CHAPTER 5

ACCOUNTING FOR MERCHANDISING OPERATIONS

CHAPTER LEARNING OBJECTIVES
1. Describe merchandising operations and inventory systems. Because of inventory, a
merchandising company has sales revenue, cost of goods sold, and gross profit. To account
for inventory, a merchandising company must choose between a perpetual and a periodic
inventory system.
2. Record purchases under a perpetual inventory system. The company debits the Inventory
account for all purchases of merchandise and, freight-in, and credits it for purchase discounts
and purchase returns and allowances.
3. Record sales under a perpetual inventory system. When a merchandising company sells
inventory, it debits Accounts Receivable (or Cash) and credits Sales Revenue for the selling
price of the merchandise. At the same time, it debits Cost of Goods Sold and credits
Inventory for the cost of the inventory items sold. Sales Returns and Allowances and Sales
Discounts are debited and are contra revenue accounts.
4. Apply the steps in the accounting cycle to a merchandising company. Each of the
required steps in the accounting cycle for a service company applies to a merchandising
company. A worksheet is again an optional step. Under a perpetual inventory system, the
company must adjust the Inventory account to agree with the physical count.
5. Prepare financial statements for a merchandising company. The income statement has
the following components: sales revenues, cost of goods sold, gross profit, operating
expenses, other income and expense, and interest expense. A comprehensive income
statement adds or subtracts any items of other comprehensive income to net income to arrive
at other comprehensive income.
a
6. Prepare a worksheet for a merchandising company. The steps in preparing a worksheet
for a merchandising company are the same as for a service company. The unique accounts
for a merchandiser are Inventory, Sales Revenue, Sales Returns and Allowances, Sales
Discounts, and Cost of Goods Sold.
a
7. Record purchases and sales under a periodic inventory system. In recording purchases
under a periodic system, companies must make entries for (a) cash and credit purchases, (b)
purchase returns and allowances, (c) purchase discounts, and (d) freight costs. In recording
sales, companies must make entries for (a) cash and credit sales, (b) sales returns and
allowances, and (c) sales discounts.
5-2 Test Bank for Financial Accounting: IFRS Edition, 4e

TRUE-FALSE STATEMENTS
1. Retailers and wholesalers are both considered merchandisers.
Ans: T, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

2. The steps in the accounting cycle are different for a merchandising company than for a
service company.
Ans: F, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

3. Companies using International Financial Reporting Standards (IFRS) use a perpetual

inventory system, while companies using U.S. GAAP use a periodic inventory system.
Ans: F, LO: 1, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

4. Companies using a perpetual inventory system report credit purchases of inventory on the
statement of financial position by increasing inventory and decreasing liabilities.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

5. Companies using a perpetual inventory system record all credit purchases by increasing
inventory and increasing liabilities.
Ans: TF, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

6. Global Care uses a perpetual inventory system and purchased wheelchairs under terms
FOB destination. The freight charges associated with the wheelchairs will be added to the
inventory account.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

7. When the buyer pays an invoice within the discount period, the amount of the discount
increases the inventory account.
Ans: F, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

8. Inventory purchased for $2,500 subject to terms 2/10, net 30 could end up being reported
on the statement of financial position at an amount greater than $2,500 if the discount isn’t
taken by the buyer.
Ans: F, LO: 2, Bloom: K, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

9. Purchase returns are recorded by the buyer as a decrease to inventory.

Ans: T, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

10. Under a perpetual inventory system, the cost of goods sold is determined each time a sale
occurs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

11. A periodic inventory system requires a detailed inventory record of inventory items.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5-3

12. Freight terms of FOB Destination means that the seller pays the freight costs.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

13. Freight costs incurred by the seller on outgoing merchandise are an operating expense to
the seller.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

14. Sales revenues are earned during the period cash is collected from the buyer.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

15. The Sales Returns and Allowances account and the Sales Discounts account are both
classified as expense accounts.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

16. The revenue recognition principle applies to merchandisers by recognizing sales revenues
when the performance obligation is satisfied.
Ans: T, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

17. Sales allowances and sales discounts are both designed to encourage customers to pay
their accounts promptly.
Ans: F, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

18. To grant a customer a sales return, the seller credits Sales Returns and Allowances.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

19. Sales returns and allowances is reported on the statement of financial position as a contra
account to cost of goods sold.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

20. Sales of $2,500 subject to terms 2/10, net 30 could end up being recorded as an account
receivable at an amount greater than $2,500 if the discount isn’t taken by the buyer.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

21. When goods are returned, the seller reduces the account receivable and increases the
merchandise inventory accounts.
Ans: T, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

22. When goods are returned, the seller records the returned merchandise at its market value.
Ans: F, LO: 3, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

23. Closing entries impact the income statement but do not have an impact on the statement
of financial position.
Ans: F, LO: 4, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

24. Under International Financial Reporting Standards (IFRS) use of a worksheet by a

merchandising company is strictly optional.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5-4 Test Bank for Financial Accounting: IFRS Edition, 4e

25. A company's unadjusted balance in Inventory will usually not agree with the actual amount
of inventory on hand at year-end.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

26. For a merchandising company, all accounts that affect the determination of income are
closed to the Income Summary account.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

27. A merchandising company has different types of adjusting entries than a service company.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

28. Net sales is sales revenue less sales returns and allowances and sales discounts.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

29. Other income and expense excludes revenues and expenses that are unrelated to the
company’s main line of operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

30. Operating expenses are different for merchandising and service companies.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

31. Merchandise inventory is classified as a current asset in a classified statement of financial

position.
Ans: T, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

32. Gain on sale of equipment and interest expense are reported under other income and
expense in a merchandiser income statement.
Ans: TF, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

33. If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.
Ans: T, LO: 5, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Reporting

34. Gross profit represents the merchandising profit of a company.

Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

35. Gross profit rate is computed by dividing cost of goods sold by net sales.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

36. Under International Financial Reporting Standards (IFRS) operating expenses may be
presented by nature or by function.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

37. Under International Financial Reporting Standards (IFRS) when operating expenses are
presented by nature additional disclosures are required regarding the function of certain
expenses.
Ans: F, LO: 5, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

For Instructor Use Only

 Accounting for Merchandising Operations 5-5

38. International Financial Reporting Standards allow different presentation formats for
operating expenses including by magnitude.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

39. IFRS requires companies to mark the recorded values of certain types of assets and
liabilities to their historical cost at the end of each reporting period.
Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

40. IFRS requires a single-step income statement, but U.S GAAP allows either the single-step
or the multiple-step income statement.
Ans: F, LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

41. IFRS requires 3 years of income statements, U.S. GAAP requires 2 years of income
statements.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

42. The International Accounting Standards Board (IASB) and the Financial Accounting
Standards Board (FASB) are undertaking a project to rework the structure of financial
statements. The proposed structure will adopt the major groupings used on the statement
of financial position: current and non-current assets and liabilities, followed by equity.
Ans: F, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

a
43. In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial
balance (Dr.) and income statement (Dr.) columns.
Ans: T, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

a
44. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of
goods purchased.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
45. Under a periodic inventory system, the acquisition of inventory is charged to the
Purchases account.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a
46. Under a periodic inventory system, freight-in on merchandise purchases should be
debited to the Inventory account.
Ans: F, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a
47. Purchase Returns and Allowances and Purchase Discounts are subtracted from
Purchases to produce net purchases.
Ans: T, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

48. Merchandise inventory is reported as a long-term asset on the statement of financial

position.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

5-6 Test Bank for Financial Accounting: IFRS Edition, 4e

49. Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are
more readily determined.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

50. The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the
first 10 days of the next month.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

51. Sales should be recorded in accordance with the expense recognition principle.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

52. Sales returns and allowances and sales discounts are subtracted from sales revenue in
reporting net sales in the income statement.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

53. A merchandising company using a perpetual inventory system will usually need to make
an adjusting entry to ensure that the recorded inventory agrees with physical inventory
count.
Ans: T, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

54. If a merchandising company sells land at more than its cost, the gain should be reported
in the sales revenue section of the income statement.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

55. The major difference between the statement of financial position of a service company
and a merchandising company is inventory.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

MULTIPLE CHOICE QUESTIONS

56. Net income from operations is gross profit less
a. financing expenses.
b. operating expenses.
c. other income and expense.
d. other expenses.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

57. Which of the following would not be considered a merchandising company?

a. Retailer
b. Wholesaler
c. Service firm
d. Dot Com firm
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

For Instructor Use Only

 Accounting for Merchandising Operations 5-7

58. A merchandising company that sells directly to consumers is a

a. retailer.
b. wholesaler.
c. broker.
d. service company.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

59. Two categories of expenses for merchandising companies are

a. cost of goods sold and financing expenses.
b. operating expenses and financing expenses.
c. cost of goods sold and operating expenses.
d. sales and cost of goods sold.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

60. The primary source of revenue for merchandising companies is

a. investment income.
b. service fees.
c. the sale of merchandise.
d. the sale of fixed assets the company owns.
Ans: C, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

61. Sales revenue less cost of goods sold is called

a. gross profit.
b. net profit.
c. net income.
d. marginal income.
Ans: A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

62. After gross profit is calculated, operating expenses are deducted to determine
a. gross margin.
b. net income.
c. gross profit on sales.
d. net margin.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

63. Cost of goods sold is determined only at the end of the accounting period in
a. a perpetual inventory system.
b. a periodic inventory system.
c. both a perpetual and a periodic inventory system.
d. neither a perpetual nor a periodic inventory system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

64. Which of the following expressions is incorrect?

a. Gross profit – operating expenses = net income
b. Sales – cost of goods sold – operating expenses = net income
c. Net income + operating expenses = gross profit
d. Operating expenses – cost of goods sold = gross profit
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

5-8 Test Bank for Financial Accounting: IFRS Edition, 4e

65. Detailed records of the cost of each inventory purchase and sale are not maintained
under a
a. perpetual inventory system.
b. periodic inventory system.
c. double entry accounting system.
d. single entry accounting system.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

66. Which of the following is a true statement about inventory systems?

a. Periodic inventory systems require more detailed inventory records.
b. Perpetual inventory systems require more detailed inventory records.
c. A periodic system requires cost of goods sold be determined after each sale.
d. A perpetual system determines cost of goods sold only at the end of the accounting
period.
Ans: B, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

67. In a perpetual inventory system, cost of goods sold is recorded

a. on a daily basis.
b. on a monthly basis.
c. on an annual basis.
d. with each sale.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

68. If a company determines cost of goods sold each time a sale occurs, it
a. must have a computerized accounting system.
b. uses a combination of the perpetual and periodic inventory systems.
c. uses a periodic inventory system.
d. uses a perpetual inventory system.
Ans: D, LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

69. Under a perpetual inventory system, acquisition of merchandise for resale is debited to the
a. Inventory account.
b. Purchases account.
c. Supplies account.
d. Cost of Goods Sold account.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

