Kap 1 6th Workbook Te CH 7

Chapter 7
INVENTORY: MERCHANDISING TRANSACTIONS
LEARNING OBJECTIVES
LO 7-1 Define a merchandising business LO 7-7 Identify inventory controls
LO 7-2 Differentiate between the perpetual and Appendix 7A

the periodic inventory systems
LO 7-8 Record journal entries under the periodic
LO 7-3 Record journal entries under the perpetual inventory system
inventory system
LO 7-9 Calculate cost of goods sold under the
LO 7-4 Calculate gross profit and gross profit periodic inventory system
margin percentages
LO 7-10 Prepare a multi-step income statement
LO 7-5 Prepare the income statement under the under the periodic inventory system
perpetual inventory system
LO 7-11 Prepare closing entries for a merchandising
LO 7-6 Prepare other adjustments and closing business under the periodic inventory
entries for a merchandising business under system
the perpetual inventory system
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Assessment Questions
AS-1 LO 7-1
What is a merchandiser?
A merchandiser is any business that buys and sells products, called merchandise or goods, for the purpose of
making a profit.
AS-2 LO 7-1
Chai Canine Care operates several stores nationwide. They purchase one brand of pet food from Krong Company,
who purchases this product line direct from the factory where it is produced by Mulo Pet Food. Explain which
company (Chai Canine Care, Krong Company or Mulo Pet Food) acts as a manufacturer, wholesaler and retailer.
Mulo Pet Food is the manufacturer because they produce (or manufacture) products. They sell to Krong
Company, who is considered as a wholesaler as they sell to many different retailers like Chai Canine Care.
AS-3 LO 7-1
What is merchandise inventory?
Merchandise inventory is a collection of physical goods that a company has purchased or manufactured to sell
to its customers.
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Chapter 7 Inventory: Merchandising Transactions
AS-4 LO 7-1
What does a merchandiser’s operating cycle usually involve?
A merchandiser’s operating cycle generally involves using cash to buy merchandise inventory, selling the
inventory to customers, and collecting cash from customers.
AS-5 LO 7-1
What is COGS and what type of account is it?
COGS stands for cost of goods sold. It is an expense account that tracks the cost of inventory that has been sold
during a particular period.
AS-6 LO 7-1
How is gross profit calculated?
Gross Profit = Sales Revenue – Cost of Goods Sold
AS-7 LO 7-2
In a perpetual inventory system, how often are inventory levels updated?
A perpetual inventory system updates inventory levels after every purchase and sale.
AS-8 LO 7-2
In a periodic inventory system, how often are inventory levels updated?
A periodic inventory system only updates the inventory and cost of goods sold once the items on hand are
physically counted.
AS-9 LO 7-2
What is the benefit to a company of using a perpetual inventory system?
Managing inventory is an important part of many businesses. If there is too much inventory, capital is
unnecessarily tied up that could be used more productively in other areas. If there is too little inventory (and
the business is unaware of the inventory level) and a customer places a large order, the order cannot be fulfilled.
This can result in a loss in market credibility. A perpetual inventory system keeps track of how much inventory
there is on hand because it maintains a continuous record of the changes to inventory.
AS-10 LO 7-2
Which inventory system should a business use if it plans to track purchases and sales using a scanner and point-
of-sale terminal?
The business should use a perpetual inventory system, as it will be easy to track all costs associated with buying
and selling inventory. Management will also be able to determine the cost and number of units on hand at any
time, since the inventory record is updated each time a purchase of sale occurs.
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Inventory: Merchandising Transactions Chapter 7
AS-11 LO 7-2
Which inventory system should a business use if it plans to keep costs down by using a manual accounting
system to record transactions?
The business should use a periodic inventory system. It will not update the inventory records or cost of goods
sold until the end of the accounting period when a physical count is taken.
AS-12 LO 7-3
What are some reasons purchase returns occur?
Goods often need to be returned for reasons such as incorrect products, over-shipments and inferior product
quality.
AS-13 LO 7-3
When does a purchase allowance occur?
Purchase allowances occur when the buyer agrees to keep undesirable goods at a reduced cost.
AS-14 LO 7-3
Indicate a possible incentive for a seller to give a sales discount.
Sellers may give sales discounts to encourage customers to purchase more and to encourage early payments.
AS-15 LO 7-3
What is a trade discount?
A trade discount is the discount from the manufacturer’s suggested retail price that is usually given by
manufacturers to merchandisers to resell their products.
AS-16 LO 7-3
If a cash discount term is written as 3/10, n/30, what does this mean?
A 3% discount is applied if paid within 10 days; otherwise, the full amount is due within 30 days.
AS-17 LO 7-3
Explain the difference between a sales allowance and a sales discount.

A sales allowance occurs when a reduction to the original selling price is given to the customer for keeping
undesirable goods (e.g. goods sold were damaged during shipping and the customer agrees to hold on to
the goods). A sales discount is an offer made to a customer if certain criteria are met. For example, if an early
payment is made or a specified number of goods are bought in one purchase.
353
AS-18 LO 7-3
What are the two possible Freight on Board (FOB) points?

FOB shipping and FOB destination
AS-19 LO 7-3
What does FOB shipping point indicate?

FOB shipping point indicates that ownership of items being purchased changes when the goods leave the
seller’s place of business. The buyer pays for shipping.
AS-20 LO 7-3
What does FOB destination indicate?

FOB destination indicates that ownership of items being purchased changes when the goods arrive at the
buyer’s place of business. The seller pays for shipping.
AS-21 LO 7-3
What type of account is sales returns and allowances, and what is it used for?
Sales returns and allowances is a contra revenue account. It is used to track the amount of sales returns or
allowances given to customers.
AS-22 LO 7-3
In a perpetual inventory system, describe the transaction(s) required to record the sale of merchandise inventory.
Two transactions are required. One is to record the sale and the other is to record the removal of inventory.
AS-23 LO 7-3
What is inventory shrinkage? How is it journalized under the perpetual inventory system?
When the amount of merchandise inventory in the accounting records exceeds the amount of inventory based
on a physical count, the difference is referred to as inventory shrinkage. It is journalized by debiting cost of
goods sold and crediting merchandise inventory for the difference.
AS-24 LO 7-4
What is the formula for gross profit margin?
Gross Profit Margin (%) = Gross Profit ÷ Net Sales
354
AS-25 LO 7-5
Define operating expenses.
Operating expenses are the expenses incurred in promoting and selling products or services and in running the
operations that make and sell the products or services.
AS-26 LO 7-5
What is one difference between a single-step income statement and a multi-step income statement?
A single-step income statement groups all revenue accounts together and lists all expenses together without
any further categorizations. A multi-step income statement breaks down revenues and expenses further to
show subtotals such as gross profit, operating expenses and income from operations.
AS-27 LO 7-5
What are selling expenses? What are some examples of selling expenses?
Selling expenses are the expenses related to selling merchandise inventory. Examples of selling expenses include
salaries of salespeople, rent for retail space and advertising.
AS-28 LO 7-5
What are administrative expenses? What are some examples of administrative expenses?
Administrative expenses are expenses related to running the business, which are not directly tied to selling
inventory. Examples of administrative expenses include salaries of administrative personnel, office supplies and
depreciation of office equipment.
AS-29 LO 7-5
In a typical multi-step income statement, which category do items such as interest revenue and loss from a
lawsuit fall under?
Items such as interest revenue and loss from a lawsuit fall under a separate category called other income and
expenses.
AS-30 LO 7-5
What is the difference between the income statement under a periodic inventory system and the income
statement under a perpetual inventory system?
An income statement under the periodic inventory system shows a multiple-line calculation of cost of goods
sold. An income statement under the perpetual inventory system presents cost of goods sold as a single-line
item.
AS-31 LO 7-6
Explain why the inventory account is not debited or credited as a part of the closing entries when a perpetual
inventory system is used.
Since the inventory account is constantly being updated to account for the cost of purchases and goods sold,
the ending balance should reflect what is on hand at the end of the accounting period.
355
AS-32 LO 7-7
Provide an example of how an accountant can manage inventory to ensure the economical and efficient use of
resources.
An accountant can calculate financial ratios to determine if there is too much or too little inventory on hand.
An accountant can also regularly check the physical condition of the inventory to make sure that damaged or
expired inventory is sold or disposed of in a timely fashion so that valuable storage space can be maximized.
AS-33 LO 7-7
List two safety measures that can be taken to avoid inventory losses through theft.
To avoid theft, inventory facilities are locked up after closing. The more valuable the inventory, the more
elaborate the security measures needed to protect it. Safety measures can include anything from fences and
guard dogs to alarm systems, security guards, security cameras, or even hiring an inventory custodian who is
charged specifically with protecting the inventory.
AS-34 LO 7-8 (Appendix 7A)

In a periodic inventory system, describe the transaction(s) required to record the sale of merchandise inventory.
One transaction is required to record the sale. Merchandise inventory is not updated after every sale.
AS-35 LO 7-9 (Appendix 7A)
Explain how cost of goods available for sale is calculated in a periodic inventory system.
Cost of goods available for sale in a periodic inventory system is calculated by adding the beginning inventory
and net purchases together. It shows the cost of the units in merchandise inventory.
356
Practice Questions
PR-1 LO 7-2
Suppose that on March 15, 2022, both Company A and Company B sold inventory with a cost of $40,000. The
updated balance of merchandise inventory as at March 1 for both companies was $90,000. Company A uses the
perpetual inventory system. Company B uses the periodic inventory system and performs an inventory count
at the end of each month. What is the value of merchandise inventory on record as at March 15 for each of
Company A and Company B?
The value of merchandise inventory for Company A as at March 15 is $50,000. The value of merchandise
inventory for Company B as at March 15 is $90,000.
PR-2 LO 7-3
Carter’s Cabinets purchased $34,500 worth of cabinets from Kory’s Kitchen Wares on April 15. Payment is due
May 15. Which accounts will be debited and credited on May 15, and for how much?
On May 15, accounts payable will be debited for $34,500, and cash will be credited for $34,500.
PR-3 LO 7-3
On January 12, 2022, Corner-Mart received a shipment of T-shirts from Promo Novelties for an event. The invoice
was for $5,000 and was recorded in the accounting system. Soon after the delivery was made, the marketing
manager discovered that the logo was printed incorrectly. The goods were returned to Promo Novelties on
January 31. Prepare the journal entry for Corner-Mart to record the return using the perpetual inventory system.
JOURNAL
Date Account Title and Explanation Debit Credit
2022
Jan 31 Accounts Payable 5,000
Merchandise Inventory 5,000
To record the purchase return
PR-4 LO 7-3
Tyler Good, the owner of Good Merchandising, is reviewing the year-end financial statements. Tyler and his
accountant are trying to determine which items should be included in inventory. Indicate whether each of the
following items should be included in ending inventory values.
Item Inventory? (Yes or No)

Goods purchased FOB shipping point that are in transit at December 31 Yes
Freight charges on goods sold No
Warehouse wage expenses No
Accounts payable balances No
Supplies used in the office No
Goods purchased FOB destination that are in transit at December 31 No
Goods sold FOB shipping point that are in transit at December 31 No
Freight charges on goods purchased Yes
Accounts receivable balances No
Goods sold FOB destination that are in transit at December 31 Yes
357
PR-5 LO 7-4
Fill in the missing amounts in the shaded boxes.
Sales $315,000
Cost of Goods Sold 207,310
Gross Profit $107,690
Gross Margin 34.2%
PR-6 LO 7-4
A shoe retailer bought inventory for $20,000 and sold it for $35,000. What is the gross profit on the entire
shipment if the business takes advantage of the early cash payment terms of 3/10, n/30 from its supplier?
Gross Profit = Net Sales − Cost of Goods Sold

= $35,000 − ($20,000 × 97%)
= $35,000 − $19,400
= $15,600
PR-7 LO 7-5
A partial income statement for Fresh Look Cards & Stationery is shown below. Fill in the missing numbers.
Fresh Look Cards & Stationery

Income Statement (partial)
For the Year Ended December 31, 2022
Sales Revenue $300,000
Less: Sales Returns & Allowances $5,000
Sales Discounts 1,000 (6,000)
Net Sales 294,000
Cost of Goods Sold (125,000)
PR-8 LO 7-6
In 2022, Green 4 U had revenues of $560,000 and expenses of $730,000. Give the journal entry to close net income (loss)
to owner’s capital account on the year-end of December 31, 2022.
JOURNAL
2022
Dec 31 Owner’s Capital 170,000
Income Summary 170,000
To close income summary account
358
PR-9 LO 7-7
The Style Shop has a requirement that all goods be scanned before they are removed from the check-out area.
Which inventory control does this practice demonstrate?
The requirement that all goods be scanned before they are removed from the check-out area is an example of
the inventory control of compliance with procedures.
PR-10 LO 7-8 (Appendix 7A)

