CH 05

Chapter 5/Accounting for Merchandising Businesses  241
Chapter 5
Accounting for Merchandising Businesses
OBJECTIVES
Obj 1 Distinguish the activities and financial statements of service and merchandising
businesses.
Obj 2 Describe and illustrate the financial statements of a merchandising business.
Obj 3 Describe and illustrate the accounting for merchandise transactions including:
sales of merchandise,
purchase of merchandise,
transportation costs, sales taxes, trade discounts,
dual nature of merchandising transactions.
Obj 4 Describe the adjusting and closing process for a merchandising business.
QUESTION GRID
True / False
No. Objective Difficulty No. Objective Difficulty No. Objective Difficulty
1 05-01 Easy 27 05-02 Easy 53 05-03 Moderate
2 05-01 Moderate 28 05-03 Moderate 54 05-03 Easy
3 05-01 Moderate 29 05-03 Easy 55 05-03 Difficult
4 05-01 Easy 30 05-03 Moderate 56 05-03 Easy
5 05-01 Easy 31 05-03 Moderate 57 05-03 Moderate
6 05-01 Easy 32 05-03 Easy 58 05-03 Difficult
7 05-02 Moderate 33 05-03 Easy 59 05-03 Moderate
8 05-02 Moderate 34 05-03 Easy 60 05-03 Easy
9 05-02 Moderate 35 05-03 Moderate 61 05-03 Moderate
21 05-02 Easy 47 05-03 Difficult 73 05-04 Easy
22 05-02 Easy 48 05-03 Easy 74 05-04 Easy
23 05-02 Easy 49 05-03 Easy 75 05-APP Easy
24 05-02 Difficult 50 05-03 Easy
25 05-02 Easy 51 05-03 Easy
26 05-02 Easy 52 05-03 Moderate
242  Chapter 5/Accounting for Merchandising Businesses
Multiple Choice
1 05-01 Moderate 33 05-03 Easy 65 05-03 Difficult
3 05-01 Easy 35 05-03 Moderate 67 05-03 Difficult
4 05-01 Easy 36 05-03 Difficult 68 05-03 Difficult
6 05-02 Difficult 38 05-03 Moderate 70 05-03 Moderate
8 05-02 Easy 40 05-03 Easy 72 05-03 Easy
12 05-02 Easy 44 05-03 Easy 76 05-03 Easy
14 05-02 Easy 46 05-03 Moderate 78 05-03 Difficult
15 05-02 Easy 47 05-03 Easy 79 05-03 Easy
17 05-02 Easy 49 05-03 Difficult 81 05-03 Easy
18 05-02 Easy 50 05-03 Easy 82 05-03 Easy
22 05-02 Difficult 54 05-03 Easy 86 05-04 Easy
23 05-02 Difficult 55 05-03 Moderate 87 06-APP Moderate
24 05-02 Moderate 56 05-03 Moderate 88 06-APP Easy
25 05-02 Difficult 57 05-03 Difficult 89 06-APP Easy
26 05-02 Moderate 58 05-03 Difficult 90 06-APP Easy
27 05-02 Difficult 59 05-03 Moderate 91 06-APP Moderate
28 05-03 Easy 60 05-03 Moderate 92 06-APP Moderate
29 05-03 Moderate 61 05-03 Difficult 93 06-APP Easy
30 05-03 Moderate 62 05-03 Moderate
31 05-03 Easy 63 05-03 Moderate
32 05-03 Easy 64 05-03 Easy
Exercise/Other
1 05-01 Moderate 6 05-03 Moderate 11 05-03 Difficult
3 05-02 Difficult 8 05-03 Easy 13 05-04 Easy
5 05-03 Moderate 10 05-03 Difficult
Problem
4 05-02 Difficult 14 05-03 Difficult 24 05-03 Moderate
5 05-02 Difficult 15 05-03 Easy 25 05-03 Difficult
7 05-02 Moderate 17 05-03 Difficult 27 05-03 Moderate
8 05-03 Difficult 18 05-03 Difficult
9 05-03 Difficult 19 05-03 Difficult
10 05-03 Difficult 20 05-03 Moderate
Chapter 5—Accounting for Merchandising Businesses
TRUE/FALSE
1. One of the most important differences between a service business and a retail business is in
what is sold.
ANS: T DIF: Easy OBJ: 05-01
NAT: AACSB Analytic | AICPA BB-Industry
2. In a merchandise business, sales minus operating expenses equals net income.

ANS: F DIF: Moderate OBJ: 05-01
NAT: AACSB Analytic | AICPA FN-Measurement
3. Cost of merchandise sold is the amount that the merchandising company pays for the
merchandise it intends to sell.
4. Service businesses provide services for income, while a merchandising business sells
merchandise.
5. Merchandise inventory account is found on the income statement.

ANS: F DIF: Easy OBJ: 05-01
6. In many retail businesses, inventory is the largest current asset.

7. Under a periodic inventory system, the merchandise on hand at the end of the year is
determined by a physical count of the inventory.
ANS: T DIF: Moderate OBJ: 05-02
8. In the periodic inventory system, purchases of merchandise for resale are debited to the
Purchases account.
9. Under the periodic inventory system, the cost of goods sold is equal to the beginning
merchandise inventory plus the cost of goods purchased plus the ending merchandise
inventory.
10. In a perpetual inventory system, the Merchandise Inventory account is only used to reflect
the beginning inventory.
11. In a periodic inventory system, the cost of goods purchased includes the cost of
transportation-in.
12. As we compare a merchandise business to a service business, the financial statement that
changes the most is the Balance Sheet.
13. When a merchandising business is compared to a service business, the financial statement
that is not affected by that change is the Statement of Retained Earnings.
14. The ending merchandise inventory for 2007 is the same as the beginning merchandise
inventory for 2008.
15. In a multi-step income statement the dollar amount for income from operations is always the
same as net income.
16. Net sales is equal to sales minus cost of merchandise sold.

17. Gross profit minus selling expenses equals net income.

18. The form of the balance sheet in which assets, liabilities, and stockholders’ equity are
presented in a downward sequence is called the report form.
19. On the income statement in the single-step form, the total of all expenses is deducted from
the total of all revenues.
20. The single-step income statement is easier to prepare, but a criticism of this format is that
gross profit and income from operations are not readily available.
21. Income that cannot be associated definitely with operations, such as a gain from the sale of a
fixed asset, is listed as Other Income on the multiple-step income statement.
22. Transportation In is the amount paid by the company to deliver merchandise sold to a
customer.
23. In the Merchandising Income Statement, sales will be reduced by sales discounts and sales
returns and allowances to arrive at net sales.
24. Other income and expenses are items that are not related to the primary operating activity.
ANS: T DIF: Difficult OBJ: 05-02
25. Transportation-in is considered a cost of purchasing inventory.

26. The cost of merchandise inventory is limited to the purchase price less any purchase
discounts.
27. As inventory is sold in many retail businesses, the largest expense is created.
28. Under the perpetual inventory system, when a sale is made, both the retail and cost values
are recorded.
29. Under the perpetual inventory system, the cost of merchandise sold is recorded when sales
are made.
30. If payment is due by the end of the month in which the sale is made, the invoice terms are
expressed as n/30.
31. When merchandise that was sold is returned, a credit to sales returns and allowances is
made.
32. In a perpetual inventory system, when merchandise is returned to the seller, Cost of
Merchandise Sold is one of the accounts debited to record the transaction.
33. Sales Returns and Allowances is a contra-revenue account.

34. Sales Discounts is a revenue account with a credit balance.

35. Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally
treated as credit sales.
36. Sales to customers who use nonbank credit cards, such as American Express, are generally
treated as credit sales.
37. Retailers record all credit card sales as charge sales.

38. The service fee that credit card companies charge retailers varies and is the primary reason
why some businesses do not accept all credit cards.
39. A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
40. The effect of a sales return and allowance is a reduction in sales revenue and a decrease in
cash or accounts receivable.
41. Merchandise Inventory normally has a debit balance.

