ACC 100 Week 6 Quiz Chapter 5 – Strayer Latest
5 – 12
Test Bank for Accounting Principles, Eleventh Edition
5 – 13
Accounting for Merchandising Operations
CHAPTER 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
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True-False Statements
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Multiple Choice Questions
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Summary of Questions by LEARNING Objectives and Bloom’s Taxonomy
Brief Exercises
190.
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Exercises
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Completion Statements
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Matching Statements
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Short-Answer Essay
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning Objective 1
1.
TF
35.
TF
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MC
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MC
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Ex
239.
SA
2.
TF
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TF
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Learning Objective 2
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TF
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Learning Objective 3
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TF
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MC
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TF
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TF
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BE
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C
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TF
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TF
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BE
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C
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TF
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TF
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Ex
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MC
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MC
90.
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106.
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Ex
SUMMARY OF Learning OBJECTIVES BY QUESTION TYPE
Learning Objective 4
13.
TF
15.
TF
108.
MC
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MC
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MC
211.
Ex
213.
Ex
14.
TF
40.
TF
109.
MC
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MC
195.
BE
212.
Ex
Learning Objective 5
16.
TF
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TF
117.
MC
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MC
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C
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TF
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C
18.
TF
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TF
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BE
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SA
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TF
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TF
120.
MC
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BE
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SA
20.
TF
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TF
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MC
131.
MC
141.
MC
215.
Ex
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TF
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TF
122.
MC
132.
MC
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MC
216.
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TF
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MC
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MC
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MC
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TF
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MC
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MC
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MC
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MC
218.
Ex
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TF
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MC
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MC
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MC
219.
Ex
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TF
116.
MC
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171.
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Ex
Learning Objective a6
a34.
TF
175.
MC
178.
MC
181.
MC
184.
MC
187.
MC
a225.
Ex
a146.
MC
176.
MC
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MC
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MC
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MC
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MC
a147.
MC
177.
MC
180.
MC
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MC
186.
MC
189.
MC
Learning Objective a7
a30.
TF
a149.
MC
a154.
MC
a159.
MC
a164.
MC
a201.
BE
a225.
Ex
a31.
TF
a150.
MC
a155.
MC
a160.
MC
a174.
MC
a221.
Ex
a226.
Ex
a32.
TF
a151.
MC
a156.
MC
a161.
MC
a198.
BE
a222.
Ex
a33.
TF
a152.
MC
a157.
MC
a162.
MC
a199.
BE
a223.
Ex
a148.
MC
a153.
MC
a158.
MC
a163.
MC
a200.
BE
a224.
Ex
Learning Objective 8
175.
MC
177.
MC
179.
MC
181.
MC
183.
MC
185.
MC
176.
MC
178.
MC
180.
MC
182.
MC
184.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise SA = Short-Answer
MA = Matching
CHAPTER LEARNING OBJECTIVES
1. Identify the differences between service and merchandising companies. Because of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual and a periodic inventory system.
2. Explain the recording of purchases under a perpetual inventory system. The company debits the Inventory account for all purchases of merchandise, and freight-in, and credits it for purchase discounts and purchase returns and allowances.
3. Explain the recording of sales revenues under a perpetual inventory system. When a merchandising company sells inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling price of the merchandise. At the same time, it debits Cost of Goods Sold and credits Inventory for the cost of the inventory items sold. Sales returns and allowances and sales discounts are debited and are contra revenue accounts.
4. Explain the steps in the accounting cycle for a merchandising company. Each of the required steps in the accounting cycle for a service company applies to a merchandising company. A worksheet is again an optional step. Under a perpetual inventory system, the company must adjust the Inventory account to agree with the physical count.
5. Distinguish between a multiple-step and a single-step income statement. A multiple-step income statement shows numerous steps in determining net income, including nonoperating activities sections. A single-step income statement classifies all data under two categories, revenues or expenses, and determines net income in one step.
a6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet for a merchandising company are the same as for a service company. The unique accounts for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.
a7. Explain the recording of purchases and sales of inventory under a periodic inventory system. In recording purchases under a periodic system, companies must make entries for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording sales, companies must make entries for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.
TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
2. The steps in the accounting cycle are different for a merchandising company than for a service company.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
3. Sales minus operating expenses equals gross profit.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
4. Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
5. A periodic inventory system requires a detailed inventory record of inventory items.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
6. Freight terms of FOB Destination means that the seller pays the freight costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
7. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
8. Sales revenues are earned during the period cash is collected from the buyer.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
9. The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
10. The revenue recognition principle applies to merchandisers by recognizing sales revenues when the performance obligation is satisfied.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
11. Sales Returns and Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
12. To grant a customer a sales return, the seller credits Sales Returns and Allowances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
13. A company’s unadjusted balance in Inventory will usually not agree with the actual amount of inventory on hand at year-end.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
14. For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
15. A merchandising company has different types of adjusting entries than a service company.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
16. Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
17. Operating expenses are different for merchandising and service enterprises.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
18. Net sales appears on both the multiple-step and single-step forms of an income statement.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
19. A multiple-step income statement provides users with more information about a company’s income performance.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
20. The multiple-step form of income statement is easier to read than the single-step form.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
21. Inventory is classified as a current asset in a classified balance sheet.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
22. Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
23. The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
24. In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
25. A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
26. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
27. Gross profit represents the merchandising profit of a company.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
28. Gross profit is a measure of the overall profitability of a company.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
29. Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
a30. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a31. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a32. Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a33. Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a34. Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
35. Inventory is reported as a long-term asset on the balance sheet.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
36. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
37. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
38. Sales revenue should be recorded in accordance with the matching principle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
39. Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
40. A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
41. If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
42. The major difference between the balance sheets of a service company and a merchandising company is inventory.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to True-False Statements
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19.
T
25.
T
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F
37.
F
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8.
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14.
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20.
F
26.
T
a32.
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38.
F
3.
F
9.
F
15.
F
21.
T
27.
T
a33.
F
39.
T
4.
T
10.
T
16.
F
22.
F
28.
F
a34.
T
40.
T
5.
F
11.
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F
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MULTIPLE CHOICE QUESTIONS
43. Net income is gross profit less
a. financing expenses.
b. operating expenses.
c. other expenses and losses.
d. other expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
44. An enterprise which sells goods to customers is known as a
a. proprietorship.
b. corporation.
c. retailer.
d. service firm.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
45. Which of the following would not be considered a merchandising company?
a. Retailer
b. Wholesaler
c. Service firm
d. Dot Com firm
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
46. A merchandising company that sells directly to consumers is a
a. retailer.
b. wholesaler.
c. broker.
d. service company.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
47. Two categories of expenses for merchandising companies are
a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
48. The primary source of revenue for a wholesaler is
a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
49. Sales revenue less cost of goods sold is called
a. gross profit.
b. net profit.
c. net income.
d. marginal income.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
50. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
51. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
52. Which of the following expressions is incorrect?
a. Gross profit – operating expenses = net income
b. Sales revenue – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
53. Detailed records of goods held for resale are not maintained under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
54. A perpetual inventory system would likely be used by a(n)
a. automobile dealership.
b. hardware store.
c. drugstore.
d. convenience store.
Ans: A, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
55. Which of the following is a true statement about inventory systems?
a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting period.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
56. In a perpetual inventory system, cost of goods sold is recorded
a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
57. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computer accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
58. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
59. The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales Revenue.
d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
60. The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
61. A buyer would record a payment within the discount period under a perpetual inventory system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
62. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
63. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
64. Paden Company purchased merchandise from Emmett Company with freight terms of FOB shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
65. Glenn Company purchased merchandise inventory with an invoice price of $9,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Glenn Company pays within the discount period?
a. $8,100
b. $8,280
c. $8,820
d. $9,000
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $9,000 ( (1 – .02) ( $8,820
66. Scott Company purchased merchandise with an invoice price of $3,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?
a. 20%
b. 24%
c. 18%
d. 36%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [360 ( (30 ( 10)] ( 1% ( 18%
67. If a company is given credit terms of 2/10, n/30, it should
a. hold off paying the bill until the end of the credit period, while investing the money at 10% annual interest during this time.
b. pay within the discount period and recognize a savings.
c. pay within the credit period but don’t take the trouble to invest the cash while waiting to pay the bill.
d. recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
68. In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to
a. Inventory.
b. Purchase Discounts.
c. Purchase Allowance.
d. Sales Discounts.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
69. Jake’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $60,000, terms 2/10, n/30.
Returned $1,200 of the shipment for credit.
Paid $300 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory increased by
a. $57,624.
b. $57,918.
c. $57,924.
d. $59,100.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [($60,000 ( $1,200( .98)] ( 300 ( $57,924
70. Costner’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $40,000, terms 2/10, n/30.
Returned $800 of the shipment for credit.
Paid $200 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a. increased by $38,416.
b. increased by $38,612.
c. increased by $38,616.
d. increased by $39,400.
