Suggested Solutions
Worksheet 5
Merchandising Businesses
Tutorial Questions
Question 1
Rite Help Drug Store - Buyer
Date Accounts & Explanations POST Dr Cr
REF $ $
April 6 Purchases 6,000
Accounts Payable 6,000
April 6 Freight In 250
Cash 250
April 10 Accounts Payable 800
Purchases Returns & Allow. 800
April 15 Accounts Payable 3,000
Purchase Discount 60
Cash 2,940
April 27 Accounts Payable 2,200
Cash 2,200
Boston Medical - Seller
Date Accounts & Explanations POST Dr Cr
REF $ $
April 6 Accounts Receivable 6,000
Sales Revenue 6,000
April 10 Sales Returns & Allowances 800
Accounts Receivable 800
April 15 Cash 2,940
Sales Discount 60
Accounts Receivable 3,000
April 27 Cash 2,200
Accounts Receivable 2,200
Question 2
Part (i) General Journal
Date Accounts & Explanation Folio Dr $ Cr $
a) Supplies Expense 2,580
Supplies 2,580
b) Rent Expense 5,000
Prepaid Rent 5,000
c) Unearned Sales Revenue 1,100
Sales Revenue 1,100
d) Depreciation Expense-Furniture & Fixtures 2,650
Accumulated depreciation – Furniture & Fixtures 2,650
e) Salary Expense 1,300
Salary Payable 1,300
f) Interest Expense 600
Interest Payable 600
g) Inventory 5,300
COGS 5,300
Part (ii) WEN TENG COMPANY
Income Statement
For Year Ended 31/12/93
Sales Revenue $347,800
Less: Sales Discount 10,300
Sales Returns & Allowances 8,200 18,500
Net Sales $329,300
Less: COGS (166,470)
GROSS PROFIT 162,830
Less Operating Expenses:
Salary Expense 84,050
Rent Expense 12,000
Utilities Expense 5,800
Depreciation Expense: Furniture & Fixture 2,650
Supplies Expense 2,580 (107,080)
OPERATING INCOME 55,750
Other Revenues & Expenses:
Interest Expense (3,500)
NET INCOME $52,250
WEN TENG COMPANY
Statement of Owner’s Equity
For Year Ended 31/12/93
Wen Teng, Capital 1/1/93 $23,680
Add: Net Income 52,250
75,930
Less: Wen Teng, Withdrawals (48,000)
Wen Teng, Capital, 31/12/93 $27,930
WEN TENG COMPANY
Balance Sheet
December 31, 1993
Assets $ $
Current Assets
Cash 5,670
Accounts Receivable 37,100
Inventory 65,800
Supplies 1,350
Prepaid Rent 1,000
Total Current Assets 110,920
Long-Term Assets
Furniture & Fixtures 26,500
Accumulated Dep.- Furniture & Fixtures (23,850) 2,650
Total Assets $113,570
Liabilities
Current Liabilities
Accounts Payable 46,340
Salary Payable 1,300
Interest Payable 600
Unearned Sales Revenue 2,400
Total Current Liabilities 50,640
L-T Liabilities
Notes Payable, Long-Term 35,000
Total Liabilities 85,640
Owner’s Equity
Wen Teng, Capital 27,930
Total Liabilities & Owner’s Equity $113,570
Wen Teng Company
Closing Entries
December 31, 1993
Folio Dr.$ Cr.$
Sales Revenue 347,800
Income summary 347,800
To close Sales Revenue A/C to Income Summary
Income Summary 295,550
Sales discount 10,300
Sales returns and allowances 8,200
COGS 166,470
Salary Expense 84,050
Rent Expense 12,000
