FUNDAMENTAL ACCOUNTING PRINCIPLES 22ND EDITION SOLUTIONS MANUAL BY WILD SHAW CHIAPPETTA

Additional accounts of a merchandising company likely include Merchandise Inventory, Sales of goods, Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances and possibly De

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FUNDAMENTAL ACCOUNTING PRINCIPLES 22ND EDITION SOLUTIONS MANUAL BY WILD,

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2 Additional accounts of a merchandising company likely include Merchandise Inventory, Sales (of goods), Cost of Goods Sold, Sales Discounts, and Sales Returns and Allowances (and possibly Delivery Expense)

3 A company can have a net loss if its expenses (absent cost of goods sold) are greater than its gross profit from sales of merchandise

4 A cash discount can be offered to encourage customers to promptly pay This provides cash more quickly to the seller and avoids the costs of additional collection activities Of course, the seller must perform a costs vs benefits analysis

on the merits and terms of any cash discount offered to customers

5 For a perpetual inventory system, inventory shrinkage is determined by taking a physical count of the inventory available at the end of a period and comparing that amount with the amount recorded in the Merchandise Inventory account

6 Cash discounts are granted in return for early payment and reduce the amount paid

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7 Sales discount is a term used by a seller to describe a cash discount granted to a customer Purchase discount is a term used by a purchaser to describe a cash discount received from a seller (It is a matter of perspective: seller versus buyer.)

8 A manager is concerned about the quantity of its purchase returns because the company incurs costs in receiving, inspecting, identifying, and returning the merchandise More returns create more expenses By knowing more about returns, the manager can decide if they are a problem and how they can be minimized

9 The sender (maker) of a debit memorandum records a debit in an account of the recipient; and the recipient records a credit in an account maintained for the sender

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10 The single-step income statement format presents cost of goods sold and expenses

in one list, totals the list, and subtracts the total from net sales in one step The multiple-step format presents intermediate totals, including gross profit (the difference between net sales and cost of goods sold) and sub-categories of expenses (often by key activities)

11 Apple calls its inventory account “Inventories.” A detailed calculation of cost of goods sold is not presented by Apple

12 Google titles its cost of sales accounts as “Cost of revenues” Google presents costs of sales separate for “Google (advertising and other)” and “Motorola Mobile (hardware and other)”

13 Samsung titles its cost of goods sold account “Cost of sales.”

14 Samsung reports a separate gross margin figure on its consolidated income statement Its 2013 gross profit is ₩90,996,358 (in millions of Korean won)

15 A buyer should attempt to negotiate the shipping terms FOB destination In this case, title will pass after the goods are safely delivered to the buyer’s business and transportation charges will be the responsibility of the supplier (seller).

QUICK STUDIES Quick Study 5-1 (10 minutes)

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Computation of net income:

Krug Service Co

Quick Study 5-4 (15 minutes)

Returned defective units [(25 x $10]

Cash 5,635 Merchandise Inventory* 115

Paid for purchase less cash discount

*[(6,000 - $250) x 2%]

Quick Study 5-5 (10 minutes)

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Aug 1 Merchandise Inventory 60,000

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Apr 1 Accounts Receivable 3,000

Sales 3,000

To record credit sale

1 Cost of Goods Sold 1,800

Merchandise Inventory 1,800

To record cost of credit sale

4 Sales Returns and Allowances 600

Accounts Receivable 600

To record sales return

4 Merchandise Inventory 360

Cost of Goods Sold 360

Restore cost of returned goods to inventory

July 31 Cost of Goods Sold 1,900

To adjust for shrinkage based on

physical count [$37,800 - $35,900]

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July 31 Sales 160,200

To close temporary accounts with credit balances

July 31 Income Summary 165,900

Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on)

the liquidity of a company It helps in determining whether a company will be able to meet its current obligations as they come due with its most liquid assets

In this case, the company only has 65 cents available in quick assets to pay $1.00

in current liabilities as they come due An acid-test ratio less than one usually suggests some concern and encourages further analysis of liquidity

