7 Accounting for

Merchandising Operations
Learning Objectives
1 Describe merchandising operations and inventory systems.

2 Record purchases under a perpetual inventory system.

3 Record sales under a perpetual inventory system.

Apply the steps in the accounting cycle to a merchandising

4 company.

5 Compare a multiple-step with a single-step income statement.

5-1
LEARNING Describe merchandising operations and
1
OBJECTIVE inventory systems.

Merchandising Companies
Buy and Sell Goods
Retailer

Wholesaler Consumer

The primary source of revenues is referred to as

sales revenue or sales.
5-2 LO 1
 Merchandising Operations

Income Measurement
Not used in a
Sales Less
Illustration 5-1
Service business.
Revenue Income measurement process for a
merchandising company

Cost of Equals Gross Less

Goods Sold Profit

Operating Equals Net

Cost of goods sold is the total Income
Expenses
cost of merchandise sold during (Loss)
the period.

5-3 LO 1
 Operating Cycles
Illustration 5-2
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service company.

Illustration 5-3

5-4 LO 1
 Flow of Costs
Illustration 5-4

Beginning Inv + Purchases – COGS = Ending Inv

Companies use either a perpetual inventory system or a periodic
5-5 inventory system to account for inventory. LO 1
 Flow of Costs

PERPETUAL SYSTEM
 Maintain detailed records of the cost of each inventory
purchase and sale.

 Records continuously show inventory that should be on

hand for every item.

 Company determines cost of goods sold each time a

sale occurs.

5-6 LO 1
 Flow of Costs

PERIODIC SYSTEM
 Do not keep detailed records of the goods on hand.

 Cost of goods sold determined by count at the end of

the accounting period.

 Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000

Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000

5-7 LO 1
 Flow of Costs

5-8
 Flow of Costs

ADVANTAGES OF THE PERPETUAL SYSTEM

 Traditionally used for merchandise with high unit
values.

 Shows the quantity and cost of the inventory that

should be on hand at any time.

 Provides better control over inventories than a periodic

system.

5-9 LO 1
5-10 LO 1
 DO IT! 1 Merchandising Operations and Inventory Systems

Indicate whether the following statements are true or false.

1. The primary source of revenue for a merchandising

company results from performing services for False
customers.

2. The operating cycle of a service company is usually

shorter than that of a merchandising company. True

3. Sales revenue less cost of goods sold equals gross

True
profit.

4. Ending inventory plus the cost of goods purchased

equals cost of goods available for sale.
False

5-11 LO 1
LEARNING Record purchases under a perpetual
2
OBJECTIVE inventory system.

 Made using cash or credit (on account).

 Normally record when

goods are received from
the seller.

 Purchase invoice should

support each credit
purchase.

Illustration 5-6
Sales invoice used as purchase
invoice by Sauk Stereo

5-12 LO 2
 Recording Purchases of Merchandise
Illustration 5-6

Illustration: Sauk Stereo (the

buyer) uses as a purchase
invoice the sales invoice
prepared by PW Audio Supply,
Inc. (the seller). Prepare the
journal entry for Sauk Stereo for
the invoice from PW Audio
Supply.

May 4 Inventory 3,800

Accounts Payable 3,800
5-13 LO 2
 Freight Costs

Ownership of the goods

passes to the buyer when the
public carrier accepts the
goods from the seller.

Ownership of the goods

remains with the seller until
the goods reach the buyer.

Illustration 5-7
Shipping terms
Freight costs incurred by the seller are an
operating expense.
5-14 LO 2
 Freight Costs

Illustration: Assume upon delivery of the goods on May 6, Sauk

Stereo pays Public Freight Company $150 for freight charges
(FOB Shipping), the entry on Sauk Stereo’s books is:

May 6 Inventory 150

Cash 150

Assume the freight terms on the invoice in Illustration 5-6 had

required PW Audio Supply to pay the freight charges (FOB
Destination), the entry by PW Audio Supply would have been:

May 4 Freight-Out 150

Cash 150
5-15 LO 2
 Purchase Returns and Allowances

Purchaser may be dissatisfied because goods are damaged or

defective, of inferior quality, or do not meet specifications.