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: [($40,000 ( $800) ( .98] ( $200 ( $38,616
71. Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in
a. Freight Expense.
b. Freight – In.
c. Inventory.
d Freight – Out.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
72. Glover Co. returned defective goods costing $5,000 to Mal Company on April 19, for credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by Glover Co. on April 19, in receiving full credit is:
a. Accounts Payable 5,000
Inventory 5,000
b. Accounts Payable 5,000
Inventory 150
Cash 5,150
c. Accounts Payable 5,000
Purchase Discounts 120
Inventory 4,850
d. Accounts Payable 5,000
Inventory 120
Cash 4,850
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
73. McIntyre Company made a purchase of merchandise on credit from Marvin Company on August 8, for $9,000, terms 3/10, n/30. On August 17, McIntyre makes the appropriate payment to Marvin. The entry on August 17 for McIntyre Company is:
a. Accounts Payable 9,000
Cash 9,000
b. Accounts Payable 8,730
Cash 8,730
c. Accounts Payable 9,000
Purchase Returns and Allowances 270
MC. 73 (Cont.)
Cash 8,730
d. Accounts Payable 9,000
Inventory 270
Cash 8,730
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $9,000 ( .97 ( $8,730
74. On July 9, Sheb Company sells goods on credit to Wooley Company for $5,000, terms 1/10, n/60. Sheb receives payment on July 18. The entry by Sheb on July 18 is:
a. Cash 5,000
Accounts Receivable 5,000
b. Cash 5,000
Sales Discounts 50
Accounts Receivable 4,950
c. Cash 4,950
Sales Discounts 50
Accounts Receivable 5,000
d. Cash 5,050
Sales Discounts 50
Accounts Receivable 5,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $5,000 ( .99 ( $4,950
75. On November 2, 2014, Kasdan Company has cash sales of $6,000 from merchandise having a cost of $3,600. The entries to record the day’s cash sales will include:
a. a $3,600 credit to Cost of Goods Sold.
b. a $6,000 credit to Cash.
c. a $3,600 credit to Inventory.
d a $6,000 debit to Accounts Receivable.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
76. A credit sale of $4,000 is made on April 25, terms 2/10, n/30, on which a return of $250 is granted on April 28. What amount is received as payment in full on May 4?
a. $3,675
b. $3,750
c. $3,920
d $4,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($4,000 ( $250) ( .98 ( $3,675
77. The entry to record the receipt of payment within the discount period on a sale of $2,000 with terms of 2/10, n/30 will include a credit to
a. Sales Discounts for $40.
b. Cash for $1,960.
c. Accounts Receivable for $2,000.
d. Sales Revenue for $2,000.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
78. The collection of a $6,000 account within the 2 percent discount period will result in a
a. debit to Sales Discounts for $120.
b. debit to Accounts Receivable for $5,880.
c. credit to Cash for $5,880.
d. credit to Accounts Receivable for $5,880.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $6,000 ( .02 ( $120
79. Company X sells $900 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y’s check?
a. $630
b. $720
c. $810
d. $882
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $900 ( .98 ( $882
80. Cleese Company sells merchandise on account for $5,000 to Langston Company with credit terms of 2/10, n/30. Langston Company returns $1,000 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $3,920
b. $4,000
c. $4,900
d. $4,920
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($5,000 ( $1,000) ( .98 ( $3,920
81. The collection of a $1,500 account after the 2 percent discount period will result in a
a. debit to Cash for $1,470.
b. debit to Accounts Receivable for $1,500.
c. debit to Cash for $1,500.
d. debit to Sales Discounts for $30.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
82. The collection of a $1,000 account after the 2 percent discount period will result in a
a. debit to Cash for $980.
b. credit to Accounts Receivable for $1,000.
c. credit to Cash for $1,000.
d. debit to Sales Discounts for $20.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
83. In a perpetual inventory system, the Cost of Goods Sold account is used
a. only when a cash sale of merchandise occurs.
b. only when a credit sale of merchandise occurs.
c. only when a sale of merchandise occurs.
d. whenever there is a sale of merchandise or a return of merchandise sold.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
84. Sales revenues are usually considered earned when
a. cash is received from credit sales.
b. an order is received.
c. goods have been transferred from the seller to the buyer.
d. adjusting entries are made.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
85. A sales invoice is a source document that
a. provides support for goods purchased for resale.
b. provides evidence of incurred operating expenses.
c. provides evidence of credit sales.
d. serves only as a customer receipt.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
86. Sales revenue
a. may be recorded before cash is collected.
b. will always equal cash collections in a month.
c. only results from credit sales.
d. is only recorded after cash is collected.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
87. The journal entry to record a credit sale is
a. Cash
Sales Revenue
b. Cash
Service Revenue
c. Accounts Receivable
Service Revenue
d. Accounts Receivable
Sales Revenue
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
88. Sales Returns and Allowances is increased when
a. an employee does a good job.
b. goods are sold on credit.
c. goods that were sold on credit are returned.
d. customers refuse to pay their accounts.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
89. The Sales Returns and Allowances account is classified as a(n)
a. asset account.
b. contra asset account.
c. expense account.
d. contra revenue account.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
90. A credit granted to a customer for returned goods requires a debit to
a. Sales Revenue and a credit to Cash.
b. Sales Returns and Allowances and a credit to Accounts Receivable.
c. Accounts Receivable and a credit to a contra-revenue account.
d. Cash and a credit to Sales Returns and Allowances.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
91. If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales
a. discount.
b. return.
c. contra asset.
d. allowance.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
92. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is granted on July 18. What amount is received as payment in full on July 24?
a. $3,332
b. $3,440
c. $3,528
d $3,600
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: ($3,600 ( $200) ( .98 ( $3,332
93. When goods are returned that relate to a prior cash sale,
a. the Sales Returns and Allowances account should not be used.
b. the cash account will be credited.
c. Sales Returns and Allowances will be credited.
d. Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
94. The Sales Returns and Allowances account does not provide information to management about
a. possible inferior merchandise.
b. the percentage of credit sales versus cash sales.
c. inefficiencies in filling orders.
d. errors in overbilling customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
95. A Sales Returns and Allowances account is not debited if a customer
a. returns defective merchandise.
b. receives a credit for merchandise of inferior quality.
c. utilizes a prompt payment incentive.
d. returns goods that are not in accordance with specifications.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
96. As an incentive for customers to pay their accounts promptly, a business may offer its customers
a. a sales discount.
b. free delivery.
c. a sales allowance.
d. a sales return.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
97. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d. two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
98. A sales discount does not
a. provide the purchaser with a cash saving.
b. reduce the amount of cash received from a credit sale.
c. increase a contra-revenue account.
d. increase an operating expense account.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
99. Company A sells $2,500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B’s check?
a. $1,750
b. $2,000
c. $2,250
d. $2,450
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution: $2,500 ( .98 ( $2,450
100. Kern Company sells merchandise on account for $8,000 to Block Company with credit terms of 2/10, n/30. Block Company returns $1,600 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
a. $6,272
b. $6,400
c. $7,840
d. $7,872
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution: ($8,000 ( $1,600) ( .98 ( $6,272
101. Carter Company sells merchandise on account for $4,000 to Hannah Company with credit terms of 2/10, n/30. Hannah Company returns $600 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Carter Company make upon receipt of the check?
a. Cash 3,400
Accounts Receivable 3,400
b. Cash 3,332
Sales Returns and Allowances 668
Accounts Receivable 4,000
c. Cash 3,332
Sales Returns and Allowances 600
Sales Discounts 68
Accounts Receivable 4,000
d. Cash 3,920
Sales Discounts 80
Sales Returns and Allowances 600
Accounts Receivable 3,400
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
102. Which of the following would not be classified as a contra account?
a. Sales Revenue
b. Sales Returns and Allowances
c. Accumulated Depreciation
d. Sales Discounts
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
103. Which of the following accounts has a normal credit balance?
a. Sales Returns and Allowances
b. Sales Discounts
c. Sales Revenue
d. Selling Expense
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
104. With respect to the income statement,
a. contra-revenue accounts do not appear on the income statement.
b. sales discounts increase the amount of sales.
c. contra-revenue accounts increase the amount of operating expenses.
d. sales discounts are included in the calculation of gross profit.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
105. When a seller grants credit for returned goods, the account that is credited is
a. Sales Revenue.
b. Sales Returns and Allowances.
c. Inventory.
d. Accounts Receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
106. The respective normal account balances of Sales Revenue, Sales Returns and Allowances, and Sales Discounts are
a. credit, credit, credit.
b. debit, credit, debit.
c. credit, debit, debit.
d. credit, debit, credit.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
107. All of the following are contra revenue accounts except
a. sales revenue.
b. sales allowances.
c. sales discounts.
d. sales returns.
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
108. A merchandising company using a perpetual system will make
a. the same number of adjusting entries as a service company does.
b. one more adjusting entry than a service company does.
c. one less adjusting entry than a service company does.
d. different types of adjusting entries compared to a service company.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
109. In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of
a. sales revenue.
b. inventory.
c. sales discounts.
d. freight-out.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
110. A merchandising company using a perpetual system may record an adjusting entry by
a. debiting Income Summary.
b. crediting Income Summary.
c. debiting Cost of Goods Sold.
d. debiting Sales Revenue.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
111. The operating cycle of a merchandiser is
a. always one year in length.
b. generally longer than it is for a service company.
c. about the same as for a service company.
d. generally shorter than it is for a service company.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
112. When the physical count of Rosanna Company inventory had a cost of $4,350 at year end and the unadjusted balance in Inventory was $4,500, Rosanna will have to make the following entry:
a. Cost of Goods Sold 150
Inventory 150
b. Inventory 150
Cost of Goods Sold 150
c. Income Summary 150
Inventory 150
d. Cost of Goods Sold 4,500
Inventory 4,500
Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $4,500 ( $4,350 ( $150
113. Arquette Company’s financial information is presented below.
Sales Revenue $ ???? Cost of Goods Sold 540,000
Sales Returns and Allowances 40,000 Gross Profit ????
Net Sales 900,000
The missing amounts above are:
Sales Revenue Gross Profit
a. $940,000 $360,000
b. $860,000 $360,000
c. $940,000 $420,000
d. $860,000 $420,000
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution: $900,000 ( $40,000 ( $940,000; $900,000 ( $540,000 ( $360,000
114. The sales revenue section of an income statement for a retailer would not include
a. Sales discounts.
b. Sales revenue.
c. Net sales.
d. Cost of goods sold.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
115. The operating expense section of an income statement for a wholesaler would not include
a. freight-out.
b. utilities expense.
c. cost of goods sold.
d. insurance expense.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
116. Income from operations will always result if
a. the cost of goods sold exceeds operating expenses.
b. revenues exceed cost of goods sold.
c. revenues exceed operating expenses.
d. gross profit exceeds operating expenses.
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
117. Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.
a. Gross profit
b. Operating expenses
c. Sales revenues
d. Cost of goods sold
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
118. Conrad Company reported the following balances at June 30, 2014:
Sales Revenue $16,200
Sales Returns and Allowances 600
Sales Discounts 300
Cost of Goods Sold 7,500
Net sales for the month is
a. $7,800
b. $15,300.
c. $15,600.
d. $16,200.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $16,200 ( $600 ( $300 ( $15,300
119. Income from operations appears on
a. both a multiple-step and a single-step income statement.
b. neither a multiple-step nor a single-step income statement.
c. a single-step income statement.
d. a multiple-step income statement.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
120. Gross profit does not appear
a. on a multiple-step income statement.
b. on a single-step income statement.
c. to be relevant in analyzing the operation of a merchandiser.
d. on the income statement if the periodic inventory system is used because it cannot be calculated.
Ans: B, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
121. Which of the following is not a true statement about a multiple-step income statement?
a. Operating expenses are similar for merchandising and service enterprises.
b. There may be a section for nonoperating activities.
c. There may be a section for operating assets.
d. There is a section for cost of goods sold.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
122. Which one of the following is shown on a multiple-step but not on a single-step income statement?
a. Net sales
b. Net income
c. Gross profit
d. Cost of goods sold
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
123. All of the following items would be reported as other expenses and losses except
a. freight-out.
b. casualty losses.
c. interest expense.
d. loss from employees’ strikes.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
124. If a company has net sales of $700,000 and cost of goods sold of $455,000, the gross profit percentage is
a. 25%.
b. 35%.
c. 65%.
d. 100%.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: ($700,000 ( $455,000) ( $700,000 ( 35%
125. A company shows the following balances:
Sales Revenue $2,500,000
Sales Returns and Allowances 450,000
Sales Discounts 50,000
Cost of Goods Sold 1,400,000
What is the gross profit percentage?
a. 30%
b. 44%
c. 56%
d. 70%
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $2,500,000 ( $450,000 ( $50,000 ( $2,000,000; ($2,000,000 ( $1,400,000) ( $2,000,000 ( 30%
126. The gross profit rate is computed by dividing gross profit by
a. cost of goods sold.
b. net income.
c. net sales.
d. sales revenue.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
127. In terms of liquidity, inventory is
a. more liquid than cash.
b. more liquid than accounts receivable.
c. more liquid than prepaid expenses.
d. less liquid than store equipment.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
128. On a classified balance sheet, inventory is classified as
a. an intangible asset.
b. property, plant, and equipment.
c. a current asset.
d. a long-term investment.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
129. Gross profit for a merchandiser is net sales minus
a. operating expenses.
b. cost of goods sold.
c. sales discounts.
d. cost of goods available for sale.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
130. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.
Parker’s gross profit is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
131. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.
Yoder’s income from operations is
a. $18,000.
b. $27,000.
c. $45,000.
d. $90,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
132. During 2014, Parker Enterprises generated revenues of $90,000. The company’s expenses were as follows: cost of goods sold of $45,000, operating expenses of $18,000 and a loss on the sale of equipment of $3,000.
Yoder’s net income is
a. $24,000.
b. $27,000.
c. $45,000.
d. $90,000.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
133. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000
Gross profit would be
a. $30,000.
b. $90,000.
MC. 133 (Cont.)
c. $165,000.
d. $225,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $225,000 ( $135,000 ( $90,000
134. Financial information is presented below:
Operating Expenses $ 60,000
Sales Revenue 225,000
Cost of Goods Sold 135,000
The gross profit rate would be
a. .133.
b. .400.
c. .600.
d. .733.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: ($225,000 ( $135,000) ( $225,000 ( .40
135. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales 300,000
Cost of Goods Sold 158,000
Gross profit would be
a. $104,000.
b. $116,000.
c. $130,000.
d. $142,000.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $300,000 ( $26,000 ( $12,000 ( $262,000; $262,000 ( $158,000 ( $104,000
136. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 26,000
Sales Discounts 12,000
Sales Revenue 300,000
Cost of Goods Sold 158,000
The gross profit rate would be
a. .347.
b. .397.
c. .473.
d. .542.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $300,000 ( $26,000 ( $12,000 ( $262,000; ($262,000 ( $158,000) ( $262,000 ( .397
137. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
The amount of net sales on the income statement would be
a. $290,000.
b. $302,000.
c. $308,000.
d. $320,000.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $320,000 ( $18,000 ( $12,000 ( $290,000
138. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
Gross profit would be
a. $26,000.
b. $116,000.
c. $128,000.
d. $134,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $320,000 ( $18,000 ( $12,000 ( $290,000; $290,000 ( $174,000 ( $116,000
139. Financial information is presented below:
Operating Expenses $ 90,000
Sales Returns and Allowances 18,000
Sales Discounts 12,000
Sales Revenue 320,000
Cost of Goods Sold 174,000
The gross profit rate would be
a. .363.
b. .400.
c. .456.
d. .503.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $320,000 ( $18,000 ( $12,000 ( $290,000;($290,000 ( $174,000) ( $290,000 ( .40
140. If a company has sales revenue of $630,000, net sales of $600,000, and cost of goods sold of $390,000, the gross profit rate is
a. 35%.
b. 38%
c. 62%.
d. 65%.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: ($600,000 ( $390,000) ( $600,000 ( 35%
141. Dawson’s Fashions sold merchandise for $40,000 cash during the month of July. Returns that month totaled $1,000. If the company’s gross profit rate is 40%, Murray’s will report monthly net sales revenue and cost of goods sold of
a. $39,000 and $23,400.
b. $39,000 and $24,000.
c. $40,000 and $23,400.
d. $40,000 and $24,000.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
142. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.
Baxter’s gross profit for August, 2014 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
Ans: D, LO:5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $60,000 ( $36,000 ( $24,000
143. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.
Baxter’s nonoperating income (loss) for the month of August, 2014 is
a. $0.
b. $1,000.
c. $2,000.
d. $3,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $1,000 ( $2,000 ( $3,000
144. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.
Baxter’s operating income for the month of August, 2014 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $60,000 ( $36,000 ( $4,000 ( $20,000
145. During August, 2014, Baxter’s Supply Store generated revenues of $60,000. The company’s expenses were as follows: cost of goods sold of $36,000 and operating expenses of $4,000. The company also had rent revenue of $1,000 and a gain on the sale of a delivery truck of $2,000.
Baxter’s net income for August, 2014 is
a. $20,000.
b. $21,000.
c. $23,000.
d. $24,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $60,000 ( $36,000 ( 4,000 ( $1,000 ( $2,000 ( $23,000
a146. In a worksheet for a merchandising company, Inventory would appear in the
a. trial balance and adjusted trial balance columns only.
b. trial balance and balance sheet columns only.
c. trial balance, adjusted trial balance, and balance sheet columns.
d. trial balance, adjusted trial balance, and income statement columns.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a147. The Inventory account balance appearing in a perpetual inventory worksheet represents the
a. ending inventory.
b. beginning inventory.
c. cost of merchandise purchased.
d. cost of merchandise sold.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a148. The following information is available for Dennehy Company:
Sales Revenue $390,000 Freight-In $30,000
Ending Inventory 37,500 Purchase Returns and Allowances 15,000
Purchases 270,000 Beginning Inventory 45,000
Dennehy’s cost of goods sold is
a. $262,500.
b. $285,000.
MC. 148 (Cont.)
c. $292,500.
d. $345,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $45,000 + $270,000 ( $15,000 + $30,000 ( $37,500 ( $292,500
,
a149. At the beginning of September, 2014, Stella Company reported Inventory of $8,000. During the month, the company made purchases of $35,600. At September 30, 2014, a physical count of inventory reported $8,400 on hand. Cost of goods sold for the month is
a. $35,200.
b. $35,600.
c. $36,000.
d. $43,600.
