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5.14: Solutions

  • Page ID
    30994
  • Discussion Questions

    1. A business providing a service holds no inventory for resale. Thus, a business that sells goods must match the cost of the goods sold with the revenue the sales generate. The Income Statement will show this, as well as the Gross Profit (also known as Gross Margin)—the difference between Sales and Cost of Goods Sold. A service business Income Statement would not show these items.
    2. Gross Profit is the result of deducting Cost of Goods Sold from Sales (or Net Sales). For example, if a car is sold for $16,000 but cost $12,000, the Gross Profit calculation would be
      Sales $16,000
      Cost of Goods Sold 12,000
      Gross Profit 4,000

      The profit on the sale, before considering operating and other expenses, is $4,000. The Gross Profit percentage is $4,000/16,000 or 25 per cent. That means for every $1 of Sales, the business earns $0.25 on average to cover operating and other expenses.

    3. The Merchandise Inventory account collects information regarding the purchase of inventory, return to supplier of inventory, purchase discounts, transportation costs, and inventory shrinkage adjustments.
    4. The sales and collection cycle starts off when a sale is made, often creating an Account Receivable. The Account Receivable is subsequently removed when cash is collected. If merchandise is returned because it is say, the wrong model or defective, a Sales Returns and Allowances records this amount and the Account Receivable is reduced. To speed up collections, discounts may be offered in return for prompt payments. If so, a Sales Discount may be given.

      Assuming a perpetual inventory system, the purchase and payment cycle starts with the purchase of merchandise, which becomes the inventory held for resale; the purchase generally creates an Account Payable. The Account Payable is removed once the account is paid by a cash disbursement. Purchases may be returned if the inventory item is wrong or defective. If so, the Account Payable would be reduced and a credit to Merchandise Inventory would be recorded. Discounts may be offered by the supplier to speed up payment by the purchaser. If so, the purchaser would be given a purchase discount which is debited to Account Payable and credited to Merchandise Inventory.

    5. The contra accounts used for sales are
      1. Sales Returns and Allowances, which accumulates merchandise returned to the seller by the customer because of some defect or error.
      2. Sales Discounts, which accumulates discounts taken by customers when payments are made to the seller within the discount period.

      In a perpetual inventory system, there are no contra accounts used for purchases.

    6. (Appendix) In a perpetual inventory system, the balances in Merchandise Inventory and Cost of Goods Sold are updated with each transaction involving purchases and sales. In a periodic inventory system, the balances in Merchandise Inventory and Cost of Goods Sold are not known until an inventory count is performed. The advantage of a perpetual system is that account balances are maintained in real time and therefore always known which is not the case for a periodic system where account balances have to be estimated until an inventory count is performed.

    Exercises

    EXERCISE 5–1

    1. The completed table is as follows:
      2014 2013 2012 2011
      Sales $10,000 $9,000 $8,000 $7,000
      Cost of Goods Sold 7,500 6,840 6,160 5,460
      Gross Profit 2,500 2,160 1,840 1,540
      Gross Profit Percentage 25% 24% 23% 22%
    2. The company's gross profit percentage has increased each year from 2011 to 2014 inclusive. This means it is earning more per sales dollar each year (from 22 cents per dollar in 2011 to 25 cents per dollar in 2014). This is a favourable trend because the company is generating more gross profit to apply against operating and other expenses which hopefully results in greater net income.

    EXERCISE 5–2

    General Journal
    Date Account/Explanation F Debit Credit
    Jul. 6

    Merchandise Inventory

    600

    Accounts Payable

    600
    To record purchase of inventory on account.
    9

    Accounts Payable

    200

    Merchandise Inventory

    200
    To record returns made on goods purchased.
    15

    Accounts Payable

    400

    Cash

    396

    Merchandise Inventory

    4
    To record payment made within discount period.

    EXERCISE 5–3

    1. The Horne Inc. general journal is as follows:
      General Journal
      Date Account/Explanation F Debit Credit
      May 5