PJ Electronics had the following business transactions during the month of February 2022.
Feb 10 PJ purchased $3,200 worth of capacitors from Cole Circuits. The invoice showed payment terms of 3/10, n/30.
Feb 10 While unpacking the above shipment, PJ’s receiving department noticed that some of the boxes of circuits were
damaged. The boxes were returned to the supplier. Total value was $500.
Feb 20 PJ paid the balance of the invoice less the return and discount.
Prepare the journal entries for the above transactions. Assume PJ Electronics uses a periodic inventory system.
JOURNAL
2022
Feb 10 Purchases 3,200
Accounts Payable 3,200
To purchase inventory on account
Feb 10 Accounts Payable 500

Purchase Returns & Allowances 500
To record purchase return
Feb 20 Accounts Payable 2,700

Purchase Discounts 81
To record payment to supplier less return
PR-11 LO 7-9, 10 (Appendix 7A)

The following information was taken from the books and records of Mike’s Mattresses for the year ended December 31, 2022.
Account Balance
Ending Inventory $30,200
Purchases 520,000
Sales Revenue 1,520,000
Purchase Discounts 2,400
Sales Returns & Allowances 3,200
Beginning Inventory 25,500
Sales Discounts 4,700
Purchase Returns & Allowances 1,500
359
Prepare a partial income statement for the year ended December 31, 2022, up to and including gross profit. The
company uses the periodic inventory system.
Mike’s Mattresses
Sales Revenue $1,520,000
Less: Sales Discounts $4,700
Sales Returns & Allowances 3,200 7,900
Net Sales 1,512,100
Cost of Goods Sold
Merchandise Inventory, Jan 1, 2022 25,500
Purchases $520,000
Less: Purchase Discounts $2,400
Purchase Returns & Allowances 1,500 3,900
Net Purchases 516,100
Cost of Goods Available for Sale 541,600
Less: Merchandise Inventory, Dec 31, 2022 30,200
Gross Profit $1,000,700
PR-12 LO 7-10 (Appendix 7A)

The following is a summary of the account balances from the records of Dora’s Craft Supplies for the year ended
December 31, 2022.
Account Balance
Purchases $57,500
Sales Returns & Allowances 750
Expenses 23,500
Merchandise Inventory, January 1, 2022 15,400
Merchandise Inventory, December 31, 2022 20,600
Using the income summary method, give the journal entry to close the temporary accounts for the year ending
December 31, 2022.
JOURNAL
Date Account Title and Description Debit Credit
2022
Dec 31 Income Summary 97,150
Purchases 57,500
Expenses 23,500
To close temporary accounts for the period
360
Application Questions Group A

AP-1A LO 7-2
Your friend Maya is setting up a retail business and has asked you to explain the difference in accounting for
a perpetual and a periodic inventory system. Specifically, she has asked what accounts related to inventory are
needed in the chart of accounts for each system. She also wants to know if there is any differences in how the
information is reported on the financial statements at the end of the accounting period.
A perpetual inventory system involves updating the inventory account each time goods are purchased, sold or
returned. The cost of goods is accounted for at same time. A periodic inventory system does not update the
inventory account for the above until the end of the accounting period as a part of the closing entries.
The perpetual system uses the following accounts: inventory, accounts payable, sales revenue, sales discounts,
sales returns and allowances, cost of goods sold.
The periodic system uses the following accounts: purchases, purchase discounts, purchase returns and
allowances, freight-in, sales revenue, sales discounts, sales returns and allowances.
AP-2A LO 7-3
Top Mop Retailers bought $12,900 worth of mops from Super Mop Wholesalers Ltd. on March 15, 2022. Payment
is due in April.
Required
a) Prepare the journal entry for Top Mop Retailers using the perpetual inventory system.
JOURNAL
2022
Mar 15 Merchandise Inventory $12,900
Accounts Payable $12,900
b) Prepare the journal entry for Top Mop Retailers for the payment of $12,900 made to Super Mop Wholesalers
Ltd. on April 15.
JOURNAL
2022
Apr 15 Accounts Payable $12,900
Cash $12,900
To pay amount owing
361
AP-3A LO 7-3
JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on May 10, 2022. On
May 11, JB’s bookkeeper was informed that $200 worth of tomatoes was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the perpetual inventory system.
JOURNAL
2022
May 11 Accounts Payable 200
Merchandise Inventory 200
AP-4A LO 7-3
On February 1, 2022, Java Wholesaler purchased $5,000 worth of coffee inventory and paid $200 for freight
charges on account. On February 16, Java Wholesaler sold all of the coffee inventory to The Coffee Cart for
$7,000 on account. As the bookkeeper for Java Wholesaler, journalize the transactions under the perpetual
inventory system.
JOURNAL
2022
Feb 1 Merchandise Inventory 5,200
Feb 16 Accounts Receivable 7,000

Sales Revenue 7,000
To record sales on account
Feb 16 Cost of Goods Sold 5,000

To record cost of goods sold
AP-5A LO 7-3
a) Beds Unlimited received a shipment of bed sheets on April 3, 2022. The value of the bed sheets was $8,000,
and the sheets were shipped FOB shipping point. Freight charges came to $100. Prepare the journal entry to
record the receipt of goods by Beds Unlimited, assuming payment will be made in May, using the perpetual
inventory system.
JOURNAL
2022
Apr 3 Merchandise Inventory 8,100
To purchase inventory
362
b) The bed sheets delivered to Beds Unlimited were the wrong material. After some negotiation, the
manager agreed to keep the products with a 10% allowance. Prepare the entry on April 10, 2022, to
record the purchase allowance. (Assume all bed sheets were still in inventory.) Allowances are not
granted on freight charges.
JOURNAL
2022
Apr 10 Accounts Payable 800
To record purchase allowance
c) Journalize the transaction for Beds Unlimited when the payment is made on May 3, 2022.
JOURNAL
2022
May 3 Accounts Payable 7,300
Cash 7,300
To pay for the goods
AP-6A LO 7-3
The following is written on an invoice relating to goods that were purchased: 5/10, n/30. What does it mean?
It means a 5% discount is applied if the invoice is paid within 10 days. Otherwise, the full amount owing is due
in 30 days.
AP-7A LO 7-3
Shoe Retailers uses the perpetual inventory system. It purchased $10,000 worth of shoes from Runner Wear
Supplies on March 1, 2022. Runner Wear’s invoice shows terms of 2/10, n/30.
Required
a) What is the latest date Shoe Retailers can pay the bill and apply the discount?
March 11 is the latest date to take advantage of the discount.
b) As bookkeeper for Shoe Retailers, prepare the journal entry to record the March 1 purchase.
JOURNAL
2022
Mar 1 Merchandise Inventory 10,000
To record the purchase
363
c) Journalize the transaction for payment of the invoice, assuming the payment was made on March 5.
JOURNAL
2022
Mar 5 Accounts Payable 10,000
Cash 9,800
To pay invoice owing less discount received
d) Journalize the transaction for payment of the invoice, assuming the payment was made on April 3.
JOURNAL
2022
Apr 3 Accounts Payable 10,000
Cash 10,000
To record the payment to Runner Wear Supplies
AP-8A LO 7-3
On May 1, 2022, Food Wholesalers purchased $3,000 worth of dried fruit inventory plus $100 for freight charges
on account. On May 15, Food Wholesalers sold all of the dried fruit inventory to Retail Grocers for $4,000 on
account. As the bookkeeper for Food Wholesalers, journalize the transactions using the perpetual inventory
system.
JOURNAL
2022
May 1 Merchandise Inventory 3,100
May 15 Accounts Receivable 4,000

Sales Revenue 4,000
May 15 Cost of Goods Sold 3,100

364
AP-9A LO 7-3
On March 20, 2022, Cup-A-Java received a shipment of gift mugs for resale from Cup Makers in the amount of
$5,000. The terms stated on the invoice from Cup Makers were 3/15, n/60. Under a perpetual inventory system,
journalize the following scenarios for Cup-A-Java.
Required
a) As the bookkeeper for Cup-A-Java, record the purchase of inventory.
JOURNAL
2022
To record the purchase of inventory on account
b) If Cup-A-Java decides to take advantage of the early payment cash discount, by when should the
payment be made to qualify for the discount?
The payment should be made by April 4.
c) The payment by Cup-A-Java to Cup Makers was made on March 31. Prepare the journal entry for the
payment of goods.
JOURNAL
2022
Cash 4,850
To pay invoice owing less discount received for early payment
d) Journalize the entry if payment had instead been made on May 20.
JOURNAL
2022
Cash 5,000
To record the payment to Cup Makers Inc.
365
e) On March 25, 20% of the shipment was returned because the mugs were the wrong size. The invoice
has not yet been paid. Prepare the journal entry for this transaction.
JOURNAL
2022
f ) Continue from e). Journalize the entry if Cup-A-Java took advantage of the early payment cash discount
when paying for the balance of the mugs on March 31.
JOURNAL
2022
Cash 3,880
To pay invoice less discount
AP-10A LO 7-3
Johnson is a maker of cotton garments that are sold to various retailers. On September 1, 2022, Craig’s Retailers
sent back a shipment of goods that were unsatisfactory. The goods had a cost of $4,620 and were sold on
account for $7,700. Johnson returned the goods to inventory. Johnson uses a perpetual inventory system.
Required
a) As Johnson’s bookkeeper, prepare the journal entries to reflect the return.
JOURNAL
2022
Sep 1 Sales Returns & Allowances 7,700
Accounts Receivable 7,700
To record sales returns for unsatisfactory products
Sep 1 Merchandise Inventory 4,620

To restock inventory return
366
b) Journalize the entry if Craig’s only returned half of the shipment.
JOURNAL
2022
Sep 1 Sales Returns & Allowances 3,850

AP-11A LO 7-3
Assume you are the bookkeeper for Moira’s Wholesalers, a distributor of kitchen furniture. Your sales manager
informed you that Ted’s Retailers is unhappy with the quality of some tables delivered on August 12, 2022,
and will be shipping back all the goods. The original invoice amounted to $1,500 and the goods cost Moira’s
$1,000. Using a perpetual inventory system, complete the journal entries for Moira’s Wholesalers for each of the
following independent scenarios.
Required
a) Rather than taking back the tables, your sales manager allows Ted’s Retailers a 10% discount if it agrees
to keep the goods. Record Ted’s payment in settlement of the invoice on September 12 assuming the
allowance is not recorded until the settlement date.
JOURNAL
2022
Sep 12 Cash 1,350
To collect outstanding accounts receivable
b) Suppose that Ted’s shipped back all the goods on August 15 and the inventory was put back on the
sales floor. Journalize the transactions.
JOURNAL
2022
Aug 15 Sales Returns & Allowances 1,500
To record sales returns from Ted’s Retailers
Aug 15 Merchandise Inventory 1,000

To restock inventory returned
367
c) Suppose that Ted’s shipped back half the goods on August 15 and kept the other half with a 10%
allowance. Journalize the transactions that took place on August 15.
JOURNAL
2022
Aug 15 Sales Returns & Allowances 825
Accounts Receivable 825
To record sales returns from Ted’s Retailers
Aug 15 Merchandise Inventory 500

Cost of Goods Sold 500
d) Continue from part b). Since all the goods were sold and returned in the same period, what happened
to Moira’s gross profit? (Disregard the additional shipping and administration costs.) Explain your answer.
Moira’s gross profit increased by $500 when goods were sold and decreased by the same amount when
goods were returned.
AP-12A LO 7-3
The following transactions took place at Science Supplies during May 2022.
May 14 Sold merchandise on credit to Elements for $10,000, terms 2/10, n/30, FOB destination; cost of
goods was $8,500
May 14 Science Supplies paid $50 to ship the goods to Elements
May 16 Elements returned $500 (sales price) worth of merchandise purchased on May 14; cost of goods was
$375; goods were returned to inventory
May 17 Received payment from Elements for the May 14 sale
May 18 Sold merchandise on credit to Litmus for $6,000, terms 2/10, n/30; cost of goods was $3,600
May 26 Litmus kept the merchandise purchased on May 18; however, some of it was defective so Science
Supplies agreed to a 50% allowance on the total sale
May 31 Received payment from Litmus for the May 18 sale
Journalize the above transactions assuming that Science Supplies uses a perpetual inventory system. Round all
calculations to the nearest dollar.
JOURNAL
2022
Sales Revenue 10,000

To record cost of sales

368

May 14 Shipping Expense 50
Cash 50
To pay shipping costs

May 16 Sales Returns & Allowances 500
To record sales return on account

May 16 Merchandise Inventory 375
To record inventory from sales return

May 17 Cash 9,310
Sales Discount 190
To receive payment from customer less discount

Sales Revenue 6,000

To record sales on account and cost of sales

May 26 Sales Returns & Allowances 3,000
To record sales allowance on account

May 31 Cash 3,000
To receive payment from customer
AP-13A LO 7-3
Shirley’s Wraps operates as a sandwich and wrap shop. Its customers can pay by cash, debit or credit card. For
each debit transaction, Shirley pays $0.20. For credit cards, she pays 2% of the total of credit card transactions.
On May 13, 2022, Shirley compiled the following summary for the work day.
Transaction Type Total Number of

Transactions
Cash $425 52
Debit Card 327 43
Credit Card 0 0
Required
a) Calculate the total debit/credit card expense for May 13.
Number of debit transactions × amount per transaction = 43 transactions × $0.20 = $8.60
369
b) Record the journal entry for the day’s sales. (Ignore COGS.)
JOURNAL
2022
May 13 Debit/Credit Card Expense 8.60
Cash 743.40
Sales Revenue 752.00
To record sales
AP-14A LO 7-3
Tom’s Bistro operates as a restaurant. Its customers can pay by cash, debit or credit card. For each debit
transaction, Tom pays $0.15. For credit cards, he pays 3% of the total of credit card transactions. On March 22,
2022, Tom compiled the following summary for the work day.

