Chapter 10

Accounting Cycle of a Merchandising

Business

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE – perpetual inventory system
3. FALSE – periodic inventory system
4. TRUE
5. TRUE
6. TRUE
7. TRUE
8. FALSE - ₱90
9. FALSE [8 bananas sold x (₱5 sale price - ₱1 unit cost)] = ₱32
10. FALSE – shortage

PROBLEM 2: FOR CLASSROOM DISCUSSION

Solutions:

Requirement 1: Journal entries

Perpetual system Periodic system

1.
Inventory 130,000 Purchases 130,000
Accounts payable 130,000 Accounts payable 130,000

2.
Inventory 5,000 Freight-in 5,000
Cash 5,000 Cash 5,000
 3.
Accounts payable 3,000 Accounts payable 3,000
Inventory 3,000 Purchase returns 3,000

4.
Accounts receivable 320,000 Accounts receivable 320,000
Sales 320,000 Sales 320,000

Cost of goods sold 128,000 No entry

Inventory 128,000

5.
Sales returns 2,500 Sales returns 2,500
Accounts receivable 2,500 Accounts receivable 2,500

Inventory 1,000 No entry

Cost of goods sold 1,000

Requirement 2: Cost of goods sold

A. Perpetual
Cost of goods sold

(4) Cost of goods sold 128,000

1,000 (5) Sales return
127,000 end. Bal.
B. Periodic

Beginning inventory ₱9,000

Purchases (1) ₱130,000
Freight-in (2) 5,000
Purchase returns (3) (3,000)
Purchase discounts -
Net purchases 132,000
Total goods available for sale 141,000
Ending inventory (14,000)
Cost of goods sold ₱127,000

Requirement 3: Statement of COGS and Gross profit

Entity A
Statement of Cost of goods sold and Gross profit
For the period ended December 31, 20x1

Sales ₱320,000
Sales returns (2,500)
Net sales 317,500
Cost of goods sold:
Beginning inventory ₱9,000
Add: Net purchases 132,000
Total goods available for sale 141,000
Less: Ending inventory (14,000) (127,000)
Gross profit ₱190,500
4. Solution:
Inventory
beg. 20,000
Net purchases 210,000 190,000 COGS
40,000 end.

5. Solution:
Inventory
beg. 40,000
Net purchases 270,000 230,000 COGS (squeeze)
80,000 end.

6. Solution:
Inventory
beg. 30,000
Net purchases (squeeze) 260,000 270,000 COGS
20,000 end.

7. Solution:
Inventory
beg. (squeeze) 30,000
Net purchases 170,000 140,000 COGS
60,000 end.

8. Solution:
Inventory
beg. irrelevant
Net purchases 130,000 140,000 COGS
70,000 end.

₱140,000 COGS + ₱70,000 Inventory, end. = ₱210,000 TGAS

9. Solution:
Inventory
beg. 0
Net purchases 130,000 60,000 COGS
70,000 end.

10. Solution:
Inventory
beg. 10,000
Net purchases 160,000 170,000 COGS
0 end.

11. Solution:
Inventory
beg. 50,000
Net purchases Irrelevant 170,000 COGS
40,000 end. (210K – 170K)

Change in inventory (50K, beg. – 40K, end.) = 10,000 decrease

12. Solution:
Inventory
beg. (squeeze) 20,000
Net purchases 150,000 120,000 COGS (170K TGAS – 50K)
50,000 end.

Change in inventory (20K, beg. – 50K, end.) = 30,000 increase

 13. Requirement 13: Perpetual inventory system

I. Journal entries
a. Inventory 160,000
Accounts payable 160,000

b. Inventory 3,000
Cash 3,000

c. Accounts payable 2,000

Inventory 2,000

d. Cash 270,000
Sales 270,000

Cost of goods sold 180,000

Inventory 180,000

e. Sales returns 6,000

Cash 6,000

Inventory 4,000
Cost of goods sold 4,000

f. Accounts payable 180,000

Cash 180,000

g. Utilities expense 20,000

Cash 20,000
II. Posting

ASSETS
Cash Inventory
beg. 60,000 beg. 40,000
(d) 270,000 3,000 (b) (a) 160,000
6,000 (e) (b) 3,000 2,000 (c)
180,000 (f) (e) 4,000 180,000 (d)
20,000 (g)

Bal. 121,000 Bal. 25,000

Equipment
beg. 200,000

Bal. 200,000

Accumulated depreciation
20,000 beg.