      Accounts Receivable

      4,000

      Sales

      4,000

      Cost of Goods Sold

      2,500

      Merchandise Inventory

      2,500
      7

      Sales Returns and Allowances

      500

      Accounts Receivable

      500

      Merchandise Inventory

      300

      Cost of Goods Sold

      300
      15

      Cash

      3,430

      Sales Discounts

      70

      Accounts Receivable

      3,500
      31

      Cost of Goods Sold

      100

      Merchandise Inventory

      100
      (3,000 beginning MI − 2,500 + 300 = 800 unadjusted MI balance; 800 − 700 = 100 shrinkage)
    2. The Sperling Renovations Ltd. general journal is as follows:
      General Journal
      Date Account/Explanation F Debit Credit
      May 5

      Merchandise Inventory

      4,000

      Accounts Payable

      4,000
      7

      Accounts Payable

      500

      Merchandise Inventory

      500
      15

      Accounts Payable

      3,500

      Merchandise Inventory

      70

      Cash

      3,430
      The shrinkage adjustment recorded by Horne Inc. does not impact Sperling in any way therefore no adjusting entry is required in Sperling's records.

    EXERCISE 5–4

    General Journal
    Date Account/Explanation F Debit Credit
    Mar 1

    Merchandise inventory

    25,000

    Accounts payable

    25,000
    (Purchase, terms 2/10, net 30)
    Mar 3

    Accounts receivable

    5,000

    Cost of goods sold

    2,600

    Sales

    5,000

    Merchandise inventory

    2,600
    (Sale, terms 1/10, n30)
    General Journal
    Date Account/Explanation F Debit Credit
    Mar 4

    Merchandise inventory

    100

    Sales returns and allowances

    200

    Accounts receivable

    200

    Cost of goods sold

    100
    (Sales return, Mar 3)
    Mar 5

    Merchandise inventory

    15,000

    Cash

    15,000
    (Cash purchase)
    Mar 6

    Merchandise inventory

    200

    Cash

    200
    (Freight)
    Mar 7

    Cash

    500

    Merchandise inventory

    500
    (Allowance for damaged inventory)
    Mar 8

    Accounts receivable

    25,000

    Cost of goods sold

    13,000

    Sales

    25,000

    Merchandise inventory

    13,000
    (Sale, terms 1.5/10, n30)
    Mar 9

    Delivery expense or freight-out

    500

    Cash

    500
    (Shipping costs for Mar 8 sale)
    Mar 11

    Accounts payable

    12,500

    Merchandise inventory

    250

    Cash

    12,250
    (50% payment of Mar 1 purchase)
    Mar 13

    Cash

    4,950

    Sales discount

    50

    Accounts receivable

    5,000
    (Collect Mar 3 sale)
    Mar 15

    Office supplies inventory

    540

    Account payable

    540
    (Purchase 1/10, n30)
    Mar 18

    No Entry

    Mar 20

    Cash

    6,010

    Accounts receivable

    6,010
    (Collect account)
    Mar 25

    Account payable

    540

    Office supplies inventory

    5.40

    Cash

    534.60
    (Payment of Mar 15 purchase)
    General Journal
    Date Account/Explanation F Debit Credit
    Mar 27

    Cash

    12,500

    Cost of goods sold

    5,000

    Sales

    12,500

    Merchandise inventory

    5,000
    (Cash sale)
    Mar 31

    Account payable

    12,500

    Cash

    12,500
    (Payment of Mar 1 balance, discount expired)