42. A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the
invoice date to take advantage of the cash discount.
43. Discounts taken by the buyer for early payment of an invoice are credited to Cash Discounts
by the buyer.
44. In a perpetual inventory system, merchandise returned to vendors reduces the merchandise
inventory account.
45. Under the perpetual inventory system, a company purchases merchandise on terms 2/10,
n/30. If payment is made within 10 days of the purchase, the entry to record the payment
will include a credit to Cash and a credit to Purchase Discounts.
46. Purchases of merchandise are typically credited to the merchandise inventory account under
the perpetual inventory system.
47. When the seller offers a sales discount, even if borrowing has to be done, it is generally
advantageous for the buyer to pay within the discount period.
48. When a large quantity of merchandise is purchased, a reduction allowed on the sale price is
called a trade discount.
49. A deduction allowed to wholesalers and retailers from the price of merchandise listed in
catalogs is called cash discounts.
50. Sellers and buyers are required to record trade discounts.

51. If the ownership of merchandise passes to the buyer when the seller delivers the
merchandise for shipment, the terms are stated as FOB destination.
52. A sale of $600 on account, subject to a sales tax of 5%, would be recorded as an account
receivable of $600.
53. When merchandise is sold for $500 plus 5% sales tax, the Sales account should be credited
for $525.
54. The abbreviation FOB stands for Free On Board.

55. Merchandise is sold for $4,500, terms FOB destination, 2/10, n/30, with prepaid
transportation costs of $250. If $800 of the merchandise is returned prior to payment and the
invoice is paid within the discount period, the amount of the sales discount is $79.
ANS: F DIF: Difficult OBJ: 05-03
56. If the buyer bears the transportation costs related to a purchase, the terms are said to be FOB
destination.
57. When the terms of sale are FOB shipping point, the buyer should pay the transportation
charges.
58. If merchandise costing $2,500, terms FOB destination, 2/10, n/30, with prepaid
transportation costs of $100, is paid within 10 days, the amount of the purchases discount is
$50.
59. Comparing the merchandise entries for the seller and the buyer, the seller is required to
record more entries for the same transactions than the buyer.
60. The chart of accounts for a merchandise business would include an account called Delivery
Expense.
61. There is no difference between the recording of cash sales and the recording of MasterCard
or VISA sales.
62. When companies use a perpetual inventory system, the recording of the purchase of
inventory will include a debit to purchases.
63. Most companies will not take a purchases discount, because 1% or 2% discounts are
insignificant.
64. The seller may prepay the transportation costs even though the terms are FOB shipping
point.
65. The seller records the sales tax as part of the sales amount.
66. The buyer will include the sales tax as part of the cost of merchandise purchased.
67. A business using the perpetual inventory system, with its detailed subsidiary records, does
not need to take a physical inventory.
68. Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the
merchandise to the buyer's place of business.
69. Purchased goods in transit should be included in the ending inventory if the goods were
shipped FOB shipping point.
70. Purchased goods in transit, shipped FOB destination, should be excluded from ending
inventory.
71. If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is
included in the general ledger.
72. The adjusting entry to record inventory shrinkage would generally include a debit to Cost of
Merchandise Sold.
73. Closing entries for a merchandising business are not similar to those for a service business.
74. The ratio of net sales to assets measures how effectively a business is using its assets to
generate sales.
75. The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and
Transportation In are found on the balance sheet.
ANS: F DIF: Easy OBJ: 05-App
MULTIPLE CHOICE
1. Which one of the following is not a difference between a retail business and a service
business?
a. in what is sold
b. the inclusion of gross profit in the income statement
c. accounting equation
d. merchandise inventory included in the balance sheet
ANS: C DIF: Moderate OBJ: 05-01
2. Net income plus operating expenses is equal to

a. cost of merchandise sold
b. cost of goods available for sale
c. net sales
d. gross profit
ANS: D DIF: Easy OBJ: 05-01
3. Generally, the revenue account for a merchandising business is entitled

a. Sales
b. Net Sales
c. Gross Sales
d. Gross Profit
ANS: A DIF: Easy OBJ: 05-01
4. What is the term applied to the excess of net revenue from sales over the cost of
merchandise sold?
a. gross profit
b. income from operations
c. net income
d. gross sales
5. The term "inventory" indicates

a. merchandise held for sale in the normal course of business
b. materials in the process of production or held for production
c. supplies
d. both (a) and (b)
6. A company using the periodic inventory system has the following account balances:
Merchandise Inventory at the beginning of the year, $4,000; Transportation-In, $450;
Purchases, $12,000; Purchases Returns and Allowances, $2,300; Purchases Discounts, $220.
The cost of merchandise purchased is equal to
a. $13,930
b. $9,930
c. $9,489
d. $14520
ANS: B DIF: Difficult OBJ: 05-02
7. A company, using the periodic inventory system, has merchandise inventory costing $140 on
hand at the beginning of the period. During the period, merchandise costing $400 is
purchased. At year-end, merchandise inventory costing $180 is on hand. The cost of
merchandise sold for the year is
a. $720
b. $550
c. $360
d. $140
ANS: C DIF: Difficult OBJ: 05-02
8. Expenses that are incurred directly or entirely in connection with the sale of merchandise are
classified as
a. selling expenses
b. general expenses
c. other expenses
d. administrative expenses
9. Office salaries, depreciation of office equipment, and office supplies are examples of what
type of expense?
a. selling expense
b. miscellaneous expense
c. administrative expense
d. other expense
ANS: C DIF: Easy OBJ: 05-02
10. The form of income statement that derives its name from the fact that the total of all
expenses is deducted from the total of all revenues is called a
a. multiple-step statement
b. revenue statement
c. report-form statement
d. single-step statement
11. Multiple-step income statements show

a. gross profit but not income from operations
b. neither gross profit nor income from operations
c. both gross profit and income from operations
d. income from operations but not gross profit
12. When the three sections of a balance sheet are presented on a page in a downward sequence,
it is called the
a. account form
b. comparative form
c. horizontal form
d. report form
13. The statement of retained earnings shows

a. only net income, beginning and ending retained earnings
b. only total assets, beginning and ending retained earnings
c. only net income, beginning Capital Stock, and dividends
d. only net income/net loss, dividends, and beginning and ending retained earnings
ANS: D DIF: Moderate OBJ: 05-02
14. Merchandise inventory is classified on the balance sheet as a

a. Current Liability
b. Current Asset
c. Long-Term Asset
d. Long-Term Liability
ANS: B DIF: Easy OBJ: 05-02
15. Which account is not classified as a selling expense?

a. Sales Salaries
b. Transportation-Out
c. Sales Discounts
d. Advertising Expense
16. The primary difference between a periodic and perpetual inventory system is that a
a. periodic system determines the inventory on hand only at the end of the accounting
period
b. periodic system keeps a record showing the inventory on hand at all times
c. periodic system provides an easy means to determine inventory shrinkage
d. periodic system records the cost of the sale on the date the sale is made
ANS: A DIF: Moderate OBJ: 05-02
17. The inventory system employing accounting records that continuously disclose the amount
of inventory is called
a. retail
b. periodic
c. physical
d. perpetual
18. When the perpetual inventory system is used, the inventory sold is shown on the income
statement as
a. cost of merchandise sold
b. purchases
c. purchases returns and allowances
d. net purchases
19. When comparing a retail business to a service business, the financial statement that changes
the most is the
a. Balance Sheet
b. Income Statement
c. Statement of Retained Earnings
d. Statement of Cash Flow
ANS: B DIF: Moderate OBJ: 05-02
20. When comparing a retail business to a service business, the financial statement that changes
the least is the
a. Balance Sheet
b. Income Statement
c. Statement of Retained Earnings
d. Statement of Cash Flow
21. Gross profit is equal to:

a. sales plus (sales discounts and sales returns and allowances) plus cost of merchandise
sold
b. sales plus sales returns and allowances less sales discounts less cost of merchandise sold
c. sales plus sales discounts less sales returns and allowances less cost of merchandise sold
d. sales less (sales discounts and sales returns and allowances) less cost of merchandise sold
22. Using the following information, what is the amount of cost of merchandise sold?
Purchases $28,000 Purchases discounts $800

Merchandise 6,500 Merchandise inventory 7,800
inventory April 1 April 30
Sales returns and 750 Sales 57,000
allowances
Purchases returns and 1,000 Transportation In 880
allowances
a. 25,780
b. 23,270
c. 31,220
d. 24,020
ANS: A DIF: Difficult OBJ: 05-02
23. Using the following information, what is the amount of gross profit?
Merchandise inventory 6,500 Merchandise inventory 7,800
April 1 April 30
allowances
allowances
a. 31,970
b. 30,470
c. 25,780
d. 56,250
24. Using the following information, what is the amount of net sales?