70. The journal entry to record a return of merchandise purchased on account under a
perpetual inventory system would credit
a. Accounts Payable.
b. Purchase Returns and Allowances.
c. Sales.
d. Inventory.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5-9

71. The Inventory account is used in each of the following except the entry to record
a. goods purchased on account.
b. the return of goods purchased.
c. payment of freight on goods sold.
d. payment within the discount period.
Ans: C, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

72. A buyer would record a payment within the discount period under a perpetual inventory
system by crediting
a. Accounts Payable.
b. Inventory.
c. Purchase Discounts.
d. Sales Discounts.
Ans: B, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

73. If a purchaser using a perpetual system agrees to freight terms of FOB shipping point,
then the
a. Inventory account will be increased.
b. Inventory account will not be affected.
c. seller will bear the freight cost.
d. carrier will bear the freight cost.
Ans: A, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

74. Freight costs paid by a seller on merchandise sold to customers will cause an increase
a. in the selling expense of the buyer.
b. in operating expenses for the seller.
c. to the cost of goods sold of the seller.
d. to a contra-revenue account of the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

75. Hicks Company purchased merchandise from Beyer Company with freight terms of FOB
shipping point. The freight costs will be paid by the
a. seller.
b. buyer.
c. transportation company.
d. buyer and the seller.
Ans: B, LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

76. Geran Company purchased merchandise inventory with an invoice price of $15,000 and
credit terms of 2/10, n/30. What is the net cost of the goods if Geran Company pays within
the discount period?
a.$15,000
b.$14,700
c.$13,500
d.$13,800
Ans: B, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

5 - 10 Test Bank for Financial Accounting: IFRS Edition, 4e

77. Reese Company purchased merchandise with an invoice price of $3,000 and credit terms
of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in
the credit terms?
a.10%
b.12%
c.18%
d.36%
Ans: C, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

78. If a company is given credit terms of 2/10, n/30, it should

a.hold off paying the bill until the end of the credit period, while investing the money at 10%
annual interest during this time.
b.pay within the discount period and recognize a savings.
c.pay within the credit period but don't take the trouble to invest the cash while waiting to pay the
bill.
d.recognize that the supplier is desperate for cash and withhold payment until the end of the
credit period while negotiating a lower sales price.
Ans: B, LO: 2, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving,
IMA: Business Economics

79. In a perpetual inventory system, the amount of the discount allowed for paying for
merchandise purchased within the discount period is credited by the buyer to
a.Inventory.
b.Purchase Discounts.
c.Purchase Allowance.
d.Sales Discounts.
Ans: A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

80. Tony’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $90,000, terms 2/10, n/30.
Returned $1,800 of the shipment for credit.
Paid $450 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a.increased by $86,436.
b.increased by $88,650.
c.increased by $86,877.
d.increased by $86,886.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 11

81. Stan’s Market recorded the following events involving a recent purchase of merchandise:
Received goods for $50,000, terms 2/10, n/30.
Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company’s inventory
a.increased by $48,020.
b.increased by $49,250.
c.increased by $48,265.
d.increased by $48,270.
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

82. Under the perpetual system, cash freight costs incurred by the buyer for the transporting
of goods are recorded in
a.Freight Expense.
b.Freight-In.
c.Inventory.
dFreight-Out.
Ans: C, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

83. Rasner Co. returned defective goods costing $9,000 to Markum Company on April 19, for
credit. The goods were purchased April 10, on credit, terms 3/10, n/30. The entry by
Rasner Co. on April 19, in receiving full credit is:
a.Accounts Payable 9,000
Inventory 9,000
b.Accounts Payable 9,000
Inventory 270
Cash 9,270
c.Accounts Payable 9,000
Purchase Discounts 270
Inventory 8,730
d.Accounts Payable 9,000
Inventory 270
Cash 8,730
Ans: A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

5 - 12 Test Bank for Financial Accounting: IFRS Edition, 4e

84. Mather Company made a purchase of merchandise on credit from Underwood Company
on August 8, for $8,000, terms 3/10, n/30. On August 17, Mather makes the appropriate
payment to Underwood. The entry on August 17 for Mather Company is:
a.Accounts Payable 8,000
Cash 8,000
b.Accounts Payable 7,760
Cash 7,760
c.Accounts Payable 8,000
Purchase Returns and Allowances 240
Cash 7,760
d.Accounts Payable 8,000
Inventory 240
Cash 7,760
Ans: D, LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

85. Computers For You is a retailer specializing in selling computers and related equipment.
Which of the following would not be reported in the merchandise inventory account
reported on the statement of the financial position for Computers For You at December 31,
2020?
a.Computers purchased for resale during November 2020.
b.Shelving materials purchased during December 2020.
c.Freight costs related to the computers purchased in November.
dAll of these answer choices are correct.
Ans: B, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

86. Computers For You is a retailer specializing in selling computers and related equipment.
During 2020, Computers For You sells $200,000 of merchandise to Sandcastles, Inc.
Computers For You incurs $24,000 of freight costs associated with these sales. Which of
the following is true regarding how this $24,000 is treated on the financial statements?
a.Computers For You will report the $24,000 as part of inventory on the statement of financial
position.
b.Sandcastles, Inc. will report the $24,000 as part of inventory on the statement of financial
position.
c.Computers For You will report the $24,000 as part of operating expenses on the income
statement.
d.Sandcastles, Inc. will report the $24,000 as an accounts receivable on the statement of financial
position.
Ans: C, LO: 2, Bloom: K, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 13

87. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. During December 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Advanced Communications,
Inc. was dissatisfied with 25% of the merchandise it received due to inferior quality. On
December 21, 2020, Advanced Communications, Inc. returns the goods to Touch Tronix,
Inc. for credit. Which of the following is true regarding the return of the merchandise?
a.Assets will increase by €425,000 and liabilities will increase by €425,000.
b.Assets will decrease by €425,000 and liabilities will decrease by €425,000.
c.Assets will decrease by €550,000 and liabilities will decrease by €550,000.
dAssets will increase by €550,000 and liabilities will increase by €550,000.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

88. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10,
net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full.
Advanced Communications, Inc. uses a perpetual inventory system. Which of the
following is true regarding the impact on the statement of financial position for Advanced
Communications, Inc. when the payment is made on December 18, 2020?
a.Cash decreased by €1,666,000.
b.Inventory decreased by €34,000.
c.Accounts payable decreases by €1,700,000.
dInventory decreased by €44,000.
Ans: D, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

89. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10,
net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full.
Advanced Communications, Inc. uses a perpetual inventory system. Which of the
following is true regarding the impact on the statement of financial position for Advanced
Communications, Inc. when the payment is made on December 18, 2020?
a.Liabilities decreased by €2,200,000.
b.Assets increased by €44,400.
c.Liabilities decreased by €2,156,000.
dLiabilities decreased by €1,700,000.
Ans: A, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 14 Test Bank for Financial Accounting: IFRS Edition, 4e

90. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10,
net 30. Advanced Communications, Inc. paid €32,500 in freight charges. On December
13, 2020, Advanced Communications, Inc. returned 5% of the goods due to inferior
quality. On December 18, 2020, Advanced Communications, Inc. paid the account in full.
Advanced Communications, Inc. uses a perpetual inventory system. If Advanced
Communications, Inc. has not yet sold any of these goods, what is the ending balance in
the inventory account after the payment is made?
a.€0
b.€1,615,200.
c.€2,080,700.
d€2,164,300.
Ans: C, LO: 2, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

91. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. During December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Advanced Communications,
Inc. was dissatisfied with 25% of the merchandise it receives due to inferior quality. On
December 21, 2020, Advanced Communications, Inc. returns the goods to Touch Tronix,
Inc. for credit. Which of the following is true regarding the statement of financial position
and the income statement for Touch Tronix, Inc. at December 31, 2020?
a.Assets will decrease by €125,000 and income will decrease by €125,000.
b.Assets will decrease by €425,000 and income will decrease by €425,000.
c.Assets will increase by €425,000 and income will decrease by €425,000.
dAssets will increase by €550,000 and income will decrease by €550,000.
Ans: A, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

92. Touch Tronix, Inc. sells component parts to Advanced Communications, Inc. a cell phone
manufacturer. On December 10, 2020, Touch Tronix, Inc. sold €1,700,000 of goods to
Advanced Communications, Inc. on account for €2,200,000. Terms of the sale were 2/10,
net 30. On December 18, 2020, Advanced Communications, Inc. paid the account in full.
Which of the following is true regarding the impact on the statement of financial position
for Touch Tronix, Inc. when the payment is made on December 18, 2020?
a.Assets decreased by €2,200,000.
b.Assets decreased by €44,000.
c.Assets increased by €2,156,000.
dAssets decreased by €32,500.
Ans: B, LO: 3, Bloom: AP, Difficulty: Hard, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 15

93. On July 9, Neal Company sells goods on credit to Al Dolan for $9,000, terms 1/10, n/60.
Neal receives payment on July 18. The entry by Neal on July 18 is:
a.Cash 9,000
Accounts Receivable 9,000
b.Cash 9,000
Sales Discounts 90
Accounts Receivable 8,910
c.Cash 8,910
Sales Discounts 90
Accounts Receivable 9,000
d.Cash 9,090
Sales Discounts 90
Accounts Receivable 9,000
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

94. On November 2, 2020, Griffey Company has cash sales of €7,000 from merchandise
having a cost of €5,000. The entries to record the day's cash sales will include:
a.a €5,000 credit to Cost of Goods Sold.
b.a €7,000 credit to Cash.
c.a €5,000 credit to Inventory.
da €7,000 debit to Accounts Receivable.
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

95. A credit sale of ₤6,400 is made on April 25, terms 2/10, n/30, on which a return of ₤400 is
granted on April 28. What amount is received as payment in full on May 4?
a.₤5,880
b.₤6,272
c.₤6,400
d₤6,000
Ans: A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

96. The entry to record the receipt of payment within the discount period on a sale of ¥17,500
with terms of 2/10, n/30 will include a credit to
a.Sales Discounts for ¥350.
b.Cash for ¥1,715.
c.Accounts Receivable for ¥17,500.
d.Sales Revenue for ¥17,500.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

97. The collection of a ¥12,000 account within the 2 percent discount period will result in a
a.debit to Sales Discounts for ¥240.
b.debit to Accounts Receivable for ¥11,760.
c.credit to Cash for ¥11,760.
d.credit to Accounts Receivable for ¥11,760.
Ans: A, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

98. Company X sells $1,000 of merchandise on account to Company Y with credit terms of
2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is
the amount of Company Y's check?