Purchase Return Purchase Allowance

Return goods for credit if the May choose to keep the
sale was made on credit, or merchandise if the seller will
for a cash refund if the grant a reduction of the
purchase was for cash. purchase price.

5-16 LO 2
 Purchase Returns and Allowances

Illustration: Assume Sauk Stereo returned goods costing

$300 to PW Audio Supply on May 8.

May 8 Accounts Payable 300

Inventory 300

5-17 LO 2
 Purchase Returns and Allowances

Question
In a perpetual inventory system, a return of defective
merchandise by a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Inventory

5-18 LO 2
 Purchase Discounts

Credit terms may permit buyer to claim a cash discount for

prompt payment.
Example: Credit terms
Advantages: may read 2/10, n/30.
 Purchaser saves money.

 Seller shortens the operating cycle by converting the

accounts receivable into cash earlier.

5-19 LO 2
 Purchase Discounts

2/10, n/30 1/10 EOM n/10 EOM

2% discount if 1% discount if Net amount due

paid within 10 paid within first 10 within the first 10
days, otherwise days of next days of the next
net amount due month. month.
within 30 days.

5-20 LO 2
 Purchase Discounts

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk Stereo
makes on May 14 to record the payment.

May 14 Accounts Payable 3,500

Inventory 70
Cash 3,430

(Discount = $3,500 x 2% = $70)

5-21 LO 2
 Purchase Discounts

Illustration: If Sauk Stereo failed to take the discount, and

instead made full payment of $3,500 on June 3, the journal
entry would be:

June 3 Accounts Payable 3,500

Cash 3,500

5-22 LO 2
 Purchase Discounts

Should discounts be taken when offered?

Discount of 2% on $3,500 $ 70.00

$3,500 invested at 10% for 20 days 19.18
Savings by taking the discount $ 50.82

Example: 2% for 20 days = Annual rate of 36.5%

$3,500 x 36.5% x 20 ÷ 365 = $70

5-23 LO 2
 Summary of Purchasing Transactions

Inventory
Debit Credit

4th - Purchase 3,800 300 8th - Return

6th – Freight-in 150 70 14th - Discount

Balance 3,580

5-24 LO 2
 DO IT! 2 Purchase Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200. Record the transactions on the books of De La
Hoya Company.

Sept. 5 Inventory 1,500

Accounts Payable 1,500
Sept. 8 Accounts Payable 200
Inventory 200

5-25 LO 2
LEARNING Record sales under a perpetual inventory
3
OBJECTIVE system.

 Made using cash or credit (on account).

Illustration 5-6

 Sales revenue, like service

revenue, is recorded when
the performance obligation
is satisfied.

 Performance obligation is
satisfied when the goods
are transferred from the
seller to the buyer.

 Sales invoice should

support each credit sale.
5-26 LO 3
 Recording Sales of Merchandise

Journal Entries to Record a Sale

#1 Cash or Accounts receivable XXX Selling

Sales revenue XXX Price

#2 Cost of goods sold XXX

Cost
Inventory XXX

5-27 LO 3
 Recording Sales of Merchandise

Illustration: PW Audio Supply records the sale of $3,800 on

May 4 to Sauk Stereo on account (Illustration 5-6) as follows
(assume the merchandise cost PW Audio Supply $2,400).

May 4 Accounts Receivable 3,800

Sales Revenue 3,800

4 Cost of Goods Sold 2,400

Inventory 2,400

5-28 LO 3
5-29 LO 3
 Sales Returns and Allowances

 “Flip side” of purchase returns and allowances.

 Contra-revenue account to Sales Revenue (debit).

 Sales not reduced (debited) because:

► Would obscure importance of sales returns and

allowances as a percentage of sales.

► Could distort comparisons.

