Exercises

Exercise 1 (periodic) Cramer Company uses periodic inventory procedure. Determine

the cost of goods sold for the company assuming purchases during the period were $
40,000, transportation-in was $ 300, purchase returns and allowances were $ 1,000,
beginning inventory was $ 25,000, purchase discounts were $ 2,000, and ending
inventory was $ 13,000.
Exercise 2 In each case, use the following information to calculate the missing
information:
  Case 1 Case 2

Gross sales $ 640,000 $?

Sales discounts ? 25,600

Sales returns and allowances 19,200 44,800

Net sales 608,000 1,209,600

Merchandise inventory, January 1 256,000 ? 

Purchases 384,000 768,000

Purchase discounts 7,680 13,440

Purchase returns and allowances 24,320 31,360

Net purchases 352,000 ? 

Transportation-in 25,600 38,400

Net cost of purchases 377,600 761,600

Cost of goods available for sale ? 1,081,600

Merchandise inventory, December 31 ? 384,000

Cost of goods sold 320,000 ?

Gross margin  ? 512,000

Exercise 3 In each of the following equations supply the missing term(s):

1. Net sales = Gross sales – (______________________ + Sales returns and
allowances).
2. Cost of goods sold = Beginning inventory + Net cost of purchases – ________
________.
3. Gross margin = ________ ________ – Cost of goods sold.
 4. Income from operations = __________ _________ – Operating expenses.
5. Net income = Income from operations + _________ ________ – ________
________.
Exercise 4 (periodic) A partial trial balance is presented below.  The ending physical
count of inventory is $96. Prepare the 2 adjusting entries required under the periodic
inventory method.
 Trial Balance 

  Debit

Merchandise Inventory 120

Sales  

Sales Discounts 18

Sales Returns and Allowances 45

Purchases 600

Purchase Discounts  

Purchase Returns and Allowances  

Transportation-In 36

Exercise 5 (perpetual) Under the perpetual inventory method, prepare the adjusting

entry for inventory if ending merchandise inventory is $101,000 and the physical count
of inventory is $96,000.
Problems
Problem 1  (periodic) The following data are for Leone Lumber Company:
Leone Lumber Company  

Trial Balance  

As of December 31  

Debit

Cash                70,640

Accounts Receivable              159,520

Merchandise Inventory,  January 1              285,200

Supplies on Hand                  5,360

Prepaid Insurance                  4,800

Prepaid Rent                57,600

Equipment                88,000

Accumulated Depreciation—Equipment

Accounts Payable

Capital Stock

Retained Earnings,  January 1

Sales

Sales Returns and Allowances                  5,160

Interest Revenue

Purchases              500,840

Purchases Returns and Allowances

Transportation-In                  7,840

Advertising Expense                78,000

Sales Salaries Expense              138,400

Office Salaries Expense                80,800

Officers’ Salaries Expense              160,000

Utilities Expense                  4,800

Legal and Accounting Expense                10,000

Interest Expense                      600

Miscellaneous Administrative Expense                  9,880

TOTALS          1,667,440

 A total of $3,400 of the prepaid insurance has expired.

  An inventory of supplies showed that $1,700 are still on hand.
 Prepaid rent expired during the year is $ 50,600.
 Depreciation expense on store equipment is $8,800.
 Accrued sales salaries are $4,000.
 Accrued office salaries are $3,000.
 Merchandise inventory on hand is $350,000.
Prepare the following:
1. The adjusting entries required under the periodic inventory method.
2. A multi-step income statement showing the detailed calculation of cost of goods
sold. The only selling expenses are sales salaries, advertising, supplies, and
depreciation expense—equipment.
3. A statement of retained earnings.
4. The required closing entries.
Problem 2 (perpetual) The following data are for Bayer Lamp Company: 
Bayer Lamp Company   

Trial Balance   

   December 31

Account Title Debits C

Cash $ 228,800

Accounts Receivable 193,200

Merchandise Inventory 222,000

Prepaid Insurance 11,600

Land 240,000

Building 440,000

Accumulated Depreciation – Building

Store Fixtures 222,400

Accumulated Depreciation – Store Fixtures

Accounts Payable
 Common Stock

Retained Earnings, January 1

Sales

Sales Discounts 14,800

Sales Returns and Allowances 8,000

Interest Revenue

Cost of Goods Sold 1,209,200

Advertising Expense 48,000

Sales Salaries Expense 256,000

Office Salaries Expense 296,000

Delivery Expense 18,400

Interest Expense 8,000

 Totals $ 3,416,400

 Depreciation expense on the store building is $8,800.