For Instructor Use Only

5 - 16 Test Bank for Financial Accounting: IFRS Edition, 4e

a.$700
b.$980
c.$900
d.$800
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

99. Birk Company sells merchandise on account for $8,000 to Kiner Company with credit
terms of 2/10, n/30. Kiner Company returns $1,600 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a.$7,840
b.$7,872
c.$6,400
d.$6,272
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

100. The collection of a $1,500 account after the 2 percent discount period will result in
a
a.debit to Cash for $1,470.
b.debit to Accounts Receivable for $1,500.
c.debit to Cash for $1,500.
d.debit to Sales Discounts for $30.
Ans: C, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

101. The collection of a ¥12,000 account after the 2 percent discount period will result
in a
a.debit to Cash for ¥11,760.
b.credit to Accounts Receivable for ¥12,000.
c.credit to Cash for ¥12,000.
d.debit to Sales Discounts for ¥240.
Ans: B, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

102. In a perpetual inventory system, the Cost of Goods Sold account is used
a.only when a cash sale of merchandise occurs.
b.only when a credit sale of merchandise occurs.
c.only when a sale of merchandise occurs.
d.whenever there is a sale of merchandise or a return of merchandise sold.
Ans: D, LO: 3, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

103. Sales revenues are usually considered earned when

a.cash is received from credit sales.
b.an order is received.
c.goods have been transferred from the seller to the buyer.
d.adjusting entries are made.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 17

104. A sales invoice is a source document that

a.provides support for goods purchased for resale.
b.provides evidence of incurred operating expenses.
c.provides support for credit sales.
d.serves only as a customer receipt.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

105. Sales revenue

a.may be recorded before cash is collected.
b.will always equal cash collections in a month.
c.only results from credit sales.
d.is only recorded after cash is collected.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

106. The journal entry to record a credit sale is

a.Cash
Sales Revenue
b.Cash
Service Revenue
c.Accounts Receivable
Service Revenue
d.Accounts Receivable
Sales Revenue
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

107. The Sales Returns and Allowances account is classified as a(n)

a.asset account.
b.contraasset account.
c.expense account.
d.contrarevenue account.
Ans: D, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

108. A credit sale of $3,600 is made on July 15, terms 2/10, n/30, on which a return of $200 is
granted on July 18. What amount is received as payment in full on July 24?
a.$3,600
b.$3,332
c.$3,400
d$3,528
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

109. When goods are returned that relate to a prior cash sale,
a.the Sales Returns and Allowances account should not be used.
b.the Cash account will be credited.
c.Sales Returns and Allowances will be credited.
d.Accounts Receivable will be credited.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 18 Test Bank for Financial Accounting: IFRS Edition, 4e

110. The Sales Returns and Allowances account does not provide information to management
about
a.inferior merchandise.
b.the percentage of credit sales versus cash sales.
c.inefficiencies in filling orders.
d.errors in billing customers.
Ans: B, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

111. As an incentive for customers to pay their accounts promptly, a business may offer its
customers
a.a sales discount.
b.free delivery.
c.a sales allowance.
d.a sales return.
Ans: A, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

112. The credit terms offered to a customer by a business firm are 2/10, n/30, which means that
a.the customer must pay the bill within 10 days.
b.the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from
the invoice date.
c.the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice date.
d.two sales returns can be made within 10 days of the invoice date and no returns thereafter.
Ans: C, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

113. Company A sells ¥9,000 of merchandise on account to Company B with credit terms of
2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is
the amount of Company B's check?
a.¥6,300
b.¥8,820
c.¥8,100
d.¥7,200
Ans: B, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

114. Ball Company sells merchandise on account for ₤5,000 to Edds Company with credit
terms of 2/10, n/30. Edds Company returns ₤1,000 of merchandise that was damaged,
along with a check to settle the account within the discount period. What is the amount of
the check?
a.₤4,900
b.₤4,920
c.₤4,000
d.₤3,920
Ans: D, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 19

115. Moses Company sells merchandise on account for $8,000 to Lane Company with credit
terms of 2/10, n/30. Lane Company returns $1,200 of merchandise that was damaged,
along with a check to settle the account within the discount period. What entry does
Moses Company make upon receipt of the check?
a.Cash 6,800
Accounts Receivable 6,800
b.Cash 6,664
Sales Returns and Allowances 1,336
Accounts Receivable 8,000
c. Cash 6,664
Sales Returns and Allowances 1,200
Sales Discounts 136
Accounts Receivable 8,000
d.Cash 7,840
Sales Discounts 160
Sales Returns and Allowances 1,200
Accounts Receivable 6,800
Ans: C, LO: 3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

116. Which of the following would not be classified as a contra account?

a.Sales Revenue
b.Sales Returns and Allowances
c.Accumulated Depreciation
d.Sales Discounts
Ans: A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

117. Which of the following accounts has a normal credit balance?

a.Sales Returns and Allowances
b.Sales Discounts
c.Sales
d.Freight-Out
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

118. When a seller grants credit for returned goods, the account that is credited is
a.Sales Revenue.
b.Sales Returns and Allowances.
c.Inventory.
d.Accounts Receivable.
Ans: D, LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

119. The respective normal account balances of Sales Revenue, Sales Returns and
Allowances, and Sales Discounts are
a.credit, credit, credit.
b.debit, credit, debit.
c.credit, debit, debit.
d.credit, debit, credit.
Ans: C, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

5 - 20 Test Bank for Financial Accounting: IFRS Edition, 4e

120. A merchandising company using a perpetual system will make

a.the same number of adjusting entries as a service company does.
b.one more adjusting entry than a service company does.
c.one less adjusting entry than a service company does.
d.different types of adjusting entries compared to a service company.
Ans: B, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

121. In preparing closing entries for a merchandising company, the Income Summary account
will be credited for the balance of
a.sales revenue.
b.inventory.
c.sales discounts.
d.freight-out.
Ans: A, LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

122. A merchandising company using a perpetual system may record an adjusting entry by
a.debiting Income Summary.
b.crediting Income Summary.
c.debiting Cost of Goods Sold.
d.debiting Sales Revenue.
Ans: C, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

123. When the physical count of RNA Company inventory had a cost of $3,500 at year end and
the unadjusted balance in Inventory was $3,600, RNA will have to make the following
entry:
a.Cost of Goods Sold 100
Inventory 100
b.Inventory 100
Cost of Goods Sold 100
c.Income Summary 100
Inventory 100
d.Cost of Goods Sold 3,600
Inventory 3,600
Ans: A, LO: 4, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

124. Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At
December 31, 2020 the unadjusted balance in the Inventory account is $64,000. Through
a physical count on December 31, 2020, MM determines that its actual inventory at year-
end is $62,500. Which of the following is true regarding the statement of financial position
and the income statement of MM at December 31, 2020?
a.Inventory is increased and cost of goods sold is decreased by $1,500.
b.Inventory is decreased and cost of goods sold is increased by $1,500.
c.Inventory is increased and cost of goods sold is increased by $1,500.
d.Inventory is decreased and cost of goods sold is decreased by $1,500.
Ans: B, LO: 4, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 21

125. The sales revenue section of an income statement for a retailer would not include
a.Sales discounts.
b.Sales revenue.
c.Net sales.
d.Gross profit.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

126. Rowland Company reported the following balances at June 30, 2020:
Sales Revenue $32,000
Sales Returns and Allowances 1,000
Sales Discounts 500
Cost of Goods Sold 15,500
Net sales for the month is
a.$32,000.
b.$31,000.
c.$30,500.
d.$16,500.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

127. Maxwell Company's financial information is presented below.

Sales Revenue € ???? Cost of Goods Sold €450,000
Sales Returns and Allowances 50,000 Gross Profit ????
Net Sales 780,000
The missing amounts above are:
Sales Revenue Gross Profit
a.€830,000 €330,000
b.€730,000 €330,000
c.€830,000 €380,000
d.€730,000 €380,000
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: Business Economics

128. The operating expense section of an income statement for a wholesaler would not include
a.freight-out.
b.utilities expense.
c.cost of goods sold.
d.insurance expense.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

129. Income from operations will always result if

a.the cost of goods sold exceeds operating expenses.
b.revenues exceed cost of goods sold.
c.revenues exceed operating expenses.
d.gross profit exceeds operating expenses.
Ans: D, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics

For Instructor Use Only

5 - 22 Test Bank for Financial Accounting: IFRS Edition, 4e

130. All of the following items would be reported as other income and expense except
a.interest expense.
b.casualty losses.
c.dividend revenue.
d.loss from employees' strikes.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

131. If a company has net sales of $800,000 and cost of goods sold of $520,000, the gross
profit rate is
a.65%.
b.35%.
c.46%.
d.54%.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

132. A company shows the following balances:

Sales Revenue ¥1,500,000
Sales Returns and Allowances 270,000
Sales Discounts 30,000
Cost of Goods Sold 900,000
What is the gross profit rate?
a.60%
b.75%
c.40%
d.25%
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

133. The gross profit rate is computed by dividing gross profit by

a.cost of goods sold.
b.net income.
c.net sales.
d.sales revenue.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

134. In terms of liquidity, inventory is

a.more liquid than cash.
b.more liquid than accounts receivable.
c.more liquid than prepaid expenses.
d.less liquid than store equipment.
Ans: C, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA:
Business Economics

135. On a classified statement of financial position, inventory is classified as

a.an intangible asset.
b.property, plant, and equipment.
c.a current asset.
d.a long-term investment.
Ans: C, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 23

136. Gross profit for a merchandiser is net sales minus

a.operating expenses.
b.cost of goods sold.
c.sales discounts.
d.cost of goods available for sale.
Ans: B, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

137. During 2020, Yoder Enterprises generated revenues of $180,000. The company’s
expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000
and a loss on the sale of equipment of $6,000.

Yoder’s gross profit is

a.$180,000.
b.$90,000.
c.$54,000.
d.$48,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

138. During 2020, Yoder Enterprises generated revenues of $180,000. The company’s
expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000
and a loss on the sale of equipment of $6,000.

Yoder’s income from operations is

a.$180,000.
b.$90,000.
c.$54,000.
d.$36,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

139. During 2020, Yoder Enterprises generated revenues of $180,000. The company’s
expenses were as follows: cost of goods sold of $90,000, operating expenses of $36,000
and a loss on the sale of equipment of $6,000.