5-30 LO 3
 Sales Returns and Allowances

Illustration: Prepare the entry PW Audio Supply would make

to record the credit for returned goods that had a $300 selling
price (assume a $140 cost). Assume the goods were not
defective.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

8 Inventory 140
Cost of Goods Sold 140

5-31 LO 3
 Sales Returns and Allowances

Illustration: Assume the returned goods were defective and

had a scrap value of $50, PW Audio would make the following
entries:

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

8 Inventory 50
Cost of Goods Sold 50

5-32 LO 3
 Sales Returns and Allowances

Question
The cost of goods sold is determined and recorded each
time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.

5-33 LO 3
5-34 LO 3
 Sales Discount

 Offered to customers to promote prompt payment of the

balance due.

 Contra-revenue account (debit) to Sales Revenue.

5-35 LO 3
 Sales Discount

Illustration: Assume Sauk Stereo pays the balance due of

$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.

May 14 Cash 3,430

Sales Discounts 70 *
Accounts Receivable 3,500

* [($3,800 – $300) X 2%]

5-36 LO 3
 DO IT! 3 Sales Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.

Sept. 5 Accounts Receivable 1,500

Sales Revenue 1,500
Sept. 5 Cost of Goods Sold 800
Inventory 800

5-37 LO 3
 DO IT! 3 Sales Transactions

On September 5, De La Hoya Company buys merchandise on

account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.

Sept. 8 Sales Returns and Allowances 200

Accounts Receivable 200
Sept. 8 Inventory 30
Cost of Goods Sold 30

5-38 LO 3
LEARNING Apply the steps in the accounting cycle to a
4
OBJECTIVE merchandising company.

Adjusting Entries
 Generally the same as a service company.

 One additional adjustment to make the records agree with

the actual inventory on hand.

 Involves adjusting Inventory and Cost of Goods Sold.

5-39 LO 4
 Adjusting Entries

Illustration: Suppose that PW Audio Supply has an unadjusted

balance of $40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. The company would make an adjusting
entry as follows.

Cost of Goods Sold 500

Inventory 500

5-40 LO 4
 Closing Entries

5-41 LO 4
 Closing Entries

5-42 LO 4
 DO IT! 4 Closing Entries

The trial balance of Celine’s Sports Wear Shop at December 31

shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.

Dec. 31 Sales Revenue 162,400

Rent Revenue 6,000
Income Summary 168,400

5-43 LO 4
 The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.

Dec. 31 Income Summary 151,000

Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
5-44 LO 4
LEARNING Compare a multiple-step with a single-step
5
OBJECTIVE income statement.

Multiple-Step Income Statement

 Shows several steps in determining net income.

 Two steps relate to principal operating activities.

 Distinguishes between operating and non-operating

activities.

5-45 LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

Illustration 5-14
5-46
LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

 Gross profit

Illustration 5-14
5-47
LO 5
 Illustration 5-14

Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

Illustration 5-14
5-48
LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

Illustration 5-14
5-49
LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

Illustration 5-14
5-50
LO 5
 Multiple-
Step

Key Items:
 Net sales

 Gross profit

 Operating
expenses

 Nonoperating
activities

 Net income

Illustration 5-14
5-51
LO 5
 Multiple-Step Income Statement

Question
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.

5-52 LO 5
 Single-Step Income Statement

 Subtract total expenses from total revenues

 Two reasons for using the single-step format:

1. Company does not realize any profit until total

revenues exceed total expenses.

2. Format is simpler and easier to read.

5-53 LO 5
 Single-Step Income Statement

Illustration 5-15

5-54 LO 5
5-55 LO 5
 Classified Balance Sheet

Illustration 5-16

5-56 LO 5
 DO IT! 5 Financial Statement Classifications

Indicate in which financial statement and under what

classification each of the following accounts would be reported.

5-57 LO 5
5-58 LO 5
5-59 LO 5
LEARNING APPENDIX 5A: Prepare a worksheet for
6
OBJECTIVE a merchandising company.

Using a Worksheet
As indicated in Chapter 4, a worksheet enables companies to
prepare financial statements before they journalize and post
adjusting entries. The steps in preparing a worksheet for a
merchandising company are the same as for a service
company. Illustration 5A-1 shows the worksheet for PW Audio
Supply, Inc. (excluding nonoperating items). The unique
accounts for a merchandiser using a perpetual inventory system
are in red.

