5.9: Exercises

EXERCISE 5–1 (LO1)

Consider the following information of Jones Corporation over four years:

	2024	2023	2022	2021
Sales	$10,000	$9,000	$ ?	$7,000
Cost of Goods Sold	?	6,840	6,160	?
Gross Profit	2,500	?	1,840	?
Gross Profit Percentage	?	?	?	22%

Required:

1. Calculate the missing amounts for each year.
2. What does this information indicate about the company?

EXERCISE 5–2 (LO2)

Reber Corp. uses the perpetual inventory system. Its transactions during July 2023 are as follows:

July 6	Purchased $600 of merchandise on account from Hobson Corporation for terms 1/10, net 30.
9	Returned $200 of defective merchandise.
15	Paid the amount owing to Hobson.

Required: Prepare journal entries to record the above transactions for Reber Corp.

EXERCISE 5–3 (LO2,3,4)

Horne Inc. and Sperling Renovations Ltd. both sell goods and use the perpetual inventory system. Horne Inc. had $3,000 of merchandise inventory at the start of its fiscal year, January 1, 2023. During the 2023, Horne Inc. had the following transactions:

May 5	Horne sold $4,000 of merchandise on account to Sperling Renovations Ltd., terms 2/10, net 30. Cost of merchandise to Horne from its supplier was $2,500.
7	Sperling returned $500 of merchandise received in error which Horne returned to inventory; Horne issued a credit memo. Cost of merchandise to Horne was $300.
15	Horne received the amount due from Sperling Renovations Ltd.

A physical count and valuation of Horne's Merchandise Inventory at May 31, the fiscal year-end, showed $700 of goods on hand.

Required: Prepare journal entries to record the above transactions and adjustment:

1. In the records of Horne Inc.
2. In the records of Sperling Renovations Ltd.

EXERCISE 5–4 (LO2,3) Recording Purchase and Sales Transactions

Below are transactions for March, 2023 for AngieJ Ltd.:

March 1	Purchased $25,000 of merchandise on account for terms 2/10, n30.
March 3	Sold merchandise to a customer for $5,000 for terms 1/10, n30. (Cost $2,600)
March 4	Customer from March 3 returned $200 of some unsuitable goods which were returned to inventory. (Cost $100)
March 5	Purchased $15,000 of merchandise from a supplier for cash and arranged for shipping, fob shipping point.
March 6	Paid $200 for shipping on the March 5 purchase.
March 7	Contacted the supplier from March 5 regarding $2,000 of merchandise with some minor damages. Supplier agreed to reduce the price and offered an allowance of $500 cash, which was accepted.
March 8	Sold $25,000 of merchandise for terms 1.5/10, n30. (Cost $13,000). Agreed to pay shipping costs for the goods sold to the customer.
March 9	Shipped the goods sold on March 8 to customer, fob destination for $500 cash. (Hint: Shipping costs paid to ship merchandise sold to a customer is an operating expense.)
March 11	Paid for fifty percent of the March 1 purchase to the supplier.
March 13	Collected the account owing from the customer from March 3.
March 15	Purchased office supplies on account for $540 for terms 1/10, n30.
March 18	Ordered merchandise inventory from a supplier totalling $15,000. Goods to be shipped on April 10, fob shipping point.
March 20	Collected $6,010 cash from an account owing from two months ago. The early payment discount had expired.
March 25	Paid for the March 15 purchase.
March 27	Sold $12,500 of merchandise inventory for cash (Cost $5,000).
March 31	Paid the remaining of the amount owing from the March 1 purchase.

Required: Prepare the journal entries, if any, for AngieJ Ltd.

EXERCISE 5–5 (LO2,3) Recording Purchase and Sales Transactions

Below are the April, 2023 sales for Beautort Corp.