Transactions
Cash $2,203 49
Debit Card 0 0
Credit Card 3,731 83
Required
a) Calculate the total debit/credit card expense for March 22.
Total credit card amount × percentage of total = $3,731 × 0.03 = $111.93
JOURNAL
2022
Mar 22 Debit/Credit Card Expense 111.93
Cash 5,822.07
Sales Revenue 5,934.00
To record sales
AP-15A LO 7-3
Leslie and Ben run a dry cleaners together, called Pawny Cleaners. Their customers can pay by cash, debit or
credit card. For each debit transaction, they pay $0.35. For credit cards, they pay 1.5% of the total of credit card
transactions. On August 20, 2022, Ben compiled the following summary for the work day.

Transactions
Cash $741 35
Debit Card 4,376 120
370
Required
a) Calculate the total debit/credit card expense for August 20.
Total debit/credit card expense = $42 + 43.25 = $85.25
JOURNAL
2022
Aug 20 Debit/Credit Card Expense 85.25
Cash 7,914.75
To record sales
AP-16A LO 7-4
If net sales is $300,000 and cost of goods sold is $180,000, what is the gross profit and gross margin percentage?
Gross Profit = Net Sales – Cost of Goods Sold
= $300,000 – $180,000
= $120,000
Gross Margin Percentage (%) = Gross Profit ÷ Net Sales
= $120,000 ÷ $300,000
= 0.40 or 40%
AP-17A LO 7-4
If a computer company bought computers for $10,000 and sold them for $14,000, how much would the gross
profit be on the entire shipment if the business took advantage of the early cash payment terms of 2/15, n/30
from its supplier?
= $14,000 − ($10,000 × 98%)
= $14,000 − $9,800
= $4,200
371
AP-18A LO 7-1, 3, 4
Suppose that Sky Lights Wholesaler’s profit margin is 55% and that all sales are on account. Prepare the journal
entries required to record sales for the year ended December 31, 2022, assuming that the company had
$1,450,000 in sales revenue for the year and uses a perpetual inventory system.
JOURNAL
2022
Dec 31 Accounts Receivable 1,450,000
Sales Revenue 1,450,000
To record sales for the year
Dec 31 Cost of Goods Sold 652,500

To record cost of products sold for the year
AP-19A LO 7-3, 4
The following information pertains to Wicked Kitchen Supplies for March 2022.
Mar 1 Purchased merchandise for $16,000 on credit from Hotel Supplies, terms 1/20, n/30, FOB shipping point
Mar 1 Wicked paid $35 cash to have the merchandise from Hotel Supplies delivered
Mar 5 Sold merchandise on credit to Four Boars Restaurant for $8,000, terms 2/10, n/30; cost of goods was
$5,500
Mar 5 Paid $25 cash to ship the goods to Four Boars Restaurant (FOB destination)
Mar 8 Four Boars returned $1,900 (sales price) worth of merchandise purchased on March 5; cost of goods
was $800; there was nothing wrong with the merchandise and it will be resold
Mar 12 Returned $500 of the merchandise purchased on March 1 as it was the wrong design
Mar 15 Received payment from Four Boars Restaurant for the March 5 sale
Mar 15 Paid for merchandise purchased from Hotel Supplies on March 1
Mar 23 Sold merchandise on credit to Black Kettle Kitchen for $4,000, terms 2/10, n/30; cost of goods was $2,000
Mar 26 Black Kettle Kitchen returned $200 (sales price) of merchandise purchased on March 23; cost of goods
was $50. Merchandise was returned to inventory
Mar 31 Received payment from Black Kettle Kitchen for the March 23 sale
Journalize the above transactions assuming that Wicked Kitchen Supplies uses a perpetual inventory system.
Round all calculations to the nearest whole dollar.
JOURNAL
2022
Mar 1 Merchandise Inventory 35

Cash 35
372

Mar 5 Accounts Receivable 8,000
Sales Revenue 8,000
To record sale of inventory on account
Mar 5 Cost of Goods Sold 5,500

To record cost of sale
Mar 5 Shipping Expense 25

Cash 25
Mar 8 Sales Returns & Allowances 1,900


To record inventory from the return
Mar 12 Accounts Payable 500

To return incorrect goods
Mar 15 Cash 5,978

Sales Discounts 122

Cash 15,345
To pay supplier less discount

Sales Revenue 4,000

Mar 26 Sales Returns & Allowances 200

373

To record inventory from the return
Mar 31 Cash 3,724

Sales Discounts 76
Analysis
Calculate Wicked Kitchen Supplies’ gross profit for the month.
Net Sales = Sales Revenue – Sales Returns and Allowances – Sales Discounts
= ($8,000 + $4,000) – ($1900 + $200) – ($122 + $76)
= $9,702
Cost of Goods Sold = $5,500 – $800 + $2,000 – $50
= $6,650
Gross Profit = $9,702 – $6,650
= $3,052
AP-20A LO 7-5
The detailed accounting records for Ferris Wheel Consulting have been lost. The owner of the business was able
to provide the following information for 2022.
Account Balance
Accounts Receivable $45,600
Cash 106,900
Income Tax Expense 31,150
Interest Expense 4,500
Owner, Capital 371,500
Selling Expenses 45,930
Calculate Ferris Wheel’s net income for 2022.

Gross Profit 84,500
Expenses
Selling Expenses $45,930
Income Tax Expense 31,150
Total Expenses 81,580
Net Income $2,920
374
AP-21A LO 7-5
The following information is for Surplus Direct for the year ended September 30, 2022.
Account Balance
Cost of Goods Sold $26,000
Interest Expense 780
Interest Revenue 550
Maintenance Expense 2,000
Rent Expense 4,000
Salaries Expense 6,000
Supplies Expense 600
Using the information provided, prepare a multi-step income statement. Assume that 60% of expenses are for
selling and 40% are for administrative.
Surplus Direct
Income Statement
For the Year Ended September 30, 2022
Less: Sales Returns & Allowances $50
Net Sales 84,950
Gross Profit 58,950
Operating Expenses
Selling Expenses
Maintenance Expense $1,200
Rent Expense 2,400
Total Selling Expenses 7,560
Administrative Expenses
Maintenance Expense 800
Rent Expense 1,600
Total Administrative Expenses 5,040
Total Operating Expenses (12,600)
Income from Operations 46,350
Other Income and Expenses

Interest Revenue 550
Interest Expense (780) (230)
Net Income $46,120
375
AP-22A LO 7-5
Glent Company prepared the following trial balance at its year end of September 30, 2022. The company is
owned by Wayne Glent.
Glent Company
Trial Balance
September 30, 2022
Account Title DR CR
Cash $14,600
Prepaid Expenses 2,000
Store Equipment 40,000
Accumulated Depreciation—Store Equipment $2,500
Unearned Revenue 6,000
Bank Loan 9,000
Glent, Capital 38,750
Glent, Withdrawals 1,000
Gain on Sale of Equipment 4,000
Depreciation Expense—Store Equipment 500
Advertising Expense 1,200
Rent Expense—Retail Space 10,000
Rent Expense—Office Space 5,000
Sales Salaries Expense 8,000
Office Salaries Expense 4,500
Total $130,000 $130,000
Notes:
1. Assume the balance of owner’s equity is the opening balance.
2. The bank loan is payable over the next nine years in equal annual installments.
376
Required
a) Prepare a multi-step income statement using the trial balances.
Glent Company
Income Statement
Gross Profit 31,750

Operating Expenses
Selling Expenses
Depreciation Expense—Store Equipment $500
Total Selling Expenses $19,700

Total Operating Expenses 29,200

Interest Expense (600) 3,400
Net Income $5,950

b) Prepare a statement of owner’s equity.
Glent Company
Statement of Owner’s Equity
Glent, Capital, October 1, 2021 $38,750
Add: Net Income $5,950
Less: Glent, Withdrawals 1,000 4,950
Glent, Capital, September 30, 2022 $43,700
377
c) Prepare a classified balance sheet using the trial balances.
Glent Company
Balance Sheet
As at September 30, 2022
Assets
Current Assets
Cash $14,600
Total Current Assets $29,200
Property, Plant & Equipment
Equipment 40,000
Accumulated Depreciation (2,500)
Total Property, Plant & Equipment 37,500
Total Assets $66,700

Liabilities
Current Liabilities
Bank Loan, Current Portion 1,000
Total Current Liabilities $15,000
Long-Term Liabilities
Bank Loan, Long-Term Portion 8,000
Total Long-Term Liabilities 8,000
Total Liabilities 23,000

Owner’s Equity
Glent, Capital 43,700
Total Owner’s Equity 43,700
Total Liabilities and Owner’s Equity $66,700
378
AP-23A LO 7-5, 6
The following is Glueman Industries’ adjusted trial balance in account order for the year ended September 30,
2022.
Glueman Industries
Adjusted Trial Balance
September 30, 2022
Account Title DR CR
Cash $3,800
Prepaid Insurance 4,500
Prepaid Rent 8,100
Equipment 43,800
Accumulated Depreciation—Equipment $1,000
Wages Payable 2,820
Kiefer, Capital 48,800
Rent Expense 9,300
Utilities Expense 8,240
Wages Expense 15,800
Depreciation Expense 650
Total $135,950 $135,950
Required
a) Prepare a single-step income statement.
Glueman Industries
Income Statement
Revenues
Net Sales ($79,000 - $1,750 - $430) $76,820
Expenses
Rent Expense 9,300
Net Income $6,050
379
b) Prepare the journal entries to close the appropriate accounts using the income summary method.
JOURNAL
2022
Sep 30 Sales Revenue 79,000
To close the revenue accounts

Sep 30 Income Summary 72,950
Rent Expense 9,300
To close the expense accounts

Sep 30 Income Summary 6,050
To close the income summary account
c) Prepare journal entries to close appropriate accounts directly to the capital account.
JOURNAL
2022
Sep 30 Sales Revenue 79,000
To close the revenue account

Sep 30 Kiefer, Capital 72,950
Rent Expense 9,300
380
AP-24A LO 7-5, 7
A Bit of Fit operates several retail stores that specialize in products for a healthy lifestyle. Some of its financial
information is shown below for its fiscal year ended December 31, 2022.
Account Balance
Depreciation Expense—Store Equipment 10,000
Insurance Expense 7,000
Office Supplies Expense 2,000
Utilities Expense—Retail Space 6,750
Utilities Expense—Office Space 2,250
Required
a) Create a single-step income statement for A Bit of Fit.
A Bit of Fit
Income Statement
Revenues
Net Sales ($154,000 − $2,500 − $6,500) $145,000
Total Revenues 148,000
Expenses
Depreciation Expense 10,000
Net Income $9,500

381
b) Create a multi-step income statement for A Bit of Fit.
A Bit of Fit
Income Statement
Net Sales 145,000
Gross Profit 85,000