5-60 LO 6
 Illustration 5A-1

5-61 LO 6
LEARNING APPENDIX 5B: Record purchases and sales
7
OBJECTIVE under a periodic inventory system.

Determining Cost of Goods Sold Under a Periodic

System
 No running account of changes in inventory.

 Ending inventory determined by physical count.

 Cost of goods sold not determined until the end of the

period.

5-62 LO 7
 Determining Cost of Goods Sold
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system

Illustration 5B-2

5-63 LO 7
 Recording Merchandise Transactions

 Record revenues when sales are made.

 Do not record cost of merchandise sold on the date of
sale.
 Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.

 Record purchases in Purchases account.

 Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.

5-64 LO 7
 Recording Purchases of Merchandise

Illustration: On the basis of the sales invoice (Illustration 5-6)

and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the $3,800 purchase as follows.

May 4 Purchases 3,800

Accounts Payable 3,800

5-65 LO 7
 Recording Purchases of Merchandise

FREIGHT COSTS
Illustration: If Sauk pays Public Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:

May 6 Freight-In (Transportation-In) 150

Cash 150

5-66 LO 7
 Recording Purchases of Merchandise

PURCHASE RETURNS AND ALLOWANCES

Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.

May 8 Accounts payable 300

Purchase Returns and Allowances 300

5-67 LO 7
 Recording Purchases of Merchandise

PURCHASE DISCOUNTS
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.

May 14 Accounts Payable 3,500

Purchase Discounts 70
Cash 3,430

5-68 LO 7
 Recording Sales of Merchandise

Illustration: PW Audio Supply, records the sale of $3,800 of

merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.

May 4 Accounts Receivable 3,800

Sales Revenue 3,800

No entry is recorded for cost of goods sold at the time of the sale
under a periodic system.

5-69 LO 7
 Recording Sales of Merchandise

SALES RETURNS AND ALLOWANCES

Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.

May 8 Sales Returns and Allowances 300

Accounts Receivable 300

5-70 LO 7
 Recording Sales of Merchandise

SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment of
$3,430 on account from Sauk Stereo. PW Audio honors the 2%
cash discount and records the payment of Sauk’s account
receivable in full as follows.

May 14 Cash 3,430

Sales Discounts 70
Accounts Receivable 3,500

5-71 LO 7
 Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

5-72 LO 7
 Recording Sales of Merchandise

COMPARISON OF ENTRIES
Illustration 5B-3

5-73 LO 7
Illustration 5B-5
Worksheet for
merchandising
company—periodic
inventory system

5-74
 A Look at IFRS

LEARNING Compare the accounting for merchandising under

OBJECTIVE
8 GAAP and IFRS.

Key Points
Similarities
 Under both GAAP and IFRS, a company can choose to use either a
perpetual or a periodic inventory system.
 The definition of inventories is basically the same under GAAP and
IFRS.
 As indicated above, the basic accounting entries for merchandising
are the same under both GAAP and IFRS.

5-75 LO 8
 A Look at IFRS

Key Points
Similarities
 IFRS requires that 2 years of income statement information be
presented, whereas GAAP requires 3 years.
Differences
 Under GAAP, companies generally classify income statement items
by function. Classification by function leads to descriptions like
administration, distribution, and manufacturing. Under IFRS,
companies must classify expenses either by nature or by function.
Classification by nature leads to descriptions such as the following:
salaries, depreciation expense, and utilities expense. If a company
uses the functional-expense method on the income statement,
disclosure by nature is required in the notes.
5-76 LO 8
 A Look at IFRS

Key Points
Differences
 Presentation of the income statement under GAAP follows either
a single-step or multiple-step format. IFRS does not mention a
single-step or multiple-step approach.
 Under IFRS, revaluation of land, buildings, and intangible assets
is permitted. The initial gains and losses resulting from this
revaluation are reported as adjustments to equity, often referred
to as other comprehensive income . The effect of this difference is
that the use of IFRS result in more transactions affecting equity
(other comprehensive income) but not net income.