April 1 April 30
allowances
allowances
a. 25,780
b. 57,000
c. 57,750
d. 56,250
25. Using the following information, what is the amount of merchandise available for sale?

April 1 April 30
allowances
allowances
a. 33,580
b. 30,470
c. 25,780
d. 34,500
26. Where are selling and administrative expenses found on the multi-step income statement?
a. before gross profit
b. after sales and before gross profit
c. after net income before expenses
d. after gross profit
27. Silver Co. sold merchandise to Bronze Co. on account, $23,000, terms 2/15, net 45. The cost
of the merchandise sold is $18,500. Silver Co. issued a credit memorandum for $2,500 for
merchandise returned that originally cost $1,900. The Bronze Co. paid the invoice within the
discount period. What is amount of net sales from the above transactions?
a. $20,090
b. $20,500
c. $3,490
d. $23,000
28. Using a perpetual inventory system, the entry to record the sale of merchandise on account
includes a
a. debit to Sales
b. debit to Merchandise Inventory
c. credit to Merchandise Inventory
d. credit to Accounts Receivable
29. Which of the following accounts has a normal debit balance?

a. Accounts Payable
b. Sales Returns and Allowances
c. Sales
d. Interest Revenue
30. Merchandise is ordered on November 12; the merchandise is shipped by the seller and the
invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is
received by the buyer on November 17; the entry is made in the buyer's accounts on
November 18. The credit period begins with what date?
a. November 12
b. November 15
c. November 17
d. November 18
31. Using a perpetual inventory system, the entry to record the return from a customer of
merchandise sold on account includes a
a. credit to Sales Returns and Allowances
d. debit to Cost of Merchandise Sold
32. If merchandise sold on account is returned to the seller, the seller may inform the customer
of the details by issuing a
a. sales invoice
b. purchase invoice
c. credit memorandum
d. debit memorandum
33. The arrangements between buyer and seller as to when payments for merchandise are to be
made are called
a. credit terms
b. net cash
c. cash on demand
d. gross cash
34. In credit terms of 1/10, n/30, the "1" represents the

a. number of days in the discount period
b. full amount of the invoice
c. number of days when the entire amount is due
d. percent of the cash discount
35. Merchandise with a sales price of $500 is sold on account with term 2/10, n/30. The journal
entry to record the sale would include a
a. debit to Cash for $500
b. Debit to Sales Discounts for $10
c. Credit to Sales for $500
d. Debit to Accounts Receivable for $490
36. Merchandise subject to terms 1/10, n/30, FOB shipping point, is sold on account to a
customer for $15,000. The seller paid transportation costs of $1,000 and issued a credit
memorandum for $5,000 prior to payment. What is the amount of the cash discount
allowable?
a. $160
b. $150
c. $140
d. $100
ANS: D DIF: Difficult OBJ: 05-03
37. Which of the following accounts has a normal credit balance?

a. Sales Returns and Allowances
b. Sales
c. Merchandise Inventory
d. Delivery Expense
38. The entry to record the return of merchandise from a customer would include a
a. debit to Sales
b. credit to Sales
c. debit to Sales Returns and Allowances
d. credit to Sales returns and Allowances
39. Sales to customers who use bank credit cards such as MasterCard and Visa are usually
recorded by a
a. debit to Bank Credit Card Sales, debit to Credit Card Expense, and a credit to Sales
b. debit to Cash and a credit to Sales
c. debit to Cash, credit to Credit Card Expense, and a credit to Sales
d. debit to Sales, debit to Credit Card Expense, and a credit to Cash
40. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally
treated as
a. sales on account
b. sales returns
c. cash sales
d. sales when the credit card company remits the cash
41. When a buyer returns merchandise purchased for cash, the buyer may record the transaction
using the following entry
a. debit Merchandise Inventory; credit Cash
b. debit Cash; credit Merchandise Inventory
c. debit Cash; credit Sales Returns and Allowances
d. debit Sales Returns and Allowances; credit Cash
42. When merchandise is returned under the perpetual inventory system, the buyer would credit
a. Merchandise Inventory
b. Purchases Returns and Allowances
c. Accounts Payable
d. depending on the inventory system used.
43. When purchases of merchandise are made for cash, the transaction may be recorded with the
following entry
a. debit Cash; credit Merchandise Inventory
b. debit Merchandise Inventory; credit Cash
c. debit Merchandise Inventory; credit Cash Discounts
d. debit Merchandise Inventory; credit Purchases
44. Using a perpetual inventory system, the entry to record the purchase of $30,000 of
merchandise on account would include a
a. debit to Sales
d. credit to Sales
45. Using a perpetual inventory system, the entry to record the return of merchandise purchased
on account includes a
a. debit to Cost of Merchandise Sold
b. credit to Accounts Payable
d. credit to Sales
46. In recording the cost of merchandise sold for cash, based on data available from perpetual
inventory records, the journal entry is
a. debit Cost of Merchandise Sold; credit Sales
b. debit Cost of Merchandise Sold; credit Merchandise Inventory
c. debit Merchandise Inventory; credit Cost of Merchandise Sold
d. debit Accounts Receivable; credit Merchandise Inventory
47. The amount of the total cash paid to the seller for merchandise purchased would normally
include
a. only the list price
b. only the sales tax
c. the list price plus the sales tax
d. the list price less the sales tax
48. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a
25% trade discount and credit terms of 2/10, n/30. What amount should the retailer debit to
the Merchandise Inventory account?
a. $7,500
b. $10,000
c. $9,800
d. $7,350
49. A sales invoice included the following information: merchandise price, $4,000;
transportation, $300; terms 1/10, n/eom, FOB shipping point. Assuming that a credit for
merchandise returned of $600 is granted prior to payment, that the transportation is prepaid
by the seller, and that the invoice is paid within the discount period, what is the amount of
cash received by the seller?
a. $3,366
b. $3,400
c. $3,666
d. $3,950
50. Which of the following accounts usually has a debit balance?

a. Purchase Discounts
b. Sales tax Payable
c. Allowance for Doubtful Accounts
d. Transportation-In
51. Merchandise is sold for cash. The selling price of the merchandise is $2,000 and the sale is
subject to a 5% state sales tax. The journal entry to record the sale would include
a. A debit to Cash for $2,000.
b. A credit to Sales for $2,100.
c. A credit to Sales Tax Payable for $100.
d. None of the above.
52. If the buyer is to pay the transportation costs of delivering merchandise, delivery terms are
stated as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB buyer
53. If the seller is to pay the transportation costs of delivering merchandise, the delivery terms
are stated as
a. FOB shipping point
b. FOB destination
c. FOB n/30
d. FOB seller
54. If title to merchandise purchases passes to the buyer when the goods are shipped from the
seller, the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
55. Merchandise with an invoice price of $4,000 is purchased on June 2 subject to terms of 2/10,
n/30, FOB destination. Transportation costs paid by the seller totaled $150. What is the cost
of the merchandise if paid on June 12, assuming the discount is taken?
a. $4,150
b. $4,070
c. $4,067
d. $3,920
56. When goods are shipped FOB destination and the seller pays the transportation charges, the
buyer
a. journalizes a reduction for the cost of the merchandise.
b. journalizes a reimbursement to the seller.
c. does not take a discount.
d. makes no journal entry for the transportation.
57. Black Company sold Red Company merchandise on account FOB shipping point, 2/10, net
30, for $10,000. Black prepaid the $200 shipping charge. Which of the following entries
does Black make to record this sale?
a. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000
b. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and
Accounts Receivable-Red, debit $200; Cash, credit $200
c. Accounts Receivable-Red, debit $10,400; Sales, credit $10,400
d. Accounts Receivable-Red, debit $10,000; Sales, credit $10,000, and
Transportation Out, debit $200; Cash, credit $200
58. Orange Co. sold Red Co. merchandise on account FOB shipping point, 2/10, net 30, for
$10,000. Orange Co. prepaid the $200 shipping charge. Using the perpetual inventory
system, which of the following entries will Red Co. make if Red Co. pays within the
discount period?
a. Accounts Payable-Orange Co., debit $10,000; Transportation In, credit $200; Cash, credit
$9,800
b. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, credit $200; Cash,
credit $10,000
c. Accounts Payable-Orange Co., debit $10,000; Transportation In, debit $200; Cash, credit
$10,200
d. Accounts Payable-Orange Co., debit $10,200; Merchandise Inventory, debit $200; Cash,
credit $10,400
59. A chart of accounts for a merchandising business usually

