Accounting Hw: December 2018

Saturday, December 29, 2018

United Rug Company is a small rug retailer owned and operated by Pat Kirwan. After the accounts have been adjusted on December 31

United Rug Company is a small rug retailer owned and operated by Pat Kirwan. After the accounts have been adjusted on December 31, the following selected account balances were taken from the ledger:

Advertising Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,000 Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 Freight In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000 Merchandise Inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 Merchandise Inventory, December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 460,000 Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 Purchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,760,000 Purchases Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 Purchases Returns and Allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Pat Kirwan, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,000 Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220,000

The estimated cost of merchandise returns from December sales is $20,000. Journalize the closing entries on December 31.

Answer:

Dec. 31 Merchandise Inventory (December 31) 460,000

Estimated Returns Inventory 20,000

Sales 2,220,000

Purchases Discounts 35,000

Purchases Returns and Allowances 45,000

Merchandise Inventory (January 1) 375,000

Purchases 1,760,000

Freight In 17,000

Salaries Expense 375,000

Advertising Expense 36,000

Depreciation Expense 13,000

Miscellaneous Expense 9,000

Pat Kirwan, Capital 195,000

31 Pat Kirwan, Capital 65,000

Pat Kirwan, Drawing 65,000

Identify the errors in the following schedule of the cost of merchandise sold for the year ended May 31, 2018:

Cost of merchandise sold: Merchandise inventory, May 31, 2018 . . . . . . . . . . . . . . . . . $ 105,000 Cost of merchandise purchased: Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,110,000 Purchases returns and allowances . . . . . . . . . . . . . . . . . . 55,000 Purchases discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 Freight in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,000) Total cost of merchandise purchased . . . . . . . . . . . . 1,173,000 Inventory available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,278,000 Merchandise inventory, June 1, 2017 . . . . . . . . . . . . . . . . . . . . . 91,300 Cost of merchandise sold before estimated returns . . . . . . . . $1,186,700 Increase in estimated returns inventory . . . . . . . . . . . . . . . . . . . 43,300 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,230,000

Answer:

1. The schedule should begin with the June 1, 2017, not the May 31, 2018,

merchandise inventory.

2. Purchases returns and allowances and purchases discounts should be deducted

from (not added to) purchases.

3. Freight in should be added to (not deducted from) purchases.

4. The merchandise inventory at May 31, 2018, should be deducted from inventory

available for sale to yield cost of merchandise sold before estimated returns.

5. The estimated returns for the year of $43,300 should be deducted from cost of

merchandise sold before estimated returns to yield cost of merchandise sold.

A correct cost of merchandise sold section is as follows:

Cost of merchandise sold:

Merchandise inventory, June 1, 2017$ 91,300

Cost of merchandise purchased:

Purchases$1,110,000

Purchases returns and allowances (55,000)

Purchases discounts(30,000)

Net purchases$1,025,000

Freight in22,000

Cost of merchandise purchased1,047,000

Merchandise available for sale$1,138,300

Merchandise inventory, May 31, 2018(105,000)

Cost of merchandise sold before estimated returns $1,033,300

Increase in estimated returns inventory(43,300)

Cost of merchandise sold$ 990,000

Based on the following data, determine the cost of merchandise sold for July: Increase in estimated returns inventory $ 34,900

Based on the following data, determine the cost of merchandise sold for July:

Increase in estimated returns inventory $ 34,900

Merchandise inventory, July 1 190,850

Merchandise inventory, July 31 160,450

Purchases 1,126,000

Purchases returns and allowances 46,000

Purchases discounts 23,000

Freight in 17,500

Answer:

Cost of merchandise sold:

Merchandise inventory, July 1$ 190,850

Cost of merchandise purchased:

Purchases$1,126,000

Purchases returns and allowances (46,000)

Purchases discounts(23,000)

Net purchases$1,057,000

Freight in17,500

Total cost of merchandise purchased1,074,500

Merchandise inventory available for sale$1,265,350

Merchandise inventory, July 31(160,450)

Cost of merchandise sold before estimated returns $1,104,900

Increase in estimated returns inventory(34,900)

Cost of merchandise sold$1,070,000

Based on the following data, determine the cost of merchandise sold for November: Increase in estimated returns inventory $ 14,500

Based on the following data, determine the cost of merchandise sold for November:

Increase in estimated returns inventory $ 14,500

Merchandise inventory, November 1 28,000

Merchandise inventory, November 30 31,500

Purchases 475,000

Purchases returns and allowances 15,000

Purchases discounts 9,000

Freight in 7,000

Answer:

Cost of merchandise sold:

Merchandise inventory, November 1$ 28,000

Cost of merchandise purchased:

Purchases$475,000

Purchases returns and allowances (15,000)

Purchases discounts(9,000)