April 1	Purchased $15,000 of merchandise for cash.
April 3	Sold merchandise to a customer for $8,000 cash. (Cost $4,600)
April 5	Purchased $10,000 of merchandise from a supplier for terms 1/10, n30.
April 7	Returned $2,000 of damaged merchandise inventory from April 5 back to the supplier. Supplier will repair the items and return them to their own inventory.
April 8	Sold $8,000 of merchandise for terms 2/10, n30. (Cost $4,000). Agreed to pay shipping costs for the goods sold to the customer.
April 9	Shipped the goods sold on April 8 to customer, fob shipping point for $500 cash. (Hint: Shipping costs paid to ship merchandise sold to a customer is not an inventory cost.)
April 10	Customer from April 3 returned $1,000 of unsuitable goods which were returned to inventory. (Cost $400). Amount paid was refunded.
April 10	Agreed to give customer from April 8 sale a sales allowance of $200.
April 12	Purchased inventory on account for $22,000 for terms 1/10, n30.
April 15	Paid amount owing for purchases on April 5.
April 16	Paid $600 for shipping on the April 12 purchase.
April 18	Collected $5,000 cash, net of discount, for the customer account owing from April 8.
April 27	Paid for the April 12 purchase.
April 27	Sold $20,000 of merchandise inventory for cash (Cost $10,000).

Required: Prepare the journal entries, if any, for Beautort Corp. Round final entry amounts to the nearest whole dollar.

EXERCISE 5–6 (LO5)

The following information is taken from the records of Smith Corp. for the year ended June 30, 2023:

Advertising Expense	$ 1,500
Commissions Expense	4,000
Cost of Goods Sold	50,000
Delivery Expense	500
Depreciation Expense – Equipment	500
Insurance Expense	1,000
Office Salaries Expense	3,000
Rent Expense – Office	1,000
Rent Expense – Store	1,500
Sales Salaries Expense	2,000
Sales	72,000
Sales Returns and Allowances	2,000

Required:

1. Prepare a classified multi-step income statement for the year ended June 30, 2023. Assume an income tax rate of 20%.
2. Compute the gross profit percentage, rounding to two decimal places.

EXERCISE 5–7 (LO4) Calculating Inventory and Cost of Goods Sold

Below is a table that contains two important calculations that link together to determine net income/(loss):

Inventory, opening balance	$ 10,000	$ 53,000	?	168,540	50,562
Plus: purchases	30,000	?	1,685,400	?	?
Total goods available for sale	?	212,000	2,247,200	?	657,306
Less: ending inventory	15,000	?	842,700	556,180	100,000
Cost of goods sold	?	132,500	?	?	?
Sales	?	240,000	1,600,000	900,000	?
Less: cost of goods sold	?	?	?	?	?
Gross profit	30,000	?	?	276,400	142,694
Less: operating expenses	12,000	?	275,000	?	?
Net income/(loss)	?	43,900	?	26,400	(2,306)
Gross profit/sales (%)	?	?	?	?	?

Required: Calculate the missing account balances using the relationships between these accounts. Percentage can be rounded to the nearest two decimal places.

EXERCISE 5–8 (LO6)

Refer to the information in EXERCISE 5–6.

Required:

1. Prepare all closing entries. Assume cash dividends totalling $2,000 were declared during the year and recorded as a debit to Dividends Declared and a credit to Cash.
2. Calculate the June 30, 2023 post-closing balance in Retained Earnings assuming a beginning balance of $18,000.

EXERCISE 5–9 (LO7 Appendix)

Consider the information for each of the following four companies.

	A	B	C	D
Opening Inventory	$ ?	$ 184	$ 112	$ 750
Purchases	1415	?	840	5,860
Transportation-In	25	6	15	?
Cost of Goods Available for Sale	1,940	534	?	6,620
Ending Inventory	340	200	135	?
Cost of Goods Sold	?	?	?	5,740

Required: Calculate the missing amounts.

EXERCISE 5–10 (LO7 Appendix)

The following data pertain to Pauling Inc.

Opening Inventory	$ 375
Purchases	2930
Purchases Discounts	5
Purchases Returns and Allowances	20
Transportation-In	105

Ending inventory amounts to $440.

Required: Calculate cost of goods sold.

EXERCISE 5–11 (LO7 Appendix)

The following information is taken from the records of four different companies in the same industry:

	A	B	C	D
Sales	$300	$150	$ ?	$ 90
Opening Inventory	?	40	40	12
Purchases	240	?	?	63
Cost of Goods Available for Sale	320	?	190	?
Ending Inventory	?	(60)	(60)	(15)
Cost of Goods Sold	?	100	130	60
Gross Profit	$100	$ ?	$ 65	$ ?
Gross Profit percentage	?	?	?	?

