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Exam 5: Accounting for Merchandising Operations

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Question 41

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On September 12, Vander Company sold merchandise in the amount of $5,800 to Jepson Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. - Jepson uses the periodic inventory system and the gross method of accounting for purchases. The journal entry that Jepson will make on September 12 is:

A) $\begin{array} { | l | r | r | } \hline \text { Purchases } & 5,800 & \\\hline \text { Accounts payable } & & 5,800 \\\hline\end{array}$
B) $\begin{array} { | l | r | r | } \hline \text { Purchases } & 5,800 & \\\hline \text { Accounts receivable } & & 5,800 \\\hline\end{array}$
C) $\begin{array} { | l | r | r | } \hline \text { Merchandite inventory } & 5,800 & \\\hline \text { Accounts payable } & & 5,800 \\\hline\end{array}$
D) $\begin{array} { | l | l | l | } \hline \text { Accounts payable } & 4,000 & \\\hline \text { Merchandite inventory } & & 4,000 \\\hline\end{array}$
E) $\begin{array} { | l | r | r | } \hline \text { Purchases } & 4,000 & \\\hline \text { Accounts receivable } & & 4,000 \\\hline\end{array}$

F) B) and D)
G) A) and B)

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Question 42

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Purchase allowances refer to a price reduction (allowance) granted to a buyer of defective or unacceptable merchandise.

A) True
B) False

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Question 43

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Offering sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collections efforts.

Describe the key attributes of inventory for a merchandising company.

A company's quick assets are $147,000 and its current liabilities are $143,000. This company's acid-test ratio is 1.03.

From the adjusted trial balance for Brookstone Art Supplies given below, prepare a multiple-step income statement in good form. Brookstone Art SuppliesAdjusted Trial BalanceDecember 31 $\text { Brookstone Art SuppliesAdjusted Trial BalanceDecember } 31$ $\begin{array}{|l|r|l|}\hline & \text { Debit } & \text { Credit } \\\hline \text { Cash } & \$ 9,400 & \\\hline \text { Accounts receivable } & 25,000 & \\\hline \text { Merchandise inventory } & 36,000 & \\\hline \text { Office supplies } & 900 & \\\hline \text { Store equipment } & 75,000 &\\\hline \text { Accumulated depreciation-store equipment } & & \$ 22,000 \\\hline \text { Office equipment } & 60,000 & \\\hline \text { Accumulated depreciation-office equipment } & & 15,000 \\\hline \text { Accounts payable } & & 42,000 \\\hline \text { Notes payable } & & 10,000 \\\hline \text { A. Brookstone, Capital } & & 110,700 \\\hline \text { A. Brookstone, Withdrawals } & 48,000 & \\\hline \text { Sales } & & 325,000\\\hline\end{array}$ $\begin{array} {| l | r | r |} \hline\text { Sales discounts } & 6,000 & \\\hline \text { Sales returns and allowances } & 16,500 & \\\hline \text { Cost of goods sold } & 195,000 & \\\hline \text { Selling expenses } & 32,500 & \\\hline \text { General and adrministrative expenses } & 19,800 & \\\hline \text { Interest expense } & 600 & \\\hline \text { Totals } & \$ 524,700 & \$ 524,700 \\\hline\end{array}$

Merchandise inventory is reported in the long-term assets section of the balance sheet.

A company purchases merchandise with a catalog price of $20,000. The company receives a 35% trade discount from the seller. The seller also offers credit terms of 2/10, n/30. Assuming no returns were made and that payment was made within the discount period, what is the net cost of the merchandise?

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Describe the recording process (including costs) for the types of transactions involved in purchasing merchandise inventory when a perpetual inventory system is used.

Under the net method, when a company uses a perpetual inventory system, an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Merchandise Inventory and a credit to Accounts Payable of $2,000.

The following information refers to Percy's Records and its competitors in the music store business. $\begin{array} { | l | r | r | } \hline & \begin{array} { c } \text { Curreat } \\\text { Ratio }\end{array} &{ \begin{array} { c } \text { Quick } \\\text { Ratio }\end{array} } \\\hline \text { Percy's Records } & 2.0 & 0.95 \\\hline \text { Jewel CDs } & 1.5 & 1.00 \\\hline \text { Rudy's Raps } & 1.8 & 1.20 \\\hline \text { Marvin's Jazz } & 1.9 & 0.80 \\\hline \text { Industry Average } & 2.0 & 1.00 \\\hline\end{array}$ Required: Comment on the relative liquidity positions of these companies.

When purchases are recorded at net amounts, any discounts lost as a result of late payments are reported as an operating expense.

All of the following statements regarding sales returns and allowances are true except:

A company's net sales were $676,600, its cost of goods sold was $236,810 and its net income was $33,750. Its gross margin ratio equals:

The following information is for Barrel and its competitor Crate. $\begin{array} { | l | l | l | l | l | } \hline & { \text { Barrel } } &&{ \text { Crate } } \\\hline & \underline { \text { Year 1 } } & \text { Year 2 } & \underline { \text { Year 1 } } & \text { Year 2 } \\\hline \text { Net sales } & \$ 347,850 & \$ 365.418 & \$ 579.750 & \$ 664,395 \\\hline \text { Cost of sales } & 121.747 & 146,167 & 318,862 & 312,265 \\& & & & \\\hline\end{array}$ Required: 1. Calculate the dollar amount of gross margin and the gross margin ratio to the nearest percent, for each company for both years. 2. Which company had the more favorable ratio for each year? 3. Which company had the more favorable change in the gross margin ratio over this 2-year period?

A buyer failed to take advantage of the vendor's credit terms of 2/15, n/45, but instead paid the invoice in full at the end of 45 days. By not taking advantage of the cash discount, the equivalent annual interest lost on the amount of the purchase is:

A company reported the following year-end information: $\begin{array} { | l | r | } \hline \text { Cash } & \$ 52,000 \\\hline \text { Short-term investments } & 12,000 \\\hline \text { Accounts receivable } & 54,000 \\\hline \text { Inventory } &3 2 5 , 0 0 0 \\\hline \text { Prepaid expenses } & 17,500 \\\hline \text { Accounts payable } & 106,500 \\\hline \text { Other eurrent payables } & 25,000 \\\hline\end{array}$ Required: 1. Explain the purpose of the acid-test ratio. 2. Calculate the acid-test ratio for this company. 3. What does the acid-test ratio reveal about this company?

A company had net sales of $340,500, its cost of goods sold was $257,000, and its net income was $13,750. The company's gross margin ratio equals 24.5%.

A company's gross profit was $83,750 and its net sales were $347,800. Its gross margin ratio equals: