000
Sales 645,358
Sales returns and allowances 5,000
Cost of goods sold 100,636
Salaries expense 290,990
Depreciation expense 17,785
Freight out 18,000
Utilities expense 13,125
Advertising expense 9,600
Insurance expense 7,280
Property tax expense 5,950
Income tax expense 33,937 0000000
Total $972,296 $972,296

BYP 5-7 (Continued)

(d)

Income Statement
Year Ended June 30, 2014
Sales revenue
Sales ........................................................................................... $645,358
Less: Sales returns and allowances........................................... 5,000
Net sales ..................................................................................... 640,358
Cost of goods sold .............................................................................. 100,636
Gross profit .......................................................................................... 539,722
Operating expenses
Salaries expense ..................................................... $290,990
Depreciation expense............................................... 17,785
Freight out ............................................................... 18,000
Utilities expense ....................................................... 13,125
Advertising expense ................................................. 9,600
Insurance expense ................................................... 7,280
Property tax expense ............................................... 5,950
Total operating expenses.................................................... 362,730
Profit from operations........................................................................... 176,992
Rent revenue ............................................................ $6,000
Interest expense ...................................................... 5,354 646
Profit before income tax ....................................................................... 177,638
Income tax expense ............................................................................. 33,937
Profit .................................................................................................... $143,701
(e)
Retained Earnings:
Beginning balance ............................................................................... $ 66,788
Add: Profit ........................................................................................... 143,701
Less: Dividends ................................................................................... (30,000)
Ending balance .................................................................................... $180,489

BYP 5-7 (Continued)

(f)
June 30, 2014
Assets
Current assets
Cash ............................................................................................................. $ 18,674
Supplies ........................................................................................................ 3,775
Prepaid insurance ......................................................................................... 20,080
Total current assets ............................................................................. 72,619
Land ..................................................................... $100,000
Buildings .............................................................. $165,000
Equipment ............................................................ $44,520
Vehicles ............................................................... $52,500
Total property, plant, and equipment.......... 192,735
Total assets .................................................................................................. $265,354

Current liabilities
Accounts payable.......................................................................................... $ 7,165
Unearned revenue ........................................................................................ 500
Salaries payable ........................................................................................... 208
Interest payable ............................................................................................ 55
Income tax payable ....................................................................................... 937
Current portion of bank loan payable ............................................................ 7,500
Current portion of mortgage payable ............................................................ 5,000
Total current liabilities ......................................................................... 21,365
Bank loan payable ($22,500 – $7,500).......................................................... 15,000
Mortgage payable ($53,200 – $5,000) .......................................................... 48,200
Total liabilities ...................................................................................... 84,565
Common shares........................................................................ $ 300
Retained earnings ..................................................................... 180,489
Total shareholders’ equity .................................................................... 180,789

BYP 5-7 (Continued)

(g)
Koebel Competitor
Current $72,619
ratio = 3.4:1 2:1
$21,365
Gross profit $539,722

= 84.3% 75%
Margin $640,358
Profit $143,701
= 22.4% 15%
margin $640,358
Koebel’s Family Bakery’s ratios are better in every respect. Koebel has better liquidity
and profitability than its competitor. Of course, you must recall that Koebel’s is a
small, family company while its competitor is a large, publicly-traded company. They
likely have different product lines, cost structures, and other differences affecting their
financial results.

COMPREHENSIVE CASE: CHAPTERS 1 – 5
(b)
Date Account Titles Debit Credit
March 1 Cash .................................................................. 125,000

Accounts Receivable................................. 125,000
2 Accounts Payable .............................................. 200,000

($200,000 × 2%) ............................... 4,000
Cash ($200,000 – $4,000) ........................ 196,000
5 Merchandise Inventory....................................... 300,000

Accounts Payable ..................................... 300,000
6 Cash .................................................................. 285,000

Sales ......................................................... 285,000

Merchandise Inventory .............................. 200,000
7 Accounts Payable .............................................. 25,000

8 No entry necessary
9 Accounts Receivable ......................................... 200,000

Sales ......................................................... 200,000

9 Freight Out ......................................................... 5,000

Cash ......................................................... 5,000
12 Cash .................................................................. 12,500

Unearned Revenue ................................... 12,500

COMPREHENSIVE CASE: CHAPTERS 1─5 (Continued)
(b) (Continued)
March 13 Sales Returns and Allowances .......................... 20,000