Required:

1. Calculate the missing amounts.
2. Which company seems to be performing best? Why?

Problems

PROBLEM 5–1 (LO1,2,3,4)

Salem Corp. was incorporated on July 2, 2023 to operate a merchandising business. It uses the perpetual inventory system. All its sales are on account with terms: 2/10, n30. Its transactions during July 2023 are as follows:

July 2	Issued share capital for $5,000 cash.
2	Purchased $3,500 merchandise on account from Blic Pens Ltd. for terms 2/10, n30.
2	Sold $2,000 of merchandise on account to Spellman Chair Rentals Inc. (Cost to Salem: $1,200).
3	Paid Sayer Holdings Corp. $500 for July rent.
5	Paid Easton Furniture Ltd. $1,000 for equipment.
8	Collected $200 for a cash sale made today to Ethan Matthews Furniture Ltd. (Cost: $120).
8	Purchased $2,000 merchandise on account from Shaw Distributors Inc. for terms 2/15, n30.
9	Received the amount due from Spellman Chair Rentals Inc. for the July 2 sale.
10	Paid Blic Pens Ltd. for the July 2 purchase.
10	Purchased $200 of merchandise on account from Peel Products Inc. for terms n30.
15	Sold $2,000 of merchandise on account to Eagle Products Corp. (Cost: $1,300).
15	Purchased $1,500 of merchandise on account from Bevan Door Inc. for terms 2/10, n30.
15	Received a memo from Shaw Distributors Inc. to reduce accounts payable by $100 for defective merchandise included in the July 8 purchase.
16	Eagle Products Corp. returned $200 of defective merchandise which was scrapped (Cost to Salem: $150).
20	Sold $3,500 of merchandise on account to Aspen Promotions Ltd. (Cost: $2,700).
20	Paid Shaw Distributors Inc. for half the purchase made July 8.
24	Received half the amount due from Eagle Products Corp. in partial payment for the July 15 sale.
24	Paid Bevan Doors Ltd. for the purchase made July 15.
26	Sold $600 merchandise on account to Longbeach Sales Ltd. (Cost: $400).
26	Purchased $800 of merchandise on account from Silverman Co. for terms 2/10, n30.
31	Paid Speedy Transport Co. $350 for transportation to Salem's warehouse during the month (all purchases are fob shipping point).

Required:

1. Prepare journal entries to record the July transactions. Include general ledger account numbers and a brief description.
2. Calculate the unadjusted ending balance in merchandise inventory.
3. Assume the merchandise inventory is counted at July 31 and assigned a total cost of $2,400. Prepare the July 31 adjusting entry.

PROBLEM 5–2 (LO1,5,6)

The following closing entries were prepared for Whirlybird Products Inc. at December 31, 2023, the end of its fiscal year.

Required: Calculate gross profit.

PROBLEM 5–3 (LO1,5,6)

The following alphabetized adjusted trial balance has been extracted from the records of Acme Automotive Inc. at December 31, 2023, its third fiscal year-end. All accounts have a normal balance.

Accounts Payable	9,000
Accounts Receivable	15,000
Accumulated Depreciation – Equipment	36,000
Advertising Expense	14,000
Bank Loan	14,000
Cash	2,000
Commissions Expense	29,000
Cost of Goods Sold	126,000
Delivery Expense	14,800
Depreciation Expense	12,000
Dividends	11,000
Equipment	120,000
Income Taxes Expense	4,200
Income Taxes Payable	4,200
Insurance Expense	10,400
Interest Expense	840
Merchandise Inventory	26,000
Office Supplies Expense	3,100
Rent Expense	32,400
Rent Revenue	19,200
Retained Earnings	12,440
Sales	310,000
Sales Discounts	1,300
Sales Returns and Allowances	2,900
Sales Salaries Expense	26,400
Share Capital	70,000
Supplies	3,200
Telephone Expense	1,800
Utilities Expense	4,200
Wages Expense – Office	14,300

Required:

1. Prepare a classified multi-step income statement and statement of changes in equity for the year ended December 31, 2023. Assume 40% of the Rent Expense is allocated to general and administrative expenses with the remainder allocated to selling expenses. Additionally, assume that $20,000 of shares were issued during the year ended December 31, 2023.
2. Prepare closing entries.

PROBLEM 5–4 (LO1,2,3,4) Challenge Question – Pulling It All Together

Calculating Purchases, Inventory Shrinkage, Net Sales, Cost Goods Sold, Gross Profit, and Net Income/(Loss)

The information below is a summary of the merchandise inventory and sales transactions for 2016.