Operating Expenses
Selling Expenses
Depreciation Expense—Store Equipment $10,000

Utilities Expense—Office Space 2,250

Interest Expense (500) 2,500
Net Income $9,500
Analysis
Give a reason why income and expenses are categorized into “operating”—and further, by “selling” and
“administrative”—and “other” on the multi-step income statement. Your response should consider impact on
controls related to financial reporting.
Operating income and expenses usually indicate items that are likely to repeat year after year. Further separation
between “selling” and “administrative” provides more control over managing allocation between the two areas.
For example, a review of the breakdown of salaries expense may reveal that more needs to be allocated to the
sales category than office or vice versa. Other income and expenses are not part of regular operations of the
business and may not appear on the income statement each year. Separating regular revenues and expenses
from those that are not regular allows management and users to see how much profit was generated from
regular activities. This provides management with the ability to make decisions involving costs over which they
have control. For example, a large gain or loss on the sale of a building occurred during the year but this does
not happen every year. Therefore, readers can easily see what the profit would have been without the building
sale.
382
AP-25A LO 7-3, 7
CD Wholesalers had the following business transactions during the month of June 2022.
June 10 CD purchased $4,800 worth of towels from Taki Towels. The invoice showed payment terms of 2/10, n/30.
June 10 While unpackaging the above shipment, CD's receiving department noticed that some of the boxes of towels
were damaged. The boxes were returned to the supplier. Total value was $800.
June 20 CD paid the balance of the invoice less the return and discount.
June 22 CD sold all of the towels to Metro Merchandise for $8,000 on terms of 3/10, n/45.
June 30 Metro paid CD for the goods purchased.
Required
a) Prepare the journal entries to record the above transactions. Assume CD Wholesalers uses a perpetual
inventory system.
JOURNAL
2022
June 10 Merchandise Inventory 4,800
June 10 Accounts Payable 800

To return goods to supplier
June 20 Accounts Payable 4,000

Cash 3,920
To pay remaining invoice balance less return and discount
June 22 Accounts Receivable 8,000

Sales Revenue 8,000
To sell goods on account
June 22 Cost of Goods Sold 3,920

June 28 Cash 7,760

Sales Discount 240
To record invoice paid by Metro Merchandise
b) Calculate June’s ending inventory based on the above transactions. Assume that merchandise inventory at
the beginning of June amounted to $2,500.
Ending Inventory = $2,500 + $4,800 − $800 − $80 − $3,920
= $2,500
383
c) At the end of June, an inventory count was performed. The balance of inventory according to the count was
$2,000. Management deemed that the difference between the ledger account and physical inventory count
was due to theft (shrinkage). Prepare the journal entry to adjust the merchandise inventory balance on June
30 based on the inventory balance you calculated in part b).
JOURNAL
2022
June 30 Cost of Goods Sold 500
To adjust merchandise inventory to actual per the physical count
d) Explain how use of sales discounts and sales returns and allowances accounts supports internal controls for
a merchandising type of business.
Use of sales discounts and sales returns and allowances accounts allows management to see how effective their
credit policies are so far as the amount reported in sales discounts reflects the extent to which customers are
paying their accounts within the discount period. If the balance in this account either increased or decreased
from what year to the next, management may want to change their credit policies. Where sales returns and
allowances are concerned, management is able to monitor the dollar amount and investigate any significant
fluctuations. By debiting amounts to separate accounts instead of directly to the Sales Revenue account for either
of the above, management is able to see the total for each and compare from one period to the next.
AP-26A LO 7-8 (Appendix 7A)

JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on May 10, 2022. On
May 11, JB’s bookkeeper was informed that $200 worth of tomatoes was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the periodic inventory system.
JOURNAL
2022
May 11 Accounts Payable 200

a) Boards Unlimited received a shipment of skateboards on April 3, 2022. The value of the skateboards was
$8,000, and they were shipped FOB shipping point. Freight charges came to $100. Prepare the journal entry
to record the receipt of goods by Boards Unlimited, assuming payment will be made in May, using the
periodic inventory system.
JOURNAL
2022
Apr 3 Purchases 8,000
Freight-in 100
384
b) The skateboards delivered to Boards Unlimited were the wrong colour. After some negotiation, the manager
agreed to keep the products with a 10% discount. Prepare the entry on April 10 to record the purchase
allowance. (Assume all skateboards were still in inventory.)
JOURNAL
2022
To record allowance for goods with wrong colour
c) Journalize the transaction for Boards Unlimited when the payment is made on May 3.
JOURNAL
2022
Cash 7,300
To pay for the goods
AP-28A LO 7-2, 3, 8 (Appendix 7A)
For each business transaction in the table below, identify which accounts are debited and credited. Do this for
both the perpetual and periodic inventory systems.
Perpetual Inventory Periodic Inventory
Transaction System System
DR CR DR CR
1. Purchased inventory on account • Merchandise • Accounts • Purchases • Accounts
Inventory Payable Payable
2. Returned a portion of the inventory • Accounts • Merchandise • Accounts • Purchase
purchased in transaction 1 Payable Inventory Payable Returns &
Allowances
3. Paid for remaining invoice balance after • Accounts • Cash • Accounts • Cash
taking advantage of the early payment Payable • Merchandise Payable • Purchase
discount Inventory Discounts
4. Sold inventory on account • Accounts • Sales • Accounts • Sales
Receivable • Merchandise Receivable
• Cost of Inventory
Goods Sold
5. Customer found that a portion of goods • Sales • Accounts • Sales • Accounts
sold in transaction 4 were of lower quality; Returns & Receivable Returns & Receivable
however, she agreed to keep them at a 10% Allowances Allowances
discount
6. Customer paid the remaining invoice • Cash • Accounts • Cash • Accounts
balance after taking advantage of an early • Sales Receivable • Sales Receivable
payment discount Discounts Discounts
385

Below is a partial multi-step income statement for AJ Retailer. AJ uses a periodic inventory system. Fill in the
missing amounts in the shaded cells.
AJ Retailer
Income Statement
Sales Returns 6,300
Net Sales 325,500
Cost of Goods Sold
Beginning Inventory $25,000
Purchases $289,000
Purchase Returns 5,000
Freight-In 10,000 284,000
Ending Inventory 57,000

Real Apparel is a retail clothing business. It has the following accounts in its general ledger as at December 31,
2022.
• Administrative Expenses
• Interest Expense
• Interest Revenue
• Sales Returns & Allowances
• Merchandise Inventory, December 31, 2022
• Merchandise Inventory, January 1, 2022
• Purchases
• Sales Discounts
• Purchase Discounts
• Sales Revenue
• Selling Expenses
Real Apparel uses the periodic inventory method. Prepare a multi-step statement of income in good form
(without numerical amounts).
386
Real Apparel
Income Statement
Sales Revenue
Less: Sales Returns & Allowances
Sales Discounts
Net Sales
Cost of Goods Sold
Merchandise Inventory, January 1, 2022
Purchases
Less: Purchase Discounts
Net Purchases
Cost of Goods Available for Sale
Less: Merchandise Inventory, December 31, 2022
Cost of Goods Sold
Gross Profit
Operating Expenses
Selling Expenses
Total Operating Expenses
Income from Operations
Other Revenues and Expenses
Interest Revenue
Interest Expense
Net Income

AP-31A LO 7-9, 11 (Appendix 7A)

The following information was taken from the financial records of Redmond Distribution, owned by Marcus
Redmond, at its year end of December 31, 2022. The company uses the periodic inventory system.
Freight-In $1,400
Purchases 100,000
Rent Expense 30,000
387
Required
a) Calculate the cost of goods sold for Redmond Distribution for 2022.
Merchandise Inventory, January 1, 2022 $150,000

Purchases $100,000
Less: Purchase Returns & Allowances 13,800
Freight-In 1,400 87,600
b) Prepare the closing entries for Redmond Distribution for 2022 using the income summary method.
JOURNAL
2022
Dec 31 Sales Revenue 250,000
To close revenue and credit accounts, update inventory

Purchases 100,000
Freight-In 1,400
Rent Expense 30,000
To close expense and debit accounts, update inventory

Redmond, Capital 46,000
388
AP-32A LO 7-8, 9, 10, 11 (Appendix 7A)

Crystal Crockery, owned by Crystal Kleer, has provided you with the following information about the transactions
occurring in March 2022.
Mar 2 Crystal Crockery received a shipment of gift mugs for resale from Cup Makers. The amount on the invoice
is $7,000 and the stated terms are 2/15, n/45.
Mar 2 Crystal Crockery paid $400 cash for shipping charges.
Mar 5 The manager of Crystal Crockery checked the shipped cups and found that goods worth $700 were
defective. The defective goods were returned to the supplier.
Mar 13 Crystal Crockery paid the remaining invoice balance and, in doing so, took advantage of the early
payment discount.
Mar 20 Crystal Crockery sold the goods costing $6,174 to EatFresh Supermarket for $9,500.
Mar 22 EatFresh Supermarket found 10% worth of items to be defective and returned these to Crystal Crockery.
The goods cannot be resold.
Mar 28 The invoice showed terms 2/10, n/60. EatFresh Supermarket paid the remaining invoice balance after
taking advantage of the early settlement discount
The opening inventory balance was $500 and the closing inventory balance was $847.
Assume Crystal Crockery uses the periodic inventory system.
Required
a) Prepare the journal entries to record the purchase and sales transactions.
JOURNAL
2022
Mar 2 Purchases 7,000
Mar 2 Freight-In 400

Cash 400
To record freight-in charges
Mar 5 Accounts Payable 700

To return defective goods to supplier

Cash 6,174
Purchase Discount 126
To pay remaining invoice balance less discount received for
early payment

Sales Revenue 9,500
To record sale of goods on account
Mar 22 Sales Returns & Allowances 950

To record defective goods returned by the buyer
389

Mar 28 Cash 8,379
Sales Discount 171
To record invoice paid by EatFresh Supermarket less discount
b) Prepare the journal entries to record the closing entries for the month using the income summary method.
Assume that the accounting period for Crystal Crockery is one month.
JOURNAL
2022
Mar 31 Sales Revenue 9,500
Purchase Discounts 126
To close revenue and other income statement credit balance
accounts and to set up ending inventory balance for the period
Mar 31 Income Summary 9,021

Sales Discounts 171
Purchases 7,000
Freight-In 400
To close expense and other debit balance income statement
accounts and to remove beginning inventory for the period
Mar 31 Income Summary 2,152

Kleer, Capital 2,152
c) Prepare the net purchases sectio+n of the income statement.

Purchases $7,000
Less: Purchase Returns & Allowances $700
Purchase Discounts 126 826
Net Purchases 6,174
d) Prepare the cost of goods sold section of the income statement.

Cost of Goods Sold
Beginning Inventory $500
Net Purchases $6,174
Freight- In 400 6,574
Less: Ending Inventory 847
390
AP-33A LO 7-9, 10, 11 (Appendix 7A)

The following information was taken from the records of Arc Suppliers on December 31, 2022. Assume all
accounts have normal balances.
Account Balance
Cash 34,500
Freight-In 3,000
Interest Revenue 2,000
Purchases 142,545
Rent Expense 12,000
J. Arc, Withdrawals 15,000
J. Arc, Capital 35,600
Required
a) Prepare a partial multi-step income statement up to and including gross profit assuming a periodic
inventory system is used.
Arc Suppliers
Sales Discounts 1,875 6,075
Net Sales 218,275

Cost of Goods Sold
Purchases $142,545
Less: Purchase Returns & Allowances $6,500
Purchase Discounts 11,000 17,500
Freight-In 3,000
Less: Ending Inventory 46,575

391
b) Prepare a multi-step income statement up to and including gross profit assuming a perpetual inventory
system is used.
Arc Suppliers
Sales Discounts 1,875 6,075
Net Sales 218,275
c) Calculate net income.