    EXERCISE 5–5

    General Journal

    Date Account/Explanation F Debit Credit
    Apr 1

    Merchandise inventory

    15,000

    Cash

    15,000
    (Cash purchase)
    Apr 3

    Cash

    8,000

    Cost of goods sold

    4,600

    Sales

    8,000

    Merchandise inventory

    4,600
    (Cash sale)
    Apr 5

    Merchandise inventory

    10,000

    Accounts payable

    10,000
    (Purchase, terms 1/10, n30)
    Apr 7

    Accounts payable

    2,000

    Merchandise inventory

    2,000
    (Purchase returns)
    Apr 8

    Accounts receivable

    8,000

    Cost of goods sold

    4,000

    Merchandise inventory

    4,000

    Sales

    8,000
    (Sale, terms 2/10, n30)
    Apr 9

    Delivery expense or freight-out

    500

    Cash

    500
    (Shipping costs for Apr 8 sale)
    Apr 10

    Merchandise inventory

    1,000

    Sales returns and allowances

    400

    Cost of goods sold

    400

    Cash

    1,000
    (Sale return)
    General Journal
    Date Account/Explanation F Debit Credit
    Apr 10

    Sales allowance

    200

    Accounts receivable

    200
    (Apr 8 sale, sales allowance)
    Apr 12

    Merchandise inventory

    22,000

    Accounts payable

    22,000
    (Purchase, terms 1/10, n30)
    Apr 15

    Accounts payable

    8,000

    Merchandise inventory

    Cash ($10,000−2,000)×0.99

    7,920
    (Paid Apr 5 purchase)
    Apr 16

    Merchandise inventory

    600

    Cash

    600
    (Freight on Apr 12 purchase)
    Apr 18

    Cash

    5,000

    Sales discount

    102
    Accounts receivable ($5,000÷0.98)

    Accounts receivable ($5,000÷0.98)

    5,102
    (Partial payment on account)
    Apr 27

    Accounts payable

    22,000

    Cash

    22,000
    (Paid account, discount forfeited)
    Apr 27

    Cash

    20,000

    Cost of goods sold

    10,000

    Merchandise inventory

    10,000

    Sales

    20,000
    (Cash sale)

    EXERCISE 5–6

    1. The income statement is as follows:

      Smith Corp.

      Income Statement

      Year Ended June 30, 2015

      Sales $72,000
      Less: Sales returns and allowances 2,000
      Net sales $70,000
      Cost of goods sold 50,000
      Gross profit $20,000
      Operating expenses:
      Selling expenses:
      Advertising expense $1,500
      Commissions expense 4,000
      Delivery expense 500
      Rent expense - store 1,500
      Sales salaries expense 2,000
      Total selling expenses $9,500
      General and administrative expenses:
      Depreciation expense - equipment 500
      Insurance expense 1,000
      Office salaries expense 3,000
      Rent expense - office 1,000
      Total general and administrative expenses 5,500
      Total operating expenses 15,000
      Income before income tax expense 5,000
      Income tax expense 1,000
      Net income $4,000
    2. The gross profit percentage, rounded to two decimal places, is 28.57% calculated as 100 × (20,000/70,000).

    EXERCISE 5–7

    Inventory, opening balance $ 10,000 $ 53,000 $ 561,800 $ 168,540 50,562
    Plus: purchases 30,000 159,000 1,685,400 1,011,240 606,744
    Total goods available for sale 40,000 212,000 2,247,200 1,179,780 657,306
    Less: ending inventory 15,000 79,500 842,700 556,180 100,000
    Cost of goods sold 25,000 132,500 1,404,500 623,600 557,306
    Sales 55,000 240,000 1,600,000 900,000 700,000
    Less: cost of goods sold 25,000 132,500 1,404,500 623,600 557,306
    Gross profit 30,000 107,500 195,500 276,400 142,694
    Less: operating expenses 12,000 63,600 275,000 250,000 145,000
    Net income/(loss) 18,000 43,900 (79,500) 26,400 (2,306)
    Gross profit/sales (%) 54.55% 44.79% 12.22% 30.71% 0