Utilities Expense 5,800
Depreciation Expense: Furniture & Fix. 2,650
Supplies Expense 2,580
Interest Expense 3,500
To close Expenses & contra Revenue a/c’s to Income Summary
52,250
Income Summary
Wen Teng, Capital 52,250
To close Income Summary to Capital
Wen Teng, Capital 48,000
Wen Teng, Withdrawals 48,000
To close withdrawals account to Capital A/C
Question 3
Part (i) General Journal
Date Accounts & Explanation Folio. Dr $ Cr $
a) Insurance Expense 790
Prepaid Insurance 790
b) Depreciation Expense-Store Fixtures 8,192
Accumulated Depreciation – Store Fixtures 8,192
c) Salary Expense 1,260
Salary Payable 1,260
d) Interest Expense 870
Interest Payable 870
e) Stores Supplies Expense 1,230
Store Supplies 1,230
f) COGS 6,980
Inventory 6,980
g) Bad-Debt Expense 1,198
Allowance For Bad-Debts 1,198
WORKINGS
a) Insurance Expired = $(6,090 – 5,300) = $790
b) Depreciation Expense = 20% of (64,000 – 23,040) = $8,192
e) Supplies Used = $(1,990 - 760) = $1,230
f) Inventory Shortage = $(101,760 – 94,780) = $6,980
g) Increase in Allowance = $(3,468 – 2,270) = $1,198 (Bad-Debts)
Part (ii)
TRAVEL MASTER SUPPLY COMPANY
Income Statement
For the year ended December 31, 20X7
Sales Revenue $297,500
Less: Sales Discount $0
Sales returns & Allowances 3,500 (3,500)
Net Sales 294,000
Less COGS 168,070
Gross Profit 125,930
Less Operating Expenses:
Salary Expense 47,840
Rent Expense 14,630
Depreciation Expense: Store Fixtures 8,192
Utilities Expense 6,780
Insurance Expense 6,090
Store Supplies Expense 1,230
Bad-Debt Expense 1,198 (85,960)
Operating Income 39,970
Other Expense:
Interest Expense (3,970)
Net Income $36,000
TRAVEL MASTER SUPPLY COMPANY
Statement of Owner’s Equity
For the year ended December 31, 20X7
Elaine Lorens, Capital, 1/1/20x7 $73,120
Add: Net income 36,000
109,120
Less: Elaine Lorens, Withdrawals (36,200)
Elaine Lorens, Capital, 31/12/20x7 72,920
TRAVEL MASTER
Balance Sheet
December 31, 20x7
Assets $ $
Current Assets
Cash 2,910
Accounts Receivable 12,460
Less: Allowance For Bad-Debts (3,468) 8,992
Inventory 94,780
Store Supplies 760
Prepaid Insurance 2,410
Total Current Assets 109,852
Long-Term Assets
Store Fixtures
Accumulated Dep.- Store & Fixtures 64,000
Total Assets (31,232) 32,768
Liabilities $142,620
Current Liabilities
Accounts Payable
Salary Payable 29,770
Interest Payable 1,260
Total Current Liabilities 870
L-T Liabilities 31,900
Notes Payable, Long-Term
Total Liabilities 37,800
Owner’s Equity 69,700
Elaine Lorens, Capital
Total Liabilities & Owner’s Equity 72,920
$142,620
Part (iii)
GP Percentage = GP/Net Sales
= $121,930/$290,000
= 0.42 or 42%
Inventory Turnover = COGS/Average Inventory
= $168,070/$89,490* (Beginning Inventory +Ending Inventory)/2
= 1.88 times
Ratios indicate deterioration in profitability.
