# 5.13: Problems

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## PROBLEM 5–1 (LO1,2,3,4)

Salem Corp. was incorporated on July 2, 2015 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 2015 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, 2015, the end of its fiscal year.  General Journal Date Account/Explanation F Debit Credit Dec. 31 Sales 37,800 Income Summary 37,800 31 Income Summary 32,800 Cost of Goods Sold 26,800 Sales Returns and Allowances 690 Sales Discounts 310 Salaries Expenses 5,000 31 Income Summary 5,000 Retained Earnings 5,000 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, 2015, 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, 2015. 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, 2015.
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 5.3 and the T-account summary illustrations for inventory and cost of goods sold at the end of Section 5.6.) ## 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 2016. Their year-end is December 31.  Turret Retail Ltd. Trial Balance At December 31, 2016 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, 2016. 2. Prepare the closing entries for the year-ended December 31, 2016. 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, 2017. 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, 2017 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, 2017.

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