Yoder’s net income is

a.$180,000.
b.$90,000.
c.$54,000.
d.$48,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

5 - 24 Test Bank for Financial Accounting: IFRS Edition, 4e

140. Financial information is presented below:

Operating Expenses € 90,000
Net Sales 300,000
Cost of Goods Sold 165,000

Gross profit would be

a.€210,000.
b.€45,000.
c.€135,000.
d.€300,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

141. Financial information is presented below:

Operating Expenses € 90,000
Net Sales 300,000
Cost of Goods Sold 165,000

The gross profit rate would be

a. .70.
b. .15.
c. .30.
d. .45.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

142. Financial information is presented below:

Operating Expenses € 270,000
Sales Returns and Allowances 78,000
Sales Discounts 36,000
Sales Revenue 900,000
Cost of Goods Sold 402,000

Gross profit would be

a.€462,000.
b.€384,000.
c.€420,000.
d.€498,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 25

143. Financial information is presented below:

Operating Expenses € 270,000
Sales Returns and Allowances 78,000
Sales Discounts 36,000
Sales Revenue 900,000
Cost of Goods Sold 402,000

The gross profit rate would be

a. .535.
b. .489.
c. .511.
d. .553.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

144. Financial information is presented below:

Operating Expenses € 270,000
Sales Returns and Allowances 78,000
Sales Discounts 36,000
Sales Revenue 960,000
Cost of Goods Sold 462,000

The amount of net sales on the income statement would be

a.€924,000.
b.€846,000.
c.€960,000.
d.€996,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

145. Financial information is presented below:

Operating Expenses € 270,000
Sales Returns and Allowances 78,000
Sales Discounts 36,000
Sales Revenue 960,000
Cost of Goods Sold 462,000
Gross profit would be
a.€462,000.
b.€420,000.
c.€384,000.
d.€498,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

5 - 26 Test Bank for Financial Accounting: IFRS Edition, 4e

146. Financial information is presented below:

Operating Expenses € 270,000
Sales Returns and Allowances 78,000
Sales Discounts 36,000
Sales Revenue 960,000
Cost of Goods Sold 462,000
The gross profit rate would be
a. .454.
b. .546.
c. .500.
d. .538.
Ans: A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

147. If a company has sales of $630,000, net sales of $600,000, and cost of goods sold of
$450,000, the gross profit rate is
a.71%.
b.75%
c.25%.
d.29%.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

148. Murray’s Fashions sold merchandise for $152,000 cash during the month of July. Returns
that month totaled $3,200. If the company’s gross profit rate is 40%, Murray’s will report
monthly net sales revenue and cost of goods sold of
a.$152,000 and $60,800.
b.$148,800 and $59,520.
c.$148,800 and $89,280.
d.$152,000 and $89,280.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

149. During August, 2020, Joe’s Supply Store generated revenues of $150,000. The
company’s expenses were as follows: cost of goods sold of $60,000 and operating
expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the
sale of a delivery truck of $5,000.

Joe’s gross profit for August, 2020 is

a.$150,000.
b.$95,000.
c.$90,000.
d.$80,000.
Ans: C, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 27

150. During August, 2020, Joe’s Supply Store generated revenues of $150,000. The
company’s expenses were as follows: cost of goods sold of $60,000 and operating
expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the
sale of a delivery truck of $5,000.

Joe’s other income and expense (loss) for the month of August, 2020 is
a.$0.
b.$2,500.
c.$5,000.
d.$7,500.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

151. During August, 2020, Joe’s Supply Store generated revenues of $150,000. The
company’s expenses were as follows: cost of goods sold of $60,000 and operating
expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the
sale of a delivery truck of $5,000.

Joe’s income from operations for the month of August, 2020 is

a.$150,000.
b.$97,500.
c.$92,500.
d.$80,000.
Ans: D, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

152. During August, 2020, Joe’s Supply Store generated revenues of $150,000. The
company’s expenses were as follows: cost of goods sold of $60,000 and operating
expenses of $10,000. The company also had rent revenue of $2,500 and a gain on the
sale of a delivery truck of $5,000.

Joe’s net income for August, 2020 is

a.$90,000.
b.$87,500.
c.$82,500.
d.$80,000.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

153. Operating expenses include salaries, utilities, advertising, and depreciation. International
Financial Reporting Standards allow different presentation formats including by
a.magnitude.
b.nature.
c.position.
d.classification.
Ans: B, LO: 5, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

5 - 28 Test Bank for Financial Accounting: IFRS Edition, 4e

154. Operating expenditures include salaries, utilities, advertising, and depreciation.

Presentation of operating expenses by nature
a.provides very detailed information, with numerous line items.
b.aggregates costs into groupings based on the primary functional activities in which the
company engages.
c.requires disclosures of additional details regarding the nature of certain expenses.
d.All of these answer choices are correct.
Ans: A, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

155. International Financial Reporting Standards call for companies to mark the recorded
values of certain types of assets and liabilities to fair value each period. These unrealized
gains and losses are excluded from net income but included in comprehensive income
and include all of the following except
a.adjustments to pension plan assets.
b.gains from foreign currency translation.
c.unrealized losses on certain types of investments.
d.adjustment to fixed assets for depreciation.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

156. Which of the following statements is true regarding International Financial Reporting
Standards (IFRS) and U.S. GAAP?
a.IFRS allows both the perpetual and periodic systems, but U.S GAAP permits only the perpetual
system.
b.IFRS requires a single-step income statement, but U.S. GAAP allows either the
single-step or the multiple-step income statement.
c. U.S. GAAP allows operating expenses to be reported by either function or nature, IFRS
requires reporting by function.
d.IFRS requires 2 years of income statements, U.S. GAAP requires 3 years of income
statements.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

157. Which of the following statements is true regarding the project to rework the structure of
financial statements undertaken by the International Accounting Standard Board (IASB)
and the Financial Accounting Standards Board (FASB)?
a.The proposed changes to the financial statements would result in considerably more detail than
currently seen under IFRS and U.S. GAAP.
b.The proposed structure is meant to draw attention away from net income.
c.The proposed structure will adopt major groupings similar to those currently used by the
statement of cash flows (operating, investing, and financial).
d.All of these answer choices are correct.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 29
a
158. Sampson Company's accounting records show the following for the year ending
December 31, 2020:

Purchase Discounts ₤ 28,000

Freight-In 39,000
Purchases 1,000,050
Beginning Inventory 117,500
Ending Inventory 144,000
Purchase Returns 32,000

Using the periodic system, the cost of goods purchased is

a.₤901,050.
b.₤1,021,050.
c.₤1,043,050.
d.₤979,050.
Ans: D, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
159. Sampson Company's accounting records show the following for the year ending
December 31, 2020:

Purchase Discounts ₤ 28,000

Freight-In 39,000
Purchases 1,000,050
Beginning Inventory 117,500
Ending Inventory 144,000
Purchase Returns 32,000

Using the periodic system, the cost of goods sold is

a.₤1,005,550.
b.₤994,550.
c.₤952,550.
d.₤1,047,550.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
160. The following information is available for Norton Company:
Sales Revenue $390,000 Freight-In $30,000
Ending Inventory 36,000 Purchase Returns and Allowances 15,000
Purchases 290,000 Beginning Inventory 45,000

Norton's cost of goods sold is

a.$365,000.
b.$350,000.
c.$314,000.
d.$305,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

5 - 30 Test Bank for Financial Accounting: IFRS Edition, 4e
a
161.
At the beginning of September, 2020, GLF Company reported Inventory of $8,000. During
the month, the company made purchases of $28,400. At September 30, 2020, a physical
count of inventory reported $9,600 on hand. Cost of goods sold for the month is
a.$1,600.
b.$28,400.
c.$26,800.
d.$36,400.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
162.
At the beginning of the year, Meng Company had an inventory of ¥500,000. During the
year, the company purchased goods costing ¥2,000,000. If Meng Company reported
ending inventory of ¥600,000 and sales of ¥2,500,000, the company’s cost of goods sold
and gross profit rate must be
a.¥1,250,000 and 50%.
b.¥1,900,000 and 24%.
c.¥1,250,000 and 24%.
d.¥1,900,000 and 76%.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
163.
During the year, Carla’s Pet Shop’s merchandise inventory decreased by $40,000. If the
company’s cost of goods sold for the year was $650,000, purchases must have been
a.$690,000.
b.$610,000.
c.$570,000.
d.Unable to determine.
Ans: B, LO: 7, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

a
164. Cost of goods available for sale is computed by adding
a.beginning inventory to net purchases.
b.beginning inventory to the cost of goods purchased.
c.net purchases and freight-in.
d.purchases to beginning inventory.
Ans: B, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA:
Business Economics

a
165. The Freight-In account
a.increases the cost of merchandise purchased.
b.is contra to the Purchases account.
c.is a permanent account.
d.has a normal credit balance.
Ans: A, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a
166. Net purchases plus freight-in determines
a.cost of goods sold.
b.cost of goods available for sale.
c.cost of goods purchased.
d.total goods available for sale.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 31
a
167. Powers Company has the following account balances:
Purchases $99,000
Sales Returns and Allowances 12,800
Purchase Discounts 8,000
Freight-In 6,000
Delivery Expense 8,000
The cost of goods purchased for the period is
a.$107,000.
b.$97,000.
c.$105,000.
d.$92,200.
Ans: B, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
168.
Gould Shoe Store has a beginning inventory of €45,000. During the period, purchases
were €250,000; purchase returns, €6,000; and freight-in €15,000. A physical count of
inventory at the end of the period revealed that €30,000 was still on hand. The cost of
goods available for sale was
a.€286,000.
b.€274,000.
c.€304,000.
d.€316,000.
Ans: C, LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

a
169. In a periodic inventory system, a return of defective merchandise to a supplier is recorded
by crediting
a.Accounts Payable.
b.Inventory.
c.Purchases.
d.Purchase Returns and Allowances.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a
170.
Which one of the following transactions is recorded with the same entry in a perpetual and
a periodic inventory system?
a.Cash received on account with a discount
b.Payment of freight costs on a purchase
c.Return of merchandise sold
d.Sale of merchandise on credit
Ans: A, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 32 Test Bank for Financial Accounting: IFRS Edition, 4e
a
171.
The journal entry to record a return of merchandise purchased on account under a
periodic inventory system would be
a.Accounts Payable
Purchase Returns and Allowances
b.Purchase Returns and Allowances
Accounts Payable
c.Accounts Payable
Inventory
d.Inventory
Accounts Payable
Ans: A, LO: 7, Bloom: C, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a
172. Under a periodic inventory system, acquisition of merchandise is debited to the
a.Inventory account.
b.Cost of Goods Sold account.
c.Purchases account.
d.Accounts Payable account.
Ans: C, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

a
173. Which of the following accounts has a normal credit balance?
a.Purchases
b.Sales Returns and Allowances
c.Freight-In
d.Purchase Discounts
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a
174. The respective normal account balances of Purchases, Purchase Discounts, and Freight-
In are
a.credit, credit, debit.
b.debit, credit, credit.
c.debit, credit, debit.
d.debit, debit, debit.
Ans: C, LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a
175. In a worksheet for a merchandising company, Inventory would appear in the
a.trial balance and adjusted trial balance columns only.
b.trial balance and statement of financial position columns only.
c.trial balance, adjusted trial balance, and statement of financial position columns.
d.trial balance, adjusted trial balance, and income statement columns.
Ans: C, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a
176. The Inventory account balance appearing in a worksheet represents the
a.ending inventory.
b.beginning inventory.
c.cost of merchandise purchased.
d.cost of merchandise sold.
Ans: A, LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 33

177. Cole Company has sales revenue of ₤24,000, cost of goods sold of ₤16,000 and
operating expenses of ₤6,000 for the year ended December 31. Cole's gross profit is
a.₤18,000.
b.₤8,000.
c.₤2,000.
d.₤0.
Ans: B, LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA:
Reporting