Net purchases$451,000

Freight in7,000

Total cost of merchandise purchased 458,000

Merchandise available for sale$486,000

Merchandise inventory, November 30(31,500)

Cost of merchandise before estimated returns $454,500

Increase in estimated returns inventory(14,500)

Cost of merchandise sold$440,000

The following data were extracted from the accounting records of Harkins Company for the year ended April 30, 2019:

Increase in estimated returns inventory $ 11,600

Merchandise inventory, May 1, 2018 380,000

Merchandise inventory, April 30, 2019 415,000

Purchases 3,800,000

Purchases returns and allowances 150,000

Purchases discounts 80,000

Sales 5,850,000

Freight in 16,600

a. Prepare the cost of merchandise sold section of the income statement for the year ended April 30, 2019, using the periodic inventory system.

b. Determine the gross profit to be reported on the income statement for the year ended April 30, 2019.

c. Would gross profit be different if the perpetual inventory system was used instead of the periodic inventory system?

Answer:

a. Cost of merchandise sold:

Merchandise inventory, May 1, 2018$ 380,000

Cost of merchandise purchased:

Purchases$3,800,000

Purchases returns and allowances (150,000)

Purchases discounts(80,000)

Net purchases$3,570,000

Freight in16,600

Total cost of merchandise purchased 3,586,600

Merchandise available for sale$3,966,600

Merchandise inventory, April 30, 2019(415,000)

Cost of merchandise sold before estimated returns $3,551,600

Increase in estimated returns inventory(11,600)

Cost of merchandise sold$3,540,000

b. $2,310,000 ($5,850,000 – $3,540,000)

c. No. Gross profit would be the same if the perpetual inventory system was

used.

The following selected transactions were completed by Air Systems Company during January of the current year. Air Systems Company uses the periodic inventory system.

Jan.

2. Purchased $18,200 of merchandise on account, FOB shipping point, terms 2/15, n/30.

5. Paid freight of $190 on the January 2 purchase.

6. Returned $2,750 of the merchandise purchased on January 2.

13. Sold merchandise on account, $37,300, FOB destination, 1/10, n/30. The cost of merchandise sold was $22,400.

15. Paid freight of $215 for the merchandise sold on January 13.

17. Paid for the purchase of January 2 less the return and discount.

23. Received payment on account for the sale of January 13 less the discount.

Journalize the entries to record the transactions of Air Systems Company.

Answer:

Jan. 2 Purchases18,200

Accounts Payable18,200

5 Freight In190

Cash190

6 Accounts Payable2,750

Purchases Returns and Allowances2,750

13 Accounts Receivable [$37,300 – ($37,300 × 1%)] 36,927

Sales36,927

15 Delivery Expense215

Cash215

17 Accounts Payable15,450

Purchases Discounts*309

Cash15,141

23 Cash36,927

Accounts Receivable36,927

* [($18,200 – $2,750) × 2%]

For (a) through (d), identify the items designated by X and Y. a. Purchases 2 (X 1 Y) 5 Net purchases.

For (a) through (d), identify the items designated by X and Y.

a. Purchases 2 (X 1 Y) 5 Net purchases.

b. Net purchases 1 X 5 Cost of merchandise purchased.

c. Merchandise inventory (beginning) 1 Cost of merchandise purchased 5 X.

d. Merchandise available for sale 2 X 5 Cost of merchandise sold before estimated returns.

e. Cost of merchandise sold before estimated returns 2 X = Cost of merchandise sold.

Answer:

a. Purchases discounts, purchases returns and allowances

b. Freight in

c. Merchandise available for sale

d. Merchandise inventory (ending)

e. Increase in estimated returns inventory

Complete the following table by indicating for (a) through (g) whether the proper answer is debit or credit:

| Normal

Account Increase | Decrease | Balance

Purchases debit | (a) | (b)

Purchases Discounts credit | (c) | credit

Purchases Returns and Allowances (d) | (e) | (f )

Freight In debit | (g) | debit

Answer:

(a) credit

(b) debit

(d) credit

(e) debit

(f) credit

(g) credit

Kroger Co., a national supermarket chain, reported the following data (in millions) in its financial statements for a recent year:

Total revenue $108,465

Total assets at end of year 30,556

Total assets at beginning of year 29,281

a. Compute the asset turnover. Round to two decimal places.

b. Tiffany & Co. is a large North American retailer of jewelry with an asset turnover of 0.86. Why would Tiffany’s asset turnover be lower than that of Kroger?