20,000 Bal.

LIABILITIES
Accounts payable
30,000 beg.
(c) 2,000 160,000 (a)
(f) 180,000
8,000 Bal.

EQUITY
Owner’s equity
250,000 beg.

250,000 Bal.
 INCOME
Sales

270,000 (d)

270,000 Bal.

Sales Returns

(e) 6,000

Bal. 6,000

EXPENSES
Cost of goods sold Utilities expense

(d) 180,000 (g) 20,000

4,000 (e)
Bal. 176,000 Bal. 20,000
III. Unadjusted trial balance

Entity B
Unadjusted trial balance
December 31, 20x1

Accounts Dr. Cr.

Cash 121,000
Inventory 25,000
Equipment 200,000
Accumulated depreciation 20,000
Accounts payable 8,000
Owner's equity 250,000
Sales 270,000
Sales returns 6,000
Cost of goods sold 176,000
Utilities expense 20,000
Totals 548,000 548,000

IV. Adjusting entries

AJE #1: Depreciation

Depreciation expense 20,000
Accumulated depreciation 20,000
V. Worksheet
VI. Closing entries

Cl.E#1: Closing to Income summary

Sales 270,000
Sales returns 6,000
Cost of goods sold 176,000
Utilities expense 20,000
Depreciation expense 20,000
Income summary 48,000

Cl.E#2: Closing of Income summary to Owner’s equity

Income summary 48,000

Owner’s equity 48,000
 14. Requirement 14: Periodic inventory system

I. Journal entries
a. Purchases 160,000
Accounts payable 160,000

b. Freight-in 3,000
Cash 3,000

c. Accounts payable 2,000

Purchase returns 2,000

d. Cash 270,000
Sales 270,000

e. Sales returns 6,000

Cash 6,000

f. Accounts payable 180,000

Cash 180,000

g. Utilities expense 20,000

Cash 20,000
II. Posting

ASSETS
Cash Inventory
beg. 60,000 beg. 40,000
(d) 270,000 3,000 (b)
6,000 (e)
180,000 (f)
20,000 (g)

Bal. 121,000 Bal. 40,000

Equipment
beg. 200,000

Bal. 200,000

Accumulated depreciation
20,000 beg.

20,000 Bal.

LIABILITIES
Accounts payable
30,000 beg.
(c) 2,000 160,000 (a)
(f) 180,000
8,000 Bal.

EQUITY
Owner’s equity
250,000 beg.

250,000 Bal.
 INCOME
Sales

270,000 (d)

270,000 Bal.

Sales Returns

(e) 6,000

Bal. 6,000

EXPENSES
Purchases Freight-in
(a) 160,000 (b) 3,000

Bal. 160,000 Bal. 3,000

Purchase returns
2,000 (c)

2,000 Bal.

Utilities expense
(g) 20,000

Bal. 20,000
III. Unadjusted trial balance

Entity B
Unadjusted trial balance
December 31, 20x1

Accounts Dr. Cr.

Cash 121,000
Inventory, beg. 40,000
Equipment 200,000
Accumulated depreciation 20,000
Accounts payable 8,000
Owner's equity 250,000
Sales 270,000
Sales returns 6,000
Purchases 160,000
Freight-in 3,000
Purchase returns 2,000
Utilities expense 20,000
Totals 550,000 550,000

IV. Adjusting entries

AJE #1: Depreciation

Depreciation expense 20,000
Accumulated depreciation 20,000

AJE #2: Ending inventory

Inventory, end. 25,000
Income summary 25,000
V. Worksheet
 P a g e | 17

VI. Closing entries

Cl.E#1: Closing to Income summary

Sales 270,000
Purchase returns 2,000
Inventory, beg. 40,000
Purchases 160,000
Freight-in 3,000
Sales returns 6,000
Utilities expense 20,000
Depreciation expense 20,000
Income summary 23,000

