FEATURE STORY

Who Doesn’t Shop?

Carrefour, headquartered in France, is the largest retailer in Europe and the second largest retailer in the world. While 40% of its sales are in France, it operates stores under a variety of names in 32 countries in Europe, Asia, and Latin America, such as Carrefour Express, Dity, Ed, Minipreco, and Promocash. Its nearly 10,000 stores employ 471,000 people and generate sales of €112 billion.

Becoming an international titan hasn’t always been easy. Carrefour has enjoyed some successful mergers and acquisitions. But, it has also experienced setbacks, including a failed effort to acquire a giant Brazilian retailer. It has had some success in increasing market share in emerging markets. But, by far the largest share of its sales are in Europe, which has experienced low consumer confidence in recent years due to the recession and debt crisis. As a result, Carrefour’s increases in emerging markets have only served to offset declines in Europe.

Management has experienced upheaval, with three new chief executive officers during a seven-year period. Investors in recent years have withdrawn support for the company, resulting in a drop in Carrefour’s share price of two-thirds in less than five years. At times, the company has struggled strategically. Recently, it decided to quit using temporary price cuts to promote products. Instead, Carrefour sets prices low on certain key items. It also decided to not set its prices as low as those of bargain stores, such as E.Leclerc (FRA). Carrefour’s management felt that the additional services the company provides would enable it to charge slightly higher prices than bargain stores without losing customers. However, poor economic conditions made consumers extremely price-conscious. As a result, the company has seen a significant drop in customer traffic.

Nobody said retailing is easy, but at number two in the world, Carrefour has no intention of throwing in the towel. The company recently launched a makeover of 500 superstores in Europe, and it continues to look for expansion opportunities in countries that have good growth opportunities. Recently, the company opened its first store in India. Lars Olofsson, CEO of Carrefour, declared: “The opening of this first store marks Carrefour’s entry into the Indian market and will be followed shortly by the opening of other Cash & Carry stores. This first step is essential to allow the Carrefour teams to fully understand the specificities of the Indian market and then build our presence in other formats.”

PREVIEW OF CHAPTER 5

Merchandising is one of the largest and most influential industries in the world. It is likely that a number of you will work for a merchandiser. Therefore, understanding the financial statements of merchandising companies is important. In this chapter, you will learn the basics about reporting merchandising transactions. In addition, you will learn how to prepare and analyze a commonly used form of the income statement. The content and organization of the chapter are as follows.

Merchandising Operations

Learning Objective 1

Identify the differences between service and merchandising companies.

Metro (DEU), Carrefour (FRA), and Tesco (GBR) are called merchandising companies because they buy and sell merchandise rather than perform services as their primary source of revenue. Merchandising companies that purchase and sell directly to consumers are called retailers. Merchandising companies that sell to retailers are known as wholesalers. For example, retailer Walgreens (USA) might buy goods from wholesaler Grupo Casa SA de CV (MEX). Retailer Office Depot (USA) might buy office supplies from wholesaler Corporate Express (NLD). The primary source of revenues for merchandising companies is the sale of merchandise, often referred to simply as sales revenue or sales. A merchandising company has two categories of expenses: cost of goods sold and operating expenses.

Cost of goods sold is the total cost of merchandise sold during the period. This expense is directly related to the revenue recognized from the sale of goods. Illustration 5-1 shows the income measurement process for a merchandising company. The items in the two blue boxes are unique to a merchandising company; they are not used by a service company.

Operating Cycles

The operating cycle of a merchandising company ordinarily is longer than that of a service company. The purchase of merchandise inventory and its eventual sale lengthen the cycle. Illustration 5-2 shows the operating cycle of a service company.

Illustration 5-3 shows the operating cycle of a merchandising company.

Note that the added asset account for a merchandising company is the Inventory account. Companies report inventory as a current asset on the statement of financial position.

Flow of Costs

The flow of costs for a merchandising company is as follows. Beginning inventory plus the cost of goods purchased is the cost of goods available for sale. As goods are sold, they are assigned to cost of goods sold. Those goods that are not sold by the end of the accounting period represent ending inventory. Illustration 5-4 describes these relationships. Companies use one of two systems to account for inventory: a perpetual inventory system or a periodic inventory system.

• HELPFUL HINT
For control purposes, companies take a physical inventory count under the perpetual system even though it is not needed to determine cost of goods sold.

PERPETUAL SYSTEM

In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. These records continuously—perpetually—show the inventory that should be on hand for every item. For example, a Toyota (JPN) dealership has separate inventory records for each automobile, truck, and van on its lot and showroom floor. Similarly, a Morrisons (GBR) grocery store uses bar codes and optical scanners to keep a daily running record of every box of cereal and every jar of jelly that it buys and sells. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.

PERIODIC SYSTEM

In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they determine the cost of goods sold only at the end of the accounting period—that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand.

To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:

1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.

Illustration 5-5 graphically compares the sequence of activities and the timing of the cost of goods sold computation under the two inventory systems.

ADVANTAGES OF THE PERPETUAL SYSTEM

Companies that sell merchandise with high unit values, such as automobiles, furniture, and major home appliances, have traditionally used perpetual systems. The growing use of computers and electronic scanners has enabled many more companies to install perpetual inventory systems. The perpetual inventory system is so named because the accounting records continuously—perpetually—show the quantity and cost of the inventory that should be on hand at any time.

A perpetual inventory system provides better control over inventories than a periodic system. Since the inventory records show the quantities that should be on hand, the company can count the goods at any time to see whether the amount of goods actually on hand agrees with the inventory records. If shortages are uncovered, the company can investigate immediately. Although a perpetual inventory system requires both additional clerical work and expense to maintain the subsidiary records, a computerized system can minimize this cost.