Ans: A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $8,000 + $35,600 ( $8,400 ( $35,200
,
a150. At the beginning of the year, Hunt Company had an inventory of $750,000. During the year, the company purchased goods costing $2,400,000. If Hunt Company reported ending inventory of $900,000 and sales of $3,750,000, the company’s cost of goods sold and gross profit rate must be
a. $1,500,000 and 66.7%.
b. $2,250,000 and 40%.
c. $1,500,000 and 40%.
d. $2,250,000 and 60%.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $$750,000 +$2,400,000 ( $900,000 ( $2,250,000; ($3,750,000 ( $2,250,000) ( $3,750,000 ( 40%
a151. During the year, Slick’s Pet Shop’s inventory decreased by $25,000. If the company’s cost of goods sold for the year was $500,000, purchases must have been
a. $475,000.
b. $500,000.
c. $525,000.
d. Unable to determine.
Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $500,000 ( $25,000 ( $475,000
a152. Cost of goods available for sale is computed by adding
a. beginning inventory to net purchases.
b. beginning inventory to the cost of goods purchased.
c. net purchases and freight-in.
d. purchases to beginning inventory.
Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
a 153. The Freight-In account
a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.
Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a 154. Net purchases plus freight-in determines
a. cost of goods sold.
b. cost of goods available for sale.
c. cost of goods purchased.
d. total goods available for sale.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a155. Goldblum Company has the following account balances:
Purchases $96,000
Sales Returns and Allowances 12,800
Purchase Discounts 8,000
Freight-In 6,000
Delivery Expense 10,000
The cost of goods purchased for the period is
a. $80,800.
b. $88,000.
c. $94,000.
d. $104,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution: $96,000 ( $8,000 + $6,000 ( $94,000
,
a156. McKendrick Shoe Store has a beginning inventory of $45,000. During the period, purchases were $195,000; purchase returns, $6,000; and freight-in $15,000. A physical count of inventory at the end of the period revealed that $30,000 was still on hand. The cost of goods available for sale was
a. $189,000.
b. $204,000.
c. $219,000.
d. $249,000.
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution: $45,000 + $195,000 ( $6,000 + $15,000 ( $249,000
a157. In a periodic inventory system, a return of defective merchandise to a supplier is recorded by crediting
a. Accounts Payable.
b. Inventory.
c. Purchases.
d. Purchase Returns and Allowances.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a158. Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?
a. Cash received on account with a discount
b. Payment of freight costs on a purchase
c. Return of merchandise sold
d. Sale of merchandise on credit
Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a159. The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be
a. Accounts Payable
Purchase Returns and Allowances
b. Purchase Returns and Allowances
Accounts Payable
c. Accounts Payable
Inventory
d. Inventory
Accounts Payable
Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a160. Under a periodic inventory system, acquisition of merchandise is debited to the
a. Inventory account.
b. Cost of Goods Sold account.
c. Purchases account.
d. Accounts Payable account.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
a161. Which of the following accounts has a normal credit balance?
a. Purchases
b. Sales Returns and Allowances
c. Freight-In
d. Purchase Discounts
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a162. The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are
a. credit, credit, debit.
b. debit, credit, credit.
c. debit, credit, debit.
d. debit, debit, debit.
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a163. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:
Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800
Using the periodic system, the cost of goods purchased is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $402,000 ( $11,200 ( $12,800 ( $15,600 ( $393,600
a164. Cobb Company’s accounting records show the following at the year ending on December 31, 2014:
Purchase Discounts $ 11,200
Freight – In 15,600
Purchases 402,000
Beginning Inventory 47,000
Ending Inventory 57,600
Purchase Returns 12,800
Using the periodic system, the cost of goods sold is
a. $378,000.
b. $383,000.
c. $393,600.
d. $404,200.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: $47,000 + $402,000 ( $11,200 ( $12,800 + $15,600 ( $57,600 ( $383,000
165. Ezra Company has sales revenue of $60,000, cost of goods sold of $36,000 and operating expenses of $14,000 for the year ended December 31. Ezra’s gross profit is
a. $0.
b. $10,000.
c. $24,000.
d. $46,000.
Ans: C, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution: $60,000 ( $36,000 ( $24,000
166. Rae Company uses a perpetual inventory system made a purchase of merchandise on credit from Tyree Corporation on August 3, for $9,000, terms 2/10, n/45. On August 10, Rae makes the appropriate payment to Tyree. The entry on August 10 for Rae Company is
a. Accounts Payable 9,000
Cash 9,000
b. Accounts Payable 8,820
Cash 8,820
c. Accounts Payable 9,000
Purchase Returns and Allowances 180
Cash 8,820
d. Accounts Payable 9,000
Inventory 180
Cash 8,820
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution: $9,000 ( .98 ( $8,820
167. Kate Company uses a perpetual inventory system purchased inventory from Phoebe Company. The shipping costs were $500 and the terms of the shipment were FOB shipping point. Kate would have the following entry regarding the shipping charges:
a. There is no entry on Kate’s books for this transaction.
b. Freight Expense 500
Cash 500
c. Freight-Out 500
Cash 500
d. Inventory 500
Cash 500
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
168. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA
169. On October 4, 2014, JT Corporation had credit sales transactions of $4,000 from merchandise having cost $2,400. The entries to record the day’s credit transactions include a
a. debit of $4,000 to Inventory.
b. credit of $4,000 to Sales Revenue.
c. debit of $2,400 to Inventory.
d. credit of $2,400 to Cost of Goods Sold.
Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
170. Which of the following accounts is not closed to Income Summary?
a. Cost of Goods Sold
b. Inventory
c. Sales Revenue
d. Sales Discounts
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
171. In the Augie Company, sales were $750,000, sales returns and allowances were $30,000, and cost of goods sold was $450,000. The gross profit rate was
a. 36%.
b. 37.5%.
c. 40%.
d. 41.7%.
Ans: B, LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution: ($750,000 ( $30,000) ( $450,000 ( $270,000; $270,000 ( $720,000 ( 37.5%
172. Net sales is sales revenue less
a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
173. In the balance sheet, ending inventory is reported
a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
a174. Cost of goods available for sale is computed by adding
a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
175. The Income statement is
a. required under GAAP but not under IFRS.
b. required under IFRS in the same format as under GAAP.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
176. The basic accounting entries for merchandising are
a. the same under GAAP and under IFRS.
b. required under GAAP but not under IFRS.
c. required under IFRS but not under GAAP.
d. required under IFRS with some differences as compared to GAAP.
IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
177. Under GAAP, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
178. Under IFRS, companies can choose which inventory system?
Perpetual Periodic
a. Yes No
b. Yes Yes
c. No Yes
d. Yes No
IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
179. Companies cannot use the
a. periodic inventory system under GAAP.
b. periodic inventory system under IFRS.
c. perpetual system under IFRS.
d. both periodic and perpetual can be used under GAAP and IFRS.
IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
180. Inventories are defined by IFRS as
a. held-for-sale in the ordinary course of business.
b. in the process of production for sale in the ordinary course of business.
c. in the form of materials or supplies to be consumed in the production process or in the providing of services.
d. All of these answer choices are correct.
IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
181. Under GAAP, companies generally classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
182. Under IFRS, companies must classify income statement items by
a. function.
b. nature.
c. nature or function
d. date incurred.
IFRS. Ans: C, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
183. Under GAPP, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
184. Under IFRS, income statement items are generally described as
a. administration, distribution, manufacturing, etc.
b. salaries, depreciation, utilities, etc.
c. administration, depreciation, manufacturing, etc.
d. salaries, distribution, utilities, etc.
IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
185. For the income statement, IFRS requires
a. single-step approach.
b. multiple-step approach.
c. single-step approach or multiple-step approach.
d. no specific income statement approach.
IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
186. Under IFRS, companies can apply revaluation to
a. land, buildings, and intangible assets.
b. land, buildings, but not intangible assets.
c. intangible assets, but not land or beer.
d. no assets.
IFRS. Ans: A, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
187. The use of IFRS results in more transactions affecting
a. net income but not other comprehensive income.
b. other comprehensive income, but not net income.
c. but net income and other comprehensive income.
d. neither net income nor other comprehensive income.
IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
188. Comprehensive income under IFRS
a. includes unrealized gains and losses included in net income, in contrast to GAAP.
b. includes unrealized gains and losses included in net income, similar to GAAP.
c. excludes unrealized gains and losses included in net income, in contrast to GAAP.
d. excludes unrealized gains and losses included in net income, similar to GAAP.
IFRS. Ans: B, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
189. The number of years of income statement information to be presented is
a. 2 years under both GAAP and IFRS.
b. 3 years under both GAAP and IFRS.
c. 2 years under GAAP and 3 years under IFRS.
d. 3 years under GAAP and 2 years under IFRS.
