Ex 6.

2 Income Statement Balance Sheet

Trans- Net - Cost of - All Other = Net Assets = Liabilities + Owners'
action Sales Goods Sold Expenses Income Equity

a. NE NE NE NE I I NE
b. I NE NE I I NE I
c. NE I NE D D NE D
d. NE NE NE NE NE NE NE
e. NE I NE D D NE D
P6.1A
CLAYPOOL HARDWARE
a.
General Journal

(1)
Nov. 5 Accounts receivable (Bemidji Construction) 13,390
Sales 13,390
Sold merchandise on account.

5 Cost of Good Sold 9,105

Inventory 9,105
To record the cost of goods sold relating to the
sales of merchandise to Bemidji Construction.

9 Inventory 3,800
Accounts Payable (Owatonna Tool Co.) 3,800
Purchased merchandise on credit.

Dec. 5 Cash 13,390

Accounts Receivable (Bemidji 13,390
Construction)
Collected accounts receivable.

9 Accounts Payable (Owatonna Tool. Co.) 3,800

Cash 3,800
Paid account payable to supplier.

31 Shrinkage Loss 1,710

Inventory 1,710
To adjust inventory records to reflect the
of the year-end physical count.
Inventory per accounting records $ 183,790
Inventory per physical count 182,080
Adjustment for inventory shrinkage $ 1,710

b.
CLAYPOOL HARDWARE
Partial Income Statement
For the Year Ended December 31, 20__
Net sales $ 1,024,900
Cost of goods sold (1) $ 695,222
Gross profit $ 329,678
c. Claypool seems quite able to pass its extra transportation costs on to its customers and, in fact, enjoys
a significant financial benefit from its remote location. The following data support these conclusions:

Claypool Industry
Hardware Average Difference
Annual sales …………………………….. $1,024,900 $1,000,000 $24,900
Gross profit ……………………………… 329,678 250,000 (1) 79,678
Gross profit rate ………………………… 32% (2) 25% 7%

(1) $1,000,000 sales ´ 25% = $250,000

(2) $329,678 gross profit ¸ $1,024,900 net sales = 32%

Claypool earned a gross profit rate of 32%, which is significantly higher than the industry average.
Claypool’s sales were above the industry average, and it earned $79,678 more gross profit than the
“average” store of its size.

To have a higher-than-average cost of goods sold and still earn a much larger-than-
average amount of gross profit, Claypool must be able to charge substantially higher
sales prices than most hardware stores. Presumably, the company could not charge such
prices in a highly competitive environment. Thus, the remote location appears to
insulate it from competition and allow it to operate more profitably than hardware stores
with nearby competitors.
 PROBLEM 6.2A
HENDRY'S BOUTIQUE
a.
HENDRY'S BOUTIQUE
Income Statement
For the Year Ended December 31, 2005
Sales $ 226,000
Less: Sales returns and allowances 2,500
Net sales 223,500
Cost of goods sold 100,575
Gross profit 122,925
Other expenses:
Purchase discounts lost $ 250
Utilities expense 4,120
Office supply expense 520
Depreciation expense: office equipment 2,750
Rent expense 6,100
Insurance expense 900
Salaries expense 88,095 102,735
Income before income taxes expense 20,190
Income tax expense 8,190
Net income $ 12,000

b. Gross profit ¸ Net sales = gross profit margin

Using the figures from the income statement prepared in part a, the store’s gross profit
margin is computed as follows: $122,925 ¸ $223,500 = 55%

c. Sales returns and allowances amount to only 1.1% of the store’s total sales. Thus, it appears
that customers are relatively satisfied with their purchases.

d. The use of the Purchase Discounts Lost account indicates that the store records purchases
net of any purchase discounts. Had the store recorded purchases at their gross invoice
amounts, this account would not be used, and Purchase Discounts Taken would have
appeared in the adjusted trial balance instead.

e. The $3,200 of sales taxes payable appearing in the adjusted trial balance represents sales
taxes collected by the store for the sales taxes imposed on its customers. When the store
submits this amount to the proper tax authorities, the liability will be removed. Sales taxes
are applicable only when merchandise is sold to the final customer; thus, retail stores
normally incur no sales taxes expense.

f. Cash, Accounts Receivable, and Merchandise Inventory are the accounts that comprise the
store’s operating cycle.
 PROBLEM 6.5A
SIOGO SHOES AND SOLE MATES

General Journal

a. Journal entries by Siogo Shoes:

Feb . 9 Accounts Receivable (Sole Mates) 10,000

Sales 10,000
Sold merchandise on account; terms, 1/10,

9 Cost of Goods Sold 6,000

Inventory 6,000
To record cost of merchandise sold (100 pr. X
$60/pr.)
12 Delivery Expense 40
Cash 40
Paid delivery charges on outbound shipment.