178. Logan Company made a purchase of merchandise on credit from Claude Corporation on
August 3, for $7,500, terms 2/10, n/45. On August 10, Logan makes the appropriate
payment to Claude. The entry on August 10 for Logan Company is
a.Accounts Payable 7,500
Cash 7,500
b.Accounts Payable 7,350
Cash 7,350
c.Accounts Payable 7,500
Purchase Returns and Allowances 150
Cash 7,350
d.Accounts Payable 7,500
Inventory 150
Cash 7,350
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

179. Cartier Company purchased inventory from Pissaro Company. The shipping costs were
$400 and the terms of the shipment were FOB shipping point. Cartier would have the
following entry regarding the shipping charges:
a.There is no entry on Cartier's books for this transaction.
b.Freight Expense 400
Cash 400
c.Freight-Out 400
Cash 400
d.Inventory 400
Cash 400
Ans: D, LO: 2, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

180. 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.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: FSA

For Instructor Use Only

5 - 34 Test Bank for Financial Accounting: IFRS Edition, 4e

181. On October 4, 2020, Terry Corporation had credit sales transactions of $2,800 from
merchandise having cost $1,900. The entries to record the day's credit transactions
include a
a.debit of $2,800 to Inventory.
b.credit of $2,800 to Sales Revenue.
c.debit of $1,900 to Inventory.
d.credit of $1,900 to Cost of Goods Sold.
Ans: B, LO: 3, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

182. Which of the following accounts is not closed to Income Summary?

a.Cost of Goods Sold
b.Inventory
c.Sales Revenue
d.Sales Discounts
Ans: B, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

183. In the Clark Company, sales were $480,000, sales returns and allowances were $30,000,
and cost of goods sold was $315,000. The gross profit rate was
a.70%.
b.30%.
c.34%.
d.66%.
Ans: B, LO: 5, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

184. Net sales is sales revenue less

a.sales discounts.
b.sales returns.
c.sales returns and allowances.
d.sales discounts and sales returns and allowances.
Ans: D, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

185. In the statement of financial position, ending inventory is reported

a.in current assets immediately following prepaid expenses.
b.in current assets immediately following accounts receivable.
c.in current assets immediately following cash.
d.under property, plant, and equipment.
Ans: A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

a
186. Cost of goods purchased is computed by adding
a.beginning inventory to freight-in.
b.beginning inventory to net purchases.
c.beginning inventory to purchases and freight-in.
d.freight-in to net purchases.
Ans: D, LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 35

BRIEF EXERCISES
BE 187
Presented here are the components in Ferrell Company’s income statement. Determine the
missing amounts.
Cost of Gross Operating Net
_Sales Revenue_ Goods Sold _Profit Expenses Income
€75,000 (a) €40,000 (b) €17,000
(c) €56,000 €59,000 €48,000 (d)
Ans: N/A, LO: 1, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 187 (5 min.)

a.€35,000
b.€23,000
c.€115,000
d.€11,000

BE 188
Prepare the necessary journal entries on the books of Jayhawk Carpet Company to record the
following transactions, assuming a perpetual inventory system (you may omit
explanations):
(a)Jayhawk purchased $45,000 of merchandise on account, terms 2/10, n/30.
(b)Returned $4,000 of damaged merchandise for credit.
(c)Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 188 (5 min.)

(a)Inventory 45,000
Accounts Payable 45,000

(b)Accounts Payable 4,000

Inventory 4,000

(c)Accounts Payable ($45,000 – $4,000) 41,000

Inventory ($41,000 × .02) 820
Cash ($41,000 – $820) 40,180

BE 189
Bryant Company sold goods on account to Kolmer Enterprises with terms of 2/10, n/30. The
goods had a cost of $600 and a selling price of $900. Both Bryant and Kolmer use a
perpetual inventory system. Record the sale on the books of Bryant and the purchase on
the books of Kolmer.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

5 - 36 Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 189 (3 min.)

Journal entry on Bryant’s books:

Accounts Receivable.... 900

Sales Revenue. 900
Cost of Goods Sold….. . 600
Inventory 600

Journal entry on Kolmer’s books:

Inventory 900
Accounts Payable 900

BE 190
Richter Company sells merchandise on account for $2,500 to Lynch Company with credit terms
of 3/10, n/60. Lynch Company returns $200 of merchandise that was damaged, along with
a check to settle the account within the discount period. What entry does Richter
Company make upon receipt of the check and the damaged merchandise?
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 190 (3 min.)

Sales Returns and Allowances 200
Sales Discounts ($2,300 × .03) 69
Cash ($2,500 – $200 – $69) 2,231
Accounts Receivable 2,500

BE 191
Nen Company uses a perpetual inventory system. During May, the following transactions and
events occurred.

May 13 Sold 12 motors at a cost of $40 each to Slater Brothers Supply Company, terms 1/10,
n/30. The motors cost Nen $25 each.

May 16 Two defective motors were returned to Nen.

May 23 Received payment in full from Slater Brothers.

Instructions
Journalize the May transactions for Nen Company (seller) assuming that Nen uses a perpetual
inventory system. You may omit explanations.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 37

Solution 191 (8 min.)

May 13 Accounts Receivable 480
Sales Revenue 480

Cost of Goods Sold 300

Inventory 300
May 16 Sales Returns and Allowances 80
Accounts Receivable 80

Inventory 50
Cost of Goods Sold 50

May 23 Cash 396

Sales Discounts ($400 × .01) 4
Accounts Receivable ($480 – $80) 400

BE 192
The income statement for Guinn Company for the year ended December 31, 2020 is as follows:

GUINN COMPANY
Income Statement
For the Year Ended December 31, 2020
Revenues
Sales revenue ₤55,000
Interest revenue 3,000
Total revenues 58,000
Expenses
Cost of goods sold ₤36,000
Operating expenses 16,000
Interest expense 1,000
Total expenses 53,000
Net income ₤ 5,000

Prepare the entries to close the revenue and expense accounts at December 31, 2020. You may
omit explanations for the transactions.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 192 (5 min.)

Dec. 31 Sales Revenue 55,000
Interest Revenue 3,000
Income Summary 58,000

31 Income Summary 53,000

Cost of Goods Sold 36,000
Operating Expenses 16,000
Interest Expense 1,000

BE 193
Rhodes Company provides this information for the month of November, 2020: sales on credit
$140,000; cash sales $60,000; sales discounts $2,000; and sales returns and allowances

For Instructor Use Only

5 - 38 Test Bank for Financial Accounting: IFRS Edition, 4e

$8,000. Prepare the sales revenues section of the income statement based on this
information.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 193 (3 min.)

RHODES COMPANY
Income Statement (Partial)
For the Month Ended November 30, 2020

Sales revenue $200,000

Less: Sales returns and allowances $8,000
Sales discounts 2,000 10,000
Net sales $190,000

BE 194
During October, 2020, Carol’s Catering Company generated sales revenue of $13,000. Sales
discounts totaled $200 for the month. Expenses were as follows: Cost of goods sold of
$8,000 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 194 (4 min.)

(1)Gross profit: $4,800 ($13,000 - $200 - $8,000)
(2)Income from operations: $2,800 ($4,800 - $2,000)
a
BE 195
For each of the following, determine the missing amounts.

Beginning Goods Available Cost of Ending

Inventory Purchases for Sale Goods Sold Inventory
1.$20,000 ________ $ 60,000 $25,000 _______
2. ______ $220,000 $250,000 _______ $40,000
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

a
Solution 195 (4 min.)
1.Purchases $40,000 ($60,000 – $20,000), Ending inventory $35,000 ($60,000 – $25,000)

2.Beginning inventory $30,000 ($250,000 – $220,000), Cost of Goods Sold $210,000 ($250,000 –
$40,000)

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 39
a
BE 196
Assume that Vangundy Company uses a periodic inventory system and has these account
balances: Purchases €490,000; Purchase Returns and Allowances €14,000; Purchase
Discounts €12,000; and Freight-In €15,000. Determine net purchases and cost of goods
purchased.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

a
Solution 196 (4 min.)
Calculation of Net Purchases and Cost of Goods Purchased

Purchases €490,000
Less: Purchase returns and allowances €14,000
Purchase discounts 12,000 26,000
Net purchases 464,000
Add: freight-in 15,000
Cost of goods purchased €479,000
a
BE 197
Assume that Vangundy Company uses a periodic inventory system and has these account
balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase
Discounts $11,000; and Freight-In $15,000; beginning inventory of $45,000; ending
inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 197 (6 min.)

Inventory, beginning $ 45,000
Purchases $600,000
Less: Purchase returns and allowances $25,000
Purchase discounts 11,000 36,000
Net purchases 564,000
Add: Freight-in 15,000
Cost of goods purchased 579,000
Cost of goods available for sale 624,000
Inventory, ending 55,000
Cost of goods sold $569,000
a
BE 198
Slater Brothers Supply uses a periodic inventory system. During May, the following transactions
and events occurred.

May 13 Purchased 12 motors at a cost of $40 each from Nen Company, terms 1/10, n/30. The
motors cost Nen Company $25 each.

May 16 Returned 2 defective motors to Nen.

May 23 Paid Nen Company in full.

Instructions
Journalize the May transactions for Slater Brothers. You may omit explanations.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

5 - 40 Test Bank for Financial Accounting: IFRS Edition, 4e

a
Solution 198 (6 min.)
May 13 Purchases 480
Accounts Payable 480
May 16 Accounts Payable 80
Purchase Returns and Allowances 80
May 23 Accounts Payable ($480 – $80) 400
Purchase Discounts ($400 × .01) 4
Cash 396

EXERCISES
Ex. 199
For each of the following, determine the missing amounts.

Sales Cost of Operating

Revenue Goods Sold Gross Profit Expenses Net Income
1.¥1,000,000 ________ _______ ¥250,000 ¥100,000

2.________ ¥950,000 ¥1,000,000 _______ ¥800,000

Ans: N/A, LO: 1, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 199 (5 min.)

1.Gross Profit = ¥350,000 (¥250,000 + ¥100,000)
Cost of Goods Sold = ¥650,000 (¥1,000,000 – ¥350,000)

2.Sales Revenue = ¥1,950,000 (¥950,000 + ¥1,000,000)

Operating Expenses = ¥200,000 (¥1,000,000 – ¥800,000)

Ex. 200
On October 1, Belton Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200
each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 25 bicycles at a cost of $200 each from Kuhn Bicycle Company, terms
2/10, n/30.
6 Sold 15 bicycles to Team America for $300 each, terms 2/10, n/30.
7 Received credit from Kuhn Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Kuhn Bicycle Company in full, less discount.

Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual
inventory system.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 41

Solution 200 (20 min.)

Oct. 4 Inventory 5,000
Accounts Payable 5,000

6 Accounts Receivable 4,500

Sales Revenue 4,500

Cost of Goods Sold 3,000

Inventory 3,000

7 Accounts Payable 400

Inventory 400

13 Sales Returns and Allowances 300

Accounts Receivable 300

Inventory 200
Cost of Goods Sold 200

14 Accounts Payable ($5,000 – $400) 4,600

Cash ($4,600×.98) 4,508
Inventory ($4,600×.02) 92

Ex. 201
On September 1, Reid Supply had an inventory of 15 backpacks at a cost of $20 each. The
company uses a perpetual inventory system. During September, the following transactions
and events occurred.

