Ch 5

Which of the following would NOT appear on the single-step income statement for a merchandiser:

Operating Income does not appear on the single-step income statement, which groups all revenues together and all expenses together without calculating other subtotals.

Stan's Discount Floor Covering made Net Sales Revenue of $100,000 and the Cost of Goods Sold totaled $60,000. What is the gross profit percentage for this period?

First, calculate Gross Profit by taking Net Sales Revenue - Cost of Goods Sold. In this case, $100,000 - 60,000 = $40,000 Gross Profit. To calculate gross profit percentage, divide Gross Profit by Net Sales Revenue ($40,000 / $100,000) = 40%.

Best Discount Store uses the perpetual system for inventory and had a sale on account to Mark Watson of $3,000 with terms 1/10 or n/30. Before payment, Mr. Watson returned $1,000 of the merchandise. Mr. Watson paid within the discount period. What is the amount of cash Best Discount Store received?

The balance of Accounts Receivable after the return would be $2,000 ($3,000 - $1,000 return). The discount would be $2,000 * .01 = $20. The balance in Accounts Receivable of $2,000 - $20 discount = $1,980 Cash that is received.

Smith Company purchased inventory of $2,000 on account and uses the periodic system. The journal entry for the purchase would be:

When using the periodic system, purchases are recorded in the Purchases account as a debit (instead of Merchandise Inventory) and Accounts Payable as a credit.

Grant Manufacturing purchased $10,000 of merchandise inventory on account from a vendor and was billed $300 for freight. The credit terms are 2/10, n/30. Because some of the merchandise was not what was ordered, Grant Manufacturing returned $2,000 the same day. Grant Manufacturing uses the perpetual inventory system and made payment for the merchandise, less the return, within the discount period. The journal entry to record the payment after the return within the discount period would be:

he Accounts Payable balance would be $10,000 + $300 billed for shipping - $2,000 return = $8,300. Accounts Payable is debited as it is being decreased (balance paid off). Merchandise Inventory is credited for the amount of the discount, calculated by taking $10,000 purchase - $2,000 return = $8,000 * .02 = $160. Shipping is part of Accounts Payable, but it is not discounted. Cash would be the Accounts Payable $8,300 - $160 credit to Merchandise Inventory = $8,140.

Which of the following accounts do you typically see on a merchandising business's Balance Sheet that you do NOT see on the Balance Sheet of a service business?

A service business offers a service and does not sell merchandise. Therefore, Merchandise Inventory is on the Balance Sheet as a Current Asset for a merchandising business, but not a service business.

Best Discount Store uses the perpetual system and had sales on account of $5,000 with terms 3/10, n/30. The goods cost is $2,000. The journal entry to record the sale on account would be:

For the sale, Accounts Receivable is debited and Sales Revenue is credited less the discount, so the amount would be (5,000 - (5,000 * .03) = $4,850. When merchandise is sold, it needs to be moved to Cost of Goods Sold and out of Merchandise Inventory (debit Cost of Goods Sold, credit Merchandise Inventory).

Best Discount Store uses the perpetual system and had a sale on account to Julie Smith of $5,000 with terms 3/10, n/30. Ms. Smith did NOT pay within the discount period. The journal entry to record receiving payment from the sale on account would be:

If not paid within the discount period, the full amount of $5,000 is due. Since the transaction at the time of the sale would have taken the $150 ($5,000 * .03) discount away from the debit to Accounts Receivable and credit to Service revenue, the $150 discount is forfeited. So Cash is debited for the full amount of $5,000, Sales Discounts Forfeited is credited for the discount of $150, and Accounts Receivable is credited for the amount from the original entry of $4,850.

On the multi-step income statement, assume that Operating Income is $10,000, Interest Expense is $1,000, and income tax rate is 30%. What is the Net Income?

Net Income = Operating Income - Interest Expense * (1 - tax rate). In this case, ($10,000 - $1,000) * (1 - .3) = $6,300. To expand this more, the income before Income Tax Expense is calculated as Operating Income less Interest Expense or $10,000 - $1,000 = $9,000. If income taxes are 30% of this amount, Income Tax Expense is 30% x $9,000 = $2,700. Net Income is Income before Income Tax Expense less Income Tax Expense or $9,000 - $2,700 = $6,300.

Sales Revenue is $300,000, Cost of Goods Sold is $200,000, and Operating Expenses are $50,000 for the period. What is Gross Profit?

Sales Revenue - Cost of Goods Sold = Gross Profit. So, Gross Profit is $300,000 - $200,000 = $100,000. Operating expenses are not subtracted out to get Gross Profit, but subtracted from Gross Profit to get Net Income.

Deca Manufacturing purchased $12,000 of merchandise inventory on account from a vendor and was billed $200 for freight. The credit terms are 1/10, n/30. Because some of the merchandise was not what was ordered, Deca Manufacturing returned $3,000 the same day. Deca Manufacturing uses the perpetual inventory system and made payment for the merchandise, less the return, within the discount period. The journal entry to record the payment after the return within the discount period would be:

The Accounts Payable balance would be $12,000 + $200 billed for shipping - $3,000 return = $9,200. Accounts Payable is debited as it is being decreased (balance paid off). Merchandise Inventory is credited for the amount of the discount, calculated by taking $12,000 purchase - $3,000 return = $9,000 * .01 = $90. Shipping is part of Accounts Payable, but it is not discounted. Cash would be the Accounts Payable $9,200 - $90 credit to Merchandise Inventory = $9,110.

Best Discount Store uses the perpetual system and had a sale on account to Julie Smith of $5,000 with terms 3/10, n /30. Ms. Smith paid within the discount period. The journal entry to record receiving payment from the sale on account would be:

The amount of discount of $150 (.03 * 5,000) was already taken off of Accounts Receivable and Service Revenue at the time the revenue was recorded. The amount owed to us by Ms. Smith and to be paid is $4,850 ($5,000 - $150). The $4,850 needs to be taken out of Accounts Receivable (credit) and $4,850 is received in Cash (debit).

Assume that Jones Company has an unadjusted balance in Merchandise Inventory of $100,000. Due to shrinkage, a physical inventory shows that Merchandise Inventory is actually $99,000. The journal entry to record the needed adjustment would be:

To adjust for the lower amount of merchandise, the Cost of Goods Sold is Debited and Merchandise Inventory is credited.

A customer returned $4,000 of merchandise that was previously purchased on account before the bill was paid. The cost of goods sold was $1,500. The perpetual system is used. When recording the return of the merchandise, the seller records:

When a customer returns merchandise to the seller, the seller records two journal entries. Debit Refunds Payable and credit Accounts Receivable for the amount returned at sales price. Debit Merchandise Inventory and credit Estimated Returns Inventory for the merchandise returned at cost.

Abbott Company paid $100 in freight charges to ship goods to a customer and did not charge the customer for the freight. Abbott uses the perpetual system. The journal entry to record this transaction would be:

When the seller pays the shipping costs, it is a debit to Delivery Expense and a credit to Cash.

Abbott Company purchased inventory of $15,000 on account and uses the periodic system. The journal entry for the purchase would be:

When using the periodic system, purchases are recorded in the Purchases account as a debit (instead of Merchandise Inventory) and Accounts Payable as a credit.