Some businesses find it either unnecessary or uneconomical to invest in a computerized perpetual inventory system. Many small merchandising businesses find that basic accounting software provides some of the essential benefits of a perpetual inventory system. Also, managers of some small businesses still find that they can control their merchandise and manage day-to-day operations using a periodic inventory system.

Because of the widespread use of the perpetual inventory system, we illustrate it in this chapter. We discuss and illustrate the periodic system in Appendix 5B.

PRACTICE MULTIPLE-CHOICE QUESTIONS

(LO 1)

1. Gross profit will result if:

   1. operating expenses are less than net income.
   2. sales revenues are greater than operating expenses.
   3. sales revenues are greater than cost of goods sold.
   4. operating expenses are greater than cost of goods sold.

(LO 2)

2. Under a perpetual inventory system, when goods are purchased for resale by a company:

   1. purchases on account are debited to Inventory.
   2. purchases on account are debited to Purchases.
   3. purchase returns are debited to Purchase Returns and Allowances.
   4. freight costs are debited to Freight-Out.

(LO 3)

3. The sales accounts that normally have a debit balance are:

   1. Sales Discounts.
   2. Sales Returns and Allowances.
   3. Both (a) and (b).
   4. Neither (a) nor (b).

(LO 3)

4. A credit sale of NT$7,500 is made on June 13, terms 2/10, net/30. A return of NT$500 is granted on June 16. The amount received as payment in full on June 23 is:

   1. NT$7,000.
   2. NT$6,860.
   3. NT$6,850.
   4. NT$6,500.

(LO 2)

5. Which of the following accounts will normally appear in the ledger of a merchandising company that uses a perpetual inventory system?

   1. Purchases.
   2. Freight-In.
   3. Cost of Goods Sold.
   4. Purchase Discounts.

(LO 3)

6. To record the sale of goods for cash in a perpetual inventory system:

   1. only one journal entry is necessary to record cost of goods sold and reduction of inventory.
   2. only one journal entry is necessary to record the receipt of cash and the sales revenue.
   3. two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory.
   4. two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue.

(LO 4)

7. The steps in the accounting cycle for a merchandising company are the same as those in a service company except:

   1. an additional adjusting journal entry for inventory may be needed in a merchandising company.
   2. closing journal entries are not required for a merchandising company.
   3. a post-closing trial balance is not required for a merchandising company.
   4. an income statement is required for a merchandising company.

(LO 5)

8. The income statement for a merchandising company shows each of the following features except:

   1. gross profit.
   2. cost of goods sold.
   3. a sales section.
   4. investing activities section.

(LO 5)

9. If sales revenues are €400,000, cost of goods sold is €310,000, and operating expenses are €60,000, the gross profit is:

   1. €30,000.
   2. €90,000.
   3. €340,000.
   4. €400,000.

(LO 6)

10.  
    In a worksheet using a perpetual inventory system, Inventory is shown in the following columns:

    1. adjusted trial balance debit and statement of financial position debit.
    2. income statement debit and statement of financial position debit.
    3. income statement credit and statement of financial position debit.
    4. income statement credit and adjusted trial balance debit.

(LO 7)

11.  
    In determining cost of goods sold in a periodic system:

    1. purchase discounts are deducted from net purchases.
    2. freight-out is added to net purchases.
    3. purchase returns and allowances are deducted from net purchases.
    4. freight-in is added to net purchases.

(LO 7)

12.  
    If beginning inventory is HK$600,000, cost of goods purchased is HK$3,800,000, and ending inventory is HK$500,000, cost of goods sold is:

    1. HK$3,900,000.
    2. HK$3,700,000.
    3. HK$3,300,000.
    4. HK$4,200,000.

(LO 7)

13.  
    When goods are purchased for resale by a company using a periodic inventory system:

    1. purchases on account are debited to Inventory.
    2. purchases on account are debited to Purchases.
    3. purchase returns are debited to Purchase Returns and Allowances.
    4. freight costs are debited to Purchases.

Prepare purchase and sales entries.

(LO 2, 3)

1. On June 10, Vareen Company purchased £8,000 of merchandise from Harrah Company, FOB shipping point, terms 3/10, n/30. Vareen pays the freight costs of £400 on June 11. Damaged goods totaling £300 are returned to Harrah for credit on June 12. The fair value of these goods in £70. On June 19, Vareen pays Harrah Company in full, less the purchase discount. Both companies use a perpetual inventory system.

1. 1. “The steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company.” Do you agree or disagree?
   2. Is the measurement of net income for a merchandising company conceptually the same as for a service company? Explain.

2. Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?

3. 1. How do the components of revenues and expenses differ between merchandising and service companies?
   2. Explain the income measurement process in a merchandising company.

4. How does income measurement differ between a merchandising and a service company?

5. When is cost of goods sold determined in a perpetual inventory system?

6. Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the buyer and a debit to Freight-Out by the seller.

7. Explain the meaning of the credit terms 2/10, n/30.

8. Goods costing £2,500 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, a £200 credit memo is received from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period using a perpetual inventory system.

9. Karen Lloyd believes revenues from credit sales may be recorded before they are collected in cash. Do you agree? Explain.

10. 1. What is the primary source document for recording (1) cash sales, (2) credit sales.
    2. Using XXs for amounts, give the journal entry for each of the transactions in part (a).

11. A credit sale is made on July 10 for €700, terms 2/10, n/30. On July 12, €100 of goods are returned for credit. Give the journal entry on July 19 to record the receipt of the balance due within the discount period.

12. Explain why the Inventory account will usually require adjustment at year-end.

13. Prepare the closing entries for the Sales Revenue account, assuming a balance of €180,000 and the Cost of Goods Sold account with a €125,000 balance.

14. What merchandising account(s) will appear in the post-closing trial balance?

15. Regis Co. has sales revenue of HK$1,090,000, cost of goods sold of HK$700,000, and operating expenses of HK$230,000. What is its gross profit and its gross profit rate?

16. Kim Ho Company reports net sales of ¥800,000, gross profit of ¥570,000, and net income of ¥240,000. What are its operating expenses?

17. Identify the distinguishing features of an income statement for a merchandising company.

18. Identify the sections of an income statement that relate to

    1. operating activities, and
    2. non-operating activities.
19.  

    Indicate the columns of the worksheet in which

    1. inventory and
    2. cost of goods sold will be shown using a perpetual inventory system.
20.  

    Identify the accounts that are added to or deducted from Purchases to determine the cost of goods purchased using a periodic inventory system. For each account, indicate whether it is added or deducted.

21.  

    Goods costing NT$60,000 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, a NT$6,000 credit was received from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period, assuming a periodic inventory system.

BRIEF EXERCISES

Compute missing amounts in determining net income.

(LO 1)

BE5-1 Presented below are the components in Clearwater Company, Ltd.’s income statement. Determine the missing amounts.

Journalize perpetual inventory entries.

(LO 2, 3)

BE5-2 Giovanni Company buys merchandise on account from Gordon Company. The selling price of the goods is €780, and the cost of the goods is €560. Both companies use perpetual inventory systems. Journalize the transaction on the books of both companies.

Journalize sales transactions.

(LO 3)

BE5-3 Prepare the journal entries to record the following transactions on Benson Company, Ltd.’s books using a perpetual inventory system.

1. On March 2, Benson Company sold £800,000 of merchandise to Edgebrook Company, terms 2/10, n/30. The cost of the merchandise sold was £620,000.
2. On March 6, Edgebrook Company returned £120,000 of the merchandise purchased on March 2. The cost of the returned merchandise was £90,000.
3. On March 12, Benson Company received the balance due from Edgebrook Company.

Journalize purchase transactions.

(LO 2)

BE5-4 From the information BE5-3, prepare the journal entries to record these transactions on Edgebrook Company’s books under a perpetual inventory system.

Prepare adjusting entry for merchandise inventory.

(LO 4)

BE5-5 At year-end, the perpetual inventory records of Federer Company showed merchandise inventory of CHF98,000. The company determined, however, that its actual inventory on hand was CHF96,100. Record the necessary adjusting entry.

Prepare closing entries for accounts.

(LO 4)

BE5-6 Orlaida Company has the following account balances: Sales Revenue €192,000, Sales Discounts €2,000, Cost of Goods Sold €105,000, and Inventory €40,000. Prepare the entries to record the closing of these items to Income Summary.

Prepare sales section of income statement.

(LO 5)

BE5-7 Yangtze Company, Ltd. provides the following information for the month ended October 31, 2017 (amounts in Chinese yuan): sales on credit ¥280,000, cash sales ¥100,000, sales discounts ¥5,000, sales returns and allowances ¥22,000. Prepare the sales section of the income statement based on this information.

Explain presentation in an income statement.

(LO 5)

BE5-8 Explain where each of the following items would appear on an income statement: (a) gain on sale of equipment, (b) interest expense, (c) casualty loss from vandalism, (d) cost of goods sold, and (e) depreciation expense.

Compute net sales, gross profit, income from operations, and gross profit rate.

(LO 5)

BE5-9 Assume Jose Company has the following reported amounts: Sales revenue €506,000, Sales returns and allowances €13,000, Cost of goods sold €342,000, Operating expenses €110,000. Compute the following: (a) net sales, (b) gross profit, (c) income from operations, and (d) gross profit rate. (Round to one decimal place.)

Identify worksheet columns for selected accounts.

(LO 6)

*BE5-10 Presented below is the format of the worksheet presented in the chapter.

Indicate where the following items will appear on the worksheet: (a) Cash, (b) Inventory, (c) Sales revenue, and (d) Cost of goods sold.

Example:

Cash: Trial balance debit column; Adjusted trial balance debit column; and Statement of financial position debit column.

Compute net purchases and cost of goods purchased.

(LO 7)

*BE5-11 Assume that Kowloon Company uses a periodic inventory system and has these account balances (in thousands): Purchases 430,000; Purchase Returns and Allowances 13,000; Purchase Discounts 8,000; and Freight-In 16,000. Determine net purchases and cost of goods purchased.

Compute cost of goods sold and gross profit.

(LO 7)

*BE5-12 Assume the same information as in BE5-11 and also that Kowloon Company has beginning inventory (in thousands) of 60,000, ending inventory of 86,000, and net sales of 680,000. Determine the amounts to be reported for cost of goods sold and gross profit.

Journalize purchase transactions.

(LO 7)

*BE5-13 Prepare the journal entries to record these transactions on Huntington Company’s books using a periodic inventory system.

1. On March 2, Huntington Company purchased £900,000 of merchandise from Saunder Company, terms 2/10, n/30.
2. On March 6, Huntington Company returned £184,000 of the merchandise purchased on March 2.
3. On March 12, Huntington Company paid the balance due to Saunder Company.

Prepare closing entries for merchandise accounts.

(LO 7)

*BE5-14 A. Hall Company has the following merchandise account balances: Sales Revenue $180,000, Sales Discounts $2,000, Purchases $120,000, and Purchases Returns and Allowances $30,000. In addition, it has a beginning inventory of $40,000 and an ending inventory of $30,000. Prepare the entries to record the closing of these items to Income Summary using the periodic inventory system.

Identify worksheet columns for selected accounts.

(LO 7)

*BE5-15 Presented below is the format of the worksheet using the periodic inventory system presented in Appendix 5B.

Indicate where the following items will appear on the worksheet: (a) Cash, (b) Beginning inventory, (c) Accounts payable, and (d) Ending inventory.

Example:

Cash: Trial balance debit column; Adjustment trial balance debit column; and Statement of financial position debit column.

Answer general questions about merchandisers.

(LO 1)

E5-1 Mr. Soukup has prepared the following list of statements about service companies and merchandisers.

1. Measuring net income for a merchandiser is conceptually the same as for a service company.
2. For a merchandiser, sales less operating expenses is called gross profit.
3. For a merchandiser, the primary source of revenues is the sale of inventory.
4. Sales salaries and wages is an example of an operating expense.
5. The operating cycle of a merchandiser is the same as that of a service company.
6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.
7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.
8. A periodic inventory system provides better control over inventories than a perpetual system.

Instructions

Identify each statement as true or false. If false, indicate how to correct the statement.

Journalize purchase transactions.

(LO 2)

E5-2 Information related to Duffy Co., Ltd. is presented below.

1. On April 5, purchased merchandise from Thomas Company, Ltd. for £25,000, terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of £900 on merchandise purchased from Thomas.
3. On April 7, purchased equipment on account for £26,000.
4. On April 8, returned damaged merchandise to Thomas and was granted a £2,600 credit for returned merchandise.
5. On April 15, paid the amount due to Thomas in full.

Instructions

1. Prepare the journal entries to record these transactions on the books of Duffy Co., Ltd. under a perpetual inventory system.
2. Assume that Duffy Co., Ltd. paid the balance due to Thomas Company, Ltd. on May 4 instead of April 15. Prepare the journal entry to record this payment.

Journalize perpetual inventory entries.

(LO 2, 3)

E5-3 On September 1, Moreau Office Supply SA had an inventory of 30 calculators at a cost of €22 each. The company uses a perpetual inventory system. During September, the following transactions occurred.

Instructions

Journalize the September transactions.

Prepare purchase and sales entries.

(LO 2, 3)

E5-4 On June 10, York Company Ltd. purchased £7,600 of merchandise from Bianchi Company, FOB shipping point, terms 2/10, n/30. York pays the freight costs of £400 on June 11. Damaged goods totaling £300 are returned to Bianchi for credit on June 12. The fair value of these goods is £70. On June 19, York pays Bianchi Company in full, less the purchase discount. Both companies use a perpetual inventory system.

Instructions

1. Prepare separate entries for each transaction on the books of York Company, Ltd.
2. Prepare separate entries for each transaction for Bianchi Company. The merchandise purchased by York on June 10 had cost Bianchi £4,300.

Journalize sales transactions.

(LO 3)

E5-5 Presented below are transactions related to Li Company, Ltd.

1. On December 3, Li sold HK$580,000 of merchandise to South China Co., Ltd. terms 1/10, n/30, FOB shipping point. The cost of the merchandise sold was HK$364,800.
2. On December 8, South China was granted an allowance of HK$28,000 for merchandise purchased on December 3.
3. On December 13, Li received the balance due from South China.

Instructions

1. Prepare the journal entries to record these transactions on the books of Li Company, Ltd. using a perpetual inventory system.
2. Assume that Li Company, Ltd. received the balance due from South China Co., Ltd. on January 2 of the following year instead of December 13. Prepare the journal entry to record the receipt of payment on January 2.

Prepare sales section and closing entries.

(LO 4, 5)

E5-6 The adjusted trial balance of Mendoza Company SLU shows the following data pertaining to sales at the end of its fiscal year October 31, 2017: Sales Revenue €820,000, Freight-Out €16,000, Sales Returns and Allowances €28,000, and Sales Discounts €13,000.

Instructions

1. Prepare the sales section of the income statement.
2. Prepare separate closing entries for (1) sales, and (2) the contra accounts to sales.

Prepare adjusting and closing entries.

(LO 4)

E5-7 Hezir Company A.Ş. had the following account balances at year-end: Cost of Goods Sold 60,000, Inventory 15,000, Operating Expenses 29,000, Sales Revenue 117,000, Sales Discounts 1,300, and Sales Returns and Allowances 1,700. A physical count of inventory determines that merchandise inventory on hand is 14,200.

Instructions

1. Prepare the adjusting entry necessary as a result of the physical count.
2. Prepare closing entries.

Prepare adjusting and closing entries.

(LO 4)

E5-8 Presented below is information related to Poulsen Industries, A/S for the month of January 2017.

Instructions

1. Prepare the necessary adjusting entry for inventory.
2. Prepare the necessary closing entries.

Prepare an income statement.

(LO 5)

E5-9 Presented below is information for Bach Company, Ltd. for the month of March 2017.

Instructions

1. Prepare an income statement.
2. Prepare a comprehensive income statement.
3. Compute the gross profit rate.

Prepare an income statement.

(LO 5)

E5-10 In its income statement for the year ended December 31, 2017, Mancini Company, SpA reported the following condensed data.

Instructions

1. Prepare an income statement.
2. Prepare a comprehensive income statement.

Prepare correcting entries for sales and purchases.

(LO 2, 3)

E5-11 An inexperienced accountant for Zoeng Company, Ltd. made the following errors in recording merchandising transactions.