Cl.E#2: Closing of Income summary to Owner’s equity

Income summary 48,000*

Owner’s equity 48,000

* 25,000 from AJE #2 + 23,000 from Cl.E #1 above = 48,000

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PROBLEM 3: JOURNAL ENTRIES

Requirement (a): Journal entries

Perpetual system Periodic system

1.
Inventory 90,000 Purchases 90,000
Accounts payable 90,000 Accounts payable 90,000

2.
Inventory 7,000 Freight-in 7,000
Cash 7,000 Cash 7,000

3.
Accounts payable 2,000 Accounts payable 2,000
Inventory 2,000 Purchase returns 2,000

4.
Accounts receivable 132,000 Accounts receivable 132,000
Sales 132,000 Sales 132,000

Cost of goods sold 80,000 No entry

Inventory 80,000

5.
Sales returns 9,000 Sales returns 9,000
Accounts receivable 9,000 Accounts receivable 9,000

Inventory 6,000 No entry

Cost of goods sold 6,000
 P a g e | 19

Requirement (b):

Perpetual inventory system:

Cost of goods sold

(4) Cost of goods sold 80,000

6,000 (5) Sales return
74,000 end. Bal.

Periodic inventory system:

Beginning inventory ₱ -
Purchases (1) ₱90,000
Freight-in (2) 7,000
Purchase returns (3) (2,000)
Purchase discounts -
Net purchases 95,000
Total goods available for sale 95,000
Ending inventory (physical count) (21,000)
Cost of goods sold ₱74,000
 P a g e | 20

PROBLEM 4: JOURNAL ENTRIES

Solution:

Requirement (a): Journal entries

Perpetual system Periodic system

1.
Inventory 120,000 Purchases 120,000
Accounts payable 120,000 Accounts payable 120,000

2.
Inventory 12,000 Freight-in 12,000
Cash 12,000 Cash 12,000

3.
Accounts payable 2,400 Accounts payable 2,400
Inventory 2,400 Purchase returns 2,400

4.
Accounts receivable 147,600 Accounts receivable 147,600
Sales 147,600 Sales 147,600

Cost of goods sold 98,400 No entry

Inventory 98,400

5.
Sales returns 10,800 Sales returns 10,800
Accounts receivable 10,800 Accounts receivable 10,800

Inventory 7,200 No entry

Cost of goods sold 7,200
 P a g e | 21

Requirement (b):

Perpetual inventory system:

Cost of goods sold

(4) Cost of goods sold 98,400

7,200 (5) Sales return
91,200 end. Bal.

Periodic inventory system:

Beginning inventory ₱ 6,200

Purchases (1) ₱120,000
Freight-in (2) 12,000
Purchase returns (3) (2,400)
Purchase discounts -
Net purchases 129,600
Total goods available for sale 135,800
Ending inventory (physical count) (44,600)
Cost of goods sold ₱91,200
 P a g e | 22

PROBLEM 5: STATEMENT OF COGS & GROSS PROFIT

Solution:

Entity A
Statement of Cost of goods sold and Gross profit
For the period ended December 31, 20x1

Net sales:
Sales 230,000
Sales discounts (7,000)
Sales returns (15,000) 208,000
Cost of goods sold:
Beginning inventory 22,000
Purchases 120,000
Freight-in 5,000
Purchase discounts (3,000)
Purchase returns (2,000)
Total goods available for sale 142,000
Less: Ending inventory (28,000) (114,000)
Gross profit 94,000
 P a g e | 23

PROBLEM 6: STATEMENT OF COGS & GROSS PROFIT

Solution:

Entity B
Statement of Cost of goods sold and Gross profit
For the period ended December 31, 20x1

Net sales:
Sales 320,000
Sales discounts (10,000)
Sales returns (8,000) 302,000
Cost of goods sold:
Beginning inventory 27,000
Purchases 145,000
Freight-in 7,000
Purchase discounts (4,000)
Purchase returns (3,000)
Total goods available for sale 172,000
Less: Ending inventory (32,000) (140,000)
Gross profit 162,000
 P a g e | 24

PROBLEM 7: COMPUTATIONS
1. Solution:
Sales 724,200
Sales discounts (10,000)
Sales returns (3,600)
Net sales 710,600

2. Solution:
Purchases 220,000
Freight-in 12,000
Purchase discounts (4,500)
Purchase returns (3,000)
Net purchases 224,500

3. Solution:
Inventory, beg. 22,400
Purchases 252,000
Freight-in 11,000
Purchase discounts (4,900)
Purchase returns (3,000)
Total good available for sale 277,500

4. Solution:
Inventory, beg. 22,400
Purchases 252,000
Freight-in 11,000
Purchase discounts (4,900)
Purchase returns (3,000)
Total good available for sale 277,500
Inventory, end. (15,000)
Cost of goods sold 262,500
 P a g e | 25

5. Solution:
Inventory
beg. 33,000
Net purchases 128,000 96,000 COGS

65,000 end.