Total cost of purchases	$250,000
Total sales	580,000
Purchases shipping costs	500
Merchandise inventory, opening balance	55,000
Purchase discounts	3,500
Sales discounts	200
Total sales returns to inventory	100
Merchandise inventory, closing GL balance	90,000
Merchandise inventory, physical inventory count	88,500
Sales allowances	600
Operating expenses	250,000
Sales returns	200
Purchase returns and allowances	200
Net purchases	?
Inventory shrinkage adjustment amount	?
Cost of goods sold	?
Net sales	?
Gross profit	?
Net income/(loss)	?
Gross profit ratio	?

Required: Calculate and fill in the blanks. (Hint: Refer to the merchandising company illustration in Section 5.1 and the T-account summary illustrations for inventory and cost of goods sold at the end of Section 5.4.)

PROBLEM 5–5 (LO1,2,3,5,6) Preparing a Classified Multiple-step Income Statement and Closing Entries

Below is the adjusted trial balance presented in alphabetical order for Turret Retail Ltd., for 2023. Their year-end is December 31.

Turret Retail Ltd.
Trial Balance
At December 31, 2023
Accounts payable		$31,250
Accounts receivable	$140,000
Accrued salaries and benefits payable		12,000
Accumulated depreciation, furniture		4,300
Cash	21,000
Cash dividends	10,000
Cost of goods sold	240,000
Bank loan payable (long-term)		40,320
Depreciation expense	3,200
Copyright	20,000
Furniture	20,000
Income tax expense	2,028
Income taxes payable		8,000
Insurance expense	5,000
Interest expense	200
Interest payable		550
Land	140,000
Merchandise inventory	120,000
Prepaid insurance expense	6,000
Rent expense	30,240
Rental income		6,000
Retained earnings		307,748
Salaries expense	57,000
Sales		360,000
Sales discounts	3,600
Sales returns and allowances	9,600
Share capital		20,000
Shop supplies expense	2,400
Shop supplies expense	1,000
Travel expense	2,100
Unearned revenue		50,500
Utilities expense	7,300
	840,668	840,668

Required:

1. Prepare a classified multiple-step income statement in good form, reporting operating expenses by nature, for the year ended December 31, 2023.
2. Prepare the closing entries for the year-ended December 31, 2023.
3. Calculate the gross profit ratio to two decimal places and comment on what this ratio means.

PROBLEM 5–6 (LO1,2,3,4,5) Challenge Question – Preparing Adjusting Entries and a Classified Multiple-step Income Statement

Below are the unadjusted accounts balances for Yuba Yabi Enterprises Ltd., for the year ended March 31, 2023. All account balances are normal. Yuba Yabi's business involves selling frozen food to restaurants as well as providing consulting services to assist restaurant businesses with their daily operations.

Yuba Yabi Enterprises Ltd.
Unadjusted Trial Balance
March 31, 2023
Accounts payable	68,750
Accounts receivable	308,000
Accrued salaries and benefits payable	26,400
Accumulated depreciation, furniture	9,460
Cash	46,200
Cash dividends	22,000
Cost of goods sold	528,000
Advertising expense	9,900
Bank loan payable (long-term)	88,704
Depreciation expense	7,040
Copyright	44,000
Franchise	66,000
Furniture	44,000
Income tax expense	-
Income taxes payable	17,600
Insurance expense	11,000
Interest expense	440
Interest payable	1,210
Land	308,000
Merchandise inventory	264,000
Prepaid insurance expense	13,200
Prepaid advertising expense	8,800
Rent expense	66,528
Rental income	13,200
Retained earnings	265,364
Salaries expense	125,400
Sales	792,000
Sales discounts	7,920
Sales returns and allowances	21,120
Service revenue	495,000
Share capital	44,000
Shop supplies	8,360
Shop supplies expense	2,200
Travel expense	4,620
Unearned service revenue	111,100
Utilities expense	16,060

Additional information:

The following are adjusting entries that have not yet been recorded:

Accrued salaries	$12,000
Accrued interest on the bank loan	5,600
Inventory shrinkage	7,800
Prepaid insurance expense	5,000 has expired
Prepaid advertising expense	no change
Unearned revenue	30,000 has been earned
Income tax rate	30%

Required:

1. Update the affected accounts by the adjustments, if any. Round all adjustments to the nearest whole dollar.
2. Prepare a classified multiple-step income statement in good form for the year ended March 31, 2023.