Accounts Receivable................................. 20,000

Cost of Goods Sold ................................... 14,000
14 Accounts Payable ($300,000 – $25,000) ........... 275,000

($275,000 × 2%) ................................. 5,500
Cash ($300,000 – $25,000 – $5,500) 269,500
16 Salaries Expense ............................................... 45,000

Cash.......................................................... 45,000
19 Cash ($200,000 – $20,000 – $3,600) ................ 176,400

Sales Discounts ($180,000 × 2%)...................... 3,600
Accounts Receivable
($200,000 – $20,000) .......................... 180,000
20 Cash ................................................................. 255,000

Sales ......................................................... 255,000


Cash .......................................................... 50,000
30 Rent Expense .................................................... 5,000

Cash ......................................................... 5,000

(d)
March 31 Utilities Expense ................................................ 10,000

Accounts Payable ..................................... 10,000

Salaries Payable ....................................... 10,000
31 Interest Expense ................................................ 9,000

Interest Payable ........................................ 9,000
31 Depreciation Expense ........................................ 14,500

Accumulated Depreciation—Equipment .... 14,500
($145,000 ÷ 10 years = $14,500)
31 Income Tax Expense .......................................... 50,000

Income Tax Payable .................................. 50,000


(a), (b), (d) and (g)
Cash Supplies
Feb. 28 Bal. 65,000 Feb. 28 Bal. 7,500
Mar. 1 125,000 Mar. 2 196,000 Mar. 31 Bal. 7,500
6 285,000 9 5,000
12 12,500 14 269,500 Prepaid Rent
19 176,400 16 45,000 Feb. 28 Bal. 5,000
20 255,000 27 50,000 Mar. 31 Bal. 5,000

30 5,000
Mar. 31 Bal. 348,400 Equipment
Feb. 28 Bal. 145,000
Accounts Receivable
Mar. 31 Bal. 145,000
Feb. 28 Bal. 350,000
Mar. 9 200,000 Mar. 1 125,000 Accumulated Depreciation
—Equipment
13 20,000
Feb. 28 Bal. 29,000
19 180,000
Mar. 31 14,500
Mar. 31 Bal. 225,000
Mar. 31 Bal. 43,500
Accounts Payable
Feb. 28 Bal. 2,750,000
Feb. 28 Bal. 1,550,000
Mar. 5 300,000 Mar. 2 4,000
Mar. 2 200,000 Mar. 5 300,000
6 200,000
7 25,000 31 10,000
13 14,000 7 25,000
14 275,000
9 140,000
Mar. 31 Bal. 1,360,000
14 5,500
20 179,000
Mar. 31 Bal. 2,510,500


(a), (b), (d) and (g) (Continued)
Salaries Payable
Mar. 31 10,000
Mar. 31 Bal. 10,000
Interest Payable
Mar. 31 9,000
Mar. 31 Bal. 9,000
Unearned Revenue
Feb. 28 Bal. 35,000
Mar. 12 12,500
Mar. 31 Bal. 47,500
Bank Loan Payable – Non-Current

Feb. 28 Bal. 450,000
Mar. 31 Bal. 450,000
Income Tax Payable

Mar. 31 50,000
Mar. 31 Bal. 50,000
Common Shares
Feb. 28 Bal. 200,000
Mar. 31 Bal. 200,000
Retained Earnings
Feb. 28 Bal. 550,500
Mar. 31 CE 50,000 Mar. 31 CE 570,900
Mar. 31 Bal. 1,071,400


Dividends
Feb. 28 Bal. 50,000
Mar. 31 Bal. 50,000
Mar. 31 CE 50,000
Mar. 31 Bal. 0
Sales
Feb. 28 Bal. 5,479,400
Mar. 6 285,000
9 200,000
20 255,000
Mar. 31 Bal. 6,219,400
Mar. 31 CE 6,219,400
Mar. 31 Bal. 0
Sales Returns and Allowances

Feb. 28 Bal. 107,000
Mar. 13 20,000
Mar. 31 Bal. 127,000
Mar. 31 CE 127,000
Mar. 31 Bal. 0
Sales Discounts
Feb. 28 Bal. 65,000
Mar. 19 3,600
Mar. 31 Bal. 68,600
Mar. 31 CE 68,600
Mar. 31 Bal. 0


Advertising Expense
Feb. 28 Bal. 75,000
Mar. 31 Bal. 75,000
Mar. 31 CE 75,000
Mar. 31 Bal. 0
Cost of Goods Sold