Travel Master
Closing Entries
December 31, 20X7
Folio Dr.$ Cr.$
Sales Revenue 297,500
Income summary 297,500
To close Sales Revenue A/C to Income Summary
Income Summary 261,500
Sales Returns & Allowances 3,500
COGS 168,070
Salary Expense 47,840
Rent Expense 14,630
Utilities Expense 6,780
Depreciation Expense: Store & Fixtures 8,192
Insurance Expense 6,090
Interest Expense 3,970
Stores Supplies Expense 1,230
Bad-Debt Expense 1,198
To close Expense & contra Revenue A/Cs to Income Summary
Income Summary 36,000
Elaine Lorens, Capital 36,000
To close Income Summary to Capital
Elaine Lorens, Capital 36,200
Elaine Lorens, Withdrawals 36,200
To close Withdrawals A/C to Capital A/C
Practice Questions
Question 1
Date Accounts & Explanations POST Dr Cr
REF $ $
May 3 Office Supplies 300
Cash 300
May 7 Purchases 2,000
Accounts Payable 2,000
May 8 Accounts Payable 1,000
Purchases Returns & Allow. 1,000
May 10 Cash 450
Sales 450
May 13 Accounts Receivable 3,900
Sales 3,900
May 16 Accounts Payable 1,000
Purchase discount 30
Cash 970
May 17 Sales Returns & Allowances 900
Accounts Receivable 900
May 18 Purchases 4,000
Accounts Payable 4,000
May 26 Accounts Payable 4,000
Cash 3,920
Purchase Discount 80
May 28 Cash 2,940
Sales Discount 60
Accounts Receivable 3,000
Question 2
Latham Sales Company
Income Statement
For the year ended March 31, 2004
$ $ $ $
Sales revenue 442,210
Less: Sales discounts 4,800
Sales returns and allowances 11,300 (16,100)
Net sales 426,110
Less COGS:
Beginning inventory 130,050
Purchases 233,000
Less: Purchases discount 3,100
Purchases returns and allowances 7,600 (10,700)
Net purchases 222,300
Add: Freight-in 10,000 232,300
Cost of goods available for sale 362,350
Less ending inventory (133,200) (229,150)
Gross Margin 196,960
Operating Expenses:
Sales commission expense 80,000
Salary expense 25,900
Rent expense 6,000
Utilities expense 1,840
Depreciation expense: furniture 1,000
Insurance expense 3,000 (117,740)
Operating Income 79,220
Other revenues:
Interest revenue 9,630
Net Income 88,850
Latham Sales Company
Statement of Owner’s Equity
For the year ended March 31, 2004
Ben Latham, Capital, April 1, 2003 $172,780
Add: Net income 88,850
261,630
Less: Ben Latham, Withdrawals (66,040)
Ben Latham, Capital, March 31, 2004 195,590
Latham Sales Company
Balance Sheet
As at March 31, 2004
$ $
Assets
Current Assets
Cash 7,880
Notes receivable 12,400
Interest receivable 1,030
Inventory 133,200
Prepaid insurance 600
Total current assets 155,110
Investments
Notes receivable 62,000
Plant Assets
Furniture 6,000
Less: Accumulated Depreciation (5000) 1,000
Total Assets 218,110
Liabilities
Current Liabilities
Accounts payable 12,220
Sales commission payable 1,700
Salary payable 1,200
Unearned sales revenue 7,400
Total Liabilities 22,520
Owner’s equity
Ben Latham, Capital 195,590
Total liabilities and Owner’s Equity 218,110
Latham Sales Company
Closing entries
March 31, 2004
Folio Dr.$ Cr.$
Sales revenue 442,210
Interest revenue 9,630
Purchases discount 3,100
Purchases returns and allowances 7,600
Inventory 133,200
Income summary 595,740
To close IS a/c’s with CR. balances & establish ending inventory
balance
Income summary 506,890
Sales discount 4,800
Sales returns and allowances 11,300
Purchases 233,000
Freight-in 10,000
Sales commission expense 80,000
Salary expense 25,900
Rent expense 6,000
Utilities expense 1,840
Depreciation expense: Furniture 1,000
Insurance expense 3,000
Inventory 130,050
To close IS a/c’s with DR. balance and remove opening inventory
balance
Income summary 88,850
Ben Latham, Capital 88,850
To close income summary to capital
Ben Latham, Capital 66,040
Ben Latham, Withdrawals 66,040
To close withdrawals account