Answer:

a. 3.63 {$108,465 ÷ [($30,556 + $29,281) ÷ 2]}

b. Although Kroger and Tiffany are both retail stores, Tiffany sells jewelry using a much longer operating cycle than Kroger uses selling groceries. Thus, Kroger is able to generate $3.63 of sales for every dollar of assets. Tiffany, however, is only able to generate $0.86 in sales per dollar of assets. This difference is reasonable when one considers the sales rate for jewelry and the cost of holding jewelry inventory, relative to groceries. Fortunately, Tiffany is able to offset its longer operating cycle, relative to groceries, with higher gross profits, relative to groceries.

On July 31, 2019, the balances of the accounts appearing in the ledger of Serbian Interiors Company, a furniture wholesaler, are as follows:

Accumulated Depr.—Building $365,000

Peter Bronsky, Capital $ 530,000

Administrative Expenses 440,000

Peter Bronsky, Drawing 15,000

Building 810,000

Sales 1,437,000

Cash 78,000

Sales Tax Payable 4,500

Cost of Merchandise Sold 775,000

Selling Expenses 160,000

Interest Expense 6,000

Store Supplies 16,000

Merchandise Inventory 115,000

Store Supplies Expense 21,500

Notes Payable 100,000

Prepare the July 31, 2019, closing entries for Serbian Interiors Company.

Answer:

2019

July 31 Sales1,437,000

Administrative Expenses440,000

Cost of Merchandise Sold775,000

Interest Expense6,000

Selling Expenses160,000

Store Supplies Expense21,500

Peter Bronsky, Capital34,500

31 Peter Bronsky, Capital15,000

Peter Bronsky, Drawing15,000

The Home Depot reported the following data (in millions) in its recent financial statements:

Year 2 | Year 1

Sales $83,176 | $78,812

Total assets at the end of the year 39,946 | 40,518

Total assets at the beginning of the year 40,518 | 41,084

a. Determine the asset turnover for The Home Depot for Year 2 and Year 1. Round to two decimal places.

b. What conclusions can be drawn concerning the trend in the ability of The Home Depot to effectively use its assets to generate sales?

Answer:

a. Year 2: 2.07 {$83,176 ÷ [($39,946 + $40,518) ÷ 2]}

Year 1: 1.93 {$78,812 ÷ [($40,518 + $41,084) ÷ 2]}

b. These analyses indicate a slight increase in the effectiveness in the use of the assets to generate profits. A comparison with similar companies or industry averages would be helpful in making a more definitive statement on the effectiveness of the use of the assets.

Based on the data presented in Exercise 6-25, journalize the closing entries.2019 Mar. 31 Sales2,564,000

Based on the data presented in Exercise 6-25, journalize the closing entries.

Answer:

2019

Mar. 31 Sales2,564,000

Cost of Merchandise Sold1,520,000

Selling Expenses286,000

Administrative Expenses216,000

Interest Expense4,000

Kathy Melman, Capital538,000

31 Kathy Melman, Capital70,000

Kathy Melman, Drawing70,000

From the following list, identify the accounts that should be closed to Tim Button, Capital at the end of the fiscal year under a perpetual inventory system:

From the following list, identify the accounts that should be closed to Tim Button, Capital at the end of the fiscal year under a perpetual inventory system: (a) Accounts Receivable, (b) Cost of Merchandise Sold, (c) Customer Refunds Payable, (d) Estimated Returns Inventory, (e) Merchandise Inventory, (f) Sales, (g) Supplies, (h) Supplies Expense, (i) Tim Button, Drawing, (j) Wages Expense.

Answer:

(b) Cost of Merchandise Sold

(f) Sales

(h) Supplies Expense

(i) Tim Button, Drawing

(j) Wages Expense

Summary operating data for Custom Wire & Tubing Company during the year ended April 30, 2019, are as follows

Summary operating data for Custom Wire & Tubing Company during the year ended April 30, 2019, are as follows: cost of merchandise sold, $6,100,000; administrative expenses, $740,000; interest expense, $25,000; rent revenue, $60,000; sales, $9,332,500; and selling expenses, $1,250,000. Prepare a single-step income statement.

Answer:

Revenues:

Sales $9,332,500

Rent revenue 60,000

Total revenues $9,392,500

Expenses:

Cost of merchandise sold $6,100,000

Selling expenses 1,250,000

Administrative expenses 740,000

Interest expense 25,000

Total expenses 8,115,000

Net income $1,277,500

Identify the errors in the following income statement:Curbstone Company Income Statement For the Year Ended August 31, 2019

Identify the errors in the following income statement:

Curbstone Company Income Statement For the Year Ended August 31, 2019

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,595,000 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110,000 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,485,000 Expenses: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,000 Delivery expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 $ 685,000 Other expense: Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640,000

Answer:

1. Deducting the cost of merchandise sold from sales yields gross profit (not income

from operations).

2. Deducting the total expenses from gross profit yields income from operations

(or operating income).