Feb. 28 Bal. 3,843,900
Mar. 6 200,000 Mar. 13 14,000
9 140,000
20 179,000
Mar. 31 Bal. 4,348,900
Mar. 31 CE 4,348,900
Mar. 31 Bal. 0
Freight Out
Feb. 28 Bal. 180,000
Mar. 9 5,000
Mar. 31 Bal. 185,000
Mar. 31 CE 185,000
Mar. 31 Bal. 0
Depreciation Expense
Feb. 28 Bal. 0
Mar. 31 14,500
Mar. 31 Bal. 14,500
Mar. 31 CE 14,500
Mar. 31 Bal. 0


Interest Expense
Feb. 28 Bal. 27,000
Mar. 31 9,000
Mar. 31 Bal. 36,000
Mar. 31 CE 36,000
Mar. 31 Bal. 0
Office Expense
Feb. 28 Bal. 26,000
Mar. 31 Bal. 26,000
Mar. 31 CE 26,000
Mar. 31 Bal. 0
Rent Expense
Feb. 28 Bal. 55,000
Mar. 30 5,000
Mar. 31 Bal. 60,000
Mar. 31 CE 60,000
Mar. 31 Bal. 0
Salaries Expense
Feb. 28 Bal. 360,000
Mar. 16 45,000
27 50,000
31 10,000
Mar. 31 Bal. 465,000
Mar. 31 CE 465,000
Mar. 31 Bal. 0


Travel Expense
Feb. 28 Bal. 12,500
Mar. 31 Bal. 12,500
Mar. 31 CE 12,500
Mar. 31 Bal. 0
Utilities Expense
Feb. 28 Bal. 20,000
Mar. 31 10,000
Mar. 31 Bal. 30,000
Mar. 31 CE 30,000
Mar. 31 Bal. 0
Income Tax Expense

Feb. 28 Bal. 150,000
Mar. 31 50,000
Mar. 31 Bal. 200,000
Mar. 31 CE 200,000
Mar. 31 Bal. 0
Income Summary
Mar. 31 CE 5,648,500 Mar. 31 CE 6,219,400
CE 570,900
Bal. 0


(c)
HERITAGE FURNITURE LIMITED
Trial Balance
March 31, 2015
Debit Credit
Cash $ 348,400
Merchandise inventory 2,510,500
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Accumulated depreciation—equipment $ 29,000
Accounts payable 1,350,000
Unearned revenue 47,500
Bank loan payable—non-current 450,000
Common shares 200,000
Dividends 50,000
Sales 6,219,400
Sales discounts 68,600
Cost of goods sold 4,348,900
Freight out 185,000
Office expense 26,000
Rent expense 60,000
Travel expense 12,500
Income tax expense 150,000 000000v 0
$8,846,400 $8,846,400

Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited

(e)
March 31, 2015
Debit Credit
Cash $ 348,400
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Salaries payable 10,000
Interest payable 9,000
Income tax payable 50,000
Dividends 50,000
Sales 6,219,400
Sales discounts 68,600
Freight out 185,000
Rent expense 60,000
Income tax expense 200,000 000000v 0
$8,939,900 $8,939,900


(f)
Income Statement
Year Ended March 31, 2015
Sales revenue
Sales $6,219,400
Less: Sales returns and allowances $127,000
Sales discounts 68,600 195,600
Net sales 6,023,800
Gross profit 1,674,900
Operating expenses
Salaries expense $465,000
Freight out 185,000
Rent expense 60,000
Total operating expenses 868,000
Profit from operations 806,900
Profit before income tax 770,900
Income tax expense 200,000
Profit $ 570,900


(f)

Year Ended March 31, 2015

Balance, April 1, 2014 $199,000 $ 550,500 $ 749,500

Profit 570,900 570,900
Dividends 00 00000 (50,000) (50,000)
Balance, March 31, 2015 $200,000 $1,071,400 $1,271,400


(f) (Continued)

March 31, 2015
Assets
Current assets
Cash $ 348,400
Supplies 7,500
Prepaid rent 5,000 $3,096,400
Property, plant and equipment
Equipment $145,000
Less: Accumulated depreciation 43,500 101,500
Total assets $3,197,900

Current liabilities
Accounts payable $1,360,000
Current portion of bank loan payable 45,000
Total current liabilities 1,521,500
Bank loan payable 405,000
Total liabilities 1,926,500
Common shares $ 200,000
Retained earnings 1,071,400 1,271,400
Total liabilities and shareholders’ equity $3,197,900