1. A HK$1,750 refund to a customer for faulty merchandise was debited to Sales Revenue HK$1,750 and credited to Cash HK$1,750.
2. A HK$1,400 credit purchase of supplies was debited to Inventory HK$1,400 and credited to Cash HK$1,400.
3. A HK$2,150 sales discount was debited to Sales Revenue.
4. A cash payment of HK$200 for freight on merchandise purchases was debited to Freight-Out HK$2,000 and credited to Cash HK$2,000.

Instructions

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

Compute various income measures.

(LO 5)

E5-12 In 2017, Endeaver Company, Ltd. had net sales of £860,000 and cost of goods sold of £533,200. Operating expenses were £221,000, and interest expense was £7,000.

Instructions

1. Compute Endeaver’s gross profit.
2. Compute the gross profit rate. Why is this rate computed by financial statement users?
3. What is Endeaver’s income from operations and net income?
4. In what section of its classified statement of financial position should Endeaver report merchandise inventory?

Compute missing amounts and compute gross profit rate.

(LO 5)

E5-13 Presented below is financial information for two different companies (amounts in thousands).

Instructions

1. Determine the missing amounts.
2. Determine the gross profit rates. (Round to one decimal place.)

Compute missing amounts.

(LO 5)

E5-14 Financial information is presented below for three different companies.

Instructions

Determine the missing amounts.

Complete worksheet.

(LO 6)

*E5-15 Presented on the next page are selected accounts for Feisal Company Ltd. as reported in the worksheet at the end of May 2017.

Instructions

Complete the worksheet by extending amounts reported in the adjusted trial balance to the appropriate columns in the worksheet. Do not total individual columns.

Prepare a worksheet.

(LO 6)

*E5-16 The trial balance columns of the worksheet for Barbosa Company, SA at June 30, 2017, are as follows.

Other data:

Operating expenses incurred on account, but not yet recorded, total R$1,640.

Instructions

Enter the trial balance on a worksheet and complete the worksheet.

Prepare cost of goods sold section.

(LO 7)

*E5-17 The trial balance of Biju Company, Ltd. at the end of its fiscal year, August 31, 2017, includes these accounts (amounts in thousands): Inventory Rp17,200; Purchases Rp149,000; Sales Revenue Rp190,000; Freight-In Rp5,000; Sales Returns and Allowances Rp3,000; Freight-Out Rp1,000; and Purchase Returns and Allowances Rp6,200. The ending inventory is Rp16,000.

Instructions

Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).

Compute various income statement items.

(LO 7)

*E5-18 On January 1, 2017, Scott Enterprises, Ltd. had inventory of £50,000. At December 31, 2017, Scott had the following account balances.

At December 31, 2017, Scott determines that its ending inventory is £60,000.

Instructions

1. Compute Scott’s 2017 gross profit.
2. Compute Scott’s 2017 operating expenses if net income is £130,000 and there are no non-operating activities.

Compute missing amounts for cost of goods sold section.

(LO 7)

*E5-19 Below is a series of cost of goods sold sections for companies Alpha, Beta, Chi, and Decca.

Instructions

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

Journalize purchase transactions.

(LO 7)

*E5-20 This information relates to Olaf Co., ASA.

1. On April 5, purchased merchandise from DeVito Company for €18,000, terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of €820 on merchandise purchased from DeVito Company.
3. On April 7, purchased equipment on account for €30,000.
4. On April 8, returned some of April 5 merchandise, which cost €2,800, to DeVito Company.
5. On April 15, paid the amount due to DeVito Company in full.

Instructions

1. Prepare the journal entries to record these transactions on the books of Olaf Co. using a periodic inventory system.
2. Assume that Olaf Co. paid the balance due to DeVito Company on May 4 instead of April 15. Prepare the journal entry to record this payment.

Journalize purchase transactions.

(LO 7)

*E5-21 Presented below is information related to Chilean Industries, Ltd.

1. On April 5, purchased merchandise from Graham Company, Ltd. for £17,400, terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of £800 on merchandise purchased from Graham.
3. On April 7, purchased equipment on account from Reed Mfg., Ltd. for £27,000.
4. On April 8, returned merchandise, which cost £4,000, to Graham.
5. On April 15, paid the amount due to Graham in full.

Instructions

1. Prepare the journal entries to record these transactions on the books of Chilean Industries, Ltd. using a periodic inventory system.
2. Assume that Chilean Industries, Ltd. paid the balance due to Graham on May 4 instead of April 15. Prepare the journal entry to record this payment.

Complete worksheet.

(LO 7)

*E5-22 Presented below are selected accounts for B. Midler Company as reported in the worksheet at the end of May 2017. Ending inventory is $75,000.

Instructions

Complete the worksheet by extending amounts reported in the adjusted trial balance to the appropriate columns in the worksheet. The company uses the periodic inventory system.

PROBLEMS: SET A

Journalize purchase and sales transactions under a perpetual inventory system.

(LO 2, 3)

P5-1A Ready-Set-Go, Ltd. distributes suitcases to retail stores and extends credit terms of 1/10, n/30 to all of its customers. At the end of June, Ready-Set-Go’s inventory consisted of suitcases costing £1,200. During the month of July, the following merchandising transactions occurred.