IFRS. Ans: D, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
43.
b
64.
b
85.
c
106.
c
127.
c
a148.
c
169.
b
44.
c
65.
c
86.
a
107.
a
128.
c
a149.
a
170.
b
45.
c
66.
c
87.
d
108.
b
129.
b
a150.
b
171.
b
46.
a
67.
b
88.
c
109.
a
130.
c
a151.
a
172.
d
47.
c
68.
a
89.
d
110.
c
131.
b
a152.
b
173.
a
48.
c
69.
c
90.
b
111.
b
132.
a
a153.
a
a174.
d
49.
a
70.
c
91.
d
112.
a
133.
b
a154.
c
175.
d
50.
b
71.
c
92.
a
113.
a
134.
b
a155.
c
176.
a
51.
b
72.
a
93.
b
114.
d
135.
a
a156.
d
177.
b
52.
d
73.
d
94.
b
115.
c
136.
b
a157.
d
178.
b
53.
b
74.
c
95.
c
116.
d
137.
a
a158.
a
179.
d
54.
a
75.
c
96.
a
117.
b
138.
b
a159.
a
180.
d
55.
b
76.
a
97.
c
118.
b
139.
b
a160.
c
181.
a
56.
d
77.
c
98.
d
119.
d
140.
a
a161.
d
182.
c
57.
d
78.
a
99.
d
120.
b
141.
a
a162.
c
183.
a
58.
a
79.
d
100.
a
121.
c
142.
d
a163.
c
184.
b
59.
d
80.
a
101.
c
122.
c
143.
d
a164.
b
185.
d
60.
c
81.
c
102.
a
123.
a
144.
a
165.
c
186.
a
61.
b
82.
b
103.
c
124.
b
145.
c
166.
d
187.
b
62.
a
83.
d
104.
d
125.
a
a146.
c
167.
d
188.
b
63.
b
84.
c
105.
d
126.
c
a147.
a
168.
d
189.
d
BRIEF Exercises
BE 190
Presented here are the components in Bradley Company’s income statement. Determine the missing amounts.
Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
$75,000 (a) $35,000 (b) $17,000
(c) $86,000 $59,000 $48,000 (d)
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 190 (5 min.)
a. $40,000
b. $18,000
c. $145,000
d. $11,000
BE 191
Prepare the necessary journal entries on the books of Kelly Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):
(a) Kelly purchased $45,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $3,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 191 (5 min.)
(a) Inventory 45,000
Accounts Payable 45,000
(b) Accounts Payable 3,000
Inventory 3,000
(c) Accounts Payable ($45,000 – $3,000) 42,000
Inventory ($42,000 × .02) 840
Cash ($42,000 – $840) 41,160
BE 192
Garth Company sold goods on account to Kyle Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $1,100. Both Garth and Kyle use a perpetual inventory system. Record the sale on the books of Garth and the purchase on the books of Kyle.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 192 (3 min.)
Journal entry on Garth’s books:
Accounts Receivable…. 1,100
Sales. 1,100
Cost of Goods Sold….. . 600
Inventory………… 600
Journal entry on Kyle’s books:
Inventory……………… 1,100
Accounts Payable 1,100
BE 193
Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Richter Company make upon receipt of the check and the damaged merchandise?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 193 (3 min.)
Sales Returns and Allowances 200
Sales Discounts ($2,300 × .03) 69
Cash ($2,500 – $200 – $69) 2,231
Accounts Receivable 2,500
BE 194
Charlie Company uses a perpetual inventory system. During May, the following transactions and events occurred.
May 13 Sold 8 motors at a cost of $45 each to Scruffy Brothers Supply Company, terms 4/10, n/30. The motors cost Charlie $26 each.
May 16 One defective motor was returned to Charlie.
May 23 Received payment in full from Scruffy Brothers. Round to nearest dollar.
Instructions
Journalize the May transactions for Charlie Company (seller) assuming that Charlie uses a perpetual inventory system. You may omit explanations. Round amounts to nearest dollar.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 194 (8 min.)
May 13 Accounts Receivable 360
Sales Revenue 360
Cost of Goods Sold 208
Inventory 208
May 16 Sales Returns and Allowances 45
Accounts Receivable 45
Inventory 26
Cost of Goods Sold 26
May 23 Cash 302
Sales Discounts ($315 × .04) 13
Accounts Receivable ($360 – $45) 315
BE 195
The income statement for Pepe Serna Company for the year ended December 31, 2014 is as follows:
PEPE SERNA COMPANY
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales revenue $58,000
Interest revenue 3,000
Total revenues 61,000
Expenses
Cost of goods sold $33,000
Salaries and wages expense 13,000
Interest expense 1,000
Total expenses 47,000
Net income $ 14,000
Prepare the entries to close the revenue and expense accounts at December 31, 2014. You may omit explanations for the transactions.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 195 (5 min.)
Dec. 31 Sales Revenue 58,000
Interest Revenue 3,000
Income Summary 61,000
31 Income Summary 47,000
Cost of Goods Sold 33,000
Salaries and Wages Expense 13,000
Interest Expense 1,000
BE 196
Hoyt Company provides this information for the month of November, 2014: sales on credit $170,000; cash sales $70,000; sales discounts $2,000; and sales returns and allowances $9,000. Prepare the sales revenues section of the income statement based on this information.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 196 (3 min.)
HOYT COMPANY
Income Statement (Partial)
For the Month Ended November 30, 2014
Sales Revenue $240,000
Less: Sales Returns and Allowances $9,000
Sales Discounts 2,000 11,000
Net Sales $229,000
BE 197
During October, 2014, Red’s Catering Company generated revenues of $14,000. Sales discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of $7,700 and operating expenses of $2,000.
Calculate (1) gross profit and (2) income from operations for the month.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 197 (4 min.)
(1) Gross profit: $6,100 ($14,000 – $200 – $7,700)
(2) Income from operations: $4,100 ($6,100 – $2,000)
aBE 198
For each of the following, determine the missing amounts.
Beginning Goods Available Cost of Ending
Inventory Purchases for Sale Goods Sold Inventory
1. $10,000 ________ $ 45,000 $25,000 _______
2. ______ $220,000 $265,000 _______ $40,000
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
aSolution 198 (4 min.)
1. Purchases $35,000 ($45,000 – $10,000), Ending inventory $20,000 ($45,000 – $25,000)
2. Beginning inventory $45,000 ($265,000 – $220,000), Cost of Goods Sold $225,000 ($265,000 – $40,000)
aBE 199
Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $525,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-In $15,000. Determine net purchases and cost of goods purchased.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
aSolution 199 (4 min.)
Calculation of Net purchases and Cost of goods purchased
Purchases $525,000
Less: Purchase returns and Allowances $14,000
Purchase discounts 9,000 23,000
Net purchases 502,000
Add: Freight-in 15,000
Cost of goods purchased $517,000
aBE 200
Assume that Swann Company uses a periodic inventory system and has these account balances: Purchases $630,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-In $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 200 (6 min.)
Inventory, beginning $ 45,000
Purchases $630,000
Less: Purchase returns and allowances $25,000
Purchase discounts 11,000 36,000
Net purchases 594,000
Add: Freight-in 19,000
Cost of goods purchased 613,000
Cost of goods available for sale 658,000
Inventory, ending 55,000
Cost of goods sold $603,000
aBE 201
Scruffy Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.
May 13 Purchased 8 motors at a cost of $45 each from Charlie Company, terms 4/10, n/30. The motors cost Charlie Company $26 each.
May 16 Returned 1 defective motor to Charlie.
May 23 Paid Charlie Company in full. Round to nearest dollar.
Instructions
Journalize the May transactions for Scruffy Brothers. You may omit explanations.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
aSolution 201 (6 min.)
May 13 Purchases 360
Accounts Payable 360
May 16 Accounts Payable 45
Purchase Returns and Allowances 45
May 23 Accounts Payable ($360 – $45) 315
Purchase Discounts ($315 × .04) 13
Cash 302
Exercises
Ex. 202
For each of the following, determine the missing amounts.
Sales Cost of Gross Operating Net
Revenue Goods Sold _Profit Expenses Income
1. $100,000 ________ _______ $30,000 $12,000
2. ________ $135,000 $125,000 _______ $80,000
Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 202 (5 min.)
1. Gross Profit = $42,000 ($30,000 + $12,000)
Cost of Goods Sold = $58,000 ($100,000 – $42,000)
2. Sales = $260,000 ($135,000 + $125,000)
Operating Expenses = $45,000 ($125,000 – $80,000)
Ex. 203
On October 1, Benji’s Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.
Oct. 4 Purchased 40 bicycles at a cost of $200 each from Monrue Bicycle Company, terms 1/10, n/30.
6 Sold 25 bicycles to Team Wisconsin for $330 each, terms 2/10, n/30.
7 Received credit from Monrue Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team Wisconsin for the return of a defective bicycle.
14 Paid Monroe Bicycle Company in full, less discount.
Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 203 (20 min.)
Oct. 4 Inventory 8,000
Accounts Payable 8,000
6 Accounts Receivable 8,250
Sales Revenue 8,250
Cost of Goods Sold 5,000
Inventory 5,000
7 Accounts Payable 400
Inventory 400
Solution 203 (Cont.)
13 Sales Returns and Allowances 330
Accounts Receivable 330
Inventory 200
Cost of Goods Sold 200
14 Accounts Payable ($8,000 – $400) 7,600
Cash ($7,600×.99) 7,524
Inventory ($7,600×.01) 76
Ex. 204
On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.
Sept. 4 Purchased 70 backpacks at $20 each from Hunter, terms 2/10, n/30.
Sept. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 4 that were defective.
Sept. 9 Sold 40 backpacks for $35 each to Oliver Books, terms 2/10, n/30.