Net Income = $114,305 - $13,400 - $2,400 - $12,000 + $2,000 = $88,505
d) Prepare the closing entries assuming a periodic inventory system was used.
JOURNAL
2022
Inventory (ending balance) 46,575
To close all credit balance income statement accounts

Purchases 142,545
Freight-In 3,000
Rent Expense 12,000
To close all debit balance income statement accounts

J. Arc Capital 88,505
To transfer net income to owner's capital account

Dec 31 J. Arc, Capital 15,000
J. Arc. Withdrawals 15,000
To close owner withdrawals to capital account

392
Application Questions Group B
AP-1B LO 7-2
A friend of yours has opened a bike shop that specializes in selling fat-tire bikes. They have purchased a
computer, and the software vendor wants to know if they plan to use a perpetual or periodic system to account
for inventory. What are the advantages of using a perpetual system?
The main advantage of using a perpetual system is that at any point in time, staff can determine what they
have in stock for each make model of bike they carry. This means that if a customer calls to inquire about the
availability of a certain bike, staff can quickly confirm if it is available. Ordering inventory can also be better
managed, as staff can re-order when they notice the quantity of a popular model has been depleted.
AP-2B LO 7-3
Super Shirt Wholesalers spent $10,000 to purchase 1,000 shirts from a shirt manufacturer as inventory. Hip Top
Retailers paid $15,000 for the 1,000 shirts from Super Shirt Wholesalers on March 15, 2022. Payment is due on
April 15. Both companies use the perpetual inventory system.
Required
a) Prepare the journal entry for Hip Top Retailers on March 15.
JOURNAL
2022
b) Prepare the journal entries for Super Shirt Wholesalers on March 15.
JOURNAL
2022
To sell inventory on account

To record cost of goods sold for above sale
393
AP-3B LO 7-3
JB Supermarkets bought $2,140 worth of groceries on account from a produce supplier on December 8, 2022.
On December 9, JB’s bookkeeper was informed that 15% of the produce was substandard and returned to the
supplier. Prepare the journal entry to record the purchase return using the perpetual inventory system.
JOURNAL
2022
Dec 9 Accounts Payable 321
To return items to supplier
AP-4B LO 7-3
On September 1, 2022, Fruit Wholesalers purchased $3,700 worth of dried fruit inventory and paid $120 for
freight charges on account. On September 16, Fruit Wholesalers sold all of the dried fruit inventory to Retail
Grocers for $5,920 on account. As the bookkeeper for Fruit Wholesalers, journalize the transactions under the
perpetual inventory system.
JOURNAL
2022
Sep 16 Accounts Receivable 5,920

Sales Revenue 5,920
Sep 16 Cost of Goods Sold 3,820

AP-5B LO 7-3
a) Signs Unlimited received a shipment of plastic sheets on February 15, 2022. The sheets were shipped FOB
shipping point. The value of the plastic was $9,000, and the shipping charges totalled $110. Prepare the
journal entry to record the receipt of goods by Signs Unlimited, assuming the payments for the inventory
and freight will be made in March, using the perpetual inventory system.
JOURNAL
2022
Feb 15 Merchandise Inventory $9,110
394
b) The plastic sheets delivered to Signs Unlimited were the wrong colour. After some negotiation, the manager
agreed to keep the products with a 6% allowance on the value of the inventory. Prepare the entry on
February 22 to record the purchase allowance. (Assume all items were still in inventory.) Allowances are not
granted on freight charges.
JOURNAL
2022
Feb 22 Accounts Payable $540
Merchandise Inventory $540
To receive discount from supplier for incorrect items
c) Journalize the transaction for Signs Unlimited when the payment is made on March 15.
JOURNAL
2022
Mar 15 Accounts Payable $8,570
Cash $8,570
To pay amount owing
AP-6B LO 7-3
Rock Retailers purchased $11,200 worth of shoes from Runner Wear Supplies on April 4, 2022. Runner Wear’s
invoice shows terms of 2/10, n/30. What is the latest date that Rock Retailers can pay the bill to take advantage
of the discount? How much cash is exchanged if the full discount is taken advantage of?
The latest date to take advantage of the discount is April 14. The full discount results in a payment of $10,976
cash.
AP-7B LO 7-3
Sandal Retailers purchased $8,100 worth of sandals from Comfy Wear Supplies on April 10, 2022. Comfy Wear’s
invoice shows terms of 2/15, n/30.
Required
a) What is the latest date Sandal Retailers can pay the bill to take advantage of the discount?
The latest date to pay the bill and take advantage of the discount is April 25.
b) As the bookkeeper for Sandal Retailers, prepare the journal entry to record the purchase on April 10, using a
perpetual inventory system.
JOURNAL
2022
Apr 10 Merchandise Inventory $8,100
395
c) Journalize the transaction for payment of the invoice, assuming the payment was made on April 18.
JOURNAL
2022
Cash $7,938
Merchandise Inventory $162
To pay amount in full and take discount
d) Journalize the transaction for payment of the invoice, assuming the payment was made on April 26.
JOURNAL
2022
Cash $8,100
To pay amount in full
AP-8B LO 7-3
The following information was presented by the bookkeeper for Switch Company for the month of January 2022.
Jan 5 Purchased merchandise for $12,000 on credit from Outdoor Pursuits, terms 1/10, n/30, FOB shipping point
Jan 5 Switch Company paid $25 to have the merchandise purchased from Outdoor Pursuits delivered
Jan 12 Purchased merchandise for $7,000 on credit from Cambleback, terms 2/10, n/30
Jan 14 Returned $300 of the merchandise purchased on January 5 from Outdoor Pursuits as it was defective
Jan 15 Paid for merchandise purchased from Outdoor Pursuits on January 5
Jan 26 Paid for merchandise purchased from Cambleback on January 12
Journalize the above transactions assuming that Switch Company uses a perpetual inventory system. Round all
JOURNAL
2022
Jan 5 Merchandise Inventory 12,000

Jan 5 Merchandise Inventory 25
Cash 25


396

Jan 14 Accounts Payable 300
To return defective goods

Cash 11,583
To pay supplier less discount

Cash 7,000
To pay supplier
AP-9B LO 7-3
Pete’s Wholesalers imports and distributes towels. It sells products to various retailers throughout the country
and offers payment terms of 2/10, n/30. On October 1, 2022, Pete’s sold Ernie’s Bathroom Retailers $15,000 of
goods, which cost Pete’s $9,000. Pete’s uses a perpetual inventory system. Complete the following.
Required
a) Journalize the sale that was made on account for Pete’s Wholesalers.
JOURNAL
2022
Oct 1 Accounts Receivable 15,000

b) By what date must Ernie’s pay the invoice to qualify for the early cash payment discount?
Ernie’s must pay by October 11 to qualify for the discount.
c) Assume Ernie’s paid the bill on October 5. Record the journal entry for Pete’s Wholesalers.
JOURNAL
2022
Oct 5 Cash 14,700
Sales Discounts 300
To collect accounts receivable less discount allowed
397
d) If Ernie’s had returned half the shipment and paid for the balance owing on October 5, how would
the transactions be journalized by Pete’s Wholesaler’s? Assume the inventory was restocked by Pete’s
Wholesalers.
JOURNAL
2022
Oct 5 Sales Returns & Allowances 7,500
To record sales returns from Ernie’s
Oct 5 Merchandise Inventory 4,500

Oct 5 Cash 7,350

Sales Discounts 150
To collect accounts receivable less discount allowed
e) Suppose instead that Ernie’s found the goods unsatisfactory and agreed to keep the goods with a 10%
allowance. Prepare the journal entries for Pete’s Wholesalers to record the sales allowance and Ernie’s
payment on October 20.
JOURNAL
2022
Oct 20 Sales Returns & Allowances 1,500
To record allowance provided to Ernie’s for unsatisfactory goods
Oct 20 Cash 13,500

398
AP-10B LO 7-3
Macks makes garments that are sold to retailers. On June 1, 2022, Cory’s Retailers sent back a shipment of
goods. The goods sold on account for $6,000 and cost Macks $4,000 to make. Macks put the returned goods
back into inventory for resale. Macks uses a perpetual inventory system.
Required
a) As Macks’ bookkeeper, prepare the journal entries to reflect the return.
JOURNAL
2022
Jun 1 Sales Returns & Allowances 6,000
To record sales return for unsatisfactory products
Jun 1 Merchandise Inventory 4,000

b) Journalize the entry if Cory’s returned only half of the shipment.
JOURNAL
2022
Jun 1 Sales Returns & Allowances 3,000
Jun 1 Merchandise Inventory 2,000

c) What happened to the value of Macks’ owner’s equity when Cory’s returned the merchandise? Did it
increase, decrease or stay the same? Explain your answer.
Owner’s equity decreased because sales returns and allowances is a contra revenue account, which
decreases revenue (i.e. owner’s equity). Although the decrease to cost of goods sold will increase equity,
equity will ultimately decrease because the sales returns and allowances is a larger value.
d) Explain the logic behind debiting the sales returns and allowances as a contra account instead of
debiting the revenue account directly.
Debiting a contra account allows one to effectively track and separate total sales from returns.
399
AP-11B LO 7-3
You are the bookkeeper for Adair Wholesalers, a distributor of household furniture. Your sales manager has
informed you that Furniture King Retailers is unhappy with the quality of some sectional couches delivered on
April 15, 2022, and wants to ship back all the goods. The original invoice amounted to $4,200, and the goods
cost Adair $2,500. Using a perpetual inventory system, complete the journal entries for Adair Wholesalers for
each of the following independent scenarios.
Required
a) Rather than taking back the couches, your sales manager allows Furniture King a 10% discount if it agrees to keep
the goods. Record Furniture King’s payment in settlement of the invoice on May 15 assuming the allowance is not
recorded until the settlement date.
JOURNAL
2022
May 15 Cash 3,780
b) Suppose that Furniture King shipped back all the goods on May 10 and the inventory was put back on the sales floor.
Journalize the transactions.
JOURNAL
2022
To record sales returns from Furniture King

c) Suppose that Furniture King shipped back half the goods on May 10 and kept the other half with a 10% allowance.
Journalize the transactions that took place on May 10.
JOURNAL
2022
To record return and allowance for goods purchased by customer
[($4,200 − $2,100) + ($2,100 × 10%)]
400

To record the return of goods to inventory
($2,500 × 50%)
AP-12B LO 7-3
The following transactions took place at Art Supplies during March 2022.
Mar 14 Sold merchandise on credit to Graphic Arts for $15,000; terms 3/15, n/30; cost of goods sold was
$12,000
Mar 14 Art Supplies paid $75 to ship the goods to Graphic Arts (FOB destination)
Mar 16 Graphic Arts returned $1,000 (sales price) worth of merchandise purchased on March 14; cost of
goods was $650; goods were returned to inventory
Mar 17 Received payment from Graphic Arts for March 14 sale
Mar 18 Sold merchandise on credit to Canvas Retailers for $8,000, terms 2/10, n/30; cost of goods was $5,500
Mar 26 Canvas kept the merchandise purchased on March 18; however, some of it was defective so Art
Supplies agreed to a 40% allowance on the total sale
Mar 31 Received payment from Canvas for the March 18 sale
Journalize the above transactions assuming that Art Supplies uses a perpetual inventory system. Round all
JOURNAL
2022

Mar 14 Shipping Expense 75

Cash 75


To record inventory from sale return
401

Mar 17 Cash 13,580
Sales Discount 420

Sales Revenue 8,000
To record sale on account


To record sales allowance on account
Mar 31 Cash 4,800

Analysis
What was the gross profit earned by Art Supplies during the month of March? Show calculations.
$1,530 = $15,000 − $12,000 − $1,000 + $650 − $420 + $8,000 − $5,500 − $3,200
AP-13B LO 7-3
Brad Chang runs his own restaurant. Customers can pay by cash, debit or credit card. For each debit transaction,
Brad pays $0.25. For credit cards, he pays 2% of the total of credit card transactions. On May 9, 2022, Brad
compiled the following summary for the work day.

Transactions
Cash $1,459 23
Debit Card 4,632 72
Credit Card 0 0
Required
a) Calculate the total debit/credit card expense for May 9.
Number of debit transactions × amount per transaction = 72 transactions × $0.25 = $18
402
JOURNAL
2022
May 9 Debit/Credit Card Expense 18
Cash 6,073
Sales Revenue 6,091
To record sales
AP-14B LO 7-3
Burt Mecklin operates a large pet store. Customers can pay by cash, debit or credit card. For each debit
transaction, Burt pays $0.15. For credit cards, he pays 2% of the total of credit card transactions. On November
15, 2022, Burt compiled the following summary for the work day.
Transactions
Cash $2,640 33
Debit Card 0 0
Required
a) Calculate the total debit/credit card expense for November 15.
JOURNAL
2022
Nov 15 Debit/Credit Card Expense 108.80
Cash 7,971.20
To record sales
AP-15B LO 7-3
Ron runs his own butcher shop. His customers can pay by cash, debit or credit card. For each debit transaction,
Ron pays $0.25. For credit cards, Ron pays 3% of the total of credit card transactions. On April 3, 2022, Ron
compiled the following summary for the work day.

Transactions
Cash $836 27
Debit Card 1,298 40
403
Required
a) Calculate the total debit/credit card expense for April 3.

Total debit/credit card expense = $10 + 40.98 = $50.98
JOURNAL
2022
Apr 3 Debit/Credit Card Expense 50.98
Cash 3,449.02
To record sales
AP-16B LO 7-4
If sales are $290,000 and cost of goods sold is $130,000, what are the gross profit and gross margin percentage?