    EXERCISE 5–8

    1. Closing entries:
      General Journal
      Date Account/Explanation F Debit Credit
      June 30

      Sales

      72,000

      Income Summary

      72,000
      (to close credit balance temporary accounts)
      30

      Income Summary

      68,000

      Sales Returns and Allowances

      2,000

      Cost of Goods Sold

      50,000

      Advertising Expense

      1,500

      Commissions Expense

      4,000

      Delivery Expense

      500

      Rent Expense – Store

      1,500

      Sales Salaries Expense

      2,000

      Depreciation Expense – Equipment

      500

      Insurance Expense

      1,000

      Office Salaries Expense

      3,000

      Rent Expense – Office

      1,000

      Income Tax Expense

      1,000
      (to close debit balance temporary accounts)
      30

      Income Summary

      4,000

      Retained Earnings

      4,000
      (to close balance in Income Summary to Retained Earnings)
      30

      Retained Earnings

      2,000

      Dividends

      2,000
      (to close Dividends to Retained Earnings)
    2. The June 30, 2015 post-closing balance in Retained Earnings is $20,000 calculated as:
      Retained Earnings
      18,000 Beginning Balance
      Dividends 2,000 4,000 Net Income
      20,000 Ending Balance

    EXERCISE 5–9

    A B C D
    Opening Inventory 500 184 112 750
    Purchases 1,415 344 840 5,860
    Transportation-In 25 6 15 10
    Cost of Goods Available for Sale 1,940 534 967 6,620
    Ending Inventory 340 200 135 880
    Cost of Goods Sold 1,600 334 832 5,740

    EXERCISE 5–10

    Opening Inventory 375
    Purchases 2,930
    Less: Purchases Discounts 5
    Less: Purchases Returns and Allowances 20
    Transportation-In 105
    Less: Ending Inventory 440
    Cost of Goods Sold 2,945

    EXERCISE 5–11

    1. The completed table is as follows:
      A B C D
      Sales $300 $150 $195 $90
      Opening Inventory 80 40 40 12
      Purchases 240 120 150 63
      Cost of Goods Available for Sale 320 160 190 75
      Ending Inventory (120) (60) (60) (15)
      Cost of Goods Sold 200 100 130 60
      Gross Profit $100 $50 $65 $30
      Gross Profit percentage 33.33% 33.33% 33.33% 33.33%
    2. All four companies have the same gross profit percentage of 33.33% which means each is contributing equally to operating expenses. In terms of real dollars, Company A is doing the best because its gross profit is $100.

    Problems

    PROBLEM 5–1

    1. The Salem Corp. general journal is as follows:
      General Journal
      Date Account/Explanation F Debit Credit
      Jul. 2

      Cash

      5,000

      Share Capital

      5,000
      To record the issue of common shares.
      2

      Merchandise Inventory

      3,500

      Accounts Payable

      3,500
      To record Purchases on credit 2/10, n/30, from Blic Pens, Ltd.
      2

      Accounts Receivable

      2,000

      Sales

      2,000
      To record sale to Spellman Chair Rentals, Inc.; terms 2/10, n/30.

      Cost of Goods Sold

      1,200

      Merchandise Inventory

      1,200
      To record the cost of sales.
      3

      Rent Expense

      500

      Cash

      500
      To record July rent payment.
      5

      Equipment

      1,000

      Cash

      1,000
      To record purchase of equipment.
      8

      Cash

      200

      Sales

      200
      To record cash sale to Ethan Matthews Furniture Ltd.

      Cost of Goods Sold

      120

      Merchandise Inventory

      120
      To record the cost of sales.
      8

      Merchandise Inventory

      2,000

      Accounts Payable

      2,000
      To record purchase of merchandise inventory; terms 2/15, n/30, from Shaw Distributors, Inc.
      9

      Cash

      1,960

      Sales Discount

      40

      Accounts Receivable

      2,000
      To record receipt of amount due from Spellman Chair Rentals, Inc. less the discount.
      General Journal
      Date Account/Explanation F Debit Credit
      10

      Accounts Payable

      3,500

      Cash

      3,430

      Merchandise Inventory

      70
      To record payment to Blic Pens Ltd. less the discount.
      10

      Merchandise Inventory

      200

      Accounts Payable

      200
      To record purchase of merchandise inventory from Peel Products, Inc.; terms n/30.
      Jul. 15

      Accounts Receivable

      2,000

      Sales

      2,000
      To record sale to Eagle Products Corp. 2/10, n/30.