July	1	Purchased suitcases on account for £1,620 from Trunk Manufacturers, FOB destination, terms 2/10, n/30. The appropriate party also made a cash payment of £100 for freight on this date.
	3	Sold suitcases on account to Satchel World for £2,200. The cost of suitcases sold was £1,400.
	9	Paid Trunk Manufacturers in full.
	12	Received payment in full from Satchel World.
	17	Sold suitcases on account to Lady GoGo for £1,400. The cost of the suitcases sold was £1,030.
	18	Purchased suitcases on account for £1,900 from Holiday Manufacturers, FOB shipping point, terms 1/10, n/30. The appropriate party also made a cash payment of £125 for freight on this date.
	20	Received £300 credit (including freight) for suitcases returned to Holiday Manufacturers.
	21	Received payment in full from Lady GoGo.
	22	Sold suitcases on account to Vagabond for £2,400. The cost of suitcases sold was £1,350.
	30	Paid Holiday Manufacturers in full.
	31	Granted Vagabond £200 credit for suitcases returned costing £120.

Ready-Set-Go’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, and No. 505 Cost of Goods Sold.

Instructions

Journalize the transactions for the month of July for Ready-Set-Go, Ltd. using a perpetual inventory system.

Journalize, post, and prepare a partial income statement.

(LO 2, 3, 5)

P5-2A Vree Distributing Company plc completed the following merchandising transactions in the month of April. At the beginning of April, the ledger of Vree showed Cash of €8,000 and Share Capital—Ordinary of €8,000.

Apr.	2	Purchased merchandise on account from Walker Supply Co. €6,200, terms 1/10, n/30.
	4	Sold merchandise on account €5,500, FOB destination, terms 1/10, n/30. The cost of the merchandise sold was €3,400.
	5	Paid €240 freight on April 4 sale.
	6	Received credit from Walker Supply Co. for merchandise returned €500.
	11	Paid Walker Supply Co. in full, less discount.
	13	Received collections in full, less discounts, from customers billed on April 4.
	14	Purchased merchandise for cash €3,800.
	16	Received refund from supplier for returned goods on cash purchase of April 14, €500.
	18	Purchased merchandise from Benjamin Distributors €4,500, FOB shipping point, terms 2/10, n/30.
	20	Paid freight on April 18 purchase €160.
	23	Sold merchandise for cash €7,400. The merchandise sold had a cost of €4,120.
	26	Purchased merchandise for cash €2,300.
	27	Paid Benjamin Distributors in full, less discount.
	29	Made refunds to cash customers for defective merchandise €90. The returned merchandise had a fair value of €30.
	30	Sold merchandise on account €3,400, terms n/30. The cost of the merchandise sold was €1,900.

Vree Distributing Company’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold, and No. 644 Freight-Out.

Instructions

1. Journalize the transactions using a perpetual inventory system.
2. Enter the beginning cash and share capital—ordinary balances, and post the transactions. (Use J1 for the journal reference.)
3. Prepare the income statement through gross profit for the month of April 2017.

(c) Gross profit €6,765

Prepare financial statements and adjusting and closing entries.

(LO 4, 5)

P5-3A Starz Department Store, Ltd. is located near the Towne Shopping Mall. At the end of the company’s calendar year on December 31, 2017, the following accounts appeared in two of its trial balances.

	Unadjusted	Adjusted
Accounts Payable	£ 76,300	£ 77,300
Accounts Receivable	50,300	50,300
Accumulated Depr.—Buildings	42,100	52,500
Accumulated Depr.—Equipment	29,600	42,700
Buildings	290,000	290,000
Cash	23,800	23,800
Cost of Goods Sold	412,700	412,700
Depreciation Expense		23,500
Dividends	24,000	24,000
Equipment	110,000	110,000
Insurance Expense		7,200
Interest Expense	3,000	8,100
Interest Payable		5,100
Interest Revenue	4,000	4,000
Inventory	£ 75,000	£ 75,000
Mortgage Payable	80,000	80,000
Prepaid Insurance	9,600	2,400
Property Tax Expense		4,800
Property Taxes Payable		4,800
Retained Earnings	64,600	64,600
Salaries and Wages Expense	105,000	105,000
Sales Commissions Expense	10,200	14,500
Sales Commissions Payable		4,300
Sales Returns and Allowances	8,000	8,000
Sales Revenue	724,000	724,000
Share Capital—Ordinary	112,000	112,000
Utilities Expense	11,000	12,000

Instructions

(a) Net income $29,100

    Retained earnings £172,800

    Total assets £456,300

1. Prepare an income statement, a retained earnings statement, and a classified statement of financial position. £16,000 of the mortgage payable is due for payment next year.
2. Journalize the adjusting entries that were made.
3. Journalize the closing entries that are necessary.

Journalize, post, and prepare a trial balance.

(LO 2, 3, 4)

P5-4A J. Zheng, a former professional tennis star, operates Zheng’s Tennis Shop, Ltd. at the Yalong River Resort. At the beginning of the current season, the ledger of Zheng’s Tennis Shop showed Cash ¥2,200, Inventory ¥1,800, and Share Capital—Ordinary ¥4,000. The following transactions were completed during April.

Apr.	4	Purchased racquets and balls from Jay-Mac Co. ¥760, FOB shipping point, terms 2/10, n/30.
	6	Paid freight on purchase from Jay-Mac Co. ¥40.
	8	Sold merchandise to members ¥1,150, terms n/30. The merchandise sold had a cost of ¥790.
	10	Received credit of ¥60 from Jay-Mac Co. for a racquet that was returned.
	11	Purchased tennis shoes from Li Sports for cash, ¥420.
	13	Paid Jay-Mac Co. in full.
	14	Purchased tennis shirts and shorts from Everett Sportswear ¥800, FOB shipping point, terms 3/10, n/60.
	15	Received cash refund of ¥50 from Li Sports for damaged merchandise that was returned.
	17	Paid freight on Everett Sportswear purchase ¥30.
	18	Sold merchandise to members ¥980, terms n/30. The cost of the merchandise sold was ¥520.
	20	Received ¥600 in cash from members in settlement of their accounts.
Apr.	21	Paid Everett Sportswear in full.
	27	Granted an allowance of ¥40 to members for tennis clothing that did not fit properly.
	30	Received cash payments on account from members, ¥820.