5-77 LO 8
 A Look at IFRS

Looking to the Future

The IASB and FASB are working on a project that would rework the structure
of financial statements. Specifically, this project will address the issue of how
to classify various items in the income statement. A main goal of this new
approach is to provide information that better represents how businesses are
run. In addition, this approach draws attention away from just one number—net
income. It will adopt major groupings similar to those currently used by the
statement of cash flows (operating, investing, and financing), so that numbers
can be more readily traced across statements. For example, the amount of
income that is generated by operations would be traceable to the assets and
liabilities used to generate the income. Finally, this approach would also
provide detail, beyond that currently seen in most statements (either GAAP or
IFRS), by requiring that line items be presented both by function and by
nature. The new financial statement format was heavily influenced by
suggestions from financial statement analysts.
5-78 LO 8
 A Look at IFRS

IFRS Self-Test Questions

Which of the following would not be included in the definition of
inventory under IFRS?

a) Photocopy paper held for sale by an office-supply store.

b) Stereo equipment held for sale by an electronics store.

c) Used office equipment held for sale by the human relations

department of a plastics company.

d) All of the above would meet the definition.

5-79 LO 8
 A Look at IFRS

IFRS Self-Test Questions

Which of the following would not be a line item of a company
reporting costs by nature?

a) Depreciation expense.

b) Salaries expense.

c) Interest expense.

d) Manufacturing expense.

5-80 LO 8
 A Look at IFRS

IFRS Self-Test Questions

Which of the following would not be a line item of a company
reporting costs by function?

a) Administration.

b) Manufacturing.

c) Utilities expense.

d) Distribution.

5-81 LO 8
Accounting for
Merchandising
Operations

5
REVIEW KEY
LEARNINGS
 Flow of Costs Adjusting &
Closing Entries

Perpetual & Periodic

systems Multiple-Step
Income
Statement

Recording Recording
Sales Purchases
Flow of Costs

Beginning Inventory + COG Purchases

= COG Available for Sale

= COGS + Ending Inventory

 Inventory systems

Perpetual system
Inventory Purchased Item Sold End of Period

• Record purchases • Record revenue • No entry

• Record COGS

Periodic system
Inventory Purchased Item Sold End of Period

• Record purchases • Record revenue • Record COGS

Recording Process
Adjusting & Closing
Multiple-Step Income Statement
QUICK
EXERCISES
 DO IT! 5-1

Indicate whether the following statements are TRUE or FALSE.

1. A merchandising company reports gross profit but a service company does not.
 True
2. Under a periodic inventory system, a company determines the cost of goods sold each time a sale
occurs.
 False. Under a perpetual inventory system, a company determines the cost of goods sold at
each time a sale occurs.
3. A service company is likely to use accounts receivable but a merchandising company is not likely
to do so.
 False. Both service and merchandising companies are likely to use accounts receivable.
4. Under a periodic inventory system, the cost of goods on hand at the beginning of the accounting
period plus the cost of goods purchased less the cost of goods on hand at the end of the accounting
period equals cost of goods sold.
 True
 Exercise E5-1

Mr. McKenzie has prepared the following list of statements about service companies and merchandisers. Indicate whether the
following statements are TRUE or FALSE.
1. Measuring net income for a merchandiser is conceptually the same as for a service company.
 True.
2. For a merchandiser, sales less operating expenses is called gross profit.
 False. For a merchandiser, sales less cost of goods sold is called gross profit.
3. For a merchandiser, the primary source of revenues is the sale of inventory.
 True.
4. Sales salaries and wages is an example of an operating expense.
 True.
5. The operating cycle of a merchandiser is the same as that of a service company.
 False. The operating cycle of a merchandiser differs from that of a service company. The operating cycle of a
merchandiser is ordinarily longer.
6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained.
 False. In a periodic inventory system, no detailed inventory records of goods on hand are maintained.
7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period.
 True.
8. A periodic inventory system provides better control over inventories than a perpetual system.
 False. A perpetual inventory system provides better control over inventories than a periodic system.
Practice BE5-4