Sept. 4 Purchased 80 backpacks at $20 each from Hunter, terms 2/10, n/30.

Sept. 6 Received credit of $120 for the return of 6 backpacks purchased on Sept. 4 that
were defective.

Sept. 9 Sold 40 backpacks for $25 each to Oliver Books, terms 2/10, n/30.

Sept. 13 Sold 15 backpacks for $25 each to Heller Office Supply, terms n/30.

Sept. 14 Paid Hunter in full, less discount.

Instructions
Journalize the September transactions for Reid Supply.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

5 - 42 Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 201 (20 min.)

Sept. 4 Inventory 1,600
Accounts Payable 1,600

Sept. 6 Accounts Payable 120

Inventory 120

Sept. 9 Accounts Receivable 1,000

Sales Revenue 1,000
Cost of Goods Sold 800
Inventory 800

Sept. 13 Accounts Receivable 375

Sales Revenue 375
Cost of Goods Sold 300
Inventory 300

Sept. 14 Accounts Payable ($1,600 – $120) 1,480

Cash ($1,480 × .98) 1,450
Inventory ($1,480 × .02) 30

Ex. 202
Dan Moran is a new accountant with Tabor Company. Tabor purchased merchandise on account
for $9,000. The credit terms are 1/10, n/30. Dan has talked with the company's banker
and knows that he could earn 6% on any money invested in the company's savings
account.

Instructions
(a)Should Dan pay the invoice within the discount period or should he keep the $9,000 in the
savings account and pay at the end of the credit period? Support your recommendation
with a calculation showing which action would be best.

(b)If Dan forgoes the discount, it may be viewed as paying an interest rate of 1% for the use of
$9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.
Ans: N/A, LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: Business Economics

Solution 202 (10 min.)

Dan should pay the invoice within the discount period to save $60:

(a)Discount of 1% on $9,000 $90

Interest received on $9,000 (for 20 days at 6%) 30 ($9,000 × 6% × 20 ÷ 360)
Savings by taking the discount $60

(b)The equivalent annual interest rate is:

1% × 360 ÷ 20 = 18%.

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 43

Ex. 203
(a)Kelso Company purchased merchandise on account from Office Suppliers for $150,000, with
terms of 2/10, n/30. During the discount period, Kelso returned some merchandise and
paid $137,200 as payment in full. Kelso uses a perpetual inventory system. Prepare the
journal entries that Kelso Company made to record:
(1) the purchase of merchandise.
(2) the return of merchandise.
(3) the payment on account.

(b)Noble Company sold merchandise to Fugate Company on account for $73,000 with credit
terms of ?/10, n/30. The cost of the merchandise sold was $43,800. During the discount
period, Fugate Company returned $3,000 of merchandise and paid its account in full
(minus the discount) by remitting $69,300 in cash. Both companies use a perpetual
inventory system. Prepare the journal entries that Noble Company made to record:
(1) the sale of merchandise.
(2) the return of merchandise.
(3) the collection on account.
Ans: N/A, LO: 2,3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 203 (20 min.)

(a)To compute the amount due after returns but before the discount, divide $137,200 by .98
(100% – 2%).
$137,200 ÷ .98 = $140,000.
Subtract $140,000 from $150,000 to determine that $10,000 of merchandise was returned.

(1) Inventory 150,000

Accounts Payable 150,000

(2) Accounts Payable 10,000

Inventory 10,000

(3) Accounts Payable 140,000

Inventory 2,800
Cash 137,200

(b)Fugate Company returns $3,000 of merchandise and owes $70,000 to Noble Company.
$69,300 ÷ $70,000 = .99
100% – 99% = 1%
The missing discount percentage is 1%. $70,000 × 1% = $700 sales discount.
$70,000 – $700 = $69,300 cash received on account.

(1) Accounts Receivable 73,000

Sales Revenue 73,000
Cost of Goods Sold 43,800
Inventory 43,800

(2) Sales Returns and Allowances 3,000

Accounts Receivable 3,000
Inventory $3,000 × ($43,800 ÷ $73,000) 1,800
Cost of Goods Sold 1,800

For Instructor Use Only

5 - 44 Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 203 (Cont.)

(3) Cash 69,300

Sales Discounts 700
Accounts Receivable 70,000

Ex. 204
An inexperienced accountant for Leyland Company made the following errors in recording
merchandising transactions.
1.A ₤225 refund to a customer for faulty merchandise was debited to Sales Revenue ₤225 and
credited to Cash $225.
2.A ₤480 credit purchase of supplies was debited to Inventory ₤480 and credited to Cash ₤480.
3.A ₤160 sales return was debited to Sales Revenue and credited to Accounts Receivable.
4.A cash payment of ₤50 for freight on merchandise purchases was debited to Freight-Out ₤500
and credited to Cash ₤500.

Instructions
Prepare separate correcting entries for each error, assuming that the incorrect entry is not
reversed. (Omit explanations.)
Ans: N/A, LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 204 (6-8 min.)

1.Sales Returns and Allowances 225
Sales Revenue 225
2.Supplies 480
Cash 480
Accounts Payable 480
Inventory 480

3.Sales Returns and Allowances 160

Sales Revenue 160

4.Inventory 50
Cash 450
Freight-Out 500

Ex. 205
Prepare the necessary journal entries to record the following transactions, assuming Hewitt
Company uses a perpetual inventory system.
(a)Purchased $25,000 of merchandise on account, terms 2/10, n/30.
(b)Returned $500 of damaged merchandise for credit.
(c)Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 45

Solution 205 (6-8 min.)

(a)Inventory 25,000
Accounts Payable 25,000

(b)Accounts Payable 500

Inventory 500

(c)Accounts Payable ($25,000 – $500)…. 24,500

Inventory ($24,500 × .02)……… 490
Cash ($24,500 – $490)………… 24,010

Ex. 206
Prepare the necessary journal entries to record the following transactions, assuming Darby
Company uses a perpetual inventory system.
(a)Darby sells $55,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
(b)The customer in (a) returned $5,000 of merchandise to Darby. The merchandise returned cost
$3,000.
(c)Darby received the balance due within the discount period.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 206 (7-9 min.)

(a)Accounts Receivable 55,000
Sales Revenue 55,000
Cost of Goods Sold 30,000
Inventory 30,000

(b)Sales Returns and Allowances 5,000

Accounts Receivable 5,000
Inventory 3,000
Cost of Goods Sold 3,000

(c)Cash ($50,000 – $500) 49,500

Sales Discounts ($50,000 × .01) 500
Accounts Receivable 50,000

Ex. 207
Newell Company completed the following transactions in October:

Credit Sales Sales Returns Date of

Date Amount Terms Date Amount Collection
Oct. 3 $ 900 2/10, n/30 Oct. 8
Oct. 11 1,200 3/10, n/30 Oct. 14$ 200 Oct. 16
Oct. 17 5,000 1/10, n/30 Oct. 201,000 Oct. 29
Oct. 21 1,700 2/10, n/60 Oct. 23200 Oct. 27
Oct. 23 2,000 2/10, n/30 Oct. 27300 Oct. 28

For Instructor Use Only

5 - 46 Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 207 (Cont.)

Instructions
(a)Indicate the cash received for each collection. Show your calculations.
(b)Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandise returned had a cost of $140.
(3) Oct. 28 collection.
Newell uses a perpetual inventory system.
Ans: N/A, LO: 3, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 207 (20 min.)

(a)Oct. 8 $882 [Sales $900 – Sales discount $18 ($900 × .02)]

Oct. 16 $970 [Sales $1,200 – Sales return $200 = $1,000;

$1,000 – Sales discount $30 ($1,000 × .03)]

Oct. 29 $4,000 [Sales $5,000 – Sales return $1,000 = $4,000;

(Discount lapsed)]

Oct. 27 $1,470 [Sales $1,700 – Sales return $200 = $1,500;

$1,500 – Sales discount $30 ($1,500 × .02)]

Oct. 28 $1,666 [Sales $2,000 – Sales return $300 = $1,700;

$1,700 – Sales discount $34 ($1,700 × .02)]

(b)(1) Oct. 17Accounts Receivable 5,000

Sales Revenue 5,000

Cost of Goods Sold 3,500

Inventory 3,500

(2) Oct. 23Sales Returns and Allowances 200

Accounts Receivable 200

Inventory 140
Cost of Goods Sold 140

(3) Oct. 28Cash 1,666

Sales Discounts 34
Accounts Receivable 1,700

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 47

Ex. 208
The following information (in 000) is available for Ling Company:
Debit Credit
Retained Earnings ¥ 50,000
Dividends ¥ 35,000
Sales Revenue 510,000
Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 357,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense45,000
Utilities Expense 18,000
Depreciation Expense7,000
Interest Revenue 25,000

Instructions
Using the above information, prepare the closing entries for Ling Company.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 208 (10 min.)

Dec. 31 Interest Revenue 25,000
Sales Revenue 510,000
Income Summary 535,000

31 Income Summary 490,000

Sales Returns and Allowances 20,000
Sales Discounts 7,000
Cost of Goods Sold 357,000
Freight-Out 2,000
Advertising Expense 15,000
Interest Expense 19,000
Salaries and Wages Expense 45,000
Utilities Expense 18,000
Depreciation Expense 7,000

31 Income Summary 45,000

Retained Earnings 45,000

31 Retained Earnings 35,000

Dividends 35,000

For Instructor Use Only

5 - 48 Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 209
The adjusted trial balance of Werly Book Company appears below.

WERLY BOOK COMPANY

Adjusted Trial Balance
December 31, 2020
Debit Credit
Cash 32,000
Accounts Receivable 25,000
Inventory 35,000
Buildings 140,000
Accumulated Depreciation—
Buildings 20,000
Accounts Payable 12,000
Share Capital-Ordinary 100,000
Retained Earnings 49,000
Dividends 20,000
Sales Revenue 325,000
Sales Discounts 6,000
Sales Returns & Allowances 8,000
Cost of Goods Sold 203,000
Operating Expenses 37,000
506,000 506,000

Instructions
Using the information given, prepare the year-end closing entries.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 209 (10 min.)

Dec. 31 Sales Revenue 325,000
Income Summary 325,000
(To close credit balance accounts)

31 Income Summary 254,000

Sales Discounts 6,000
Sales Returns and Allowances 8,000
Cost of Goods Sold 203,000
Operating Expenses 37,000
(To close accounts with debit balances)

31 Income Summary 71,000

Retained Earnings 71,000
(To transfer net income to retained earnings)

31 Retained Earnings 20,000

Dividends 20,000
(To close dividends account to retained earnings)

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 49

Ex. 210
Kennedy Company had the following account balances at year-end: cost of goods sold $85,000;
inventory $15,000; operating expenses $39,000; sales revenue $144,000; sales discounts
$1,600; and sales returns and allowances $2,300. A physical count of inventory
determines that inventory on hand is $14,400.