The chart of accounts for the tennis shop includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, and No. 505 Cost of Goods Sold.

Instructions

1. Journalize the April transactions using a perpetual inventory system.
2. Enter the beginning balances in the ledger accounts and post the April transactions. (Use J1 for the journal reference.)
3. Prepare a trial balance on April 30, 2017.

(c) Total debits ¥6,130

Complete accounting cycle beginning with a worksheet.

(LO 4, 5, 6)

*P5-5A The trial balance of Mr. Rosiak Fashion Center, Ltd. contained the following accounts at November 30, the end of the company’s fiscal year.

Adjustment data:

1. Supplies on hand totaled £2,100.
2. Depreciation is £11,500 on the equipment.
3. Interest of £4,000 is accrued on notes payable at November 30.
4. Inventory actually on hand is £44,520.

Instructions

(a) Adj. trial balance £981,200

    Net loss £1,980

(b) Gross profit £244,820

    Total assets £181,520

1. Enter the trial balance on a worksheet, and complete the worksheet.
2. Prepare an income statement and a retained earnings statement for the year, and a classified statement of financial position as of November 30, 2017. Notes payable of £6,000 are due in January 2018.
3. Journalize the adjusting entries.
4. Journalize the closing entries.
5. Prepare a post-closing trial balance.

Determine cost of goods sold and gross profit under periodic approach.

(LO 7)

*P5-6A At the end of Hotai Department Store, Ltd.’s fiscal year on December 31, 2017, these accounts appeared in its adjusted trial balance.

Freight-In	NT$   165,000
Inventory	1,215,000
Purchases	13,200,000
Purchase Discounts	360,000
Purchase Returns and Allowances	192,000
Sales Revenue	21,540,000
Sales Returns and Allowances	510,000

Additional facts:

1. Merchandise inventory on December 31, 2017, is NT$1,950,000.
2. Hotai Department Store, Ltd. uses a periodic system.

Instructions

Prepare an income statement through gross profit for the year ended December 31, 2017.

Gross profit NT$8,952,000

Calculate missing amounts and assess profitability.

(LO 7)

*P5-7A Valerie Fons operates a retail clothing operation. She purchases all merchandise inventory on credit and uses a periodic inventory system. The Accounts Payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2014 through 2017, inclusive.

	2014	2015	2016	2017
Inventory (ending)	€13,000	€ 11,300	€ 14,700	€ 12,200
Accounts payable (ending)	20,000
Sales revenue		225,700	240,300	235,000
Purchases of merchandise inventory on account		141,000	150,000	132,000
Cash payments to suppliers		135,000	161,000	127,000

Instructions

(a) 2016 €146,600

(c) 2016 Ending accts payable €15,000

1. Calculate cost of goods sold for each of the 2015, 2016, and 2017 fiscal years.
2. Calculate the gross profit for each of the 2015, 2016, and 2017 fiscal years.
3. Calculate the ending balance of accounts payable for each of the 2015, 2016, and 2017 fiscal years.
4. Sales declined in fiscal 2017. Does that mean that profitability, as measured by the gross profit rate, necessarily also declined? Explain, calculating the gross profit rate for each fiscal year to help support your answer. (Round to one decimal place.)

Journalize, post, and prepare trial balance and partial income statement using periodic approach.

(LO 7)

*P5-8A At the beginning of the current season, the ledger of Village Tennis Shop AG showed Cash CHF2,500, Inventory CHF1,700, and Share Capital—Ordinary CHF4,200. The following transactions were completed during April.

Apr.	4	Purchased racquets and balls from Hingis Co. CHF860, terms 3/10, n/30.
	6	Paid freight on Hingis Co. purchase CHF74.
	8	Sold merchandise to members CHF900, terms n/30.
	10	Received credit of CHF60 from Hingis Co. for a racquet that was returned.
	11	Purchased tennis shoes from Volker Sports for cash CHF300.
	13	Paid Hingis Co. in full.
	14	Purchased tennis shirts and shorts from Linzey Sportswear CHF700, terms 2/10, n/60.
	15	Received cash refund of CHF90 from Volker Sports for damaged merchandise that was returned.
	17	Paid freight on Linzey Sportswear purchase CHF25.
	18	Sold merchandise to members CHF1,200, terms n/30.
	20	Received CHF500 in cash from members in settlement of their accounts.
	21	Paid Linzey Sportswear in full.
	27	Granted an allowance of CHF25 to members for tennis clothing that did not fit properly.
	30	Received cash payments on account from members CHF630.

The chart of accounts for the tennis shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Share Capital—Ordinary, Sales Revenue, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-In.

Instructions

1. Journalize the April transactions using a periodic inventory system.
2. Using T-accounts, enter the beginning balances in the ledger accounts and post the April transactions.
3. Prepare a trial balance on April 30, 2017.
4. Prepare an income statement through gross profit, assuming inventory on hand at April 30 is CHF2,140.

(c) Tot. trial balance CHF6,488

(d) Gross profit CHF744

PROBLEMS: SET B

Journalize purchase and sales transactions under a perpetual inventory system.

(LO 2, 3)

P5-1B Book Nook Warehouse, AG distributes hardcover books to retail stores and extends credit terms of 2/10, n/30 to all of its customers. At the end of May, Book Nook’s inventory consisted of books purchased for €2,100. During June, the following merchandising transactions occurred.