Prepare the journal entries to record the following transactions on Novy Company’s
books using a perpetual inventory system.
(a) On March 2, Novy Company sold $900,000 of merchandise to Opps
Company, terms 2/10, n/30. The cost of the merchandise sold was $590,000.
(b) On March 6, Opps Company returned $90,000 of the merchandise purchased
on March 2. The cost of the returned merchandise was $62,000.
(c) On March 12, Novy Company received the balance due from Opps Company.
(a) On March 2, Novy Company sold $900,000 of merchandise to Opps Company, terms 2/10,
n/30. The cost of the merchandise sold was $590,000.
(a) Accounts Receivable 900,000
Sales Revenue 900,000
Cost of Goods Sold 590,000
Inventory 590,000

(b) On March 6, Opps Company returned $90,000 of the merchandise purchased on March 2.
The cost of the returned merchandise was $62,000.
(b) Sales Returns and Allowances 90,000
Accounts Receivable 90,000
Inventory 62,000
Cost of Goods Sold 62,000

(c) On March 12, Novy Company received the balance due from Opps Company.

(c) Cash ($810,000 – $16,200) 793,800

Sales Discounts ($810,000 X 2%) 16,200
Accounts Receivable 810,000
($900,000 – $90,000)
Practice BE5-14

Prepare the journal entries to record these transactions on Shabani Company’s

books using a periodic inventory system.
(a) On March 2, Shabani Company purchased $900,000 of merchandise from
Ballas Company, terms 2/10, n/30.
(b) On March 6, Shabani Company returned $110,000 of the merchandise
purchased on March 2.
(c) On March 12, Shabani Company paid the balance due to Ballas Company.
(a) On March 2, Shabani Company purchased $900,000 of merchandise from Ballas Company,
terms 2/10, n/30.
(a) Purchases 900,000
Accounts Payable 900,000
(b) On March 6, Shabani Company returned $110,000 of the merchandise purchased on March
2.
(b) Accounts Payable 110,000
Purchase Returns and Allowances 110,000

(c) On March 12, Shabani Company paid the balance due to Ballas Company.
(c) Accounts Payable ($900,000 – $110,000) 790,000
Purchase Discounts ($790,000 X 2%) 15,800
Cash ($790,000 – $15,800) 774,200
PRACTICE
PROBLEMS
Practice E5-3

On September 1, Nixa Office Supply had an inventory of 30 calculators at a cost of $18 each. The company uses a
perpetual inventory system. During September, the following transactions occurred.
Sept. 6 Purchased 90 calculators at $22 each from York, terms net/30.
9 Paid freight of $90 on calculators purchased from York Co.
10 Returned 3 calculators to York Co. for $69 credit (including freight) because they did not meet specifications.
12 Sold 26 calculators costing $23 (including freight) for $31 each to Sura Book Store, terms n/30.
14 Granted credit of $31 to Sura Book Store for the return of one calculator that was not ordered.
20 Sold 30 calculators costing $23 for $32 each to Davis Card Shop, terms n/30.
Instructions
Journalize the September transactions
Sept. 6 Inventory (90 X $22) 1,980
Account Payable 1,980

9 Inventory 90
Cash 90

10 Accounts Payable 69
Inventory 69

12 Accounts Receivable (26 X $31) 806

Sales Revenue 806
Cost of Goods Sold (26 X $23) 598
Inventory 598

14 Sales Returns and Allowances 31

Accounts Receivable 31
Inventory 23
Cost of Goods Sold 23

20 Accounts Receivable (30 X $32) 960

Sales Revenue 960
Cost of Goods Sold (30 X $23) 690
Inventory 690
Practice E5-21

Presented below is information related to Chung Co.