Sept. 13 Sold 15 backpacks for $35 each to Heller Office Supply, terms n/30.
Sept. 14 Paid Hunter in full, less discount.
Instructions
Journalize the September transactions for Reid Supply.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 204 (20 min.)
Sept. 4 Inventory 1,400
Accounts Payable 1,400
Sept. 6 Accounts Payable 100
Inventory 100
Sept. 9 Accounts Receivable 1,400
Sales Revenue 1,400
Cost of Goods Sold 800
Inventory 800
Sept. 13 Accounts Receivable 525
Sales Revenue 525
Cost of Goods Sold 300
Inventory 300
Solution 204 (Cont.)
Sept. 14 Accounts Payable ($1,400– $100) 1,300
Cash ($1,300 × .98) 1,274
Inventory ($1,300 × .02) 26
Ex. 205
Sam Wainwright is a new accountant with Ground floor Company. Ground floor purchased merchandise on account for $18,000. The credit terms are 1/10, n/30. Sam has talked with the company’s banker and knows that he could earn 4% on any money invested in the company’s savings account.
Instructions
(a) Should Sam pay the invoice within the discount period or should he keep the $18,000 in the money market account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
(b) If Sam forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $18,000for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics
Solution 205 (10 min.)
Dan should pay the invoice within the discount period to save $140:
(a) Discount of 1% on $18,000 $180
Interest received on $18,000 (for 20 days at 4%) 40 ($18,000 × 4% × 20 ÷ 360)
Savings by taking the discount $140
(b) The equivalent annual interest rate is:
1% × 360 ÷ 20 = 18%.
Ex. 206
(a) Karns Company purchased merchandise on account from Bailey Office Suppliers for $174,000, with terms of 2/10, n/30. During the discount period, Karns returned some merchandise and paid $156,800 as payment in full. Karns uses a perpetual inventory system. Prepare the journal entries that Karns Company made to record:
(1) the purchase of merchandise.
(2) the return of merchandise.
(3) the payment on account.
(b) Hinds Company sold merchandise to Peter Company on account for $146,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $86,140. During the discount period, Peter Company returned $6,000 of merchandise and paid its account in full (minus the discount) by remitting $137,200 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Hinds Company made to record:
(1) the sale of merchandise.
(2) the return of merchandise.
(3) the collection on account.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 206 (20 min.)
(a) To compute the amount due after returns but before the discount, divide $156.800 by .98 (100% – 2%).
$156,800 ÷ .98 = $60,000.
Subtract $60,000 from $174,000 to determine that $174,000 of merchandise was returned.
(1) Inventory 174,000
Accounts Payable 174,000
(2) Accounts Payable 14,000
Inventory 14,000
(3) Accounts Payable 160,000
Inventory 3,200
Cash 156,800
(b) Peter Company returns $6,000 of merchandise and owes $140,000 to Hinds Company.
$137,200 ÷ $140,000 = .98
100% – 98% = 2%
The missing discount percentage is 2%. $140,000 × 2% = $2,800 sales discount.
$140,000 – $2,800 = $137,200 cash received on account.
(1) Accounts Receivable 146,000
Sales Revenue 146,000
Cost of Goods Sold 86,140
Inventory 86,140
(2) Sales Returns and Allowances 6,000
Accounts Receivable 6,000
Inventory [$6,000 × ($86,140 ÷ $146,000)] 3,540
Cost of Goods Sold 3,540
(3) Cash 137,200
Sales Discounts 2,800
Accounts Receivable 140,000
Ex. 207
An inexperienced accountant for Tilly Company made the following errors in recording merchandising transactions.
1. A $270 refund to a customer for faulty merchandise was debited to Sales Revenue $270 and credited to Cash $270.
2. A $310 credit purchase of supplies was debited to Inventory $310 and credited to Cash $310.
3. A $190 sales return was debited to Sales Revenue.
4. A cash payment of $40 for freight on merchandise purchases was debited to Freight-Out $400 and credited to Cash $400.
Instructions
Prepare separate correcting entries for each error, assuming that the incorrect entry is not reversed. (Omit explanations.)
Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 207 (6-8 min.)
1. Sales Returns and Allowances 270
Sales Revenue 270
2. Supplies 310
Cash 310
Accounts Payable 310
Inventory 310
3. Sales Returns and Allowances 190
Sales Revenue 190
4. Inventory 40
Cash 360
Freight-Out 400
Ex. 208
Prepare the necessary journal entries to record the following transactions, assuming Dakin Company uses a perpetual inventory system.
(a) Purchased $35,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $700 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 208 (6-8 min.)
(a) Inventory 35,000
Accounts Payable 35,000
(b) Accounts Payable 700
Inventory 700
(c) Accounts Payable ($35,000 – $700) 34,300
Inventory ($34,300 × .02) 686
Cash ($33,614 – $686) 33,314
Ex. 209
Prepare the necessary journal entries to record the following transactions, assuming Eustace Company uses a perpetual inventory system.
(a) Eustace sells $45,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
(b) The customer in (a) returned $4,000 of merchandise to Eustace. The merchandise returned cost $2,400.
(c) Eustace received the balance due within the discount period.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 209 (7-9 min.)
(a) Accounts Receivable 45,000
Sales Revenue 45,000
Cost of Goods Sold 30,000
Inventory 30,000
(b) Sales Returns and Allowances 4,000
Accounts Receivable 4,000
Inventory 2,400
Cost of Goods Sold 2,400
(c) Cash ($40,000 – $400) 40,590
Sales Discounts ($40,000 × .01) 410
Accounts Receivable 41,000
Ex. 210
Newell Company completed the following transactions in October:
Credit Sales Sales Returns Date of
Date Amount Terms Date Amount Collection
Oct. 3 $ 600 2/10, n/30 Oct. 8
Oct. 11 1,700 3/10, n/30 Oct. 14 $ 400 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 20 1,000 Oct. 29
Oct. 21 1,400 2/10, n/60 Oct. 23 200 Oct. 27
Oct. 23 2,300 2/10, n/30 Oct. 27 400 Oct. 28
Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandise returned had a cost of $140.
(3) Oct. 28 collection.
Newell uses a perpetual inventory system.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 210 (20 min.)
(a) Oct. 8 $588 [Sales $600 – Sales discount $12 ($600 × .02)]
Oct. 16 $1,261 [Sales $1,700 – Sales return $400 = $1,300
$1,300 – Sales discount $39 ($1,300 × .03)]
Oct. 29 $4,000 [Sales $5,000 – Sales return $1,000 = $4,000;
(Discount lapsed)]
Oct. 27 $1,176 [Sales $1,400 – Sales return $200 = $1,200;
$1,200 – Sales discount $24 ($1,200 × .02)]
Oct. 28 $1,862 [Sales $2,300 – Sales return $400 = $1,900;
$1,900 – Sales discount $38 ($1,900 × .02)]
Solution 210 (Cont.)
(b) (1) Oct. 17 Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 3,500
Inventory 3,500
(2) Oct. 23 Sales Returns and Allowances 200
Accounts Receivable 200
Inventory 140
Cost of Goods Sold 140
(3) Oct. 28 Cash 1,862
Sales Discounts 38
Accounts Receivable 1,900
Ex. 211
The following information is available for Moiz Company:
Debit Credit
Owner’s Capital $ 50,000
Owner’s Drawings $ 30,000
Sales Revenue 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 310,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 55,000
Utilities Expense 18,000
Depreciation Expense 7,000
Interest Revenue 23,000
Instructions
Using the above information, prepare the closing entries for Moiz Company.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 211 (10 min.)
Dec. 31 Interest Revenue 23,000
Sales Revenue 510,000
Income Summary 533,000
31 Income Summary 453,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 310,000
Freight-Out 2,000
Advertising Expense 15,000
Solution 211 (Cont.)
Interest Expense 19,000
Salaries and Wages Expense 55,000
Utilities Expense 18,000
Depreciation Expense 7,000
31 Income Summary 80,000
Owner’s Capital 80,000
31 Owner’s Capital 30,000
Owner’s Drawings 30,000
Ex. 212
The adjusted trial balance of J. W. Hatch Company appears below.
J. W. HATCH
Adjusted Trial Balance
December 31, 2014
Debit Credit
Cash 12,000
Accounts Receivable 25,000
Inventory 35,000
Buildings 140,000
Accumulated Depreciation—
Buildings 20,000
Accounts Payable 12,000
Owner’s Capital 144,000
Owner’s Drawings 30,000
Sales Revenue 310,000
Sales Discounts 6,000
Sales Returns & Allowances 8,000
Cost of Goods Sold 188,000
Operating Expenses 42,000
486,000 486,000
Instructions
Using the information given, prepare the year-end closing entries.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 212 (10 min.)
Dec. 31 Sales Revenue 310,000
Income Summary 310,000
(To close credit balance accounts)
31 Income Summary 244,000
Sales Discounts 6,000
Sales Returns and Allowances 8,000
Cost of Goods Sold 188,000
Operating Expense 42,000
Solution 212 (Cont.)
(To close accounts with debit balances)
31 Income Summary 66,000
Owner’s Capital 66,000
(To transfer net income to capital)
31 Owner’s Capital 30,000
Owner’s Drawings 30,000
(To close drawings account to capital)
Ex. 213
Kennedy Company had the following account balances at year-end: cost of goods sold $85,000; inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts $1,600; and sales returns and allowances $2,300. A physical count of inventory determines that inventory on hand is $14,400.