a. is the same as the chart of accounts for a service business
b. requires more accounts than does the chart of accounts for a service business
c. is standardized by the FASB for all merchandising businesses
d. does not have a Cost of Merchandise Sold account if a perpetual inventory system is used
60. Robles Co. sells $1,000 of inventory to Salas Co.for cash. Robles paid $650 for the
merchandise. Under a perpetual inventory system, the following journal entry(ies) would be
recorded.
a. Cash 1,000 Dr, Merchandise Inventory 650 Cr
b. Cash 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr, Merchandise Inventory
650 Cr.
c. Cash 1,000 Dr, Sales 1,000 Cr
d. Accounts Receivable 1,000 Dr, Sales 1,000 Cr, Cost of Merchandise Sold 650 Dr,
Merchandise Inventory 650 Cr.
61. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is
dated on September 15 with terms of 1/15, net 45. What is the amount of the discount and up
to what date must the invoice be paid in order for the buyer to take advantage of the
discount?
a. $160, September 30
b. $160, September 25
c. $80, September 30
d. $80, September 25
62. Apple Co sells merchandise on credit to Zea Co in the amount of $8,000. The invoice is
dated on September 15 with terms of 1/15, net 45. If Zea Co. chooses not to take the
discount, by when should the payment be made?
a. September 30
b. October 30
c. October 15
d. September 25
63. Discounts taken by a buyer because of early payment are recorded on the seller’s accounting
records as
a. Purchases discount
b. Sales discount
c. Trade discount
d. Early payment discount
64. Taking advantage of a 2/10, n/30 purchases discount is equal to a savings yearly rate of
approximately
a. 2%
b. 24%
c. 20%
d. 36%
65. Based on the following information, what would be recorded as purchases discount if the
invoice is paid within the discount period?
1. $5,000 of merchandise inventory was ordered on April 2, 2007
2. $2,000 of this merchandise was received on April 5, 2007
3. On April 6, 2007, an invoice dated April 4, 2007, with terms of 2/10, net 30 for
$2,150 which included a $150 prepaid freight cost, was received.
4. On April 10, 2007, $500 of the merchandise was returned to the seller.
a. $100
b. $30
c. $43
d. $33
66. Based on the following information, what would be recorded as the cash payment if the
invoice is paid within the discount period?
a. $1,470
b. $1,520
c. $2,150
d. $1,620
67. Based on the following information, what would be recorded as net purchases amount after
all of the transactions have been recorded?
a. $2,000
b. $2,150
c. $1,620
d. $1,470
68. Based on the following information, the entry for April 10, 2007 would include?
a. Debit to Merchandise Inventory $500

b. Debit to Purchases Returns $500
c. Credit to Merchandise Inventory $500
d. Credit to Accounts Payable $500
69. Based on the following information, by what date does the invoice need to be paid in order
to take the advantage of the discount?
a. April 15, 2007

b. April 16, 2007
c. April 10, 2007
d. April 14, 2007
70. Based on the following information, what would be the cash payment if the company
decides to payment the invoice on April 30, 2007?
a. $1,650
b. $1,620
c. $2,150
d. $2,000
71. Who pays the freight costs when the terms are FOB shipping point?
a. the ultimate customer
b. the buyer
c. the seller
d. either the seller or the buyer
72. Who pays the freight cost when the terms are FOB destination?
a. the seller
b. the buyer
c. the customer
d. either the buyer or the seller
73. A retailer purchases merchandise with a catalog list price of $10,000. The retailer receives a
25% trade discount and credit terms of 2/10, n/30. How much cash will be needed to pay
this invoice within the discount period?
a. $10,000
b. $7,500
c. $9,800
d. $7,350
74. Which of the following accounts, will only be found in the chart of accounts of a
merchandising company?
a. Sales
b. Accounts Receivable
c. Merchandise Inventory
d. Accounts Payable
75. Which of the following items would affect the cost of merchandise inventory acquired
during the period?
a. quantity discounts
b. cash discounts
c. transportation-in
d. all of the above
76. If title to merchandise purchases passes to the buyer when the goods are delivered to the
buyer, the terms are
a. consigned
b. n/30
c. FOB shipping point
d. FOB destination
77. If title to merchandise purchases passes to the buyer when the goods are shipped from the
seller, the terms are
a. n/30
b. FOB shipping point
c. FOB destination
d. consigned
78. If the merchandise costs $4,000, insurance in transit costs $200, tariff costs $50, processing
the purchase order by the purchasing department costs $35, and the company receiving dock
personnel cost $15, what is the total cost charged to the merchandise?
a. $4,250
b. $4,285
c. $4,300
d. $4,000
79. Under the perpetual inventory system, all purchases of merchandise are debited to the
account entitled
b. Cost of Merchandise Sold
c. Cost of Merchandise Available for Sale
d. Purchases
80. When the perpetual inventory system is used, the inventory sold is debited to
a. supplies expense
b. cost of merchandise sold
c. merchandise inventory
d. sales
81. Under a perpetual inventory system

a. accounting records continuously disclose the amount of inventory
b. increases in inventory resulting from purchases are debited to Purchases
c. there is no need for a year-end physical count
d. the purchase returns and allowances account is credited when goods are returned to
vendors
82. The proper journal entry to record the receipt of inventory purchased on account in a
perpetual inventory system would be:
a. Jan 1 Inventory 250.00
Accounts Payable 250.00
b. Jan 1 Office Supplies 250.00
c. Jan 1 Purchases 250.00
d. Jan 1 Purchases 250.00
Accounts Receivable 250.00
83. Which of the following items should not be included in the cost of ending merchandise
inventory?
a. units on consignment
b. purchased units in transit, shipped FOB destination
c. units on hand in the warehouse
d. both (a) and (c)
84. The Paula Corp. sold merchandise for cash, $6,900. The cost of the merchandise (COMS)
sold was $4,250. The journal entry(s) to record this transaction would be
a. Cash 6,900
Merchandise Inventory 6,900
COMS 4,250
Sales 4,250
b. Accounts Rec 6,900
Sales 6,900
COMS 4,250
Merchandise Inv 4,250
c. Cash 6,900
Sales 6,900
COMS 6,900
d. Cash 4,250
Sales 4,250
COMS 4,250
e. Cash 6,900
Sales 6,900
COMS 4,250
ANS: E DIF: Moderate OBJ: 05-03
85. Inventory shortage is recorded when