1. On April 5, purchased merchandise from Jose Company for $21,000, terms 2/10, net/30,
FOB shipping point.
2. On April 6, paid freight costs of $800 on merchandise purchased from Jose.
3. On April 7, purchased equipment on account from Winker Mfg. Co. for $26,000.
4. On April 8, returned merchandise, which cost $4,000, to Jose Company.
5. On April 15, paid the amount due to Jose Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of Chung Co. using a
periodic inventory system.
(b) Assume that Chung Co. paid the balance due to Jose Company on May 4 instead of April
15. Prepare the journal entry to record this payment.
(a) 1. April 5 Purchases 21,000
Accounts Payable 21,000

2. April 6 Freight-in 800

Cash 800

3. April 7 Equipment 26,000

Accounts Payable 26,000

4. April 8 Accounts Payable 4,000

Purchase Returns and Allowances 4,000

5. April 15 Accounts Payable 17,000

($21,000 – $4,000)
Purchase Discounts
[($21,000 – $4,000) X 2%)] 340
Cash ($17,000 – $340) 16,660

(b) May 4 Accounts Payable

($21,000 – $4,000) 17,000
Cash 17,000
Practice E5-5

Presented below are transactions related to R. Humphrey Company.

1. On December 3, R. Humphrey Company sold $570,000 of merchandise to Frazier Co., terms 1/10, n/30, FOB
destination. R. Humphrey paid $400 for freight charges. The cost of the merchandise sold was $350,000.
2. On December 8, Frazier Co. was granted an allowance of $20,000 for merchandise purchased on December
3. On December 13, R. Humphrey Company received the balance due from Frazier Co.
Instructions
(a) Prepare the journal entries to record these transactions on the books of R. Humphrey Company using a
perpetual inventory system.
(b) Assume that R. Humphrey Company received the balance due from Frazier Co. on January 2 of the following
year instead of December 13. Prepare the journal entry to record the receipt of payment on January
(a) 1. Dec. 3 Accounts Receivable 570,000
Sales Revenue 570,000
Cost of Goods Sold 350,000
Inventory 350,000

Freight-Out 400
Cash 400

2. Dec. 8 Sales Returns and Allowances 20,000

Accounts Receivable 20,000

3. Dec. 13 Cash ($550,000 – $5,500) 544,500

Sales Discounts
[($570,000 – $20,000) X 1%] 5,500
Accounts Receivable
($570,000 – $20,000) 550,000

(b) Cash 550,000

Accounts Receivable
($570,000 – $20,000) 550,000
Practice E5-17

The trial balance of A. Wiencek Company at the end of its fiscal year, August 31, 2017,
includes these accounts: Inventory $19,500; Purchases $149,000; Sales Revenue $190,000;
Freight-In $5,000; Sales Returns and Allowances $3,000; Freight-Out $1,000; and Purchase
Returns and Allowances $2,000. The ending inventory is $23,000.
Instructions
Prepare a cost of goods sold section for the year ending August 31 (periodic inventory).
Inventory, September 1, 2016 $19,500
Purchases $149,000
Less: Purchase returns and allowances 2,000
Net Purchases 147,000
Add: Freight-in 5,000
Cost of goods purchased 152,000
Cost of goods available for sale 171,500
Inventory, August 31, 2017 23,000
Cost of goods sold $148,500
Practice E5-10

In its income statement for the year ended December 31, 2017, Anhad Company reported the following condensed
data.
Operating expenses $ 725,000 Interest revenue $ 28,000
Cost of goods sold 1,289,000 Loss on disposal of plant assets 17,000
Interest expense 70,000 Net sales 2,200,000

Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.
 ANHAD COMPANY ANHAD COMPANY
Income Statement Income Statement
For the Year Ended December 31, 2017 For the Year Ended December 31, 2017

Net sales $2,200,000 Revenues

Cost of goods sold 1,289,000 Net sales $2,200,000
Gross profit 911,000 Interest revenue 28,000
Operating expenses 725,000 Total revenues 2,228,000
Income from operations 186,000 Expenses
Other revenues and gains Cost of goods sold $1,289,000
Interest revenue $28,000 Operating expenses 725,000
Other expenses and losses Interest expense 70,000
Interest expense $70,000 Loss on disposal of plant assets 17,000
Loss on disposal of plant assets 17,000 87,000 59,000 Total expenses 2,101,000
Net income $127,000 Net income $127,000