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Chapter 5 Case Solutions

Party Mart purchased $5,000 of Halloween koozies from Koozie Distributors on October 5, 2012. Party Mart returned 20% of the koozies on October 10. On October 12, Party Mart paid Koozie Distributors for the invoice balance minus a purchase discount. On October 21, Party Mart sold 60% of its remaining koozies inventory for cash, realizing a 75% return. Koozie Distributors' gross profit percentage after all events was 48.98%. Party Mart's net income from the transactions was $1,854.

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199 views6 pages

Chapter 5 Case Solutions

Party Mart purchased $5,000 of Halloween koozies from Koozie Distributors on October 5, 2012. Party Mart returned 20% of the koozies on October 10. On October 12, Party Mart paid Koozie Distributors for the invoice balance minus a purchase discount. On October 21, Party Mart sold 60% of its remaining koozies inventory for cash, realizing a 75% return. Koozie Distributors' gross profit percentage after all events was 48.98%. Party Mart's net income from the transactions was $1,854.

Uploaded by

Austin Kim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 6

Chapter 5 Cases ACCT 1301

Page 1 of 6

Chapter 5 Cases
Case 1 Party Mart and Koozie Distributors
On October 5, 2012, Party Mart (a Texas-sized merchandising
company) purchased $5,000 of Halloween koozies from Koozie
Distributors. Koozie Distributors had marked the koozies up by 100%
before selling them to Party Mart, and Party Mart is going to sell them
to its customers at a price that generates a 75% return. The terms of
sale were 2/10, n/30 and Party Mart was responsible for paying
shipping costs of $200. Both companies use a perpetual inventory
system.
Party Mart received the goods on October 8 and determined that its
rookie purchasing manager had been a bit overzealous. As a result, on
October 10, Party Mart returned 20% of the koozies to Koozie
Distributors.
On October 12, Party Mart sent a check to Koozie Distributors to cover
the invoice balance, minus the purchase discount. On October 21,
Party Mart sold 60% of its Halloween koozie inventory for cash to a
demented (but loaded) parent who wanted little Johnny to have the
Best. Halloween. Party. Ever. Assume no haggling occurred such that
Party Mart did, in fact, realize a 75% return on the book value of its
inventory.
What is Koozie Distributors Gross Profit percentage after accounting
for all of these events? Im not asking for journal entries, but getting
an answer without using them would be tough.
Accounts Receivable 5,000
Sales Revenue
5,000
CGS
2,500
Inventory
2,500
Sales R&A
1,000
Accounts Receivable
1,000
Inventory
500
CGS
500
Cash
3,920
Sales Discount
80
Accounts Receivable
4,000
From all of these entries, you have the following:

Chapter 5 Cases ACCT 1301


Page 2 of 6

Sales
5,000
Sales R&A (1,000)
Sales Discount
(80)
(1,080)
Net Sales
3,920
Cost of Goods Sold
2,000
Gross Margin
1,920
1,920 / 3,920 = 48.98%

So Gross Profit percentage =

Chapter 5 Cases ACCT 1301


Page 3 of 6

Case 1 Party Mart and Koozie Distributors

(continued)

What would be the balance in Party Marts Koozie Inventory


account on October 22? Again, Im not asking for journal entries, but
getting an answer without using them would be tough. When you
get to recording the sales entry, be careful.
Inventory
5,000
Accounts Payable
200

Inventory
5,000

Accounts Payable 1,000


4,000
Inventory
1,000
80

200
Cash

Accounts Payable
Inventory
Cash

3,920

So after making these four entries, the balance in the inventory


account is 4,120.
If you sell 60% of this inventory, the cost will be 2,472 (4120*.6) and
the sales revenue will be 4,326 (4120*.6*1.75), reflecting a 75%
markup.
Cash
4,326
2,472
Sales Revenue
2,472

Cost of Goods Sold


4,326

Inventory

After all of these entries, the balance in the inventory account


should be 1,648.
How would all of these transactions (combined) impact Party Marts
net income?
Sales CGS = 1,854

Is there anything weve forgotten about in accounting for all of the


events for Party Mart? I dont think your book ever talks about this
issue specifically, but use your head. Map out the sequence of
events and see if anything pops up.

Chapter 5 Cases ACCT 1301


Page 4 of 6

Theres no specific mention of accounting for the shipping costs


associated with returning the merchandise to Koozie Distributors.
Textbooks always ignore this issue.
What do you think? The credit is obvious (cash). But whats the
debit?
Might be reasonable to increase the carrying cost of the existing
inventory, since returning inventory does increase your holding cost.
I would tend to vote along the lines of recording it as Freight-Out
(an operating expense), though.

Chapter 5 Cases ACCT 1301


Page 5 of 6

Case 1 Party Mart and Koozie Distributors

(continued)

Suppose Party Mart makes the following entries on October 31.


What happened? Be specific.
Cash
1,236
Sales Revenue
824

1,236

Cost of Goods Sold


824
Inventory

With a previous ending inventory balance of 1,648, theyve


obviously sold half of the inventory. Did they make as much as
theyd hoped? No, because the markup implicit in the sales price is
only 50% (not 75%). So they sold 20% of the inventory at a
markup of 50%.

Assume the data below (stolen from P5-3A) come from Koozie
Distributors December 31, 2012 trial balances.

What is Koozie Distributors operating income for the year?


133,100 (gross margin operating expenses)

What will Koozie Distributors report as Retained Earnings in its


12/31/2012 balance sheet?

Chapter 5 Cases ACCT 1301


Page 6 of 6

169,100

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