6. Solution:
Inventory
beg. 89,000
Net purchases 217,000 154,000 COGS

152,000 end.

7. Solution:
Inventory
beg. 20,000
Net purchases 176,000 106,000 COGS

90,000 end.

8. Solution:
Inventory
beg. 24,000
Net purchases 84,000 89,000 COGS

19,000 end.
 P a g e | 26

9. Solution:
Inventory
beg. 90,000
Net purchases 216,000 244,000 COGS

62,000 end.

10. Solution:
Inventory
beg.
Net purchases 344,000 COGS

148,000 end.

TGAS (344K COGS + 148 Invty. end.) 492,000

11. Solution:
Inventory
beg. 0
Net purchases 170,000 130,000 COGS
40,000 end.

12. Solution:
Inventory
beg. 40,000
Net purchases 170,000 210,000 COGS
0 end.
 P a g e | 27

13. Solution:
Inventory
beg. 0
Net purchases 800,000 720,000 COGS
80,000 end.

14. Solution:
Inventory
beg. 4,000
Net purchases Irrelevant 169,000 COGS
21,000 end. (190K – 169K)

Change in inventory (4K, beg. – 21K, end.) = 17,000 increase

15. Solution:
Inventory
beg. (squeeze) 12,000
Net purchases 59,000 66,000 COGS (71K TGAS – 5K EI)
5,000 end.

Change in inventory (12K, beg. – 5K, end.) = 7,000 decrease

 P a g e | 28

PROBLEM 8: WORKSHEET (PERPETUAL SYSTEM)

Requirement (a): Journal entries

(1) Inventory 420,000

Accounts payable 420,000
(2) Accounts receivable 900,000
Sales 900,000

Cost of goods sold 430,000

Inventory 430,000
(3) Cash 870,000
Accounts receivable 870,000
(4) Accounts payable 390,000
Cash 390,000
(5) Salaries expense 520,000
Cash 520,000

Requirement (b): Posting

ASSETS
Cash Accounts receivable
beg. 80,000 beg. 0
(3) 870,000 390,000 (4) (2) 900,000 870,000 (3)
520,000 (5)

Bal. 40,000 Bal. 30,000

Inventory
beg. 40,000
(1) 420,000 430,000 (2)

Bal. 30,000
 P a g e | 29

Equipment Accum. Dep’n.

beg. 200,000 20,000 beg.

Bal. 200,000 20,000 Bal.

LIABILITIES
Accounts payable
0 beg.
(4) 390,000 420,000 (1)
30,000 Bal.

EQUITY
Owner’s equity
300,000 beg.

300,000 Bal.

INCOME EXPENSES
Sales Salaries expense

900,000 (2) (5) 520,000

900,000 Bal. Bal. 520,000

Cost of goods sold

(2) 430,000
Bal. 430,000
 P a g e | 30

Requirement (c): Unadjusted trial balance

Entity A
Unadjusted Trial Balance
December 31, 20x1

Accounts Debits Credits

Cash ₱40,000
Accounts receivable 30,000
Inventory 30,000
Equipment 200,000
Accum. Depreciation ₱20,000
Accounts payable 30,000
Owner’s equity 300,000
Sales 900,000
Cost of goods sold 430,000
Salaries expense 520,000
Totals ₱1,250,000 ₱1,250,000

Requirement (d): Adjusting entries

AJE #1: Depreciation expense

Depreciation expense 20,000
Accumulated depreciation 20,000

Requirement (e): Worksheet

P a g e | 31
Requirement (f): Closing entries
CLE #1
Sales 900,000
Income summary 70,000
Cost of goods sold 430,000
Salaries expense 520,000
Depreciation expense 20,000

