Chapter 4: Exercises

Exercise 4-1: Computing Revenues, Expenses, and Income Fill in the blanks by calculating the values based on the relationship between revenues, expenses, and net income. The formula is: Net Income=Revenues−Expenses If any values are missing, you can rearrange this equation to find the missing value. Exercise 4-2: Operating Cycle for Merchandiser The correct chronological order for the five activities in a merchandiser's operating cycle with credit sales is: 1. 2. 3. 4. 5. Purchase merchandise Prepare merchandise for sale Make credit sales to customers Monitor and service accounts receivable Collect cash from customers on account Exercise 4-3: Recording Purchases, Purchases Returns, and Purchases Allowances Here are the journal entries for each transaction: 1. Apr. 2: Purchased $4,600 of merchandise on credit terms of 2/15, n/60, FOB shipping point. o Debit Merchandise Inventory $4,600 o Credit Accounts Payable $4,600 2. Apr. 2: Paid $300 cash for shipping charges. o Debit Merchandise Inventory $300 o Credit Cash $300 3. Apr. 4: Returned $600 of merchandise to Lyon Company. o Debit Accounts Payable $600 o Credit Merchandise Inventory $600 4. Apr. 17: Paid Lyon Company for the April 2 purchase, net of the return and discount. o Initial balance = $4,600 - $600 = $4,000 o Discount = $4,000 × 2% = $80 o Payment = $4,000 - $80 = $3,920 o Debit Accounts Payable $4,000 Credit Cash $3,920 o Credit Merchandise Inventory $80 (for the discount) 5. Apr. 18: Purchased $8,500 of merchandise on credit terms of 1/10, n/30, FOB destination. o Debit Merchandise Inventory $8,500 o Credit Accounts Payable $8,500 6. Apr. 21: Received a $500 allowance from Frist Corp. for scuffed merchandise. o Debit Accounts Payable $500 o Credit Merchandise Inventory $500 7. Apr. 28: Paid Frist Corp. net of the allowance and the discount. o Initial balance = $8,500 - $500 = $8,000 o Discount = $8,000 × 1% = $80 o Payment = $8,000 - $80 = $7,920 o Debit Accounts Payable $8,000 o Credit Cash $7,920 o Credit Merchandise Inventory $80 (for the discount) o Exercise 4-4: Purchasing Transactions Here are the journal entries for Recycled Fashion retail store: 1. Mar. 3: Purchased $1,150 of merchandise on credit terms of 2/15, n/60, FOB shipping point. o Debit Merchandise Inventory $1,150 o Credit Accounts Payable $1,150 2. Mar. 4: Paid $75 cash for shipping charges. o Debit Merchandise Inventory $75 o Credit Cash $75 3. Mar. 5: Returned $150 of merchandise to GreenWorld. o Debit Accounts Payable $150 o Credit Merchandise Inventory $150 4. Mar. 18: Paid GreenWorld for the March 3 purchase, net of the return and discount. o Initial balance = $1,150 - $150 = $1,000 o Discount = $1,000 × 2% = $20 o Payment = $1,000 - $20 = $980 o Debit Accounts Payable $1,000 o Credit Cash $980 o Credit Merchandise Inventory $20 5. Mar. 19: Purchased $425 of merchandise on credit terms of 1/10, n/30, FOB destination. o Debit Merchandise Inventory $425 Credit Accounts Payable $425 6. Mar. 21: Received a $25 allowance from PeopleFirst Corp. for scuffed merchandise. o Debit Accounts Payable $25 o Credit Merchandise Inventory $25 7. Mar. 29: Paid PeopleFirst for the March 19 purchase, net of the allowance and the discount. o Initial balance = $425 - $25 = $400 o Discount = $400 × 1% = $4 o Payment = $400 - $4 = $396 o Debit Accounts Payable $400 o Credit Cash $396 o Credit Merchandise Inventory $4 o Exercise 4-5: Determining Inventory Ownership and Costs in Transit For each scenario: 1. Sealy purchased goods FOB shipping point: o Sealy owns the goods during transit and is responsible for transportation costs. o Journal Entry:  Debit Merchandise Inventory $600  Credit Cash $600 2. Sealy sold goods FOB destination: o Sealy retains ownership during transit and is responsible for transportation costs. o Journal Entry:  Debit Delivery Expense $200  Credit Cash $200 3. Sealy sold goods FOB shipping point: o The buyer owns the goods during transit, and Sealy is not responsible for shipping. o No entry needed for transportation. 4. Sealy purchased goods FOB destination: o Sealy does not own the goods during transit, but the seller is responsible for shipping costs. o No entry needed for transportation. Exercise 4-6: Recording Sales, Sales Returns, and Sales Allowances Prepare the journal entries for Allied Merchandisers: 1. May 3: Purchased 2,000 units at $10 each (cash purchase). o Debit Merchandise Inventory $20,000 o Credit Cash $20,000 2. May 5: Sold 1,500 units for $14 each, terms 2/10, n/60. o Debit Accounts Receivable $21,000 o Credit Sales $21,000 o Debit Cost of Goods Sold $15,000 o Credit Merchandise Inventory $15,000 3. May 7: Macy returns 125 units (sale price $1,750; cost $1,250). o Debit Sales Returns and Allowances $1,750 o Credit Accounts Receivable $1,750 o Debit Merchandise Inventory $1,250 o Credit Cost of Goods Sold $1,250 4. May 10: Macy receives a price reduction (allowance) of $300. o Debit Sales Returns and Allowances $300 o Credit Accounts Receivable $300 5. May 15: Macy pays the invoice net of the returns, allowances, and cash discount. o Original sale: $21,000 o Less returns: $1,750 o Less allowance: $300 o Remaining balance: $18,950 o Discount: $18,950 × 2% = $379 o Payment: $18,950 - $379 = $18,571 o Debit Cash $18,571 o Debit Sales Discounts $379 o Credit Accounts Receivable $18,950