(g)
March 31 Sales ................................................................ 6,219,400

Income Summary ..................................... 6,219,400
31 Income Summary ............................................... 5,648,500

Sales Returns and Allowances .................. 127,000
Sales Discounts ......................................... 68,600
Advertising Expense .................................. 75,000
Cost of Goods Sold.................................... 4,348,900
Freight out ................................................. 185,000
Depreciation Expense................................ 14,500
Interest Expense ........................................ 36,000
Office Expense .......................................... 26,000
Rent Expense ............................................ 60,000
Salaries Expense ....................................... 465,000
Travel Expense .......................................... 12,500
Utilities Expense ........................................ 30,000
Income Tax Expense ................................. 200,000
31 Income Summary ............................................... 570,900

Retained Earnings .................................... 570,900
31 Retained Earnings ............................................. 50,000

Dividends ................................................... 50,000

(h)

Post-Closing Trial Balance
March 31, 2015
Debit Credit
Cash $ 348,400
Supplies 7,500
Prepaid rent 5,000
Equipment 145,000
Retained earnings 000000000 1,071,400
$3,241,400 $3,241,400

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Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
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(MMXIII xi FI)


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ASSIGNMENT CLASSIFICATION TABLE

1. Identify the differences 1, 2, 3, 4 1, 2 1 1A, 1B, 2B, 1

2. Prepare entries for 5, 6, 7, 8, 3, 4, 5 2, 3, 4, 6, 2A, 3A, 2B, 3B, 4, 5

3. Prepare entries for sales 7, 8, 9, 10, 4, 6 2, 3, 5, 6, 2A, 3A, 2B, 3B, 4

4. Prepare a single-step 13, 14, 15, 7, 8, 9 7, 8, 9, 10 5A, 6A, 5B, 6B, 1, 3, 7

Solutions Manual 5-1 Chapter 5

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Identify appropriate inventory system. Moderate 15-20

2A Record purchase and sales transactions. Moderate 20-30

3A Record purchase and sales transactions. Moderate 20-30

4A Record and post purchase and sales transactions; Simple 30-40

5A Record and post transactions and prepare partial Simple 30-40

6A Prepare single- and multiple-step income statements. Moderate 20-30

7A Record and post adjusting entries; prepare adjusted Moderate 35-45

8A Calculate profitability ratios and comment. Moderate 15-20

9A Calculate amounts and assess profitability. Complex 30-40

10A Calculate ratios and comment. Simple 20-30

*11A Record purchase and sales transactions; discuss Moderate 20-30

*12A Record purchase and sales transactions. Moderate 20-30

*14A Prepare partial income statement; calculate gross Simple 20-30

*15A Prepare financial statements. Moderate 40-50

1B Identify appropriate inventory system. Moderate 15-20

Solutions Manual 5-2 Chapter 5

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

3B Record purchase and sales transactions. Moderate 20-30

4B Record and post purchase and sales transactions; Simple 30-40

5B Record and post transactions and prepare partial Simple 30-40

6B Prepare single- and multiple-step income statements. Moderate 20-30

7B Record and post adjusting entries; prepare adjusted Moderate 35-45

8B Calculate profitability ratios and comment. Moderate 15-20

9B Calculate amounts and assess profitability. Complex 30-40

10B Calculate ratios and comment. Simple 20-30

*11B Record purchase and sales transactions; discuss Moderate 20-30

*12B Record purchase and sales transactions. Moderate 20-30

*14B Prepare partial income statement; calculate gross Simple 20-30

*15B Prepare financial statements. Moderate 40-50

Solutions Manual 5-3 Chapter 5

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

Solutions Manual 5-4 Chapter 5

Answers to Questions (Continued)

9. In a perpetual inventory system, purchase returns are credited to the Merchandise

Solutions Manual 5-5 Chapter 5

Answers to Questions (Continued)

14. Shoppers Drug Mart uses a multiple-step income statement.

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

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

Solutions Manual 5-6 Chapter 5

Answers to Questions (Continued)

20. High gross profit Low gross profit

*22. Periodic System

Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased (Purchases –

Cost of Goods Sold = the cost of the item(s) sold

Solutions Manual 5-7 Chapter 5

Answers to Questions (Continued)

Cost of Goods Sold =

Solutions Manual 5-8 Chapter 5

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 5-1

BRIEF EXERCISE 5-2

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

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