CLE #2
Owner’s capital 70,000
Income summary 70,000

Requirement (g): Balance sheet and Income statement

Entity A
Balance Sheet
As of December 31, 20x1
ASSETS
Cash ₱40,000
Accounts receivable 30,000
Inventory 30,000
Equipment 200,000
Accumulated depreciation (40,000)
TOTAL ASSETS ₱260,000

LIABILITIES
Accounts payable ₱30,000
TOTAL LIABILITIES 30,000

EQUITY
Owner's equity 230,000
TOTAL EQUITY 230,000
TOTAL LIABILITIES & EQUITY ₱260,000
 Entity A
Income Statement
For the year ended December 31, 20x1

Sales ₱900,000
Cost of goods sold (430,000)
GROSS PROFIT 470,000
Salaries expense (520,000)
Depreciation expense (20,000)
LOSS FOR THE PERIOD (₱70,000)
PROBLEM 9: WORKSHEET (PERPETUAL SYSTEM)

Requirement (a): Journal entries

(1) Inventory 600,000

Accounts payable 600,000
(2) Accounts receivable 1,600,000
Sales 1,600,000

Cost of goods sold 560,000

Inventory 560,000
(3) Cash 1,490,000
Accounts receivable 1,490,000
(4) Accounts payable 490,000
Cash 490,000
(5) Salaries expense 820,000
Cash 820,000
(6) Utilities expense 64,000
Cash 64,000

Requirement (b): Posting

ASSETS
Cash Accounts receivable
beg. 280,000 beg. 60,000
(3) 1,490,000 490,000 (4) (2) 1,600,000 1,490,000 (3)
820,000 (5)
64,000 (6)
Bal. 396,000 Bal. 170,000

Inventory
beg. 140,000
(1) 600,000 560,000 (2)

Bal. 180,000
 Equipment Accum. Dep’n.
beg. 300,000 180,000 beg.

Bal. 300,000 180,000 Bal.

LIABILITIES
Accounts payable
50,000 beg.
(4) 490,000 600,000 (1)
160,000 Bal.

EQUITY
Owner’s equity
550,000 beg.

550,000 Bal.

INCOME EXPENSES
Sales Salaries expense

1,600,000 (2) (5) 820,000

1,600,000 Bal. Bal. 820,000

Utilities expense

(6) 64,000
Bal. 64,000
 Cost of goods sold

(2) 560,000
Bal. 560,000

Requirement (c): Unadjusted trial balance

George Laku
Unadjusted Trial Balance
December 31, 20x1

Accounts Debits Credits

Cash ₱396,000
Accounts receivable 170,000
Inventory 180,000
Equipment 300,000
Accum. Depreciation ₱180,000
Accounts payable 160,000
Owner’s equity 550,000
Sales 1,600,000
Cost of goods sold 560,000
Salaries expense 820,000
Utilities expense 64,000
Totals ₱2,490,000 ₱2,490,000
Requirement (d): Adjusting entries

AJE #1: Depreciation expense

Depreciation expense 30,000
Accumulated depreciation 30,000

AJE #2: Bad debts expense

Bad debts expense 3,000
Allowance for bad debts 3,000

Requirement (e): Worksheet

Requirement (f): Closing entries
CLE #1
Sales 1,600,000
Cost of goods sold 560,000
Salaries expense 820,000
Utilities expense 64,000
Depreciation expense 30,000
Bad debts expense 3,000
Income summary 123,000

CLE #2
Income summary 123,000
Owner’s capital 123,000

Requirement (g): Balance sheet and Income statement

George Laku
Balance Sheet
As of December 31, 20x1
ASSETS
Cash ₱396,000
Accounts receivable 170,000
Allowance for bad debts (3,000)
Inventory 180,000
Equipment 300,000
Accumulated depreciation (210,000)
TOTAL ASSETS ₱833,000

LIABILITIES
Accounts payable ₱160,000
TOTAL LIABILITIES 160,000

EQUITY
Owner's equity 673,000
TOTAL EQUITY 673,000

TOTAL LIABILITIES & EQUITY ₱833,000

 George Laku
Income Statement
For the year ended December 31, 20x1

Sales ₱1,600,000
Cost of goods sold (560,000)
GROSS PROFIT 1,040,000
Salaries expense (820,000)
Utilities expense (64,000)
Depreciation expense (30,000)
Bad debts expense (3,000)
PROFIT FOR THE PERIOD ₱123,000