a. merchandise is returned by a buyer.
b. merchandise purchased from a seller is incomplete or short.
c. merchandise is returned to a seller.
d. there is a difference between a physical count of inventory and inventory records.
86. Which account will be included in both service and merchandising companies closing
entries?
a. Sales
b. Cost of Merchandise Sold
c. Sales Discounts
d. Sales Returns and Allowances
87. What is the major difference between a periodic and perpetual inventory system?
a. Under the periodic inventory system, the purchase of inventory will be debited to the
Purchases account
b. Under the periodic inventory system, no journal entry is recorded at the time of the sale
of inventory.
c. Under the periodic inventory system, all adjustments such as purchases returns and
allowances and discounts are reconciled at the end of the month.
d. All are correct.
ANS: D DIF: Moderate OBJ: 05-App
88. Which of the following accounts will not be found on the Cost of Merchandise Sold section
on the Income Statement?
a. Purchases
b. Transportation In
c. Sales Returns and Allowances
d. Merchandise Inventory
ANS: C DIF: Easy OBJ: 05-App
89. Under the periodic inventory system, the journal entry to record the purchase of
merchandise inventory will include a debit to
b. Purchases
c. Accounts Payable
d. Cost of Merchandise Purchased
ANS: B DIF: Easy OBJ: 05-App
90. Under the periodic inventory system, the journal entry to record the cost of merchandise sold
at the point of sale will include the following account
a. No entry is made.
b. Cost of merchandise sold
c. Inventory
d. Purchases sold
ANS: A DIF: Easy OBJ: 05-App
91. Under a periodic inventory system, closing entries will include

a. Dr. Sales, Purchases Returns and Allowances, Purchases Discounts
b. Cr. Purchases, Sales Discounts, Sales Returns and Allowances
c. Adjust Merchandise Inventory Account to match physical inventory
d. All are correct
ANS: D DIF: Moderate OBJ: 05-App
92. The proper journal entry to record the receipt of inventory purchased on account in a
periodic inventory system would be:
a. Jan 1 Inventory 250.00
b. Jan 1 Office Supplies 250.00
c. Jan 1 Purchases 250.00
d. Jan 1 Purchases 250.00
Accounts Receivable 250.00
ANS: C DIF: Moderate OBJ: 05-App
93. Which of the following accounts should be closed to Income Summary at the end of the
fiscal year?
b. Accumulated Depreciation
c. Drawing
d. Cost of Merchandise Sold
ANS: D DIF: Easy OBJ: 05-App
EXERCISE/OTHER
1. Describe the major differences in preparing the financial statements for a service business
and a merchandising business.
ANS:
Service Business Merchandising Business

Income Statement: Income Statement
Revenues Sales
Less: Operating Expenses Less Cost of Merchandise Sold
Equals: Net Income Equals: Gross Profit
Less: Operating Expenses
Equals: Net Income
Balance Sheet: Balance Sheet:

No Merchandise Inventory Account Includes Merchandise Inventory
Account in the Current Assets Section
DIF: Moderate OBJ: 05-01

2. During the current year, merchandise is sold for $ 56,000 cash and for $87,950 on account.
The cost of the merchandise sold is $61,440. What is the amount of the gross profit?
ANS:
Total sales $143,950 less $61,440 = $82,510 gross profit.
DIF: Easy OBJ: 05-01
NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 5-1
discount period. What is the amount of net income earned by Silver Co. on the above
transactions?
ANS:
$3,490 (Net Sales $23,000 - $2,500 - $410) - (Cost of Merchandise Sold $18,500 - $1,900)
DIF: Difficult OBJ: 05-02
4. Based upon the following data, determine the cost of merchandise sold for October.
Merchandise Inventory October 1 $ 98,560

Merchandise Inventory October 31 102,330
Purchases 433,880
Purchases Returns & Allowances 12,760
Purchases Discounts 9,900
Transportation In 7,120
ANS:
Cost of merchandise sold:
Merchandise Inventory October 1 $98,560
Purchases $433,880
Less: Purchases Returns and Allowances $12,760
Purchases Discounts 9,900 22,660
Net Purchases $411,220
Add transportation in 7,120
Cost of merchandise purchased 418,340
Merchandise available for sale 516,900
Less merchandise inventory, October 31 102,330
Cost of merchandise sold $414,570

5. Journalize the following merchandise transactions:
(a) Sold merchandise on account, $11,300 with terms 2/10, net 30. The cost of the
merchandise sold was $7,000.
(b) Received payment less the discount.
ANS:
(a) Accounts Receivable 11,300
Sales 11,300
Cost of Merchandise Sold 7,000
(b) Cash 11,074

Sales Discounts 226
Accounts Receivable 11,300

6. Truffles Company purchased merchandise on account from a supplier for $6,500, terms
2/10, net 30. Truffles returned $1,500 of the merchandise and received full credit. Truffles
Company paid for the merchandise within the discount period.
Under a perpetual inventory system, record all of the journal entries required for the above
transactions.
ANS:
(a) Merchandise Inventory 6,500
Accounts Payable 6,500
(b) Accounts Payable 1,500
(c) Accounts Payable 5,000
Cash 4,900
Merchandise Inventory 100

7. On February 23, 2008, Markus Company sold merchandise on account,$3,500.00. The

applicable sales tax percentage is 8.25%. Record the transaction.
Journal
Post
Date Description Ref Debit Credit
ANS:
Journal
Post
Feb. 23 Accounts Receivable 3,788.75
Sales 3,500.00
Sales Tax Payable 288.75

8. On January 29th customers who owe $12,500.00 for purchases made on Mega Sales
company credit cards submit payments of $5,750.00. Journalize this event.
ANS:
Jan 29 Cash 5,750.00
Accounts Receivable 5,750.00

9. Determine the amount to be paid in full settlement of each invoice, assuming that credit for
returns and allowances was received prior to payment and that all invoices were paid within
the discount period.
Merchandise Transportation Transportation Returns and

Paid by Seller Terms Allowances
(a) $7,600 $300 FOB Shipping $1,600
Point, 1/10, net 30
(b) $3,450 $75 FOB Destination, $550
2/10, net 45
ANS:
(a) $6,240
(b) $2,842
10. On January 4th Mega Sales makes $2,250.00 in sales on bank credit cards which charge a
2% service charge and deposit the funds into Mega Sales bank accounts at the end of the
business day. Journalize the sales and recognition of expense.
ANS:
Jan 4 Cash 2,205.00
Credit Card Expense 45.00
Sales 2,250.00
The sales can be debited to cash since the deposit is at the end of the business day. Also, since the
expense is easily determined - 2% of sales, that expense can be immediately identified and
should be recorded.
discount period. Prepare the entries that both Silver and Bronze Companies would record for
the above.
ANS:
Silver Company Journal Entries:
Sales 23,000
Sales Returns and Allowances 2,500
Cash 20,090
Sales Discounts 410
Bronze Company Journal Entries:

Cash 20,090

12. Shafer Company’s perpetual inventory records indicate that $518,900 of merchandise should
be on hand on October 31, 2008. The physical inventory indicates that $500,300 is actually
on hand. Journalize the adjusting entry for the inventory shrinkage for Shafer Company for
the year ended October 31, 2008.
ANS:

13. The records of XYZ Co. indicated that $400,000 of merchandise should be on hand on
December 31, 2008. The physical inventory indicates that $380,000 of merchandise is
actually on hand. Journalize the adjusting entry for the inventory shrinkage for the year
ended December 31, 2008.
Journal
Post
ANS:
Journal
Post
Dec 31 Cost of Merchandise Sold 20,000

14. Selected accounts and amounts appear below. Journalize the closing entry, assuming a
perpetual inventory system.
Merchandise Inventory $ 55,500

ANS:
Income Summary 512,500

PROBLEM
1. The following data were extracted from the accounting records of Marcus Gallery for the
year ended February 28, 2008.
Merchandise Inventory, March 1, 2007 $450,000

Merchandise Inventory, February 28, 2008 225,000
Purchases 175,000
Purchase Returns and Allowances 25,000
Purchase Discounts 10,000
Sales 680,000
Sales Returns 20,000
Transportation In 5,000
Prepare the cost of merchandise sold section of the income statement for the year ended
February 28, 2008, using the periodic system. Also determine gross profit.
ANS:
Marcus Gallery
Income Statement
For the Year Ended February 28,2008
Sales $680,000
Less: Sales returns 20,000
Net Sales $660,000
Cost of Merchandise Sold
Merchandise inventory, March 1, 2007 450,000
Purchases 175,000
Less: Purchases returns and allowances
$25,000
Purchase discounts 35,000
10,000
Net Purchases 140,000
Plus: Transportation in 5,000
Cost of Merchandise Purchased 145,000
Merchandise available for sale 595,000
Less merchandise inventory, February 28, 2008 225,000
Cost of merchandise sold 370,000
Gross profit $290,000