Book Nook Warehouse’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, and No. 505 Cost of Goods Sold.

Instructions

Journalize the transactions for the month of June for Book Nook Warehouse using a perpetual inventory system.

Journalize, post, and prepare a partial income statement.

(LO 2, 3, 5)

P5-2B Norwich Hardware Store, Ltd. completed the following merchandising transactions in the month of May. At the beginning of May, the ledger of Norwich showed Cash of £5,000 and Share Capital—Ordinary of £5,000.

Norwich Hardware’s chart of accounts includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 126 Supplies, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, No. 414 Sales Discounts, and No. 505 Cost of Goods Sold.

Instructions

1. Journalize the transactions using a perpetual inventory system.
2. Enter the beginning cash and share capital—ordinary balances and post the transactions. (Use J1 for the journal reference.)
3. Prepare an income statement through gross profit for the month of May 2017.

(c) Gross profit £2,567

Prepare financial statements and adjusting and closing entries.

(LO 4, 5)

P5-3B Lerwick Store Ltd. is located in midtown Metropolis. During the past several years, net income has been declining because of suburban shopping centers. At the end of the company’s fiscal year on November 30, 2017, the following accounts appeared in two of its trial balances.

(a) Net income £32,200

    Retained earnings £85,900

    Total assets £203,300

Instructions

1. Prepare an income statement, a retained earnings statement, and a classified statement of financial position. Notes payable are due in 2020.
2. Journalize the adjusting entries that were made.
3. Journalize the closing entries that are necessary.

Journalize, post, and prepare a trial balance.

(LO 2, 3, 4)

P5-4B Emile Kokott, a former disc golf star, operates Emile’s Discorama, SA. At the beginning of the current season on April 1, the ledger of Emile’s Discorama showed Cash €1,850, Inventory €2,150, and Share Capital—Ordinary €4,000. The following transactions were completed during April.

The chart of accounts for the store includes the following: No. 101 Cash, No. 112 Accounts Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 311 Share Capital—Ordinary, No. 401 Sales Revenue, No. 412 Sales Returns and Allowances, and No. 505 Cost of Goods Sold.

Instructions

1. Journalize the April transactions using a perpetual inventory system.
2. Enter the beginning balances in the ledger accounts and post the April transactions. (Use J1 for the journal reference.)
3. Prepare a trial balance on April 30, 2017.

(c) Total debits €5,540

Determine cost of goods sold and gross profit under periodic approach.

(LO 7)

*P5-5B At the end of Ilhan Department Store’s fiscal year on November 30, 2017, these accounts appeared in its adjusted trial balance.

Freight-In	7,500
Inventory	42,000
Purchases	585,000
Purchase Discounts	5,100
Purchase Returns and Allowances	2,900
Sales Revenue	1,000,000
Sales Returns and Allowances	25,000

Additional facts:

1. Merchandise inventory on November 30, 2017, is 54,600.
2. Ilhan Department Store uses a periodic system.

Instructions

Prepare an income statement through gross profit for the year ended November 30, 2017.

Gross profit 403,100

Calculate missing amounts and assess profitability.

(LO 7)

*P5-6B Psang Ltd. operates a retail operation that purchases and sells home entertainment products. The company purchases all merchandise inventory on credit and uses a periodic inventory system. The Accounts Payable account is used for recording inventory purchases only; all other current liabilities are accrued in separate accounts. You are provided with the following selected information for the fiscal years 2014 through 2017, inclusive.

Instructions

1. Calculate the missing amounts.
2. Sales declined over the 3-year fiscal period, 2015–2017. Does that mean that profitability necessarily also declined? Explain, computing the gross profit rate and the profit margin ratio for each fiscal year to help support your answer. (Round to one decimal place.)

(c) £6,700

(g) £15,200

(i) £31,700

Journalize, post, and prepare trial balance and partial income statement using periodic approach.

(LO 7)

*P5-7B At the beginning of the current season on April 1, the ledger of Oosthuizen Pro Shop, NV showed Cash €3,000; Inventory €4,000; and Share Capital—Ordinary €7,000. The following transactions occurred during April 2017.

The chart of accounts for the pro shop includes Cash, Accounts Receivable, Inventory, Accounts Payable, Share Capital—Ordinary, Sales Revenue, Sales Returns and Allowances, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Freight-In.

Instructions

1. Journalize the April transactions using a periodic inventory system.
2. Using T-accounts, enter the beginning balances in the ledger accounts and post the April transactions.
3. Prepare a trial balance on April 30, 2017.
4. Prepare an income statement through gross profit, assuming merchandise inventory on hand at April 30 is €4,824.

(c) Tot. trial balance €8,488

    Gross profit €427

CP5 On December 1, 2017, Jurczyk Distributing Company, Ltd. had the following account balances.

During December, the company completed the following summary transactions.

Adjustment data:

1. Accrued salaries and wages payable €800.
2. Depreciation €200 per month.
3. Supplies on hand €1,700.

Instructions

1. Journalize the December transactions using a perpetual inventory system.
2. Enter the December 1 balances in the ledger T-accounts and post the December transactions. Use Cost of Goods Sold, Depreciation Expense, Salaries and Wages Expense, Sales Revenue, Sales Discounts, and Supplies Expense.
3. Journalize and post adjusting entries.
4. Prepare an adjusted trial balance.
5. Prepare an income statement and a retained earnings statement for December and a classified statement of financial position at December 31.

(d) Totals      €65,600

(e) Net income  €840

MATCHA CREATIONS