Skip to main content
Business LibreTexts

5.13: Problems

  • Page ID
  • 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).


    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



    Income Summary


    Income Summary


    Cost of Goods Sold


    Sales Returns and Allowances


    Sales Discounts


    Salaries Expenses


    Income Summary


    Retained Earnings


    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


    Accounts Receivable


    Accumulated Depreciation – Equipment


    Advertising Expense


    Bank Loan




    Commissions Expense


    Cost of Goods Sold


    Delivery Expense


    Depreciation Expense






    Income Taxes Expense


    Income Taxes Payable


    Insurance Expense


    Interest Expense


    Merchandise Inventory


    Office Supplies Expense


    Rent Expense


    Rent Revenue


    Retained Earnings




    Sales Discounts


    Sales Returns and Allowances


    Sales Salaries Expense


    Share Capital




    Telephone Expense


    Utilities Expense


    Wages Expense – Office



    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


    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%


    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.
    • Was this article helpful?