      Cost of Goods Sold

      1,300

      Merchandise Inventory

      1,300
      To record the cost of sales.
      15

      Merchandise Inventory

      1,500

      Accounts Payable

      1,500
      To record purchase of merchandise inventory from Bevan Door, Inc.; terms 2/10, n/30.
      15

      Accounts Payable

      100

      Merchandise Inventory

      100
      To record credit memo from Shaw Distributors, Inc.
      16

      Sales Returns and Allowances

      200

      Accounts Receivable

      200
      To record return of defective items sold to Eagle Products Corp.; inventory scrapped.
      20

      Accounts Receivable

      3,500

      Sales

      3,500
      To record sale to Aspen Promotions, Ltd. 2/10, n/30.

      Cost of Goods Sold

      2,700

      Merchandise Inventory

      2,700
      To record the cost of sales.
      20

      Accounts Payable

      950

      Cash

      931

      Merchandise Inventory

      19
      To record payment of half of the amount due to Shaw Distributors, Inc. less memo and less discount.
      24

      Cash

      882

      Sales Discounts

      18

      Accounts Receivable

      900
      To record receipt of half of the amount due from Eagle Products Corp.; 2,000 − 200 return = 1,800/2 = 900.
      24

      Accounts Payable

      1,500

      Cash

      1,470

      Merchandise Inventory

      30
      To record payment made to Bevan Door, Inc. less discount.
      General Journal
      Date Account/Explanation F Debit Credit
      26 Accounts Receivable 600
      Sales 600
      To record sale to Longbeach Sales, Ltd. for terms 2/10, n/30.
      Cost of Goods Sold 400
      Merchandise Inventory 400
      To record the cost of sales.
      Jul. 26 Merchandise Inventory 800
      Accounts Payable 800
      To record purchase from Silverman Co. for terms 2/10, n/30.
      31 Merchandise Inventory 350
      Cash 350
      To record payment to Speedy Transport Co. for July transport of inventory to warehouse.
    2. The unadjusted ending balance in merchandise inventory is as follows:
      Merchandise Inventory
      2-Jul 3,500 1,200 2-Jul
      8-Jul 2,000 120 8-Jul
      10-Jul 200 70 10-Jul
      15-Jul 1,500 1,300 15-Jul
      26-Jul 800 100 15-Jul
      31-Jul 350 2,700 20-Jul
      19 20-Jul
      30 24-Jul
      400 26-Jul

      Unadj. Bal.

      2,411

    3. The general journal entry is as follows:
      General Journal
      Date Account/Explanation F Debit Credit
      July 31 Cost of Goods Sold 11
      Merchandise Inventory 11
      To record adjustment to merchandise inventory calculated as $2,411 − $2,400 = $11.

    PROBLEM 5–2

    Sales $37,800
    Less: Sales Returns and Allowances 690

    Sales Discounts

    310
    Net Sales $36,800
    Cost of Goods Sold 26,800
    Gross Profit $10,000

    PROBLEM 5–3

    1. The income statement and statement of changes in equity are as follows:

      Acme Automotive Inc.

      Income Statement

      Year Ended December 31, 2015

      Sales $310,000
      Less: Sales returns and allowances $2,900
      Sales discounts 1,300 4,200
      Net sales $305,800
      Cost of goods sold 126,000
      Gross profit $179,800
      Operating expenses:

      Selling expenses:

      Advertising expense

      $14,000

      Commissions expense

      29,000

      Delivery expense

      14,800

      Rent expense

      19,440

      Sales salaries expense

      26,400

      Total selling expenses

      $103,640

      General and administrative expenses:

      Depreciation expense

      $12,000

      Insurance expense

      10,400

      Office supplies expense

      3,100

      Rent expense

      12,960

      Telephone expense

      1,800

      Utilities expense

      4,200

      Wages expense – office

      14,300

      Total general and administrative expenses

      58,760

      Total operating expenses

      162,400
      Income from operations $17,400
      Other revenues and expenses:

      Rent revenue

      $19,200

      Interest expense

      (840) 18,360
      Income before tax $35,760
      Income tax expense 4,200
      Net income $31,560

      Acme Automotive Inc.