= $290,000 − $130,000
= $160,000
= $160,000 ÷ $290,000
= 0.55 or 55%
AP-17B LO 7-4
If a cell phone retail business bought cell phones for $10,800 and sold them for $14,500, how much would the
gross profit be on the entire shipment, assuming the business took advantage of the early cash payment terms
of 3/10, n/30 from its supplier?
Cost of Goods Sold = $10,800 − ($10,800 × 0.03)

= $10,800 − $324
= $10,476
= $14,500 − $10,476
= $4,024
404
AP-18B LO 7-1, 3, 4
Suppose that SCOOP Pet Supplies’ gross profit margin is 40% and that all sales are cash sales. Prepare any
journal entries required to record sales for the year ended December 31, 2022, assuming that the company had
$846,500 in sales revenue for the year and uses a perpetual inventory system.
JOURNAL
2022
Dec 31 Cash 846,500
To record cash sales for the year
Dec 31 Cost of Goods Sold 507,900

To record cost of products sold for the year
AP-19B LO 7-3, 4
Wilde Wilderness Supplies had the following transactions during January 2022.
Jan 1 Sold merchandise on credit to Merril for $15,000, terms 2/10, n/30; cost of goods was $8,500
Jan 1 Wilde paid $50 to ship the goods to Merril
Jan 5 Purchased inventory for $12,000 on credit from Outdoor Experts, terms 1/10, n/30, FOB shipping point
Jan 5 Wilde paid $25 to have the merchandise from Outdoor Experts delivered
Jan 8 Merril returned $1,200 (sales price) of merchandise purchased on January 1; the cost of goods sold was
$800. The inventory will be resold.
Jan 12 Some of the merchandise purchased on January 5 was the wrong size. Wilde decided to keep the
merchandise in exchange for a 25% allowance on the purchase. Allowances are not granted on shipping
charges.
Jan 15 Received payment from Merril for the January 1 sale
Jan 18 Sold merchandise on credit to Forest Outfitters for $5,000, terms 2/15, n/30; cost of goods was $2,600
Jan 23 Paid for merchandise purchased from Outdoor Experts on January 5
Jan 26 Wilde granted Forest Outfitters a 20% allowance on the January 18 sale due to defective products
Jan 31 Received payment from Forest Outfitters for the January 18 sale
Journalize the above transactions assuming that Wilde Wilderness Supplies uses a perpetual inventory system.
Round all calculations to the nearest whole dollar.
JOURNAL
2022
Jan 1 Accounts Receivable 15,000

Jan 1 Cost of Goods Sold 8,500

405

Jan 1 Shipping Expense 50
Cash 50


Cash 25
To record shipping costs

Jan 8 Sales Returns & Allowances 1,200


To record allowance from Outdoor Experts

Jan 15 Cash 13,800

Sales Revenue 5,000
To record sales on account and cost of sales

Jan 18 Cost of Goods Sold 2,600

Cash 9,000
To pay supplier

Jan 26 Sales Returns & Allowances 1,000

406

Jan 31 Cash 3,920
Sales Discounts 80
Analysis
Calculate Wilde Wilderness Supplies’ gross profit margin for the month.
Net Sales = Sales – Sales Returns and Allowances – Sales Discounts
= ($15,000 + $5,000) – ($1,200 + $1,000) – $80
= $17,720
Cost of Goods Sold = $8,500 – $800 + $2,600
= $10,300

= $17,720 – $10,300
= $7,420
= $7,420 ÷ $17,720
= 0.42 or 42%
AP-20B LO 7-5
Maplegrove Merchandising has the following selected financial information for the year ended December 31, 2022.
Account Balance
Rent Revenue $8,100
Administrative Expenses 79,300
407
Required
a) Calculate net sales.

Less: Sales Discounts $17,500
Net Sales $451,000
b) Using a single-step income statement, calculate net income.
Maplegrove Merchandising
Income Statement
Revenues
Net Sales $451,000
Rent Revenue 8,100
Total Revenues 554,100
Expenses
Net Income (Loss) ($64,400)

AP-21B LO 7-5
Let’s Talk Shop sells cell phone accessories. The following information is available for the year ending June 30, 2022.
Account Balance
Advertising Expense 800
408
Prepare the multi-step income statement for June 2022.
Let’s Talk Shop

Income Statement
For the Year Ended June 30, 2022
Gross Profit 37,800

Operating Expenses
Selling Expenses
Advertising Expense $800

Income (Loss) from Operations (4,000)

Interest Expense (1,000)
Net Income (Loss) ($5,000)

Analysis
Let’s Talk Shop sold 3,500 phone cases at an average price of $14 each during the year. The company buys
phone case inventory at an average price of $3.20 each. If Let’s Talk Shop had sold 4,000 phone cases instead,
would it have a positive net income? Assume operating expenses would remain the same. Show your work.
Revenue at 4,000 $56,000

Cost of Goods Sold at 4,000 (12,800)
Operating Expenses (41,800)
Other Income and Expenses (1,000)
Net Income $400
Let’s Talk Shop would have made a profit of $400 if 4,000 cases were sold.
409
AP-22B LO 7-5
Bugle News operates by selling newspaper and magazines to consumers. Peter has prepared the income
statement and balance sheet for Bugle News as shown below.
The bank loan is due in annual payments of $50,000. Note that the equipment has been fully depreciated.
Bugle News
Income Statement
Revenues
Total Revenues $1,000,000
Expenses
Rent Expense—Newsstand 50,000
Loss on Property Damage 59,000
Net Income $400,000
Bugle News
Balance Sheet
As at December 31, 2022
Assets
Cash $121,000
Equipment 800,000
Total Assets $1,500,000

Liabilities
Bank Loan 300,000
Total Liabilities $845,000

Owner’s Equity
Parker, Capital 655,000
Total Liabilities and Owner’s Equity $1,500,000
410
Required
a) Prepare the multi-step income statement for Bugle News.
Bugle News
Income Statement
Gross Profit 825,000

Operating Expenses
Selling Expenses
Advertising Expense $50,200
Rent Expense—Newsstand 50,000

Income (Loss) from Operations 434,000

Loss on Property Damage (59,000) (34,000)
Net Income (Loss) $400,000

411
b) Prepare the classified balance sheet for Bugle News.
Bugle News
Balance Sheet
As at December 31, 2022
Assets
Current Assets
Cash $121,000
Property, Plant and Equipment
Equipment 800,000
Total Property, Plant and Equipment 550,000
Total Assets $1,500,000
Liabilities
Current Liabilities
Bank Loan, Current Portion 50,000
Bank Loan, Long-Term Portion 250,000
Owner’s Equity
Parker, Capital 655,000
Total Liabilities and Owner’s Equity $1,500,000
412
AP-23B LO 7-5, 6
The following is the adjusted trial balance in alphabetical order for LCP Construction for the year ended
December 31, 2022.
LCP Construction
Adjusted Trial Balance
December 31, 2022
Account Title DR CR
Accumulated Depreciation—Equipment 1,140
Cash $10,800
Equipment 27,766
Pohler, Capital 48,060
Prepaid Rent 18,100
Rent Expense 9,300
Sales Discounts 440
Wages Expense 5,800
Wages Payable 2,745
Total $123,870 $123,870
413
Required
a) Prepare a multi-step income statement.
LCP Construction
Income Statement
Sales $60,945
Less: Sales Discounts $440
Net Sales 58,756
Gross Profit 30,096
Operating Expenses
Rent Expense 9,300
Wages Expense 5,800
Income from Operations (1,584)
Other Revenue & Expense

Interest Revenue $7,650
Net Income $6,066
b) Prepare the journal entries to close the appropriate accounts using the income summary method.
JOURNAL
2022
To close the revenue accounts

Rent Expense 9,300
Sales Discounts 440
Wages Expense 5,800

414

Pohler, Capital 6,066
To close the income summary account

AP-24B LO 7-5, 7
Rita Retail is a merchandising business. The store’s building contains a large selling area with merchandise
displays and shelves, and a smaller back office area where administrative tasks are performed, such as payroll,
marketing and HR. Excess inventory is stored at the sales manager’s house, which is located an hour’s drive away
from the main office. The following information is available.
• Salaries are for the salespeople, as well as the office staff. Office staff salaries totalled $80,000 for the year.
• The office area is allocated 20% of the utility costs.
• Depreciation is charged on the merchandise displays only.
Rita Retail
Income Statement
Expenses
Total Expenses 1,166,000
Net Income $234,000
415
Prepare a multi-step income statement for Rita Retail.
Rita Retail
Income Statement
Operating Expenses
Selling Expenses
Depreciation Expense $5,000
Net Income $234,000
Analysis
a) Give a reason why it is useful to separate expenses into selling and administrative categories on the income
statement.
Companies can use this information to better track where costs come from within the organization. This
allows managers of different departments to budget resources more efficiently to reduce the costs they are
responsible for.
b) Discuss the control implications of storing inventory at the manager’s home instead of at the store’s
location.
As with other assets, merchandise inventory should be safeguarded against loss due to theft or damage.
The fact that inventory is being stored at an off-site location does not support good inventory controls as
i) it is not accessible for shipping and receiving, ii) it can’t be easily verified against the purchase order or
supplier’s invoice, and iii) there may be no assurance that it is secured from damage or theft.
416
AP-25B LO 7-3, 6, 7
AB Retailers had the following business transactions during the month of April 2022.
Apr 10 AB Retailers bought $3,500 worth of T-shirts from Unique Designers. The invoice showed payment
terms of 2/10, n/30.
Apr 10 Soon after AB Retailers received the products, it was discovered that $500 worth of T-shirts did not
meet quality standards. These goods were returned to the supplier.
Apr 20 AB Retailers paid the remaining invoice balance.
Apr 22 AB Retailers sold all the goods for $4,500 to SK Stores on terms 3/10, n/45.
Apr 28 SK Stores paid for the goods purchased.
Required
a) Prepare the journal entries to record the above transactions. Assume AB Retailers uses the perpetual
inventory system.
JOURNAL
2022
Apr 10 Merchandise Inventory 3,500
To record purchase of inventory on account

To return goods to supplier

Cash 2,940
To pay remaining invoice balance less discount received for early
payment
Apr 22 Accounts Receivable 4,500

Sales Revenue 4,500
To record goods sold on account
Apr 22 Cost of Goods Sold 2,940

Apr 28 Cash 4,365

Sales Discount 135
To record invoice paid by SK Stores less discount
417
b) Calculate April’s ending inventory based on the above transactions. Assume that merchandise inventory at
the beginning of April amounted to $1,500.
Ending April Inventory = Beginning (April Inventory) + Purchases – Returns – Discount – COGS
= $1,500 + $3,500 – $500 – $60 – $2,940
= $1,500
c) At the end of April, an inventory count was performed. The balance of inventory according to the count was
$1,300. Management deemed that the difference between the ledger account and physical inventory count was
due to theft (shrinkage). Prepare the journal entry to adjust the merchandise inventory balance on April 30.
JOURNAL
2022
Apr 30 Cost of Goods Sold 200
To adjust merchandise inventory to the actual physical count
d) What are some controls used to safeguard inventory against shrinkage?
i) Taking a physical inventory count and comparing to values reported in the accounts
ii) Keeping inventory stored under lock and key in a safe location
iii) Inspecting inventory when received and comparing total received with what was ordered and billed
AP-26B LO 7-8 (Appendix 7A)

On July 18, 2022, the Maple Trees received a shipment of jerseys from Norton Supplies for their hockey team.
The invoice was for $6,000 and was recorded in the accounting system. When the box was opened, the team
manager discovered the jerseys were the wrong colour. The goods were returned to Norton Supplies on July 31.
Prepare the journal entry for the Maple Trees to record the return using the periodic inventory system.
JOURNAL
2022
July 31 Accounts Payable 6,000

Footloose Retailers uses the periodic inventory system. It purchased $10,000 worth of shoes from Jogger Wear
Supplies on March 1, 2022. Jogger Wear’s invoice terms are 2/15, n/30.
Required
a) What is the latest date Footloose Retailers can pay the bill to apply the discount?
March 16 is the latest date to take advantage of the discount.
418
b) As Footloose Retailers’ bookkeeper, prepare the journal entry to record the March 1 purchase.
JOURNAL
2022
Mar 1 Purchases 10,000
To purchase goods
c) Journalize the transaction for payment of the invoice on March 5.
JOURNAL
2022
Cash 9,800
Purchase Discount 200
To pay invoice owing less discount received
d) Journalize the transaction for payment of the invoice on April 3.
JOURNAL
2022
Cash 10,000
To record the payment to Jogger Wear Supplies
AP-28B LO 7-2, 3, 8 (Appendix 7A)

On January 1, 2022, a company purchases 1,000 units of inventory at $12 per unit on account. On January 5, the
company sells 25 units for $50 per unit on account.
Required
a) Write the journal entries to record the transactions under the perpetual inventory system.
JOURNAL
2022
To record purchase of units on account

Sales Revenue 1,250
To record sale of inventory on account
419

Jan 5 Cost of Goods Sold 300
b) Write the journal entries to record the transactions under the periodic inventory system.
JOURNAL
2022
Jan 1 Purchases 12,000
To record purchase of units on account