Instructions
(a) Prepare the adjusting entry necessary as a result of the physical count.
(b) Prepare closing entries.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 213 (10 min.)
(a) Cost of Goods Sold 600
Inventory 600
(b) Sales Revenue 144,000
Income Summary 144,000
Income Summary 128,500
Cost of Goods Sold 85,600
Operating Expenses 39,000
Sales Returns and Allowances 2,300
Sales Discounts 1,600
Income Summary ($144,000 – $128,500) 15,500
Owner’s, Capital 15,500
Ex. 214
Financial information is presented below for two different companies.
Gower Martini
Drugs Food and Liquor
Sales revenue
$90,000
$ (e)
Sales returns and allowances
(a)
3,000
Net sales
86,000
95,000
Cost of goods sold
56,000
(f)
Gross profit
(b)
36,000
Operating expenses
22,000
(g)
Income from operations
(c)
(h)
Other expenses and losses
4,000
7,000
Net income
(d)
11,000
Ex. 214 (Cont)
Instructions
Determine the missing amounts.
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 214 (15 min.)
(*Missing amount)
(a) Sales $ 90,000
Sales returns and allowances 4,000*
Net sales $ 86,000
(b) Net sales $ 86,000
Cost of goods sold 56,000
Gross profit $ 30,000*
(c) and (d)
Gross profit $ 30,000
Operating expenses 22,000
Income from operations (c) $ 8,000*
Other expenses and losses 4,000
Net income (d) $ 4,000*
(e) Sales $ 98,000*
Sales returns and allowances 3,000
Net sales $ 95,000
(f) Net sales $ 95,000
Cost of goods sold 59,000*
Gross profit $ 36,000
(g) and (h)
Gross profit $ 36,000
Operating expenses (g) 18,000*
Income from operations (h) $ 18,000*
Other expenses and losses 7,000
Net income $ 11,000
Ex. 215
Presented below is information for Annie Company for the month of March 2015.
Cost of goods sold $245,000 Rent expense $ 36,000
Freight-out 7,000 Sales discounts 8,000
Insurance expense 5,000 Sales returns and allowances 11,000
Salaries and wages expense 63,000 Sales revenue 410,000
Instructions
(a) Prepare a multiple -step income statement.
(b) Compute the gross profit rate.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 215 (10 min.)
(a)
ANNIE COMPANY
Income Statement
For the Month Ended March 31, 2014
Sales Revenues
Sales $410,000
Less: Sales returns and allowances $11,000
Sales discounts 8,000 19,000
Net sales 391,000
Cost of goods sold 245,000
Gross profit 146,000
Operating expenses
Salaries and wages expense 63,000
Rent expense 36,000
Insurance expense 5,000
Freight-out 7,000
Total operating expenses 111,000
Net income $ 35,000
(b) Gross profit rate = $146,000 ( $391,000 = 37.3%.
Ex. 216
In 2014, Rondelli Company had net sales of $650,000 and cost of goods sold of $455,000. Operating expenses were $150,000, and interest expense was $10,000. Rondelli prepares a multiple-step income statement.
Instructions
(a) Compute Rondelli gross profit.
(b) Compute the gross profit rate.
(c) What is Rondelli income from operations and net income?
(d) If Rondelli prepared a single-step income statement, what amount would it report for net income?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 216 (10 min.)
(a) $650,000 – $455,000 = $195,000.
(b) $195,000/$650,000 = 30%.
(c) Income from operations is $45,000 ($195,000 – $150,000), and net income is $35,000 ($45,000 – $10,000).
(d) The amount shown for net income is the same in a multiple-step income statement and a single-step income statement. Therefore, net income in Rondelli single-step income statement is also $35,000.
Ex. 217
Argentina Company gathered the following condensed data for the year ended December 31, 2014:
Cost of goods sold $ 750,000
Net sales 1,200,000
Operating expenses 275,000
Interest expense 48,000
Dividend revenue 38,000
Casualty loss from vandalism 125,000
Instructions
1. Prepare a single-step income statement for the year ended December 31, 2014.
2. Prepare a multiple-step income statement for the year ended December 31, 2014.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 217 (25 min.)
1. ARGENTINA COMPANY
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales $1,200,000
Dividend revenue 38,000
Total revenues 1,238,000
Expenses
Cost of goods sold $750,000
Operating expenses 275,000
Casualty loss from vandalism 125,000
Interest expense 48,000
Total expenses 1,198,000
Net income $ 40,000
2. ARGENTINA COMPANY
Income Statement
For the Year Ended December 31, 2014
Net sales $1,200,000
Cost of goods sold 750,000
Gross profit 450,000
Operating expenses 275,000
Income from operations 175,000
Other revenues and gains
Dividend revenue 38,000
Other expenses and losses
Casualty loss from vandalism $125,000
Interest expense 48,000 173,000 135,000
Net income $ 40,000
Ex. 218
Instructions
State the missing items identified by ?.
1. Gross profit – Operating expenses = ?
2. Cost of goods sold + Gross profit on sales = ?
3. Sales Revenue – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 218 (5 min.)
1. Income from operations (or Net income)
2. Net sales
3. Sales discounts, Sales returns and allowances
4. Other revenues and gains, Other expenses and losses
5. Gross profit
Ex. 219
The adjusted trial balance of Nick Company contained the following information:
Debit Credit
Sales Revenue $570,000
Sales Returns and Allowances $ 15,000
Sales Discounts 7,000
Cost of Goods Sold 323,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 18,000
Salaries and Wages Expense 85,000
Utilities Expense 28,000
Depreciation Expense 7,000
Interest Revenue 27,000
Instructions
1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2014.
2. Prepare a single-step income statement for the year ended December 31, 2014.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 219 (20 min.)
1. NICK COMPANY
Income Statement
For the Year Ended December 31, 2014
Revenues
Sales revenue $570,000
Less: Sales returns and allowances $ 15,000
Sales discounts 7,000 22,000
Net sales 548,000
Cost of goods sold 323,000
Gross profit 225,000
Operating expenses
Salaries and wages expense $85,000
Utilities expense 28,000
Advertising expense 15,000
Depreciation expense 7,000
Freight-out 2,000
Total operating expenses 137,000
Income from operations 88,000
Other revenues and gains
Interest revenue 27,000
Other expenses and losses
Interest expense 18,000 9,000
Net income $ 97,000
2. NICK COMPANY
Income Statement
For the Year Ended December 31, 2014
Revenues
Net sales $548,000
Interest revenue 27,000
Total revenues 575,000
Expenses
Cost of goods sold $323,000
Salaries and wages expense …………… 85,000
Utilities expense …………… 28,000
Advertising expense …………… 15,000
Depreciation expense …………… 7,000
Freight-out …………… 2,000
Interest expense 18,000
Total expenses 478,000
Net income $ 97,000
Ex. 220
The following information is available for Sheldon Leonard Company:
Operating expenses $ 85,000
Cost of goods sold 200,000
Sales 325,000
Sales returns and allowances 16,000
Instructions
Compute each of the following:
(a) Net sales
(b) Gross profit
(c) Income from operations
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 220 (6 min.)
(a) Net sales = $309,000 ($325,000 – $16,000)
(b) Gross profit = $109,000 ($309,000 – $200,000)
(c) Income from operations = $24,000 ($109,000 – $30,000 – $55,000)
aEx. 221
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company prepares monthly financial statements and uses the perpetual inventory method.
Instructions
Complete the worksheet below.
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2014
Adjusted
Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit
Cash 11,000
Inventory 19,000
Supplies 3,500
Equipment 80,000
Accum. Depreciation—
Equipment 15,000
Accounts Payable 20,000
Owner’s Capital 92,000
Owner’s Drawings 8,000
Sales Revenue 39,000
Sales Discounts 2,000
Cost of Goods Sold 23,000
Advertising Expense 7,000
Supplies Expense 6,000
Depreciation Expense 1,000
Ex. 221 (Cont.)
Rent Expense 2,500
Utilities Expense 1,000
166,000 166,000
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
aSolution 221 (15 min.)
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2014
Adjusted
Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit
Cash 11,000 11,000
Inventory 19,000 19,000
Supplies 3,500 3,500
Equipment 80,000 80,000
Accum. Depreciation—
Equipment 15,000 15,000
Accounts Payable 20,000 20,000
Owner’s Capital 92,000 92,000
Owner’s Drawings 8,000 8,000
Sales Revenue 39,000 39,000
Sales Discounts 2,000 2,000
Cost of Goods Sold 25,000 25,000
Advertising Expense 7,000 7,000
Supplies Expense 6,000 6,000
Depreciation Expense 1,000 1,000
Rent Expense 2,500 2,500
Utilities Expense 1,000 1,000
166,000 166,000 44,500 39,000 121,500 127,000
Net Loss 5,500 5,500
44,500 44,500 127,000 127,000
aEx. 222
Three items are missing in each of the following columns and are identified by letter.
Sales revenue $ (a) $840,000
Sales returns and allowances 15,000 22,000
Sales discounts 10,000 15,000
Net sales 440,000 (d)
Beginning inventory (b) 300,000
Cost of goods purchased 220,000 (e)
Ending inventory 170,000 303,000
Cost of goods sold 252,000 575,000
Gross profit (c) (f)
Ex. 222 (Cont.)
