Chapter 6

During the current year, merchandise is sold for \(\$ 2,850,750\). The cost of the merchandise sold is \(\$ 1,995,525\). a. What is the amount of the gross profit? b. Compute the gross profit percentage (gross profit divided by sales). c. Will the income statement necessarily report a net income? Explain.

In 2005, Best Buy reported revenue of \(\$ 27,433\) million. Its gross profit was \(\$ 6,495\) million. What was the amount of Best Buy's cost of merchandise sold?

For (a) through (d), identify the items designated by " \(X^{\prime \prime}\) and "Y." a. Purchases \(-(X+Y)=\) Net purchases. b. Net purchases \(+X=\) Cost of merchandise purchased. c. Merchandise inventory (beginning) \(+\) Cost of merchandise purchased \(=X\). d. Merchandise available for sale \(-X=\) Cost of merchandise sold.

For the fiscal year, sales were \(\$ 4,125,800\), sales discounts were \(\$ 380,000\), sales returns and allowances were \(\$ 186,750\), and the cost of merchandise sold was \(\$ 2,475,500\). a. What was the amount of net sales? b. What was the amount of gross profit?

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.

Summary operating data for The Voodoo Company during the current year ended November 30,2008 , are as follows: cost of merchandise sold, \(\$ 2,175,350\); administrative expenses, \(\$ 500,000\); interest expense, \(\$ 23,200\); rent revenue, \(\$ 30,000\); net sales, \(\$ 4,000,000\); and selling expenses, \(\$ 880,000\). Prepare a single-step income statement.

Two items are omitted in each of the following four lists of income statement data. Determine the amounts of the missing items, identifying them by letter. \(\begin{array}{lcccc}\text { Sales } & \$ 400,000 & \$ 500,000 & \$ 1,000,000 & \$(\mathrm{~g}) \\ \text { Sales returns and allowances } & \text { (a) } & 15,000 & (\mathrm{e}) & 30,500 \\ \text { Sales discounts } & 20,000 & 8,000 & 40,000 & 37,000 \\ \text { Net sales } & 350,000 & (\text { c }) & 910,000 & \text { (h) } \\ \text { Cost of merchandise sold } & \text { (b) } & 285,000 & \text { (f) } & 540,000 \\ \text { Gross profit } & 200,000 & \text { (d) } & 286,500 & 150,000\end{array}\)

Journalize the entries for the following transactions: a. Sold merchandise for cash, \(\$ 12,150\). The cost of the merchandise sold was \(\$ 9,100\). b. Sold merchandise on account, \(\$ 6,000\). The cost of the merchandise sold was \(\$ 4,000\). c. Sold merchandise to customers who used MasterCard and VISA, \(\$ 30,780\). The cost of the merchandise sold was \(\$ 20,000\). d. Sold merchandise to customers who used American Express, \(\$ 17,650\). The cost of the merchandise sold was \(\$ 10,500\). e. Received an invoice from National Credit Co. for \(\$ 1,900\), representing a service fee paid for processing MasterCard, VISA, and American Express sales.

During the year, sales returns and allowances totaled \(\$ 172,100\). The cost of the merchandise returned was \(\$ 100,300\). The accountant recorded all the returns and allowances by debiting the sales account and crediting Cost of Merchandise Sold for \(\$ 172,100\). Was the accountant's method of recording returns acceptable? Explain. In your explanation, include the advantages of using a sales returns and allowances account.

After the amount due on a sale of \(\$ 18,500\), terms \(2 / 10, \mathrm{n} / \mathrm{eom}\), is received from a customer within the discount period, the seller consents to the return of the entire shipment. The cost of the merchandise returned was \(\$ 11,100\). (a) What is the amount of the refund owed to the customer? (b) Journalize the entries made by the seller to record the return and the refund.

Merchandise is sold on account to a customer for \(\$ 9,200\), terms \(\mathrm{FOB}\) shipping point, \(2 / 10\), \(\mathrm{n} / 30\). The seller paid the transportation costs of \(\$ 638\). Determine the following: (a) amount of the sale, (b) amount debited to Accounts Receivable, (c) amount of the discount for early payment, and (d) amount due within the discount period.

Hushpuppy Company purchased merchandise on account from a supplier for \(\$ 6,750\), terms \(2 / 10, \mathrm{n} / 30\). Hushpuppy Company returned \(\$ 1,500\) of the merchandise and received full credit. a. If Hushpuppy Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Hushpuppy Company to record the return?

A retailer is considering the purchase of 100 units of a specific item from either of two suppliers. Their offers are as follows: A: \(\$ 375\) a unit, total of \(\$ 37,500,2 / 10, \mathrm{n} / 30\), plus transportation costs of \(\$ 1,050\). B: \(\$ 380\) a unit, total of \(\$ 38,000,1 / 10, \mathrm{n} / 30\), no charge for transportation. Which of the two offers, A or B, yields the lower price?