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Similarities: Both the acid-test ratio and current ratio are used to assess

liquidity Both ratios are computed with current liabilities as the denominator

Differences: The current ratio includes all current assets in the numerator

The acid-test ratio includes current assets less inventories and prepaids in its numerator (leaving cash & equivalents, current receivables, and short-term investments)

Comparison and Description: Compared with the current ratio, the acid-test

ratio is a more stringent test of a company’s ability to meet its current obligations The acid-test ratio is more stringent as it does not assume a company relies on prepaids and inventory to pay current liabilities This is because prepaids and inventory assets are not generally available to satisfy current obligations

Sales $150,000 $550,000 $38,700 $255,700 Sales discounts (5,000) (17,500) (600) (4,800)

S ales returns and allowances (20,000) (6,000) (5,100) (900) Net sales 125,000 526,500 33,000 250,000 Cost of goods sold (79,750) (329,589) (24,453) (126,500) Gross profit $ 45,250 $196,911 $ 8,547 $123,500

Gross margin ratio:

Interpretation of gross margin ratio for case a: The ratio of 36.2% implies

that for each dollar in net sales the company earns 36.2 cents in gross profit The company must still deduct other expenses that it incurs in running the business when computing net income

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1 Multiple-step income statement

adidas Group Income Statement (€ millions) For Year Ended December 31, 2013 Net sales €14,492 Cost of sales 7,352 Gross profit 7,140 Operating expenses

Royalty and commission income € 104

Other operating income 143

Other operating expenses 6,185

Operating profit 1,202 Other revenues and gains (expenses and losses)

Financial income 26

Financial expenses 94

Income before taxes 1,134 Income taxes 344 Net income € 790

2 Single-step income statement

adidas Group Income Statement (€ millions) For Year Ended December 31, 2013 Revenues

Net sales €14,492 Royalty and commission income 104 Other operating income 143 Financial income 26 Total revenues 14,765

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a Periodic inventory system

b Perpetual inventory system

d Perpetual inventory system

e Perpetual inventory system

Quick Study 5-16 A (10 minutes)

Purchases Returns & Allowances 250

Returned defective units [(25 x $10]

Cash 5,635 Purchases Discounts* 115

* [(6,000 - $250) x 2%)]

Quick Study 5-17A (10 minutes)

Apr 1 Accounts Receivable 3,000

Sales 3,000

To record credit sale

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a Both U.S GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales

b Under IFRS, reference to finance costs usually refers to interest expense

c IFRS permits alternative measures of income to be reported as part of the income statement

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Exercise 5-1 (30 minutes)

Note: The original missing numbers are blocked

Sales $62,000 $43,500 $46,000 $79,000 $25,600 Cost of goods sold

Total cost of merch

Merch inv (end.) (11,950) (3,000) (9,000) (6,600) (4,160)

b Find total cost of merchandise purchases by finding the number that makes the total equal the cost of goods sold Find gross profit from sales less cost of goods sold

c Find cost of goods sold from sales less gross profit Find cost of merchandise purchases by finding the number to make the calculation equal cost of goods sold

d Calculate cost of goods sold as usual Calculate sales as gross profit plus cost of goods sold

e Find merchandise inventory (ending) by subtracting cost of goods sold from goods available for sale Find gross profit from sales less cost of goods sold Find net income as gross profit less expenses

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Operating cycle of a merchandiser with credit sales follows (chronological):

2 (a) inventory made available for sale

5 (b) cash collections from customers

3 (c) credit sales to customers

be avoided in the future For example, the returns might arise from product defects, shipping damage, misleading information provided at the time of sale,

or fickle customers

An important early step in controlling returns is to have information about their dollar amount In addition, managers can set goals for reducing the dollar amount of sales returns Both objectives can be helped by having the company’s accounting system record the sales value of returned goods in a separate contra account instead of the Sales account This approach captures the information at the time of the return and allows it to be easily reported