2. The following data for the current year ended April 30 were extracted from the accounting
records of Spear Co.:

Operating expenses 75,000
Sales 485,000
Prepare a multiple-step income statement for the year ended April 30, 2007.
ANS:
Spear Co.
Income Statement
For the Year Ended June 30, 2007
Sales $485,000
Operating expenses 75,000
Net income $185,000
3. Selected data from the ledger of Black Co. after adjustment at June 30, 2007 the end of the
fiscal year, are listed as follows:
Accounts Receivable $ 39,120 Office Equipment $ 82,700

Accumulated Depreciation 60,540 Prepaid Insurance 4,680
Administrative Expenses 90,000 Note Payable 77,750
Capital Stock 75,000 Salaries Payable 3,060
Cost of Merchandise Sold 655,000 Sales (net) 900,000
Dividends 40,000 Selling Expenses 110,000
Interest Revenue 10,000 Supplies 3,125
Prepare an income statement, using the single-step form, and a statement of retained
earnings.
ANS:
Black Co.
Income Statement
Revenues:
Net sales $900,000
Interest revenue 10,000
Total revenues $910,000
Expenses:
Selling expenses 110,000
Administrative expenses 90,000
Total expenses 855,000
Net income $ 55,000
Black Co.
Statement of Retained Earnings
Retained Earnings, July 1, 2006 $0

Net income for the year $55,000
Less dividends 40,000
Retained Earnings, June 30, 2007 $15,000

4. Prepare (a) a single-step income statement, (b) a statement of stockholders’ equity, and (c) a
balance sheet in report form from the following data for Donovan Co., taken from the ledger
after adjustment on December 31, 2007 the end of the fiscal year.
Accounts Payable $ 47,200

Accumulated Depreciation - Office Equipment 22,750
Accumulated Depreciation - Store Equipment 62,100
Administrative Expenses 75,500
Capital Stock 141,750
Cash 39,700
Dividends 42,000
Interest Expense 9,000
Note Payable, Due 2008 50,000
Office Equipment 49,750
Prepaid Insurance 6,500
Rent Revenue 7,500
Salaries Payable 3,700
Sales (net) 820,500
Selling Expenses 101,500
Store Equipment 125,000
Supplies 4,000
ANS:
(a)
Donovan Co.
Income Statement
For the Year Ended December 31, 2007
Revenues:
Net sales $820,500
Rent revenue 7,500
Total revenues $828,000
Expenses:
Selling expenses 101,500
Interest expense 9,000
Total expenses 731,000
Net income $ 97,000
(b)
Donovan Co.
Statement of Retained Earnings
Retained Earnings, January 1, 2007 $0

Net income for year $97,000
Less dividends 42,000
Retained Earnings, December 31, 2007 $55,000

(c)
Donovan Co.
Balance Sheet
December 31, 2007
Assets
Current assets:
Cash $39,700
Accounts receivable 64,300
Merchandise inventory 93,250
Prepaid insurance 6,500
Supplies 4,000
Total current assets $207,750
Property, plant, and equipment:
Store equipment $125,000
Less Accumulated depreciation 62,100 $62,900
Office equipment $ 49,750
Less Accumulated depreciation 22,750 27,000
Total property, plant, and equipment 89,900
Total assets $297,650
Liabilities
Current liabilities:
Accounts payable $47,200
Salaries payable 3,700
Total current liabilities $ 50,900
Long-term liabilities:
Note payable (due 2008) 50,000
Total liabilities $100,900
Stockholders’ Equity
Capital Stock $141,750

Retained Earnings 55,000
Total Stockholders’ Equity 196,750
Total Liabilities and Stockholder's Equity $297,650

5. Prepare a multiple-step income statement for Goodwin Co. from the following data for the
year ended December 31, 2007.
Sales, $925,000; cost of merchandise sold, $560,000; administrative expenses, $30,000;

interest expense, $10,000; rent revenue, $20,000; sales returns and allowances, $55,000;
selling expenses, $110,000.
ANS:
Goodwin Co.
Income Statement
Revenue from sales:

Sales $925,000
Less: Sales returns and allowances 55,000
Net sales $870,000
Operating expenses:
Selling expenses $110,000
Total operating expenses 140,000
Income from operations $170,000
Other income:
Rent revenue $ 20,000
Other expense:
Interest expense 10,000 10,000
Net income $180,000

6. Which of the following costs would be included in merchandise inventory?
(a) Purchase price

(b) Insurance in transit
(c) Freight for delivery FOB shipping point
(d) Repair due to negligence of receiving clerk
(e) Receiving Department employee salary
(f) Cost of processing purchase orders
ANS:
(a), (b), and (c)
7. For each of the following, calculate the cost of inventory reported on the balance sheet.
(a) The total merchandise on hand at the end of the year as determined by taking a
physical inventory is $55,000. Of the $55,000, $7,000 is held on consignment.
(b) The total merchandise inventory counted at the end of the year was $65,000.
Purchases for $7,000 are in transit under FOB shipping point terms.
(c) The total merchandise inventory counted at the end of the year was $60,000.
Purchases for $5,000 are in transit under FOB destination terms.
ANS:
(a) $48,000
(b) $72,000
(c) $60,000

8. Using the perpetual inventory system, journalize the entries for the following selected
transactions:
(a) Sold merchandise on account, for $10,000. The cost of the merchandise sold was
$4,500.
(b) Sold merchandise to customers who used MasterCard and VISA, $8,500. The cost
of the merchandise sold was $4,100.
(c) Sold merchandise to customers who used American Express, $3,500. The cost of the
merchandise sold was $1,600.
(d) Paid an invoice from First National Bank for $255, representing a service fee for
processing MasterCard and VISA sales.
(e) Received $3,325 from American Express Company after a $175 collection fee had
been deducted.
ANS:
Sales 10,000

(b) Cash 8,500

Sales 8,500

(c) Accounts Receivable 3,500

Sales 3,500

(d) Credit Card Expense 255

Cash 255
(e) Cash 3,325

Credit Card Expense 175

9. Merchandise with a list price of $3,800 and costing $2,000 is sold on account, subject to the
following terms: FOB destination, 2/10, n/30. The seller prepays the transportation costs of
$50 (debit Transportation Out for the transportation costs). Prior to payment for the goods,
the seller issues a credit memorandum for $800 to the customer for merchandise costing
$500 that is returned. The correct amount is received within the discount period.
Record the foregoing transactions of the seller in the sequence indicated below.
(a) Sold the merchandise, recognizing the sale and cost of merchandise sold.
(b) Paid the transportation charges.
(c) Issued the credit memorandum.
(d) Received payment from the customer.
ANS:
Sales 3,800

(b) Transportation Out 50

Cash 50
(c) Sales Returns and Allowances 800

Accounts Receivable 800

Cost of Merchandise Sold 500
(d) Cash 2,940

Sales Discounts 60

10. Based on the information below, journalize the entries for the Seller and the Buyer. Both use
a perpetual inventory system.
(a) Seller sells Buyer on account merchandise costing $200 for $450, terms 2/10, net
30, FOB destination. The transportation charge is $35.
(b) Buyer returns as defective $150 worth of the $500 merchandise received. The
seller's cost is $85.
(c) Buyer pays within the discount period.
ANS:
(a)
Seller Buyer
Accounts Receivable 450 Merchandise Inventory 450
Sales 450 Accounts Payable 450
Cost of Merchandise
Sold 200 NA
Merchandise
Inventory 200
Transportation Out 35 NA
Cash 35
(b)
Sales Returns & Allow. 150 Accounts Payable 150
Accounts Receivable 150 Merchandise Inventory 150
Cost of Merchandise
Sold 85
(c)
Cash 294 Accounts Payable 300
Sales Discounts 6 Merchandise Inventory 6
Accounts Receivable 300 Cash 294

11. Details of a purchase invoice and related credit memorandum are summarized as follows:
Invoice: Cost of merchandise listed on purchase invoice $5,500

Prepaid transportation charge added to invoice 100
Terms, FOB shipping point, 1/10, n/eom
Credit memo: Cost of merchandise returned $1,500
Assume that the credit memorandum was received prior to payment and that the invoice is
paid within the discount period. Determine the following:
(a) Amount of the cash discount allowed.