Instructions
(a)Prepare the adjusting entry necessary as a result of the physical count.
(b)Prepare closing entries.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 210 (10 min.)

(a)Cost of Goods Sold 600
Inventory 600
(b)Sales Revenue 144,000
Income Summary 144,000
Income Summary 128,500
Cost of Goods Sold ($85,000 + $600) 85,600
Operating Expenses 39,000
Sales Returns and Allowances 2,300
Sales Discounts 1,600
Income Summary ($144,000 – $128,500) 15,500
Retained Earnings 15,500

Ex. 211
Presented below is information for Pryor Company for the month of March 2020.

Cost of goods sold €242,000 Rent expense € 30,000

Freight-out7,000 Sales discounts 8,000
Insurance expense 17,000 Sales returns and allowances13,000
Salaries and wages expense 63,000 Sales revenue 410,000

Instructions
(a)Prepare an income statement.
(b)Compute the gross profit rate.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Hard, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only

5 - 50 Test Bank for Financial Accounting: IFRS Edition, 4e

Solution 211 (10 min.)

(a)
PRYOR COMPANY
Income Statement
For the Month Ended March 31, 2020
Sales revenues
Sales revenue €410,000
Less: Sales returns and allowances €13,000
Sales discounts 8,000 21,000
Net sales 389,000
Cost of goods sold 242,000
Gross profit 147,000
Operating expenses
Salaries and wages expense 63,000
Rent expense 30,000
Insurance expense 17,000
Freight-out 7,000
Total operating expenses 117,000
Net income € 30,000

(b)Gross profit rate = €147,000  €389,000 = 37.79%.

Ex. 212
Instructions
State the missing items identified by ?.
1. Gross profit – Operating expenses = ?
2. Cost of goods sold + Gross profit on sales = ?
3. Sales revenue – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 212 (5 min.)

1. Income from operations (or Net income)
2. Net sales
3. Sales discounts, Sales returns and allowances
4. Other income and expense, interest expense
5. Gross profit

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 51

Ex. 213
The adjusted trial balance of Kasten Company contained the following information:
Debit Credit
Sales Revenue $660,000
Sales Returns and Allowances $ 20,000
Sales Discounts 7,000
Cost of Goods Sold 456,000
Freight-Out 2,000
Advertising Expense 25,000
Interest Expense 18,000
Salaries and Wages Expense55,000
Utilities Expense 28,000
Depreciation Expense7,000
Interest Revenue 30,000

Instructions
Use the above information to prepare an income statement for the year ended December 31,
2020.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution 213 (15 min.)

KASTEN COMPANY
Income Statement
For the Year Ended December 31, 2020
Sales
Sales revenue $660,000
Less: Sales returns and allowances $ 20,000
Sales discounts 7,000 27,000
Net sales 633,000
Cost of goods sold 456,000
Gross profit 177,000
Operating expenses
Salaries and wages expense $55,000
Utilities expense 28,000
Advertising expense 25,000
Depreciation expense 7,000
Freight-out 2,000
Total operating expenses 117,000
Income from operations 60,000
Other income and expense
Interest revenue 30,000
Interest expense 18,000
Net income $ 72,000

For Instructor Use Only

5 - 52 Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 214
The following information is available for Sager Company:

Operating expenses ₤ 80,000

Cost of goods sold 245,000
Sales revenue 370,000
Sales returns and allowances15,000

Instructions
Compute each of the following:
(a)Net sales
(b)Gross profit
(c)Income from operations
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

Solution 214 (6 min.)

(a)Net sales = ₤355,000 (₤370,000 – ₤15,000)
(b)Gross profit = ₤110,000 (₤355,000 – ₤245,000)
(c)Income from operations = ₤30,000 (₤110,000 – ₤80,000)

Ex. 215
Financial information is presented below for two different companies.

Elliott Stever
Cosmetics Grocery
Sales revenue $90,000 $ (e)
Sales returns and allowances (a) 4,000
Net sales 85,000 93,000
Cost of goods sold 56,000 (f)
Gross profit (b) 32,000
Operating expenses 17,000 (g)
Income from operations (c) (h)
Other income and expense (4,000) (7,000)
Net income (d) 9,000

Instructions
Determine the missing amounts.
Ans: N/A, LO: 5, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 53

Solution 215 (15 min.)

(*Missing amount)
(a)Sales revenue $ 90,000
Less: Sales returns and allowances 5,000*
Net sales $ 85,000

(b)Net sales $ 85,000

Cost of goods sold 56,000
Gross profit $ 29,000*

(c) and (d)

Gross profit $ 29,000
Operating expenses 17,000
Income from operations (c) $ 12,000*
Other income and expense 4,000
Net income (d) $ 8,000*

(e)Sales revenue $ 97,000*

Less: Sales returns and allowances 4,000
Net sales $ 93,000

(f)Net sales $ 93,000

Cost of goods sold 61,000*
Gross profit $ 32,000

(g) and (h)

Gross profit $ 32,000
Operating expenses (g) 16,000*
Income from operations (h) $ 16,000*
Other income and expense 7,000
Net income $ 9,000

Ex. 216
In 2020, Rooney Company had net sales of $600,000 and cost of goods sold of $360,000.
Operating expenses were $150,000, and interest expense was $15,000.

Instructions
(a)Compute Rooney's gross profit.
(b)Compute the gross profit rate.
(c)What is Rooney's income from operations and net income?
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution 216 (10 min.)

(a)$600,000 – $360,000 = $240,000.
(b)$240,000/$600,000 = 40%.
(c)Income from operations is $90,000 ($240,000 – $150,000), and net income is $75,000
($90,000 – $15,000).

For Instructor Use Only

5 - 54 Test Bank for Financial Accounting: IFRS Edition, 4e

Ex. 217
Hoyle Company gathered the following condensed data for the year ended December 31, 2020:

Cost of goods sold $ 760,000

Net sales 1,350,000
Operating expenses 279,000
Interest expense 63,000
Dividend revenue 38,000
Loss from employee strike 233,000

Instructions
Prepare an income statement for the year ended December 31, 2020.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

Solution 217 (15 min.)

.HOYLE COMPANY
Income Statement
For the Year Ended December 31, 2020

Net sales $1,350,000

Cost of goods sold 760,000
Gross profit 590,000
Operating expenses 279,000
Income from operations 311,000
Other income and expense
Loss from employee strike $233,000 Dividend revenue
38,000 (195,000)
Interest expense 63,000
Net income $ 53,000

a
Ex. 218
The income statement of Wilcox, Inc. includes the items listed below:
Net sales $900,000
Gross profit 340,000
Beginning inventory 80,000
Purchase discounts 15,000
Purchase returns and allowances 8,000
Freight-in 10,000
Operating expenses 300,000
Purchases 560,000

Instructions
Use the appropriate items listed above as a basis for determining:
(a)Cost of goods sold.
(b)Cost of goods available for sale.
(c)Ending inventory.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting
a
Solution 218 (15 min.)
(a)Net sales – Cost of goods sold = Gross profit

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 55

$900,000 – Cost of goods sold = $340,000

Cost of goods sold = $560,000

(b)Beginning inventory $ 80,000

Purchases $560,000
Less: Purchase discounts $15,000
Purchase returns and allowances 8,000 23,000
Net Purchases 537,000
Add: Freight-in 10,000
Cost of goods purchased 547,000
Cost of goods available for sale $627,000

(c)Cost of goods available for sale – Ending inventory = Cost of goods sold
$627,000 – Ending inventory = $560,000
Ending inventory = $67,000
a
Ex. 219
Three items are missing in each of the following columns and are identified by letter.
Sales revenue ¥ (a) ¥820,000
Sales returns and allowances25,000 20,000
Sales discounts 10,000 15,000
Net sales 440,000 (d)
Beginning inventory (b) 300,000
Cost of goods purchased 220,000 (e)
Ending inventory 170,000 303,000
Cost of goods sold 290,000 555,000
Gross profit (c) (f)

Instructions
Calculate the missing amounts and identify them by letter.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

a
Solution 219 (15 min.)
(a)¥475,000 (d) ¥785,000
(b)¥240,000 (e) ¥558,000
(c)¥150,000 (f) ¥230,000

For Instructor Use Only

5 - 56 Test Bank for Financial Accounting: IFRS Edition, 4e
a
Ex. 220
Paxson Supply Company uses a periodic inventory system. During September, the following
transactions and events occurred.

Sept. 3 Purchased 90 backpacks at $30 each from Barnes Company, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 5 backpacks purchased on Sept. 3 that were
defective.
Sept. 9 Sold 15 backpacks for $40 each to Starr Books, terms 2/10, n/30.
Sept. 13 Paid Barnes Company in full.

Instructions
Journalize the September transactions for Paxson Supply Company.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

a
Solution 220 (12 min.)
Sept. 3 Purchases 2,700
Accounts Payable 2,700
Sept. 6 Accounts Payable 150
Purchase Returns and Allowances 150
Sept. 9 Accounts Receivable 600
Sales Revenue 600
Sept. 13 Accounts Payable ($2,700 – $150) 2,550
Purchase Discounts ($2,550 × .02) 51
Cash 2,499
a
Ex. 221
The following information is available for Hopkins Company:
Beginning inventory $ 45,000
Ending inventory 70,000
Freight-in 10,000
Purchases 290,000
Purchase returns and allowances 8,000

Instructions
Compute each of the following:
(a)Net purchases
(b)Cost of goods purchased
(c)Cost of goods sold
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

a
Solution 221 (6 min.)
(a)Net purchases = $282,000 ($290,000 – $8,000)
(b)Cost of goods purchased = $292,000 ($282,000 + $10,000)
(c)Cost of goods sold = $267,000 ($45,000 + $292,000 – $70,000)

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 57
a
Ex. 222
The adjusted trial balance of Dailey Music Company appears below. Dailey Music Company
prepares monthly financial statements and uses the perpetual inventory method.
Instructions
Complete the worksheet below.
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2020

Adjusted
Trial Balance Income Statement Statement of Financial Position
Debit Credit Debit Credit Debit Credit
Cash 12,000
Inventory 21,000
Supplies 3,500
Equipment 80,000
Accum. Depreciation—
Equipment 15,000
Accounts Payable 20,000
Share Capital-Ordinary 50,000
Retained Earnings 42,000
Dividends 7,000
Sales Revenue 44,000
Sales Discounts 2,000
Cost of Goods Sold 28,000
Advertising Expense 7,000
Supplies Expense 6,000
Depreciation Expense1,000
Rent Expense 2,500
Utilities Expense 1,000
171,000 171,000

Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem
Solving, IMA: Reporting

For Instructor Use Only

5 - 58 Test Bank for Financial Accounting: IFRS Edition, 4e
a
Solution 222 (15 min.)
DAILEY MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2020