3. Interest revenue should be reported under the caption “Other revenue” and

should be added to income from operations to arrive at net income.

4. The final amount on the income statement should be labeled net income, not

gross profit.

A correct income statement is as follows:

Sales$8,595,000

Cost of merchandise sold6,110,000

Gross profit$2,485,000

Expenses:

Selling expenses$800,000

Administrative expenses575,000

Delivery expense425,000

Total expenses1,800,000

Income from operations$ 685,000

Other revenue:

Interest revenue45,000

Net income$ 730,000

On March 31, 2019, the balances of the accounts appearing in the ledger of Racine Furnishings Company, a furniture wholesaler, are as follows:

Accumulated Depreciation—Building $ 300,000

Merchandise Inventory $ 392,000

Administrative Expenses 216,000

Notes Payable 100,000

Building 1,000,000

Office Supplies 8,000

Cash 70,000

Salaries Payable 3,200

Cost of Merchandise Sold 1,520,000

Sales 2,564,000

Interest Expense 4,000

Selling Expenses 286,000

Kathy Melman, Capital 634,800

Store Supplies 36,000

Kathy Melman, Drawing 70,000

a. Prepare a multiple-step income statement for the year ended March 31, 2019.

b. Compare the major advantages and disadvantages of the multiple-step and single-step forms of income statements.

Answer:

Sales$2,564,000

Cost of merchandise sold1,520,000

Gross profit$1,044,000

Expenses:

Selling expenses$286,000

Administrative expenses216,000

Total expenses502,000

Income from operations$ 542,000

Other expense:

Interest expense4,000

Net income$ 538,000

b. The major advantage of the multiple-step form of income statement is that

relationships such as gross profit to sales are indicated. The major disadvantages

are that it is more complex and the total revenues and expenses are not indicated,

as is the case in the single-step income statement.

One item is omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them by letter.

Sales $463,400 (b) $1,295,000 (d)

Cost of merchandise sold (a) $410,000 (c) $900,000

Gross profit 83,500 277,500 275,000 600,000

Answer:

a. $379,900 ($463,400 – $83,500)

b. $687,500 ($277,500 + $410,000)

c. $1,020,000 ($1,295,000 – $275,000)

d. $1,500,000 ($900,000 + $600,000)

Zell Company had sales of $1,800,000 and related cost of merchandise sold of $1,150,000 for its first year of operations ending December 31, 2019

Zell Company had sales of $1,800,000 and related cost of merchandise sold of $1,150,000 for its first year of operations ending December 31, 2019. Zell Company provides customers a refund for any returned or damaged merchandise. At the end of the year, Zell Company estimates that customers will request refunds and allowances for 1.5% of sales and estimates that merchandise costing $16,000 will be returned. Assume that on February 3, 2020, Anderson Co. returned merchandise with a selling price of $5,000 for a cash refund. The returned merchandise originally cost Zell Company $3,100. (a) Journalize the adjusting entries on December 31, 2019, to record the expected customer refunds, allowances, and returns. (b) Journalize the entries to record the returned merchandise and cash refund to Anderson Co.

Answer:

a. 2019

Dec. 31 Sales ($1,800,000 × 1.5%) 27,000

Customer Refunds Payable27,000

31 Estimated Returns Inventory 16,000

Cost of Merchandise Sold16,000

b. 2020

Feb. 3 Customer Refunds Payable 5,000

Cash5,000

3 Merchandise Inventory 3,100

Estimated Returns Inventory3,100

For the fiscal year, sales were $191,350,000 and the cost of merchandise sold was $114,800,000.

a. What was the amount of gross profit?

b. If total operating expenses were $18,250,000, could you determine net income?

c. Is Customer Refunds Payable an asset, liability, or owner’s equity account, and what is its normal balance?

d. Is Estimated Returns Inventory an asset, liability, or owner’s equity account, and what is its normal balance?

Answer:

a. Gross profit: $76,550,000 ($191,350,000 – $114,800,000)

b. No. There could be other revenue and expense items that affect the amount of net income.

c. Customer Refunds Payable is a liability account with a normal credit balance.

d. Estimated Returns Inventory is an asset account with a normal debit balance.

The following expenses were incurred by a merchandising business during the year. In which expense section of the income statement should each be reported:

The following expenses were incurred by a merchandising business during the year. In which expense section of the income statement should each be reported: (a) selling, (b) administrative, or (c) other?

1. Advertising expense

2. Depreciation expense on store equipment

3. Insurance expense on office equipment

4. Interest expense on notes payable

5. Rent expense on office building

6. Salaries of office personnel

7. Salary of sales manager

8. Sales supplies used

Answer:

a. Selling expense, (1), (2), (7), (8)

b. Administrative expense, (3), (5), (6)

c. Other expense, (4)