(b) Amount to be paid by the purchaser if the discount is taken.
(c) Cost of the merchandise to the purchaser if the discount is NOT taken.
ANS:
(a) $40
(b) $4,060
(c) $4,100

12. Forrester Company purchased $1,200 of merchandise on account and payment was made
within the discount period. The credit terms were 2/10,n/30. Journalize Forrester's purchase
and payment.
ANS:

Cash 1,176

13. Merchandise with a list price of $4,700 is purchased on account, terms FOB shipping point,
1/10, n/30. The seller prepaid transportation costs of $200. Prior to payment, $1,500 of the
merchandise is returned. The correct amount is paid within the discount period.
Record the foregoing transactions of the buyer in the sequence indicated below.
(a) Purchased the merchandise.

(b) Recorded receipt of the credit memorandum for merchandise returned.
(c) Paid the amount owed.
ANS:

(c) Accounts Payable 3,400

Cash 3,368

14. Details of invoices for purchases of merchandise are as follows:
Returns and
Merchandise Transportation Terms Allowances
(a) $900 $35 FOB shipping point, 1/10, n/30 $100
(b) 5,600 --- FOB destination, n/30 500
(c) 2,500 25 FOB shipping point, 2/10, n/30 200
(d) 8,000 --- FOB destination, 1/10, n/30
Determine the amount to be paid in full settlement of each of the invoices, assuming that
credit for returns and allowances was received prior to payment and that all invoices were
paid within the discount period.
ANS:
(a) $827 ($900 - $100 - $8 + 35)
(b) $5,100 ($5,600 - $500)
(c) $2,279 ($2,500 - $200 - $46 + $25)
(d) $7,920 ($8,000 - $80)

15. Journalize the entries to record the following selected transactions:
(a) Sold $800 of merchandise on account, subject to 6% sales tax. The cost of
the merchandise sold was $425.
(b) Paid $836 to the state sales tax department for taxes collected.
ANS:
(a) Accounts Receivable 848
Sales 800
Sales Tax Payable 48

(b) Sales Tax Payable 836

Cash 836

16. Using the letter preceding each account, arrange the following selected accounts in the order
they would normally appear in a chart of accounts of a company that uses a multiple-step
income statement.
(a) Accounts Payable

(b) Accounts Receivable
(c) Merchandise Inventory
(d) Miscellaneous Selling Expense
(e) Sales Discounts
(f) Interest Expense
(g) Income Summary
(h) Misc. Admin. Expense
(i) Transportation Out
(j) Sales Returns and Allowances
ANS:
(b) (c) (a) (g) (j) (e) (i) (d) (h) (f)
17. Betty Buyer is a retailer selling kitchenware. Betty Buyer uses perpetual inventory. Use a
General Journal to journalize the following four transactions during the month of August:
(a) On August 5th Betty Buyer purchases inventory for sale from Pots and Pans
Purveyor for $12,500.00 with terms 2/10, n/30.
(b) On August 6th Betty Buyer pays Big Truck Transport $25 for freight-in on the
August 5th order.
(c) Betty Buyer gets a credit memo from Pots and Pans Purveyor for $175.00 for
damaged merchandise on August 8th.
(d) On August 15th Betty Buyer pays Pots and Pans Purveyor the balance due.
General Journal GJ Page 62

Date: Account Title Post Debit: Credit:
Ref:
ANS:

Ref:
Aug 5 Merchandise Inventory 12,500.00
A/P - Pots and Pans Purveyor 12,500.00
Aug 6 Merchandise Inventory 25.00

Cash 25.00
Aug 8 A/P - Pots and Pans Purveyor 175.00

Merchandise Inventory 175.00
Aug 15 A/P - Pots and Pans Purveyor 12,325.00

Cash 12,078.50
Merchandise Inventory 246.50
Computation of payment:
Purchase: $12,500.00
Less credit memo: 175.00
Balance: 12,325.00
Discount - 2% of balance: 246.50
Cash paid: $12,078.50
While inventory is debited for the value of freight-in, $25.00, this value is paid directly to the
truck company and is not discounted.
18. Putter Pilot Supplies is a golf and aviation supply store. Putter Pilot uses perpetual
inventory. Use a General Journal to journalize the following four transactions during the
month of March:
(a) On March 4th Putter purchases inventory for sale from Plane Stuff
Wholesalers for $9,750.00 with terms 1/10, n/30.
(b) On March 5th Putter pays Airborne Transfer $65 for freight-in on the March
4th order.
(c) On March 12th Putter buys an additional $12,985 in inventory from Plane
Stuff Wholesalers with terms 1/10, n/30.
(d) On March 22nd Putter pays Plane Stuff Wholesalers the balance due.

Ref:
ANS:

Ref:
Mar 4 Merchandise Inventory 9,750.00
A/P - Plane Stuff Wholesalers 9,750.00
Mar 5 Merchandise Inventory 65.00

Cash 65.00
Mar 12 Merchandise Inventory 12,985.00

A/P - Plane Stuff Wholesalers 12,985.00
Mar 22 A/P - Plane Stuff Wholesalers 22,735.00

Cash 22,605.15
Merchandise 129.85
Inventory
Purchase March 4th: - Discount period expired $9,750.00
Purchase March 12th: $12,985.00
Amount due on purchase 12,855.15
Cash paid: $22,605.15
While inventory is debited for the value of freight-in, $25.00, this value is paid directly to the
truck company and is not discounted.
19. Plane Stuff Wholesalers sells aviation supplies to retailers including Putter Pilot Supplies.
Plane Stuff Wholesalers uses perpetual inventory. Use a General Journal to journalize the
following three transactions during the month of March:
(a) On March 4th Plane Stuff Wholesalers sells inventory to Putter Pilot
Supplies for $9,750.00 with terms 1/10, n/30. The cost of the merchandise
is $5,755.00.
(b) On March 12th Plane Stuff Wholesalers sells an additional $12,985 in
inventory to Putter Pilot Supplies with terms 1/10, n/30. The cost of the
merchandise is $6,925.00.
(c) On March 23rd Plane Stuff Wholesalers receives a check from Putter
paying the balance due.

Ref:
ANS:

Ref:
Mar 4 A/R - Putter Pilot Supplies 9,750.00
Sales 9,750.00
Cost of Merchandise Sold 5,755.00
Inventory 5,755.00
Mar 12 A/R - Putter Pilot Supplies 12,985.00

Sales 12,985.00
Inventory 6,925.00
Mar 23 Cash 22,605.15

Sales Discounts 129.85
A/R - Putter Pilot 22,735.00
Supplies
Sale on March 4th: - Discount period $9,750.00
expired
Sale on March 12th: $12,985.00
Amount due on March 12th sales 12,855.15
Cash paid: $22,605.15

20. On January 3rd Mega Sales makes $2,150.00 in cash sales of general merchandise which
have a cost of $1,105.00.
(a) Journalize the sale event.
(b) Journal the cost of merchandise sold.
ANS:
(a) Jan 3rd Cash 2,150.00
Sales 2,150.00
(b) Jan 3rd Cost of Merchandise Sold 1,105.00
Merchandise Inventory 1,105.00
21. On January 5th Mega Sales makes $12,500.00 in sales on the company’s own credit cards.
The cost of merchandise sold are $6,125.00. Journalize the sales and recognition of the cost
of merchandise sold.
ANS:
Jan 5 Accounts Receivable 12,500.00
Sales 12,500.00
22. On January 15th Mega Sales sells $11,525.00 on account to Betty Buyer with terms of 2/10,
n/30. The cost of merchandise sold was $6,755.00.
(a) Journalize the sale and the recognition of the cost of the sale.
(b) On January 20th a $125.00 Credit Memorandum is given to Betty Buyer due to
merchandise that was damaged upon receipt. Journalize this event. The cost of
the returned merchandise was $55.
(c) On January 25th Betty Buyer submits payment in full. Journalize this event.
ANS:
(a)
Accounts Receivable - Betty Buyer 11,525.00
Sales 11,525.00