      Statement of Changes in Equity

      Year Ended December 31, 2015

      Share Capital Retained Earnings Total Equity
      Opening balance $50,000 $12,440 $62,440
      Shares issued 20,000 20,000
      Net income 31,560 31,560
      Dividends (11,000) (11,000)
      Ending balance $70,000 $33,000 $103,000
    2. Closing entries:
      General Journal
      Date Account/Explanation F Debit Credit
      Dec. 31 Sales 310,000
      Rent Sales 19,200
      Income Summary 329,200
      (to close credit balance temporary accounts)
      31 Income Summary 297,640
      Sales Returns and Allowances 2,900
      Sales Discounts 1,300
      Cost of Goods Sold 126,000
      Advertising Expense 14,000
      Commissions Expense 29,000
      Delivery Expense 14,800
      Rent Expense 32,400
      Sales Salaries Expense 26,400
      Depreciation Expense 12,000
      Insurance Expense 10,400
      Office Supplies Expense 3,100
      Telephone Expense 1,800
      Utilities Expense 4,200
      Wages Expense – Office 14,300
      Interest Expense 840
      Income Tax Expense 4,200
      (to close debit balance temporary accounts)
      31 Income Summary 31,560
      Retained Earnings 31,560
      (to close Income Summary to Retained Earnings)
      31 Retained Earnings 11,000
      Dividends 11,000
      (to close Dividends to Retained Earnings)

    PROBLEM 5–4

    Answers for the missing boxes are in the colored cells.

    Inventory, opening balance 55,000
    Plus: purchases 250,000
    Plus: sales returns to inventory 100
    Plus: purchase shipping costs 500
    Less: Purchase returns and allowances 200
    Less: Purchase discounts 3,500 3,100
    Net purchases 246,900
    Total goods available for sale 301,900
    Ending inventory, per GL 90,000
    Less shrinkage adjustment (90,000−88,500) 1,500 88,500
    Cost of goods sold 213,400
    Sales 580,000
    Less: sales discounts 200
    Less: sales returns 200
    Less: sales allowances 600 1,000
    Net sales 579,000
    Gross profit 365,600
    Less: operating expenses 250,000
    Net income/(loss) 115,600
    Gross profit/sales (%) (365,600÷579,000) 63.14%

    PROBLEM 5–5

    1. Turret Retail Ltd.

      Income Statement

      For the Year Ended December 31, 2016

      Sales $360,000
      Less: Sales discounts $3,600

      Sales returns and allowances

      9,600 13,200
      Net sales 346,800
      Cost of goods sold 240,000
      Gross profit from sales 106,800
      Operating expenses
      Salaries expense 57,000
      Insurance expense 5,000
      Shop supplies expense 1,000
      Depreciation expense 3,200
      Rent expense 30,240
      Travel expense 2,100
      Utilities expense 7,300
      Total operating expenses 105,840
      Income from operations 960
      Other revenue and expenses
      Rental income 6000
      Interest expense 200 5,800
      Income before tax 6,760
      Income tax expense 2,028
      Net income $4,732
    2. General Journal
      Date Account/Explanation F Debit Credit
      Dec 31 Rental income 6,000
      Sales 360,000
      Income summary 366,000
      To close temporary revenue accounts.
      Dec 31 Income summary 108,068
      Salaries expense 57,000
      Insurance expense 5,000
      Shop supplies expense 1,000
      Depreciation expense 3,200
      Rent expense 30,240
      Travel expense 2,100
      Utilities expense 7,300
      Interest expense 200
      Income tax expense 2,028
      To close temporary expense accounts.
      Dec 31 Income Summary 4,732
      Retained earnings 4,732
      To close income summary to retained earnings.
      Dec 31 Retained earnings 10,000
      Cash dividends 10,000
      To close temporary cash dividend account.
    3. Gross profit ratio = gross profit/Net sales = $106,800÷346,800 = 30.8%

      This ratio means that for every $100 of sales, the company has $30.8 left to cover operating expenses after deducting cost of goods sold. This ratio can be compared to other companies in the same industry or to historical trends within the same company. A small fluctuation in the ratio can often cause a large increase/decrease in gross profit, if inventory and sales dollar amounts are often the largest amounts reported on the income statement.