Sales Revenue 1,250
To record sale of units on account

Below is a partial multi-step income statement for Barracuda Wholesalers. Barracuda uses a periodic inventory
system. Fill in the missing amounts in the shaded cells.
Barracuda Wholesalers
Income Statement
Sales Returns 3,500
Net Sales 403,500
Cost of Goods Sold
Beginning Inventory $26,000
Purchases $292,000
Purchase Returns 15,000
Freight-In 10,000 287,000
420

Star Apparel is a retail clothing business. It has the following accounts in its general ledger as at December 31,
2022.
Account Balance
Administrative Expenses $25,000
Purchases 250,000
Star Apparel uses the periodic inventory method. Prepare a multi-step statement of income in good form.
Star Apparel
Income Statement
Net Sales 362,000
Cost of Goods Sold
Purchases $250,000
Less: Purchase Discounts (3,000)
Operating Expenses
Total Operating Expenses (71,000)
Other Revenues and Expenses
Interest Expense (6,000) 2,000
Net Income $43,000
421
AP-31B LO 7-9, 11 (Appendix 7A)

The following information was taken from the financial records of Bluevale Wholesalers, owned by Betty Bond, at
its year end of December 31, 2022. The company uses the periodic inventory system:
Account Balance
Freight-In $1,200
Purchases 120,000
Rent Expense 24,000
a) Calculate the cost of goods sold for Bluevale Wholesalers for 2022.
Merchandise Inventory, January 1, 2022 $140,000

Purchases $120,000
Less: Purchase Returns & Allowances 12,300
Freight-in 1,200 106,400
Cost of goods available for sale 246,400
b) Prepare the closing entries for Bluevale Wholesalers for 2022 using the income summary method.
JOURNAL
2022
To close revenue and credit accounts, update Inventory

422

Freight-In 1,200
Purchases 120,000
Rent Expense 24,000

Betty Bond, Capital 12,800
To close income summary, update owner's capital for net income
earned

Tommy Greggson, owner of Greggson Retail, prepared the following adjusted trial balance at its year end of
October 31, 2022. A year-end inventory count revealed that $210,000 of inventory is on hand.
Greggson Retail
Trial Balance
October 31, 2022
Account Title DR CR
Cash $78,000
Accumulated Depreciation—Store Equipment $80,000
Bank Loan 50,000
Greggson, Capital 300,000
Greggson, Withdrawals 20,000
Purchases 235,000
Freight-In 7,000
Total $941,000 $941,000
423
Required
a) Prepare a multi-step income statement for Greggson Retail, assuming a periodic inventory system is used.
Greggson Retail
Income Statement
For the Year Ended October 31, 2022
Net Sales 327,000

Cost of Goods Sold
Merchandise Inventory, November 1, 2021 165,000
Purchases $235,000
Purchase Discounts 5,000 (17,000)
Freight-In 7,000 225,000
Merchandise Inventory, October 31, 2022 210,000

Operating Expenses
Selling Expenses


Interest Expense (1,000)
Net Income $30,000

424
b) Prepare the closing entries for Greggson Retail using the income summary method.
JOURNAL
2022
Oct 31 Sales Revenue 360,000
To close revenue and credit accounts, update inventory
Oct 31 Income Summary 557,000

Purchases 235,000
Freight-In 7,000
Oct 31 Income Summary 30,000

Greggson, Capital 30,000
Close income summary
Oct 31 Greggson, Capital 20,000

Greggson, Withdrawals 20,000
To close withdrawals account
425
AP-33B LO 7-9, 10, 11 (Appendix 7A)

The following information was taken from the records of Greggs Interior Supplies on December 31, 2022.
Assume all accounts have normal balances.
Account Balance
Cash 12,345
Freight-In 1,000
Purchases 154,000
Rent Expense 6,000
Sales Discounts 900
G. Stone, Withdrawals 30,000
G. Stone, Capital 46,900
Required
a) Prepare a multi-step income statement up to and including gross profit assuming a periodic inventory
system is used.
Greggs Interior Supplies
Sales Discounts 900 4,100
Net Sales $445,900
Cost of Goods Sold:
Purchases $154,000
Purchase Discounts 9,000 12,420
Freight-In 1,000
Less:Ending Inventory 32,400

426
b) Prepare a multi-step income statement up to and including gross profit assuming a perpetual inventory
system is used.
Greggs Interior Supplies
Sales Discounts 900 4,100
Net Sales 445,900

c) Calculate net income.
Net income = $301,220 − $12,300 − $3,600 − $6,000 + $3,250 = $282,570
d) Prepare the closing entries using the income summary method and assuming a periodic inventory system was used.
JOURNAL
2022
To close all credit balance income statement accounts

Purchases 154,000
Freight-In 1,000
Sales Discounts 900
Rent Expense 6000
To close all debit balance income statement accounts

G. Stone, Capital 282,570
To transfer net income to owner's capital account

Dec 31 G. Stone, Capital 30,000
G. Stone, Withdrawals 30,000
To close owner withdrawals to capital account

427
Case Study
CS-1 LO 7-3, 4, 5, 7
Rajni Reynolds is the owner and operator of Reynolds’ Ratchets, a business that sells tools and other related
merchandise using a perpetual inventory system. During its first month of operations, February 2022, the
following transactions occurred.
Feb 1 Purchased inventory on account for $40,000, terms of 2/10, n/30

Feb 1 Received a deposit of $20,000 from a customer for products to be delivered later
Feb 1 Returned damaged inventory from the February 1 purchase worth $4,500
Feb 5 Sold products for cash of $29,000; the cost of goods was $12,000
Feb 10 Paid the balance owing to the supplier of inventory from February 1
Feb 16 Received an advertising bill for $4,000 which will be paid next month
Feb 21 Sold products on account for $41,000; the cost of goods was $20,000
Feb 22 Paid wages and benefits with $7,000 cash; this amount includes sales salaries of $5,000 and office
salaries of $2,000
Feb 25 Purchased new computers on account for $5,000
Feb 26 A customer agreed to keep a defective product for a 30% allowance; the customer originally paid
$2,000 on account for the product
Feb 27 A customer returned an incorrect product for cash; this product had a sales price of $700 and a cost
of $400; the item was returned to the sales floor for resale
Feb 28 Incurred maintenance expense at the head office of $3,000 on account
The company uses the following chart of accounts to implement its accounting system.
Account Description Account # Account Description Account #
ASSETS REVENUE
Cash 101 Sales Revenue 400
Accounts Receivable 105 Sales Returns & Allowances 455
Computers 120 EXPENSES
LIABILITIES
Advertising Expense 505
Accounts Payable 200
Unearned Revenue 215 Maintenance Expense 520
Salaries Expense 545
OWNER’S EQUITY
Reynolds, Capital 300
Reynolds, Withdrawals 310
428
Required
a) Prepare the journal entries for the period.
JOURNAL Page 1
Date Account Title and Explanation PR Debit Credit
2022
Feb 1 Merchandise Inventory 115 40,000
Accounts Payable 200 40,000
Feb 1 Cash 101 20,000

Unearned Revenue 215 20,000
To record receipt of customer deposit
Feb 1 Accounts Payable 200 4,500

Merchandise Inventory 115 4,500
To return damaged inventory
Feb 5 Cash 101 29,000

Sales Revenue 400 29,000
To record cash sales
Feb 5 Cost of Goods Sold 500 12,000

To record cost of goods sold on above sale
Feb 10 Accounts Payable 525 35,500

Cash 101 34,790
Merchandise Inventory 115 710
To pay balance owing to supplier less return and
discount
Feb 16 Advertising Expense 505 4,000

To record advertising expense on account
Feb 21 Accounts Receivable 105 41,000

Feb 21 Cost of Goods Sold 500 20,000

Feb 22 Salaries Expense 545 7,000

Cash 101 7,000
To pay salaries and benefits
429

Feb 25 Computers 120 5,000
To purchase computers on account
Feb 26 Sales Returns & Allowances 455 600

Accounts Receivable 105 600
To record allowance for defective goods
Feb 27 Sales Returns & Allowances 455 700

Cash 101 700
To record refund for defective goods
Feb 27 Merchandise Inventory 115 400

Cost of Goods Sold 500 400
To record return and restock of goods
Feb 28 Maintenance Expense 520 3,000

To pay for maintenance on account
b) Post the entries to the general ledger.

Account: Cash GL No: 101
Date Description PR DR CR Balance
2022
Feb 1 GJ1 20,000 20,000 DR
Feb 5 GJ1 29,000 49,000 DR
Feb 10 GJ1 34,790 14,210 DR
Feb 22 GJ1 7,000 7,210 DR
Feb 27 GJ1 700 6,510 DR
Account: Accounts Receivable GL No: 105

2022
Feb 21 GJ1 41,000 41,000 DR
Feb 26 GJ1 600 40,400 DR
430
Account: Merchandise Inventory GL No: 115

2022
Feb 1 GJ1 40,000 40,000 DR
Feb 1 GJ1 4,500 35,500 DR
Feb 5 GJ1 12,000 23,500 DR
Feb 10 GJ1 710 22,790 DR
Feb 21 GJ1 20,000 2,790 DR
Feb 27 GJ1 400 3,190 DR
Account: Computers GL No: 120

2022
Feb 25 GJ1 5,000 5,000 DR
Account: Accounts Payable GL No: 200

2022
Feb 1 GJ1 40,000 40,000 CR
Feb 1 GJ1 4,500 35,500 CR
Feb 10 GJ1 35,500 0 CR
Feb 16 GJ1 4,000 4,000 CR
Feb 25 GJ1 5,000 9,000 CR
Feb 28 GJ1 3,000 12,000 CR
Account: Unearned Revenue GL No: 215

2022
Feb 1 GJ1 20,000 20,000 CR
Account: Reynolds, Capital GL No: 300

431
Account: Reynolds, Withdrawals GL No: 310

Account: Sales Revenue GL No: 400

2022
Feb 5 GJ1 29,000 29,000 CR
Feb 21 GJ1 41,000 70,000 CR
Account: Sales Returns & Allowances GL No: 455

2022
Feb 26 GJ1 600 600 DR
Feb 27 GJ1 700 1,300 DR
Account: Cost of Goods Sold GL No: 500

2022
Feb 5 GJ1 12,000 12,000 DR
Feb 21 GJ1 20,000 32,000 DR
Feb 27 GJ1 400 31,600 DR
Account: Advertising Expense GL No: 505

2022
Feb 16 GJ1 4,000 4,000 DR
Account: Maintenance Expense GL No: 520

2022
Feb 28 GJ1 3,000 3,000 DR
432
Account: Salaries Expense GL No: 545

2022
Feb 22 GJ1 7,000 7,000 DR
c) Prepare a trial balance.
Reynolds’ Ratchets
Trial Balance
February 28, 2022
Account Title DR CR
Cash $6,510
Computers 5,000
Total $102,000 $102,000
433
d) Prepare a multi-step income statement for the period.
Income Statement
For the Month Ended February 28, 2022
Less: Sales Returns & Allowances 1,300
Net Sales 68,700
Gross Profit 37,100

Operating Expenses
Selling Expenses
Advertising Expense $4,000

Net Income $23,100

e) Prepare a statement of owner’s equity for the period.
For the Month Ended February 28, 2022
Reynolds, Capital, February 1, 2022 $0
Add: Net Income 23,100
Reynolds, Capital, February 28, 2022 $23,100
434
f ) Prepare a classified balance sheet for the period.
Balance Sheet
As at February 28, 2022
Assets
Current Assets
Cash $6,510
Property, Plant, & Equipment
Computers 5,000
Total Property, Plant, & Equipment 5,000
Liabilities
Current Liabilities
Owner’s Equity
Reynolds, Capital 23,100
Total Liabilities and Owner’s Equity $55,100
g) Calculate the gross profit margin on product sales.