(b)
Sales Returns and Allowances 125.00
Accounts Receivable - Betty Buyer 125.00
Inventory 55.00
Cost of Merchandise Sold 55.00
(c)
Cash 11,172.00
Sales Discounts 228.00
Accounts Receivable - Betty Buyer 11,400.00
Original Invoice $11,525.00

Less Sales Returns and Allowances 125.00
Adjusted Balance Due 11,400.00
Sales Discount Rate 2%
Sales Discount 228.00
Cash Due $11,172.00

23. Journalize the following transactions:

Jan 3 Sold merchandise on account $4,250. The cost of the merchandise sold was
$2,000.
Jan 5 Issued credit memorandum for $1,250 for merchandise returned from sale on Jan
3rd.
The cost of the merchandise returned was $570.
Jan 12 Received check for the amount due for sale on Jan 3rd less return on Jan 5th.
Jan 17 Sold merchandise for $8,000 plus 6% sales tax to cash customers. The cost of the
merchandise sold was $4,130
Journal
Post
ANS:
Journal
Post
Jan 3 Accounts Receivable 4,250
Sales 4,250

Jan 5 Sales Returns 1,250


Jan 12 Cash 3,000

Jan 17 Cash 8,480

Sales 8,000
Sales Tax Payable 480


24. Journalize the following transactions:

Jan 5 Purchased merchandise from ABC Co., $8,000, terms FOB shipping point, 2/10,
n/30.
Prepaid transportation costs of $170 were added to the invoice.
Jan 12 Issued a debit memorandum to ABC Co., for $3,000 of merchandise returned from
purchase on Jan 5th.
Jan 14 Paid ABC Co. for invoice of Jan 5, less debit memorandum of Jan 12 and
discount.
Journal
Post
ANS:
Journal
Post
Jan 5 Merchandise Inventory 8,000

Accounts Payable 170
Jan 12 Accounts Payable 3,000

Jan 14 Accounts Payable 5,170

Cash 5,070

25. Journalize the following transactions for both ABC Co. (seller) and DEF Co. (buyer).
Mar 3 ABC Co.sold merchandise on account to DEF Co., $6,000, terms FOB shipping
point, net/eom. The cost of the merchandise sold was $2,700.
Mar 5 DEF Co. paid $375 transportation charges on purchase from ABC Co.
Mar 9 ABC Co. issued DEF Co. a credit memo for merchandise returned, $1,000.
The cost of the merchandise returned was $220.
Mar 11 ABC Co. received payment from DEF Co. for purchase of Mar 3.
ABC Co. DEF Co.

ANS:
ABC Co. DEF Co.

Date Description Debit Credit Description Debit Credit
Mar 3 Accounts Receivable 6,000 Merchandise Inventory 6,000
Sales 6,000 Accounts Payable 6,000
C OMS 2,700
Merch. Inventory 2,700
Mar 5 Merchandise Inventory 375

Cash 375
Mar 9 Sales Returns 1,000 Accounts Payable 1,000

Accounts Receivable 1,000 Merch. Inventory 1,000

COMS 220
Mar Cash 5,000 Accounts Payable 5,000

11
Accounts Receivable 5,000 Cash 5,000

26. Construct a chart of accounts, assigning account numbers and arranging the accounts in balance
sheet and income statement order (“1” for assets, and so on). Each account number is three digits.
Contraccounts should designated with a decimal of the account (100.1 for contra of account 100).
Assets and liabilities should be in order of liquidity, expenses should be in alphabetical order.
Accounts Payable Equipment

Accounts Receivable Land Salaries Payable
Accumulated Depr - Equip Merchandise Inventory Sales
Advertising Expense Notes Payable Sales Discounts
Capital Stock Office Supplies Sales Returns & Allowances
Cash Prepaid Insurance Supplies Expense
Cost of Merchandise Sold Rent Expense Transportation Out
Depreciation Expense - Equip Salaries Expense Unearned Revenue
Dividends Income Summary Utilities Expense
ANS:
Acct No. Description Acct. No. Description
100 Cash 301 Retained Earnings
101 Accounts Receivable 310 Income Summary
102 Merchandise Inventory 400 Sales
103 Office Supplies 400.1 Sales Discounts
104 Land 400.2 Sales Returns & Allowances
105 Equipment 500 Advertising Expense
105.1 Accumulated Depr - Equip 501 Cost of Merchandise Sold
200 Accounts Payable 502 Depreciation Expense
201 Salaries Payable 503 Salaries Expense
202 Unearned Revenue 504 Supplies Expense
203 Notes Payable 505 Transportation Out
300 Capital Stock 506 Utilities Expense

27. Journalize the following transactions for the Eagle Company.
(1) Sells merchandise for $456. Cost of merchandise sold $300.

(2) Sells merchandise for $333 and accepts VISA as the form of payment.
Cost of merchandise sold $212.
(3) Sells merchandise on account for $567. Cost of merchandise sold $387.
(4) Credit card fees paid for the month is $98.
Journal P. 46
Date Description Debit Credit
ANS:
Journal P. 46
Date Description Debit Credit
(1) Cash 456
Sales 456
Cost of merchandise sold 300

Merchandise inventory 300
(2) Cash 333

Sales 333

(3) Accounts receivable 567

Sales 567

(4) Credit card expense 98

Cash 98


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Chapter 5/Accounting for Merchandising Businesses  241

Chapter 5—Accounting for Merchandising Businesses

2. In a merchandise business, sales minus operating expenses equals net income.

5. Merchandise inventory account is found on the income statement.

6. In many retail businesses, inventory is the largest current asset.

16. Net sales is equal to sales minus cost of merchandise sold.

17. Gross profit minus selling expenses equals net income.

25. Transportation-in is considered a cost of purchasing inventory.

33. Sales Returns and Allowances is a contra-revenue account.

34. Sales Discounts is a revenue account with a credit balance.

37. Retailers record all credit card sales as charge sales.

41. Merchandise Inventory normally has a debit balance.

50. Sellers and buyers are required to record trade discounts.

54. The abbreviation FOB stands for Free On Board.

2. Net income plus operating expenses is equal to

3. Generally, the revenue account for a merchandising business is entitled

5. The term "inventory" indicates

11. Multiple-step income statements show

13. The statement of retained earnings shows

14. Merchandise inventory is classified on the balance sheet as a

15. Which account is not classified as a selling expense?

21. Gross profit is equal to:

Purchases $28,000 Purchases discounts $800

Purchases $28,000 Purchases discounts $800

Purchases $28,000 Purchases discounts $800

29. Which of the following accounts has a normal debit balance?

34. In credit terms of 1/10, n/30, the "1" represents the

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

50. Which of the following accounts usually has a debit balance?

59. A chart of accounts for a merchandising business usually

a. Debit to Merchandise Inventory $500

a. April 15, 2007

81. Under a perpetual inventory system

85. Inventory shortage is recorded when

91. Under a periodic inventory system, closing entries will include

Service Business Merchandising Business

Balance Sheet: Balance Sheet:

DIF: Moderate OBJ: 05-01

Merchandise Inventory October 1 $ 98,560

DIF: Moderate OBJ: 05-02

5. Journalize the following merchandise transactions:

(b) Cash 11,074

DIF: Moderate OBJ: 05-03

DIF: Moderate OBJ: 05-03

7. On February 23, 2008, Markus Company sold merchandise on account,$3,500.00. The

DIF: Moderate OBJ: 05-03

DIF: Easy OBJ: 05-03

Merchandise Transportation Transportation Returns and

Bronze Company Journal Entries:

DIF: Difficult OBJ: 05-03

DIF: Easy OBJ: 05-04

DIF: Easy OBJ: 05-04

Merchandise Inventory $ 55,500

DIF: Easy OBJ: 05-04

Merchandise Inventory, March 1, 2007 $450,000

DIF: Moderate OBJ: 05-01

Cost of merchandise sold $225,000

Accounts Receivable $ 39,120 Office Equipment $ 82,700