While a company’s sales return record is important for managers, it is also valuable information for external decision makers This information can help external users identify organizations focusing on customer satisfaction and product quality Although management might choose to report the amount of sales returns as evidence of sales satisfaction, their amount is rarely reported

in financial statements provided to investors, creditors, and other external users

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Apr 2 Merchandise Inventory 4,600

*[($8,500 - $1,100) x 2%]

Paid balance (less 2%) within discount period

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May 5 Accounts Receivable 21,000

Sales 21,000

Sold merchandise on credit (1,500 x $14)

Cost of Goods Sold 2,000

Returned merchandise to inventory (200 x $10)

Granted allowance for mis-colored merchandise

and accepted a return from a customer for the

mis-colored merchandise [$120 + (40 x $14)]

Returned merchandise to inventory (40 x $10)

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May 5 Merchandise Inventory 21,000

To record allowance for mis-colored goods and

return of mis-colored merchandise

$120 + (40 x $14)

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*[24,000 x 3%]

Paid account payable within 3% discount period

a) Credit Sale

Accounts Receivable 24,000

Sales 24,000

Sold merchandise on account

Cost of Goods Sold 16,000

Collected account receivable

3 Amount borrowed to pay with discount $ 23,280

Annual rate of interest x 8% Interest per year $1,862.40 Interest per day ($1,862.40 / 365 days) $5.10* Savings from discount taken ($24,000 - $23,280) $ 720.00

Interest paid on 50-day loan (50 days x $5.10) (255.00) Net savings from borrowing to pay in discount period $ 465.00

*Rounded; if not rounded, the net savings are $464.88 instead of $465.00

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1 Entries for Sydney Company (BUYER):

May 11 Merchandise Inventory 40,000

Paid balance within the 3% discount period

*($38,600 x 03)

2 Entries for Troy Corporation (SELLER):

Sales 40,000

To record cost of sale

13 Sales Returns and Allowances 1,400

Accounts Receivable 1,400

Accepted a return from a customer

Returned goods to inventory

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Merchandise Inventory Balance, Dec 31, 2014 25,000 Purchase discounts received 1,700 Invoice cost of purchases 192,500 Purchase returns and allow 4,000 Returns by customers 2,100 Cost of sales transactions 196,000 Transportation-in 2,900 Shrinkage 800 Balance, Dec 31, 2015 20,000

Cost of Goods Sold Cost of sales transactions

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To record cash payment in discount period

3)

Nov 7 Cash 196

Merchandise Inventory 196

To record check received for return of purchases

previously paid for with discount already taken

To record sale of merchandise on credit

To record return of merchandise to inventory

Instructor note: This second entry changes if the goods returned are defective In this

case the returned inventory is recorded at its estimated value, not its cost To illustrate, if the goods (costing $130) returned are defective and estimated to be worth, say, $50, the following entry is made: Dr Merchandise Inventory for $50, Dr Loss from Defective Merchandise for $80, and Cr Cost of Goods Sold for $130

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Adjusting entries

Dec 31 Sales Salaries Expense 1,700

Salaries Payable 1,700

To record accrued salaries

Dec 31 Selling Expenses 3,000

Prepaid Selling Expenses 3,000

To record expired prepaid selling expenses

Dec 31 Cost of Goods Sold 1,550

Dec 31 Income Summary 444,750

Sales Discounts 5,000 Cost of Goods Sold ($212,000 + $1,550) 213,550 Sales Salaries Exp ($48,000 + $1,700) 49,700 Utilities Expense 15,000 Selling Expenses ($36,000 + $3,000) 39,000 Administrative Expenses 105,000

To close temporary accounts with debit

balances

Dec 31 Income Summary 84,250

K Emiko, Capital 84,250

To close Income Summary account

Dec 31 K Emiko, Capital 33,000

K Emiko, Withdrawals 33,000

To close the withdrawals account

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Multiple-Step Income Statement — Sales Related Information Only Sales (gross) $200,000 Less: Sales discounts $ 4,000