= $37,100 ÷ $68,700
= 0.54 or 54%
h) What basic economic theory is related to proper management of inventory, and how would a business be impacted if
it was not properly applied?
The basic economic principle of supply and demand can be applied to management of inventory in that, if
a business is not able to supply inventory to meet demand from customers, it will not receive the sales, and
if sales are not recorded, profits will be lost. On the other hand, if demand is not there (i.e. inventory is not
selling), cash and other resources have been tied up in inventory that could have been used elsewhere by
the business.
Therefore, management should strive to ensure they implement the appropriate buying and selling policies
and procedures related to inventory to meet supply and demand of their merchandise.
435
CS-2 LO 7-3, 4, 5, 6, 7
Gabi’s Gown Shop, owned by Gabi Gerard, is an urban clothing retailer using the perpetual inventory system. Its
balance sheet as at January 1, 2022, is presented below.
Gabi’s Gown Shop

Balance Sheet
As at January 1, 2022
Current Assets
Cash $28,400
Prepaid Rent 12,000
Equipment 32,000

Current Liabilities
Bank Loan 60,000
Owner’s Equity
Styles, Capital 29,900
Total Liabilities and Owner's Equity $122,400

During January 2022, Gabi’s Gown Shop had the following transactions.
Jan 2 Purchased 490 jackets at $60 each on account (with terms 2/10, n/30)
Jan 5 Sold $60,000 worth of inventory on account; this inventory cost $49,000
Jan 9 Purchased 100 pairs of jeans at $30 each on account (with terms 4/15, n/30)
Jan 10 Received $35,000 cash from sales previously made on account
Jan 11 Paid the balance owed to the supplier for all the jackets purchased on January 2
Jan 16 Paid wages of $3,000
Jan 18 A customer returned products bought on account to the store due to a defect; these products were
originally sold for $300 and cost $95
Jan 21 Paid the balance owed to the supplier for jeans purchased on January 9
Jan 26 Incurred $3,500 in utilities expenses, to be paid next month
Jan 30 Sold $30,000 worth of inventory for cash; this inventory cost $18,000
The company uses the following chart of accounts to implement its accounting system.
436
Account Description Account # Account Description Account #
ASSETS REVENUE
Cash 101 Sales Revenue 400
Accounts Receivable 105 Sales Returns & Allowances 405
Prepaid Rent 110
Sales Discounts 410
Store Equipment 120 EXPENSES
Accumulated Depreciation—Equipment 125 Cost of Goods Sold 500
LIABILITIES Advertising Expense 505
Accounts Payable 200 Depreciation Expense 510
Interest Payable 205 Insurance Expense 515
Salary Payable 210 Interest Expense 520
Unearned Revenue 215 Maintenance Expense 525
Bank Loan 220 Office Supplies Expense 530
OWNER’S EQUITY Professional Fees Expense 535
Gerard, Capital 300 Rent Expense 540
Gerard, Withdrawals 310 Salaries Expense 545
Income Summary 315 Utilities Expense 550
Travel Expense 555
Required
Gabi is looking to expand her business and as such has arranged a meeting with private investors to review
operating results for the month ended January 31, 2022. Knowing you are currently taking an accounting
course, she has asked you to complete the following.
a) Journalize the transactions for January 2022.
JOURNAL Page 1
2022
Jan 2 Merchandise Inventory 115 29,400

Jan 5 Accounts Receivable 105 60,000

Jan 5 Cost of Goods Sold 500 49,000

Jan 9 Merchandise Inventory 115 3,000

437

Jan 10 Cash 101 35,000
Accounts Receivable 105 35,000
To record collection of accounts receivable

Jan 11 Accounts Payable 200 29,400
Cash 101 28,812
To pay supplier for inventory purchased on Jan 2

Jan 16 Salaries Expense 545 3,000
Cash 101 3,000
To pay salaries

Jan 18 Sales Returns & Allowances 405 300
Accounts Receivable 105 300
To record returned sales

Jan 18 Merchandise Inventory 115 95
Cost of Goods Sold 500 95
To record the return of goods

Jan 21 Accounts Payable 200 3,000
Cash 101 2,880
To pay supplier for inventory purchased on Jan 9

Jan 26 Utilities Expense 550 3,500
To incur utilities expense

Jan 30 Cash 101 30,000
To record cash sales

Jan 30 Cost of Goods Sold 500 18,000

b) Journalize the following adjustments (to be recorded on January 31, 2022).

Jan 31 Prepaid rent represents one year of retail space rent; one month of prepaid rent has been used
Jan 31 Depreciation of store equipment for the month is $2,000
Jan 31 $1,000 of unearned revenue has now been earned
Jan 31 $100 of interest is accrued and owed on the bank loan
438
JOURNAL Page 2
2022
Jan 31 Rent Expense 540 1,000
Prepaid Rent 110 1,000
To recognize one month of rent

Jan 31 Depreciation Expense 510 2,000
Accumulated Depreciation—Equipment 125 2,000
To depreciate equipment

Jan 31 Unearned Revenue 215 1,000
To recognize revenue now earned

Jan 31 Interest Expense 520 100
Interest Payable 205 100
To accrue interest on the bank loan

c) Post the transactions to the general ledger.
Account: Cash GL No: 101

2022
Jan 1 Opening Balance 28,400 DR
Jan 10 GJ1 35,000 63,400 DR
Jan 11 GJ1 28,812 34,588 DR
Jan 16 GJ1 3,000 31,588 DR
Jan 21 GJ1 2,880 28,708 DR
Jan 30 GJ1 30,000 58,708 DR

Account: Accounts Receivable GL No: 105

2022
Jan 5 GJ1 60,000 60,000 DR
Jan 10 GJ1 35,000 25,000 DR
Jan 18 GJ1 300 24,700 DR
Account: Prepaid Rent GL No: 110

2022
Jan 31 Adjustment GJ2 1,000 11,000 DR
439
Account: Merchandise Inventory GL No: 115

2022
Jan 2 GJ1 29,400 79,400 DR
Jan 5 GJ1 49,000 30,400 DR
Jan 9 GJ1 3,000 33,400 DR
Jan 11 GJ1 588 32,812 DR
Jan 18 GJ1 95 32,907 DR
Jan 21 GJ1 120 32,787 DR
Jan 30 GJ1 18,000 14,787 DR
Account: Store Equipment GL No: 120

2022

Account: Accumulated Depreciation—Store Equipment GL No: 125

2022
Jan 31 Adjustment GJ2 2,000 2,000 CR

Account: Accounts Payable GL No: 200

2022
Jan 1 Opening Balance 20,500 CR
Jan 2 GJ1 29,400 49,900 CR
Jan 9 GJ1 3,000 52,900 CR
Jan 11 GJ1 29,400 23,500 CR
Jan 21 GJ1 3,000 20,500 CR
Jan 26 GJ1 3,500 24,000 CR

Account: Interest Payable GL No: 205

2022
Jan 31 Adjustment GJ2 100 100 CR

Account: Unearned Revenue GL No: 215

2022

440
Account: Bank Loan GL No: 220

2022

Account: Gerard, Capital GL No: 300

2022
Jan 31 Closing Entry GJ3 14,195 44,095 CR
Account: Income Summary GL No: 315

2022
Jan 31 Closing Entry GJ3 14,195 0 CR
Account: Sales Revenue GL No: 400

2022
Jan 5 GJ1 60,000 60,000 CR
Jan 30 GJ1 30,000 90,000 CR
Jan 31 Closing Entry GJ3 91,000 0 CR
Account: Sales Returns & Allowances GL No: 455

2022
Jan 18 GJ1 300 300 DR
Jan 31 Closing Entry GJ3 300 0 DR

Account: Cost of Goods Sold GL No: 500

2022
Jan 5 GJ1 49,000 49,000 DR
Jan 18 GJ1 95 48,905 DR
Jan 30 GJ1 18,000 66,905 DR
Jan 31 Closing Entry GJ3 66,905 0 DR
441
Account: Depreciation Expense GL No: 510

2022
Account: Interest Expense GL No: 520

2022
Jan 31 Adjustment GJ2 100 100 DR
Jan 31 Closing Entry GJ3 100 0 DR
Account: Rent Expense GL No: 540

2022
Account: Salaries Expense GL No: 545

2022
Jan 16 GJ1 3,000 3,000 DR
Account: Utilities Expense GL No: 550

2022
Jan 26 GJ1 3,500 3,500 DR
442
d) Prepare a multi-step income statement for January 2022. Assume that $3,000 of the utilities expense is for
retail space and $500 is for head office. Assume that $2,200 of the salaries expense is for sales and $800 is
for office staff.
Gabi’s Gown Shop

Income Statement
For the Month Ended January 31, 2022
Less: Sales Returns & Allowances 300
Net Sales 90,700
Gross Profit 23,795

Operating Expenses
Selling Expenses
Depreciation Expense $2,000
Rent Expense 1,000
Salaries Expense—Sales 2,200

Salaries Expense—Head Office 800
Utilities Expense—Head Office 500

Interest Expense (100)
Net Income $14,195

e) Prepare a statement of owner’s equity for January 2022.
Gabi’s Gown Shop

For the Month Ended January 31, 2022
Gerard, Capital, January 1 $29,900
Add: Net Income 14,195
Gerard, Capital, January 31 $44,095
443
f ) Prepare a balance sheet for January 2022.
Gabi’s Gown Shop

Balance Sheet
As at January 31, 2022
Current Assets
Cash $58,708
Prepaid Rent 11,000
Total Assets 139,195
Current Liabilities
Interest Payable 100
Total Current Liabilities 35,100
Bank Loan 60,000
Owner’s Equity
Gerard, Capital 44,095
Total Liabilities and Owner's Equity $139,195
444
g) Prepare the month-end closing journal entries. Use the income summary account. Add the closing entries to
the general ledger accounts in part c) above.
JOURNAL Page 3
2022
Jan 31 Sales Revenue 400 91,000
Income Summary 315 91,000
To close revenue accounts

Jan 31 Income Summary 315 76,805
Cost of Goods Sold 500 66,905
Depreciation Expense 510 2,000
Interest Expense 520 100
Salaries Expense 545 3,000
Utilities Expense 550 3,500
Rent Expense 540 1,000
Sales Returns & Allowances 405 300
To close expense accounts

Jan 31 Income Summary 315 14,195
Styles, Capital 300 14,195

h) Gabi is concerned the investors will question why her inventory levels are less than half of that at the beginning
of the month. Suggest some control measures she could implement to improve on this result in the future.
Gabi should communicate her objectives for maintaining inventory levels to her staff and implement the
necessary changes in procedures and/or processes that will achieve the stated objectives. For example, if
levels of inventory are to be consistent, staff should be aware that once inventory reaches a certain level,
more products should be ordered to prevent shortages. If Gabi finds that even after implementing changes
inventory levels are not being maintained, she may want to re-evaluate this objective.
445
Notes
446

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Chapter 7

INVENTORY: MERCHANDISING TRANSACTIONS

LO 7-2 Differentiate between the perpetual and Appendix 7A

Explain the difference between a sales allowance and a sales discount.

What are the two possible Freight on Board (FOB) points?

What does FOB shipping point indicate?

What does FOB destination indicate?

AS-34 LO 7-8 (Appendix 7A)

AS-35 LO 7-9 (Appendix 7A)

Item Inventory? (Yes or No)

Gross Profit = Net Sales − Cost of Goods Sold

Fresh Look Cards & Stationery

PR-10 LO 7-8 (Appendix 7A)

Feb 10 Accounts Payable 500

Feb 20 Accounts Payable 2,700

PR-11 LO 7-9, 10 (Appendix 7A)

PR-12 LO 7-10 (Appendix 7A)

Application Questions Group A

Feb 16 Accounts Receivable 7,000

Feb 16 Cost of Goods Sold 5,000

May 15 Accounts Receivable 4,000

May 15 Cost of Goods Sold 3,100

The payment should be made by April 4.

Sep 1 Merchandise Inventory 4,620

Sep 1 Merchandise Inventory 2,310

Aug 15 Merchandise Inventory 1,000

Aug 15 Merchandise Inventory 500

Date Account Title and Explanation Debit Credit

Transaction Type Total Number of

Transaction Type Total Number of

Transaction Type Total Number of

Dec 31 Cost of Goods Sold 652,500

Mar 1 Merchandise Inventory 35

Date Account Title and Explanation Debit Credit

Mar 5 Cost of Goods Sold 5,500

Mar 5 Shipping Expense 25

Mar 8 Sales Returns & Allowances 1,900

Mar 8 Merchandise Inventory 800

Mar 12 Accounts Payable 500

Mar 15 Cash 5,978

Mar 15 Accounts Payable 15,500

Mar 23 Accounts Receivable 4,000

Mar 23 Cost of Goods Sold 2,000

Mar 26 Sales Returns & Allowances 200

Date Account Title and Explanation Debit Credit

Mar 31 Cash 3,724

Calculate Ferris Wheel’s net income for 2022.

Sales Revenue $659,500

Other Income and Expenses

b) Prepare a statement of owner’s equity.

c) Prepare a classified balance sheet using the trial balances.

b) Create a multi-step income statement for A Bit of Fit.

June 10 Accounts Payable 800

June 20 Accounts Payable 4,000

June 22 Accounts Receivable 8,000

June 22 Cost of Goods Sold 3,920

June 28 Cash 7,760

AP-26A LO 7-8 (Appendix 7A)

b) Create a multi-step income statement for A Bit of Fit.

d) What are some controls used to safeguard inventory against shrinkage?