Instructions
Calculate the missing amounts and identify them by letter.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
aSolution 222 (15 min.)
(a) $465,000 (d) $803,000
(b) $202,000 (e) $578,000
(c) $188,000 (f) $228,000
aEx. 223
Reineman Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.
Sept. 3 Purchased 90 backpacks at $25 each from Zuzu Company, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 3 that were defective.
Sept. 9 Sold 15 backpacks for $42 each to Bailey Books, terms 2/10, n/30.
Sept. 13 Paid Zuzu Company in full.
Instructions
Journalize the September transactions for Reineman Supply Company.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
aSolution 223 (12 min.)
Sept. 3 Purchases 2,250
Accounts Payable 2,250
Sept. 6 Accounts Payable 150
Purchase Returns and Allowances 150
Sept. 9 Accounts Receivable 630
Sales Revenue 630
Sept. 13 Accounts Payable ($2,250 – $150) 2,100
Purchase Discounts ($2,100 × .02) 42
Cash 2,058
aEx. 224
The following information is available for Hopkins Company:
Beginning inventory $ 45,000
Ending inventory 70,000
Freight-in 10,000
Purchases 290,000
Purchase returns and allowances 8,000
Ex. 224 (Cont.)
Instructions
Compute each of the following:
(a) Net purchases
(b) Cost of goods purchased
(c) Cost of goods sold
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
aSolution 224 (6 min.)
(a) Net purchases = $282,000 ($290,000 – $8,000)
(b) Cost of goods purchased = $292,000 ($282,000 + $10,000)
(c) Cost of goods sold = $267,000 ($45,000 + $292,000 – $70,000)
Ex. 225
The income statement of Jue’s Luggage. includes the items listed below:
Net sales $900,000
Gross profit 315,000
Beginning inventory 80,000
Purchase discounts 15,000
Purchase returns and allowances 8,000
Freight-in 10,000
Operating expenses 300,000
Purchases 560,000
Instructions
Use the appropriate items listed above as a basis for determining:
(a) Cost of goods sold.
(b) Cost of goods available for sale.
(c) Ending inventory.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Solution 225 (15 min.)
(a) Net sales – Cost of goods sold = Gross profit
$900,000 – Cost of goods sold = $315,000
Cost of goods sold = $585,000
(b) Beginning inventory $ 80,000
Purchases $560,000
Less: Purchase discounts $15,000
Purchase returns and allowances 8,000 23,000
Net Purchases 537,000
Add: Freight-in 10,000
Cost of goods purchased 547,000
Cost of goods available for sale $627,000
(c) Cost of goods available for sale – Ending inventory = Cost of goods sold
$627,000 – Ending inventory = $585,000
Ending inventory = $42,000
aEx. 226
Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:
(a) Purchased $450,000 of merchandise on account, terms 2/10, n/30.
(b) Returned $30,000 of damaged merchandise for credit.
(c) Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
aSolution 226 (6 min.)
(a) Purchases 450,000
Accounts Payable 450,000
(b) Accounts Payable 30,000
Purchase Returns and Allowances 30,000
(c) Accounts Payable ($450,000 – $30,000) 420,000
Purchase Discounts ($420,000 × .02) 8,400
Cash ($420,000 – $8,400) 411,600
COMPLETION STATEMENTS
227. A ________________ buys and sells goods rather than performing services to earn a profit.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
228. Cost of goods sold is deducted from net sales revenue for the period in order to arrive at ________________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
229. Inventory on hand can be obtained from detailed inventory records when a ________________ inventory system is maintained.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
230. The acquisition of inventory is debited to the ____________ account when a perpetual inventory system is used.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
231. The freight cost incurred by a seller to deliver goods sold to a customer is called ________________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
232. When a customer returns merchandise previously purchased on credit, the entry for the seller to record the return requires a debit to the ________________ account and a credit to the ________________ account.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
233. Sales Returns and Allowances and Sales Discounts are both ______________ accounts and have _______________ normal balances.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
234. Every sales transaction should be supported by a ________________ that provides written evidence of the sale.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls
235. Gross profit is obtained by subtracting ________________ from ________________.
Ans: N/A, LO:5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
236. Income from operations is determined by subtracting total operating expenses from ________________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Answers to Completion Statements
227. merchandising company 233. contra revenue, debit
228. gross profit 234. business document
229. perpetual 235. cost of goods sold, net sales
230. Inventory 236. gross profit
231. freight-out
232. Sales Returns and Allowances,
Accounts Receivable
MATCHING
237. Match the items below by entering the appropriate code letter in the space provided.
A. Net sales F. FOB shipping point
B. Sales discounts G. Freight-out
C. Purchase invoice H. Gross profit
D. Periodic inventory system I. Operating expenses
E. FOB destination J. Income from operations
1. An incentive to encourage customers to pay their accounts early.
2. Expenses incurred in the process of earning sales revenue.
3. Freight terms that require the seller to pay the freight cost.
4. Sales revenue less sales returns and allowances and sales discounts.
5. A document that supports each credit purchase.
6. Net sales less cost of goods sold.
7. Freight cost to deliver goods to customers reported as a selling expense.
8. Requires a physical count of goods on hand to compute cost of goods sold.
9. Gross profit less total operating expenses.
10. Freight terms that require the buyer to pay the freight cost.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Answers to Matching
1. B 6. H
2. I 7. G
3. E 8. D
4. A 9. J
5. C 10. F
SHORT-ANSWER ESSAY QUESTIONS
S-A E 238
A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Solution 238
The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and Allowances. These accounts have debit balances but are not expenses because they are adjustments of sales, not operating, selling, or administrative expenses. They are an adjustment of the inflow from sale of goods, rather than a cost used to help earn revenue.
S-A E 239
Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 239
The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus the seller pays the freight and debits Freight-out.
S-A E 240
Adrland Caselotti believes revenues from credit sales may be recognized before they are collected in cash. Do you agree? Explain.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 240
Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be recognized when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The recognized of revenue is not dependent on the collection of credit sales.
S-A E 241
In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 241
The items reported in a multiple-step income statement that are not reported in a single-step income statement are: gross revenues as well as net revenues, gross profit, detailed operating expenses, income from operations, and other revenues and gains, and other expenses and losses.
S-A E 242
You are at a company picnic and the company president starts a conversation with you. The president says “Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory.” What is your response to the president’s remarks?
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 242
You have made a very good observation, but human and mechanical shortcomings need to be considered. The perpetual inventory system maintains detailed records of each inventory purchase, sale and return. This does not mean that everything has been correctly recorded. Some possible causes of discrepancies between the goods on hand and the amounts shown in the accounting system include (1) inventory items were coded incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were damaged or stolen, or (4) goods returned by customers were not properly entered in the accounting records. It is necessary to reconcile amounts in the ledger to actual quantities. Discrepancies should be properly accounted for and investigated.
S-A E 243
The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 243
The items reported for a merchandising company that are not reported for a service company are sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise net sales. Cost of goods sold represents the total cost of merchandise sold during the period. Gross profit is the excess of net sales over the cost of goods sold.
S-A E 244 (Ethics)
Holmes Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.
Because of this situation, Holmes never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.
Manya Andre, a new accountant, was asked to record about $70,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the notation “FOB shipper’s dock” on the document. She hadn’t seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Holmes should consider it received when it reached Holmes’s dock. She did not record the purchase until after month end.
Required:
1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Solution 244
1. Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.
2. The only ethical principle that may be involved is one of competence. Monya does not appear to know enough about reading shipping documents to make a proper determination of ownership. The goods were owned by Buzz as soon as they left the shipper’s dock. Otherwise, the goods would have been owned by no one while in transit. It does not appear that Monya compromised her integrity or that she sought some sort of gain from her mistake. It does seem likely that she should have known better how to interpret the shipping documents.
S-A E 245 (Communication)
Ellen Corhy and Bryn Davis, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Ellen’s sale was FOB shipping point, and Bryn’s was FOB destination. The company “counts” sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Ellen’s sale was therefore counted in her monthly total of sales, Bryn’s was not. Jill is quite upset. She has asked you to just include it, or to take Ellen’s off as well. She also has told you that you are being unethical for allowing Ellen to get a bonus just for choosing a particular shipping method.
Write a memo to Bryn. Explain your position.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Solution 245
M E M O
TO: Bryn Davi’s
FROM: Helen Dictison, Accounting
RE: Sales Bonuses
DATE: June 15, 200x
As you know, sales bonuses are based upon the revenue generated by each salesperson. Your total sales for the month was $110,000. This total does not include the $19,000 sale you made May 31 because of the policy to count sales on the date that title transfers to the customer. I can understand your being upset that this large sale was not counted, while someone else’s sale on the same date was counted, because of the shipping terms. However, I am sure you agree that the policy is not unethical, but it is instead more fair than our trying to make a determination in the midst of month-end closing.
I do understand your disappointment, but this sale does count in June—and it just may make the difference in June’s bonus. Please call me if I can be of further help.
ACC 100 Week 6 Quiz Chapter 5 – Strayer Latest was first posted on November 28, 2019 at 8:59 am.
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