5.13: Problems

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.