 Depreciation expense on the store fixtures is $22,240.
 Accrued sales salaries are $5,600.
 Insurance expired for the year is $10,000.
 Cost of merchandise inventory on hand December 31 is $221,000.
Prepare the following:
1. The required adjusting journal entries under the perpetual inventory method.
2. A multi-step income statement. The only administrative expenses are office
salaries and insurance. The building depreciation is on the store building.
3. A statement of retained earnings.
4. The required closing entries.
Comprehensive problems
Alternate problem 1 (perpetual) Gardner Company engaged in the following
transactions in June, the company’s first month of operations:
June 1 Stockholders invested $ 384,000 cash and $ 144,000 of merchandise inventory
in the business in exchange for capital stock.
3 Merchandise was purchased on account, $ 192,000; terms 2/10, n/30, FOB shipping
point.
4 Paid height on the June 3 purchase, $ 5,280.
7 Merchandise was purchased on account, $ 96,000; terms 2/10, n/30, FOB destination.
10 Sold merchandise on account, $ 230,400; terms 2/10, n/30, FOB shipping point.
11 Returned $ 28,800 of the merchandise purchased on June 3.
12 Paid the amount due on the purchase of June 3.
13 Sold merchandise on account, $ 240,000; terms 2/10, n/30, FOB destination.
14 Paid height on sale of June 13, $ 14,400.
20 Paid the amount due on the purchase of June 7.
21 $ 48,000 of the goods sold on June 13 were returned for credit.
22 Received the amount due on sale of June 13.
25 Received the amount due on sale of June 10.
29 Paid rent for the administration building for June, $ 19,200.
30 Paid sales salaries of $ 57,600 for June.
30 Purchased merchandise on account, $ 48,000; terms 2/10, n/30, FOB destination.
1. Prepare journal entries for the transactions using the perpetual inventory method.
2. Post the journal entries to the proper ledger accounts.
3. Prepare an adjusting entry for inventory (if needed).  The physical inventory on
June 30 was $288,000.
4. Prepare an adjusted trial balance as of June 30.
5. Prepare a multi-step income statement for the month ended June 30.
6. Prepare a statement of retained earnings.
7. Prepare a classified balance sheet.
8. Prepare the required closing entries.
Alternate problem 2 (periodic) Organized on May 1, Noah Cabinet Company engaged
in the following transactions:
May 1 The stockholders invested $ 900,000 in this new business by purchasing capital
stock.
1 Purchased merchandise on account from String Company, $ 46,800; terms n/60, FOB
shipping point, freight collect.
3 Sold merchandise for cash, $ 28,800.
6 Paid transportation charges on May 1 purchase, $ 1,440 cash.
7 Returned $ 3,600 of merchandise to String Company due to improper size.
10 Requested and received an allowance of $ 1,800 from String Company for improper
quality of certain items.
14 Sold merchandise on account to Texas Company, $ 18,000; terms 2/20, n/30, FOB
shipping point, freight collect.
16 Issued cash refund for return of merchandise relating to sale made on May 3, $ 180.
18 Purchased merchandise on account from Tan Company invoiced at $ 28,800; terms
2/15, n/30, FOB shipping point, freight collect.
18 Received a bill for freight charges of $ 900 from Ball Trucking Company on the
purchase from Tan Company.
19 Texas Company returned $ 360 of merchandise purchased on May 14.
24 Returned $ 2,880 of defective merchandise to Tan Company. Received full credit.
28 Texas Company remitted balance due on sale of May 14.
31 Paid Tan Company for the purchase of May 18 after adjusting for transaction of May
24.
31 Paid miscellaneous selling expenses of $ 7,200.
31 Paid miscellaneous administrative expenses of $ 10,800.
From the data for Noah Cabinet Company:
1. Journalize the transactions using the periodic inventory method. Round all
amounts to the nearest dollar.
2. Post the entries to the proper ledger accounts.
3. Prepare an unadjusted trial balance.
4. Prepare the adjusting entries required under the periodic inventory method.  The
