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Exam 3: Accounting for Merchandising Businesses

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Question 21

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Mattress Warehouse, which uses the perpetual inventory system, experienced the following events during December Year 1: Issued common stock for cash.Borrowed money from the Star City Bank issuing a note payable.Purchased inventory on account, terms 2/10, n/30, FOB shipping point.Returned part of the merchandise purchased in event number 3.Paid shipping costs on merchandise purchased in event number 3.Sold merchandise for cash. Label the revenue recognition 6(a) and the expense recognition 6(b).Paid shipping costs to deliver goods sold in event number 6.Recorded the discount allowed in event number 3.Recorded the payment for goods purchased in event number 3.Accrued interest on the note payable issued in event number 2 (note is not due for several months). Required:Identify each event as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects the financial statements by placing a + for increase, − for decrease, or NA for not affected under each of the components of the following statements model. If an element both increases and decreases, mark with "+−". Also, indicate in the cash flow column if the event would be recorded as an operating activity (OA), an investing activity (IA) or a financing activity (FA). In the cash flow column, use + to indicate a cash inflow and − to indicate a cash outflow. The first event is recorded as an example.

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Question 22

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Below are the income statements of two competitive companies, Green Company and Black Company, for the current year. $\begin{array}{l}&\text { Green Company}&\text { Black Company }\\ \text { Net Sales } & \$ 6,200 & \$ 3,440 \\\text { Cost of goods sold } & \underline{3,880 }& \underline{2,030} \\\text { Gross margin } & \underline{2,320} & \underline{1,410} \\\text { Operating expenses: }\\\\\text { Selling expenses } & \$ 1,220 & 660 \\\text { Administrative expenses } &\underline{ 875} & \underline{505} \\\text { Total Operating expenses } & \underline{2,095 }& \underline{1,165} \\\text {Net Income } &\underline{ \$ 225} & \underline{\$ 245}\end{array}$ Required:Based on the above statements, determine:The gross margin percentage for each company.The net income percentage for each company.Which company is selling their products for lower prices (at a lower markup).

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Gross margin percentage = Gross margin ÷...

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Question 23

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If the buyer is to pay the transportation cost of delivering merchandise, the freight or shipping terms would be stated as:

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company paid $100 cash to a freight company for delivering inventory that Whetzel had purchased from Jacobs Company with freight terms FOB shipping point.

The following events pertain to The Craft Shop, which began operations in October. The company uses the perpetual inventory method. October 1 Issued common stock to investors for $15,000October 2 Purchased $12,000 of inventory on account with terms 2/10, n/30October 3 Sold on account for $18,000 merchandise that had cost $10,000; terms 1/10, n/30October 4 Returned defective merchandise with list price of $1,000 from October 2 purchaseOctober 5 Paid freight of $100 on goods sold to customers, FOB destinationOctober 10 Paid the amount due on the merchandise purchased October 2October 12 Received cash from customer in settlement of October 3 sale Required: What was the amount of cash that The Craft Shop paid on October 10? What was the amount of cash that The Craft Shop collected on October 12? What was the balance in The Craft Shop's cash account at the end of the day on October 12?

Discuss the major differences between a perpetual inventory system and a periodic inventory system.

At the beginning of the year, Superior Sales had $7,500 of merchandise inventory. During the year, the company purchased $72,000 of inventory. At the end of the year, a count of the inventory revealed that the business had $11,640 of inventory on hand. Superior uses the periodic inventory system.What is cost of goods sold for the year?What is the amount of goods available for sale?What amount of inventory will be shown on the year-end balance sheet?

Give three examples of selling and administrative costs. At what time are these costs recognized as expenses?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company sold merchandise to a customer for $950 on account. Whetzel's cost of the merchandise was $600.

Indicate how the determination of the amount of lost, damaged, destroyed, or stolen merchandise differs between firms using a perpetual inventory system and those using a periodic inventory system. Which inventory system provides the best way to account for lost, damaged, destroyed, or stolen merchandise and why?

Give three examples of product costs. At what time are product costs recognized as expenses? What is the name of the expense account?

The following is a partial list of account balances for the Fisherman's Supply at December 31, Year 1: $\begin{array}{lr}\text { Cash } & 87,450 \\\text { Accounts receivable } & 24,800 \\\text { Inventory } & 197,450 \\\text { Supplies } & 3,600\\\text { Land } & 134,800 \\\text { Accounts payable } & 47,500 \\\text { Common stock } & 30,000 \\\text { Retained earnings } & 78,250 \\\text { Sales revenue } & 490,350\\\text { Cost of goods sold }&399,250 \\\text { Salaries expense } & 36,250 \\\text { Utilities expense } & 9,500 \\\text { other operating expense } &30,000\\\text { Gain on sale of land }&7,000\end{array}$ After the temporary accounts are closed, what is the balance of Retained Earnings?From the above information, prepare a multistep income statement.

When merchandise inventory is purchased on account, how is the accounting equation affected? (Assume a perpetual inventory system is in use.)

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAA customer returned goods to Whetzel Company that had been purchased for $60 on account. The goods had originally cost Whetzel $35. Whetzel reduced the customer's account balance for the return.

The following events apply to Deb's Dance Wholesalers.Sold merchandise to a customer. The goods were shipped FOB destination, with a freight cost of $50.Purchased merchandise with freight cost of $75, shipped with the terms FOB shipping point.Sold merchandise to a customer with freight cost of $40, shipped FOB shipping point. Required:Based on the above events, what is the total amount of freight that will be paid by Deb's Dance Wholesalers?How much of the freight cost will be recorded as an expense when incurred?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company discovered that a recent shipment of merchandise it had purchased was not of the same quality it had expected. The seller agreed to grant Whetzel an allowance of $250. Whetzel had not yet paid the amount owed on the shipment.

Xavier Company sold goods with the terms 2/15, n/30. What do the terms mean?

Jackson Medical Supply, which uses the perpetual inventory system, experienced the following events during June Year 1.Issued common stock for cash.Purchased inventory on account, terms 2/10, n/30, FOB shipping point.Paid the shipping charges on the purchase in event number 2.Sold merchandise to a customer on account, terms 2/10, n/30, FOB destination. Record the revenue recognition as 4(a) and the expense recognition as 4(b).Paid the shipping charges on goods sold in event number 4.Customer returned some of the merchandise sold in event number 4. Record the effect on revenue as 6(a) and the effect on expenses as 6(b).Recorded discount granted to the customer in event number 4.Recorded payment received from the customer in event number 4.Recorded discount received on purchase in event number 2.Recorded payment of amount due on purchase in event number 2. Required: Identify each event as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects the financial statements by placing a + for increase, − for decrease, or NA for not affected under each of the components of the following statements model. If the element both increases and decreases, mark with "+−". Also, indicate in the cash column if the event would be recorded as an operating activity (OA), an investing activity (IA) or a financing activity (FA). In the cash column, use + to indicate a cash inflow and − to indicate a cash outflow. The first event is recorded as an example.