The debits and credits from four related transactions are presented in the following T accounts. Describe each transaction. \begin{tabular}{r|rrrrr|r} \multicolumn{2}{c}{ Cash } & & \multicolumn{3}{c}{ Accounts Payable } \\ \cline { 5 - 7 } & \((2)\) & \((350\) & \((3)\) & 500 & \((1)\) & 11,500 \\ & \((4)\) & 10,780 & \((4)\) & 11,000 & \end{tabular} Merchandise Inventory

Madamé Co., a women's clothing store, purchased \(\$ 10,000\) of merchandise from a supplier on account, terms \(\mathrm{FOB}\) destination, \(2 / 10, \mathrm{n} / 30\). Madamé Co. returned \(\$ 2,500\) of the merchandise, receiving a credit memorandum, and then paid the amount due within the discount period. Journalize Madamé Co.'s entries to record (a) the purchase, (b) the merchandise return, and (c) the payment.

Journalize entries for the following related transactions of La Paz Company: a. Purchased \(\$ 18,400\) of merchandise from Harbin Co. on account, terms \(2 / 10, \mathrm{n} / 30\). b. Paid the amount owed on the invoice within the discount period. c. Discovered that \(\$ 4,500\) of the merchandise was defective and returned items, receiving credit. d. Purchased \(\$ 3,000\) of merchandise from Harbin Co. on account, terms \(n / 30\). e. Received a check for the balance owed from the return in (c), after deducting for the purchase in (d).

A sale of merchandise on account for \(\$ 12,200\) is subject to a \(6 \%\) sales tax. (a) Should the sales tax be recorded at the time of sale or when payment is received? (b) What is the amount of the sale? (c) What is the amount debited to Accounts Receivable? (d) What is the title of the account to which the \(\$ 732(\$ 12,200 \times 6 \%)\) is credited?

Journalize the entries to record the following selected transactions: a. Sold \(\$ 15,750\) of merchandise on account, subject to a sales tax of \(8 \%\). The cost of the merchandise sold was \(\$ 9,450\). b. Paid \(\$ 29,183\) to the state sales tax department for taxes collected.

Sellers Co., a furniture wholesaler, sells merchandise to Beyer Co. on account, \(\$ 14,500\), terms \(2 / 10, \mathrm{n} / 30\). The cost of the merchandise sold is \(\$ 8,800\). Sellers Co. issues a credit memorandum for \(\$ 3,750\) for merchandise returned and subsequently receives the amount due within the discount period. The cost of the merchandise returned is \(\$ 2,100\). Journalize Sellers Co.'s entries for (a) the sale, including the cost of the merchandise sold, (b) the credit memorandum, including the cost of the returned merchandise, and (c) the receipt of the check for the amount due from Beyer Co.

What is the normal balance of the following accounts: (a) Sales, (b) Sales Discounts, (c) Sales Returns and Allowances, (d) Cost of Merchandise Sold, (e) Delivery Expense, (f) Merchandise Inventory, (g) Sales Tax Payable?

Teramycin Inc.'s perpetual inventory records indicate that \(\$ 715,275\) of merchandise should be on hand on January 31,2008 . The physical inventory indicates that \(\$ 698,150\) of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for Teramycin Inc. for the year ended January 31, 2008 .

From the following list, identify the accounts that should be closed to Income Summary at the end of the fiscal year under a perpetual inventory system: (a) Accounts Payable, (b) Advertising Expense, (c) Cost of Merchandise Sold, (d) Merchandise Inventory, (e) Sales, (f) Sales Discounts, (g) Sales Returns and Allowances, (h) Supplies, (i) Supplies Expense, (j) Terry Weaver, Drawing, (k) Wages Payable.

On October 31, 2008, the balances of the accounts appearing in the ledger of Kavanaugh Company, a furniture wholesaler, are as follows: \(\begin{array}{lrlr}\text { Accumulated Dep. -Building } & \$ 152,300 & \text { Notes Payable } & \$ 120,000 \\ \text { Administrative Expenses } & 326,500 & \text { Salaries Payable } & 3,400 \\ \text { Building } & 278,400 & \text { Sales } & 1,567,700 \\ \text { Cash } & 44,200 & \text { Sales Discounts } & 90,000 \\ \text { Cost of Merchandise Sold } & 940,000 & \text { Sales Returns and Allow. } & 60,000 \\ \text { Interest Expense } & 9,600 & \text { Sales Tax Payable } & 24,500 \\ \text { Lillian Kavanaugh, Capital } & 705,775 & \text { Selling Expenses } & 620,000 \\ \text { Lillian Kavanaugh, Drawing } & 39,750 & \text { Store Supplies } & 22,900 \\ \text { Merchandise Inventory } & 130,000 & \text { Store Supplies Exp. } & 12,325\end{array}\) Prepare the October 31, 2008, closing entries for Kavanaugh Company.

The Home Depot reported the following data (in millions) in its financial statements for 2005 and 2004: \begin{tabular}{lrr} & 2005 & 2004 \\ \hline Net sales & \(\$ 73,094\) & \(\$ 64,816\) \\ Total assets at the end of the year & 38,907 & 34,437 \\ Total assets at the beginning of the year & 34,437 & 30,011 \end{tabular} a. Determine the ratio of net sales to average total assets for The Home Depot for 2005 and 2004 . Round to two decimal places. b. What conclusions can be drawn from these ratios concerning the trend in the ability of The Home Depot to effectively use its assets to generate sales?