May 31st inventory was $57,600.
5. Prepare a multi-step income statement for the month ended May 31 showing the
detailed cost of goods sold calculation.
6. Prepare a statement of retained earnings.
7. Prepare a classified balance sheet.
8. Prepare the closing entries.
Beyond the numbers—Critical thinking
Business decision case A Candy’s Shirts, Inc., has an opportunity to purchase 40,000
shirts with the logo of her favorite school in January 2009. Candy, who is not currently in
business, is considering buying these shirts and then renting a display cart from which
to sell these shirts (called a kiosk) in a shopping mall. Based on the following
information and estimates, Candy needs to decide if the business would be profitable:
 Cost of the 40,000 shirts, all of which must be purchased in January 2009, is $
440,000.
  Candy thinks it would take two years to sell all of the shirts. She estimates her
sales at 25,000 shirts in 2009 and 15,000 shirts in 2010.
 Rent of the kiosk would be $ 1,500 per month in 2009 and $ 1,600 per month in
2010.
 Candy can buy some counters on which to display the merchandise for $ 4,000.
She could sell the counters for $ 500 at the end of the second year.
 Candy estimates the cost to decorate her kiosk would be $ 2,500.
 Candy would hire employees and pay them $ 1 per shirt sold.
 Candy plans to sell the shirts for $ 17 each.
 Candy and her husband purchased $ 100,000 of capital stock in the business.
Therefore, she plans to borrow $ 400,000 from their family banker. Interest
expense on this loan will be $ 52,000 in 2009 and $ 6,500 in 2010. Candy plans to
repay $ 300,000 on 2010 January 2, and the remaining $ 100,000 on 2010 July 1
 Candy needs to rent some storage space because all 40,000 shirts cannot be
stored at the kiosk. Storage space costs $ 2,500 per year.
1. Prepare estimated income statements for 2009 and 2010 for Candy’s business.
Does it appear that the business will be profitable?
2. Will Candy have the cash available to pay the bank loan as she planned?
Business decision case B In the Annual report appendix, refer to the consolidated
statements of earnings for The Limited’s most recent three years. Calculate the gross
margin percentage and write an explanation of what the results mean for each of the
three years.
Annual report analysis C Refer to the consolidated statements of income of The
Limited in the Annual report appendix. Identify the 2000, 1999, and 1998 net sales; cost
of goods sold; gross profit; selling, administrative, and general expenses; and operating
income. Do the results present a favorable trend? Comment on the results.
Ethics case – Writing experience D Based on the ethics case related to World Auto
Parts Corporation, respond in writing to the following questions:
1. Do you agree that the total impact of this practice could be as much as $ 10
million?
2. Are the small suppliers probably better off going along with the practice?
3. Is this practice ethical?
Group project E In teams of two or three students, go to the library (or find an annual
report at www.sec.gov/edgar.shtml) to locate one merchandising company’s annual
report for the most recent year. Calculate the company’s gross margin percentage for
each of the most recent three years. As a team, write a memorandum to the instructor
showing your calculations and commenting on the results. The heading of the
memorandum should contain the date, to whom it is written, from whom, and the subject
matter.
Group project F In a team of two or three students, contact a variety of businesses in
your area and inquire as to the types of sales discount terms they offer to credit
customers and the types of purchase discount terms they are offered by their suppliers.
Calculate the approximate annual rate of interest implied in several of the more
common discount terms. For instance, the book states that the implied annual rate of
interest on terms of 2/10, n/30 is 36 per cent, assuming we use a 360-day year. Present
your findings in a written report to your instructor.