13 Sales Returns & Allowances 1,000

Accounts Receivable (Sole Mates) 1,000
Customer returned merchandise (10 pr. X

13 Inventory 600
Cost of Goods sold 600
Reduce cost of goods sold for cost of
returned (10 pr. X $60/pr.).

19 Cash 8,910
Sales Discount 90 9,000
Accounts Receivable (Sole Mates)
Collected amount due, less $1,000 return and
1% cash discount on remaining $9,000

b. Journal entries by Sole Mates:

PROBLEM 6.5A
SIOGO SHOES AND SOLE MATES (concluded)

General Journal

Feb. 9 Inventory 9,900

 Accounts Payable (Siogo Shoes) 9,900
Purchased 100 pairs of boots; terms. 1/10,
cost, $99 per pair ($100, less 1%)

12 Transportation-in 40
Cash 40
Paid transportation charge on inbound

13 Accounts Payable (Siogo Shoes) 990

Inventory 990
Returned 10 pairs of boots to supplier. (Net
$99 per pair x 10 pairs = $990.

Feb . 19 Accounts Payable (Siogo Shoes) 8,910

Cash 8,910
Paid within discount period balance owed to
Siogo Shoes ($9,900 - $990 = $8,910).

c. Yes. Sole Mates should take advantage of 1/10, n/30 purchase discounts, even if it
must borrow money for a short period of time at an annual rate of 11%. By taking
advantage of the discount, the company saves 1% by making payment 20 days early.
At an interest rate of 11% per year, the bank charges only 0.6% interest over a 20-
day period (11% ´ 20¤365 = 0.6%). Thus, the cost of passing up the discount is
greater than the cost of short-term borrowing.
 PROBLEM 6.8A
CPI

Parts a, f, and g follow; parts b, c, d, and e are on the next page.

a. The operating cycle of a merchandising company consists of purchasing merchandise, selling

that merchandise to customers (often on account), and collecting the sales proceeds from these
customers. The assets and liabilities involved in this cycle include cash, accounts receivable,
inventory, and accounts payable.

f. CPI probably would use a perpetual inventory system. The items in its inventory have a high
per-unit cost. Therefore, management will want to know the costs of the individual products
included in specific sales transactions, and also will want to keep track of the items in stock.
The company also has a computer-based accounting system, a full-time accountant, and a low
volume of transactions. This combination of factors eliminates the potential difficulties of
maintaining a perpetual system.

g. Computation of profit margin on January 6 sales transaction:

Gross profit = Sales price - Cost of goods sold
= $10,000 - $6,100
= $3,900

Gross profit = Dollar gross profit ¸ Sales revenue

margin = $3,900 ¸ $10,000
= 39%
 PROBLEM 6.8A
CPI (concluded)
b.
General Journal

Jan 2 Inventory 24,250

Accounts Payable (Sharp) 24,250
Purchased merchandise on account; terms,
n/60. Net cost, $$25,000, less 3%.

6 Accounts Receivable (Pace Corporation) 10,000

Sales 10,000
Sale on account; terms, 5/10, n/90.

6 Cost of Goods Sold 6,100

Inventory 6,100
To record the cost of merchandise sold to Pace
Corporation.

c. Computation of inventory at January 6:

Inventory at Dec. 31. $ 500,000
Add: Merchandise purchased on Jan. 2 24,250
Less: Cost of goods sold on Jan. 6 (6,100)
Inventory at close of business on Jan. 6 $ 518,150

d. Journal entries assuming use of periodic

system:
Jan 2 Purchases 24,250
Accounts Payable (Sharp) 24,250
Purchased merchandise on account; terms,
n/60. Net cost, $25,000, less 3%.

6 Accounts Receivable (Pace Corporation) 10,000

Sales 10,000
Sale on account; terms. 5/10, n/90.

e. Computation of cost of goods sold:

Inventory $ 500,000
Add: Purchases 24,250
Cost of goods available for sale $ 524,250
Less: Inventory (Jan. 6-per part c) 518,150
Cost of goods sold $ 6,100
Ex 8 Cost of Net
Net Beginning Net Ending Goods Gross Income
Sales Inventory Purchase Inventory Sold Profit Expense or (Loss)
a. 240,000 76,000 s
104,000 35,200 144,800 95,200 s
72,000 23,200
b. 480,000 72,000 272,000 80,000 264,000 216,000 196,000 20,000
c. 630,000 207,000 400,500 166,500 441,000 189,000 148,500 40,500
d. 810,000 261,000 450,000 135,000 576,000 234,000 270,000 (36,000)
e. 531,000 156,000 393,000 153,000 396,000 135,000 150,000 (15,000)