    PROBLEM 5–6

    1. Yuba Yabi Enterprises Ltd.

      Trial Balance

      March 31, 2017

      Unadjusted Trial Balance Adjustments Adjusted Trial Balance
      Debit Credit Debit Credit Debit Credit
      Accounts payable $68,750 $68,750
      Accounts receivable $308,000 $308,000

      Accrued salaries and benefits payable

      26,400 $12,000 38,400

      Accumulated depreciation, furniture

      9,460 9,460
      Cash 46,200 46,200
      Cash dividends 22,000 22,000
      Cost of goods sold 528,000 $7,800 535,800
      Advertising expense 9,900 9,900
      Bank loan payable (long-term) 88,704 88,704
      Depreciation expense 7,040 7,040
      Copyright 44,000 44,000
      Franchise 66,000 66,000
      Furniture 44,000 44,000
      Income tax expense 149,872\(^{*}\) * 229,481
      Income taxes payable 17,600 149,872\(^{*}\) 247,081
      Insurance expense 11,000 5,000 16,000
      Interest expense 440 5,600 6,040
      Interest payable 1,210 5,600 6,810
      Land 308,000 308,000
      Merchandise inventory 264,000 7,800 256,200
      Prepaid insurance expense 13,200 5,000 8,200
      Prepaid advertising expense 8,800 8,800
      Rent expense 66,528 66,528
      Rental income 13,200 13,200
      Retained earnings 265,364 265,364
      Salaries expense 125,400 12,000 137,400
      Sales 792,000 792,000
      Sales discounts 7,920 7,920
      Sales returns and allowances 21,120 21,120
      Service revenue 495,000 30,000 525,000
      Share capital 44,000 44,000
      Shop supplies 8,360 8,360
      Shop supplies expense 2,200 2,200
      Travel expense 4,620 4,620
      Unearned service revenue 111,100 30,000 81,100
      Utilities expense 16,060 16,060
      $1,932,788 $1,932,788 $210,272 $210,272 $2,179,869 $2,179,869

      \(^{*}\) Income tax expense calculation:

      Cost of goods sold $535,800
      Advertising expense 9,900
      Depreciation expense 7,040
      Insurance expense 16,000
      Interest expense 6,040
      Rent expense 66,528
      Rental income $13,200
      Salaries expense 137,400
      Sales 792,000
      Sales discounts 7,920
      Sales returns and allowances 21,120
      Service revenue 525,000
      Shop supplies expense 2,200
      Travel expense 4,620
      Utilities expense 16,060
      $830,628 $1,330,200
      Net income before taxes 499,572
      Income taxes @ 30% $149,872 adjusting entry
    2. Turret Retail Ltd.

      Income Statement

      For the Year Ended December 31, 2016

      Sales $792,000
      Less: Sales discounts $7,920

      Sales returns and allowances

      21,120 29,040
      Net sales 762,960
      Cost of goods sold 535,800
      Gross profit from sales 227,160
      Service revenue 525,000
      752,160
      Operating expenses
      Salaries expense 137,400
      Insurance expense 16,000
      Advertising expense 9,900
      Shop supplies expense 2,200
      Depreciation expense 7,040
      Rent expense 66,528
      Travel expense 4,620
      Utilities expense 16,060
      Total operating expenses 259,748
      Income from operations 492,412
      Other revenue and expenses
      Rental income 13,200
      Interest expense 6,040 7,160
      Income before tax 499,572
      Income tax expense 149,872
      Net income $349,700
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