Adjusted
Trial Balance Income Statement Statement of Financial Position
Debit Credit Debit Credit Debit Credit
Cash 12,000 12,000
Inventory 21,000 21,000
Supplies 3,500 3,500
Equipment 80,000 80,000
Accum. Depreciation—
Equipment 15,000 15,000
Accounts Payable 20,000 20,000
Share Capital-Ordinary 50,000 50,000
Retained Earnings 42,000 42,000
Dividends 7,000 7,000
Sales Revenue 44,000 44,000
Sales Discounts 2,000 2,000
Cost of Goods Sold 28,000 28,000
Advertising Expense 7,000 7,000
Supplies Expense 6,000 6,000
Depreciation Expense1,000 1,000
Rent Expense 2,500 2,500
Utilities Expense 1,000 1,000
171,000 171,000 47,500 44,000 123,500 127,000
Net Loss 3,500 3,500
47,500 47,500 127,000 127,000
a
Ex. 223
Prepare the necessary journal entries to record the following transactions, assuming a periodic
inventory system:
(a)Purchased $520,000 of merchandise on account, terms 2/10, n/30.
(b)Returned $40,000 of damaged merchandise for credit.
(c)Paid for the merchandise purchased within 10 days.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

a
Solution 223 (6 min.)
(a)Purchases 520,000
Accounts Payable 520,000

(b)Accounts Payable 40,000

Purchase Returns and Allowances 40,000

(c)Accounts Payable ($520,000 – $40,000) 480,000

Purchase Discounts ($480,000 × .02) 9,600
Cash ($480,000 – $9,600) 470,400

COMPLETION STATEMENTS

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 59

224. A ________________ buys and sells goods rather than performing services to
earn a profit.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

225. Cost of goods sold is deducted from net sales revenue for the period in order to
arrive at ________________.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting , AICPA PC: None, IMA:
Business Economics

226. Inventory on hand can be obtained from detailed inventory records when a
________________ inventory system is maintained.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

227. The acquisition of inventory is debited to the ____________ account when a

perpetual inventory system is used.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

228. The freight cost incurred by a seller to deliver goods sold to a customer is called
________________.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

229. When a customer returns merchandise previously purchased on credit, the entry
the seller makes to record the return requires a debit to the ________________ account
and a credit to the ________________ account.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

230. Sales Returns and Allowances and Sales Discounts are both ______________
accounts and have _______________ normal balances.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA

231. Every sales transaction should be supported by a ________________ that provides

written evidence of the sale.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Internal
Controls

232. Gross profit is obtained by subtracting ________________ from

________________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

233. Income from operations is determined by subtracting total operating expenses

from ________________.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

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5 - 60 Test Bank for Financial Accounting: IFRS Edition, 4e

Answers to Completion Statements

224. merchandising company 230. contra revenue, debit
225. gross profit 231. business document
226. perpetual 232. cost of goods sold, net sales
227. Inventory 233. gross profit
228. freight-out
229. Sales Returns and Allowances,
Accounts Receivable

MATCHING
234. Match the items below by entering the appropriate code letter in the space provided.

A. Net sales F. FOB shipping point

B. Sales discounts G. Freight-out
C. Purchase invoice H. Gross profit
D. Periodic inventory system I. Operating expenses
E. FOB destination J. Income from operations

1. An incentive to encourage customers to pay their accounts early.

2. Expenses incurred in the process of earning sales revenue.
3. Freight terms that require the seller to pay the freight cost.
4. Sales less sales returns and allowances and sales discounts.
5. A document that supports each credit purchase.
6. Net sales less cost of goods sold.
7. Freight cost to deliver goods to customers reported as a selling expense.
8. Requires a physical count of goods on hand to compute cost of goods sold.
9. Gross profit less total operating expenses.
10. Freight terms that require the buyer to pay the freight cost.
Ans: N/A, LO: 1-5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA

Answers to Matching
1. B 6. H
2. I 7. G
3. E 8. D
4. A 9. J
5.C 10. F

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 61

SHORT-ANSWER ESSAY QUESTIONS

S-A E 235
You are at a company picnic and the company president starts a conversation with you. The
president says “Since we use the perpetual inventory system, there is no reason to take a
physical count of our inventory.” What is your response to the president’s remarks?
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 235
You have made a very good observation, but human and mechanical shortcomings need to be
considered. The perpetual inventory system maintains detailed records of each inventory
purchase, sale and return. This does not mean that everything has been correctly
recorded. Some possible causes of discrepancies between the goods on hand and the
amounts shown in the accounting system include (1) inventory items were coded
incorrectly, (2) cashiers failed to properly scan inventory items, (3) inventory items were
damaged or stolen, or (4) goods returned by customers were not properly entered in the
accounting records. It is necessary to reconcile amounts in the ledger to actual quantities.
Discrepancies should be properly accounted for and investigated.

S-A E 236
Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will
result in a debit to Inventory by the purchaser and a debit to Freight-Out by the seller.
Ans: N/A, LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

Solution 236
The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on
board the carrier by the seller. The buyer then pays the freight and debits Inventory. FOB
destination means that the goods are placed free on board to the buyer's place of
business. Thus the seller pays the freight and debits Freight-Out.

S-A E 237
A merchandiser frequently has a need to use contra accounts related to the sale of goods.
Identify the contra accounts that have normal debit balances and explain why they are not
considered expenses.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: Problem
Solving, IMA: FSA

Solution 237
The contra accounts that have normal debit balances are Sales Discounts and Sales Returns and
Allowances. These accounts have debit balances but are not expenses because they are
adjustments of sales, not operating expenses. They are an adjustment of the inflow from
sale of goods, rather than a cost used to help earn revenue.

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5 - 62 Test Bank for Financial Accounting: IFRS Edition, 4e

S-A E 238
Mary Bolton believes revenues from credit sales may be recognized before they are collected in
cash. Do you agree? Explain.
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 238
Agree. In accordance with the revenue recognition principle, sales revenues are generally
considered to be recognized when the goods are transferred from the seller to the buyer;
that is, when the exchange transaction occurs. The recognition of revenue is not
dependent on the collection of credit sales.

S-A E 239
The income statement for a merchandising company presents five amounts not shown on a
service company’s income statement. Identify and briefly explain the five unique amounts.
Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

Solution 239
The items reported for a merchandising company that are not reported for a service company are
sales revenue, sales returns and allowances, sales discounts, cost of goods sold, and
gross profit. Sales revenue, sales returns and allowances, and sales discounts comprise
net sales. Cost of goods sold represents the total cost of merchandise sold during the
period. Gross profit is the excess of net sales over the cost of goods sold.

S-A E 240 (Ethics)

Holmes Corporation manufactures electronic components for use in many consumer products.
Their raw materials are purchased literally from all over the world. Depending on the
country involved, purchase terms vary widely. Some suppliers, for example, require full
prepayment, while others are content to receive payment within six months of receipt of
the goods.
Because of this situation, Holmes never closes its books until at least ten days after month end.
In this way, it can sort out ownership of goods in transit, and document which goods were
received by month end, and which were not.
Ann Cook, a new accountant, was asked to record about $50,000 in inventory as having been
received before month end. She argued that the shipping documents clearly showed that
the goods were actually received on the 8th of the current month. Her boss, busy with
month-end reports, curtly tells Ann to check the shipping terms. She did so, and found the
notation "FOB shipper's dock" on the document. She hadn't seen that particular notation
before, but she reasoned that if the selling company considered it shipped when it
reached their dock, Holmes should consider it received when it reached Holmes's dock.
She did not record the purchase until after month end.
Required:
1.Why are accountants concerned with the timing in the recording of purchases?
2.Was there a violation of ethical standards here? Explain.
Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting

For Instructor Use Only

 Accounting for Merchandising Operations 5 - 63

Solution 240
1.Accountants are concerned with timing because they seek to make sure that sales are recorded
in the proper period so that revenues and expenses are properly matched; to make sure
that goods recorded as owned by the company actually are owned as of the last date of
the period; and to make certain that sales recorded have been actually completed.
2.The only ethical principle that may be involved is one of competence. Ann does not appear to
know enough about reading shipping documents to make a proper determination of
ownership. The goods were owned by Holmes as soon as they left the shipper's dock.
Otherwise, the goods would have been owned by no one while in transit. It does not
appear that Ann compromised her integrity or that she sought some sort of gain from her
mistake. It does seem likely that she should have known better how to interpret the
shipping documents.

S-A E 241 (Communication)

Lori Brown and Jill Kane, two salespersons in adjoining territories, regularly compete for bonuses.
During the last month, their dollar volume of sales, on which the bonuses are based, was
nearly equal. On the last day of the month, both made a large sale. Both orders were
shipped on the last day of the month and both were received by the customer on the fifth
of the following month. Lori's sale was FOB shipping point, and Jill's was FOB destination.
The company "counts" sales for purposes of calculating bonuses on the date that
ownership passes to the purchaser. Lori's sale was therefore counted in her monthly total
of sales, Jill's was not. Jill is quite upset. She has asked you to just include it, or to take
Lori's off as well. She also has told you that you are being unethical for allowing Lori to get
a bonus just for choosing a particular shipping method.
Write a memo to Jill. Explain your position.
Ans: N/A, LO: 1, Bloom: S, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None,
IMA: Business Economics

Solution 241

MEMO
TO: Jill Kane
FROM:Martha King, Accounting
RE: Sales Bonuses
DATE: June 15, 200x

As you know, sales bonuses are based upon the revenue generated by each salesperson. Your
total sales for the month was $100,000. This total does not include the $20,000 sale you
made May 31 because of the policy to count sales on the date that title transfers to the
customer. I can understand your being upset that this large sale was not counted, while
someone else's sale on the same date was counted, because of the shipping terms.
However, I am sure you agree that the policy is not unethical, but it is instead more fair
than our trying to make a determination in the midst of month-end closing.
I do understand your disappointment, but this sale does count in June—and it just may make the
difference in June's bonus. Please call me if I can be of further help.

GAAP QUESTIONS
1.Which of the following would not be a line item of a company reporting costs by nature?
a. Manufacturing expense.

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5 - 64 Test Bank for Financial Accounting: IFRS Edition, 4e

b. Interest expense.
c. Salaries and wages expense.
d. Depreciation expense.
Ans: A, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

2.Which of the following would not be a line item of a company reporting costs by function?
a. Distribution.
b. Utilities expense.
c. Manufacturing.
d. Administration.
Ans: B LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

3.Which of the following statements in false?

a. The new income statement format will try to de-emphasize the focus on the “net income
"line item.
b. The proposed new format for financial statements was heavily influenced by suggestions
of financial statement analysis.
c. Under GAAP companies can use either a perpetual or periodic system.
d. GAAP specifically requires use of multiple-step income statement.
Ans: D, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

4.Under the new format for financial statements being proposed under a joint IASB/FASB project
a. the amount of detail shown in the income statement would decrease compared to current
presentations.
b. companies would be required to report income statement line items by function only.
c. financial statements would be presented consistent with the way management usually run
companies.
d. all financial statements would adopt headings similar to the current format of the
statement of financial position balance sheet.
Ans: C, LO: 8, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting

For Instructor Use Only