Sales returns and allowances 16,000 20,000 Net sales 180,000

The employee’s oversight in omitting these goods from the physical count would cause the cost of the physical count of ending inventory to be understated Therefore, the comparison of the perpetual inventory records with the physical count would incorrectly indicate an additional shrinkage

of $3,000 An entry would be made to debit Cost of Goods Sold and credit Merchandise Inventory for this amount As a result, the company’s ending inventory, current assets, total assets, equity, and net income would all be understated by $3,000

As a result of this error:

the denominator impact)

See the solution explanation in Exercise 5-13 As a result of this error:

gross profit would be understated

income would be understated

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Case X has the highest acid-test ratio and a healthy current ratio Since Case

X has enough current assets to cover its current liabilities by more than two times and enough liquid assets to cover its current liabilities by more than one time, Case X appears to be in the best position to meet its short-term obligations

More specifically, Case Y exhibits superior ability to meet current year obligations using the current ratio and Case X has the superior ability to meet near-term obligations using the acid-test ratio The three companies’ current ratios range from marginally adequate (such as Case Z’s 1.95) to strong (such

as Case Y’s 3.50) Further, Case X is the only company whose acid-test ratio exceeds the common benchmark (rule-of-thumb) of 1.0 Although Case Y has

a higher current ratio than Case X, Case X would appear to be in a better position to meet its current obligations since it has a higher percentage of its most liquid assets, demonstrated by a higher acid-test ratio

In summary, Case Z looks the worst for its ability to pay its immediate and current year obligations Case X looks the strongest Case Y is in between with a strong current ratio and the lowest acid-test ratio

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Returned unacceptable merchandise

17 Accounts Payable—Lyon 4,000

Purchases Discounts 80 Cash 3,920

18 Purchases 8,500

Accounts Payable—Frist 8,500

Purchased merchandise on credit

21 Accounts Payable—Frist 1,100

Purchases Returns & Allowances 1,100

Received an allowance on purchase

28 Accounts Payable—Frist 7,400

Purchases Discounts 148 Cash 7,252

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Paid account payable within 3% discount period

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1 Entries for Sydney Company (BUYER):

Returned unacceptable merchandise

20 Accounts Payable 38,600

Purchases Discounts 1,158 Cash 37,442

Paid balance within the 3% discount period

2 Entries for Troy Corporation (SELLER):

Sales 40,000

13 Sales Returns and Allowances 1,400

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To record cash payment in discount period

* [$1,500 x 2%]

3)

Nov 7 Cash 196

To record check received for return of purchases

previously paid for with discount already taken

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Income Statement (€ millions) For Year Ended December 31, 2013 Net sales €22,976.6 Cost of sales 6,601.8 Gross profit 16,374.8 Research and development expense (857.0) Advertising and promotion expense (6,886.2) Selling, general and administrative expense (4,756.8) Finance costs (29.1) Finance income 33.5 Other income 145.2 Profit before tax expense 4,024.4 Income tax expense 1,063.0 Net profit € 2,961.4

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PROBLEM SET A Problem 5-1A (40 minutes)

July 1 Merchandise Inventory 6,000

Purchased goods on credit, terms 1/15, n/30

2 Accounts Receivable—Creek 900

Sales 900

Sold goods on credit, terms 2/10, n/60

2 Cost of Goods Sold 500

Sold goods for cash

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July 16 Accounts Payable—Boden 6,000

19 Cost of Goods Sold 800

Merchandise Inventory 800

To record cost of the July 19 sale

Issued credit memo for allowance on

goods sold to customer

24 Accounts Payable—Leight 2,000

Merchandise Inventory * 40 Cash 1,960

Paid payable in discount period (*2% x $2,000)

Sold goods on credit with terms 2/10, n/60

To record cost of the July 31 sale.

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Problem 5-2A (40 minutes)

Aug 1 Merchandise Inventory 7,500

Accounts Payable—Arotek 7,500

Purchased goods on credit, terms 1/10, n/30

5 Accounts Receivable—Laird 5,200

Sales 5,200 Sold goods on credit, terms 2/10, n/60

Paid shipping charges on August 5 sale

Customer returned merchandise

Returned goods to inventory

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Paid payable within discount period

*(1% x $4,700)

19 Accounts Receivable—Tux 4,800

Sales 4,800

To record cost of the August 19 sale

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Problem 5-3A (40 minutes)

1 Net sales

Sales $225,600 Less: Sales discounts (2,250)

Sales returns and allowances (12,000) Net sales $211,350

2 Cost of Merchandise purchased

Invoice cost of merchandise purchased $ 92,000 Purchase discounts received (2,000) Purchase returns and allowances (4,500) Costs of transportation-in 4,600 Total cost of merchandise purchased $ 90,100

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3 Multiple-step income statement

VALLEY COMPANY Income Statement For Year Ended August 31, 2015 Sales $225,600

Less: Sales discounts $ 2,250

Sales returns and allowances 12,000 14,250

Sales salaries expense 32,000

Rent expense—Selling space 8,000

Store supplies expense 1,500

Advertising expense 13,000

Total selling expenses 54,500

General and administrative expenses

Office salaries expense 28,500

Rent expense—Office space 3,600

Office supplies expense 400

Total expenses 87,000

Net income $ 49,850

*Cost of goods sold (alternative computation):

Merchandise inventory, August 31, 2014 $ 25,400

Total cost of merchandise purchased (from part 2) 90,100

Merchandise available for sale 115,500

Merchandise inventory, August 31, 2015 41,000

Cost of goods sold $ 74,500

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Problem 5-3A (Concluded)

4 Single-step income statement

VALLEY COMPANY Income Statement For Year Ended August 31, 2015 Net sales $211,350 Expenses

Cost of goods sold $74,500

Selling expenses 54,500

General and administrative expenses 32,500

Total expenses 161,500 Net income $ 49,850

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Cost of Goods Sold 74,500 Sales Salaries Expense 32,000

Advertising Expense 13,000 Office Salaries Expense 28,500

To close temporary accounts with

debit balances

Aug 31 Income Summary 49,850

K Valley, Capital 49,850

To close the Income Summary account

Aug 31 K Valley, Capital 8,000

K Valley, Withdrawals 8,000

To close the withdrawals account

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Problem 5-4A (Concluded)

Part 2

The first step is to determine the amount of purchases that are subject to a discount during the year:

Invoice cost of merchandise purchases $92,000

Purchase returns and allowances (4,500)

Total cost of merchandise payable $87,500

This amount is used to determine the maximum discount, which is then compared to the actual discount:

Maximum discount available (3% x $87,500) $ 2,625

Purchase discounts received (2,000)

Purchase discounts missed $ 625

As a percent of available discounts ($625/$2,625) 23.8%

This analysis suggests that nearly 24% of available discounts have been missed As a result, it would appear that cash is not being well managed Management should try to identify a better system for ensuring that all favorable discounts are taken It is possible that the 24% of discounts not taken are actually at rates not favorable to the company (meaning that management is worse off expending resources on those discounts)— further information is required to assess this possibility

Part 3

The first step is to compute this year’s sales returns and allowances rate:

Sales $225,600

Sales returns and allowances $ 12,000

This calculation shows that the company’s customers are returning or requiring allowances on items at a higher rate than the 4% rate observed in prior years It appears that management should investigate the situation to see why there are more dissatisfied customers this year than in prior years

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Part 1

Adjustment (a) Jan 31 Store Supplies Expense 4,050

Store Supplies 4,050

To record store supplies expense

($5,800 - $1,750)

Adjustment (b) Jan 31 Insurance Expense 1,400

Prepaid Insurance 1,400

To record expired insurance

Adjustment (c) Jan 31 Depreciation Expense—Store Equip 1,525

To record depreciation expense

Adjustment (d) Jan 31 Cost of Goods Sold 1,600

To adjust inventory for shrinkage

($12,500 - $10,900)

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