MULTIPLE CHOICES AND EXERCISES

CHAPTER 1. ACCOUNTING IN ACTION

I. MULTIPLE CHOICES
1. (LO 1) K The main objective of the financial statements is to provide useful information to
a. government in deciding if the company is respecting tax laws
b. increase the value of the company
c. investors and creditors that is useful when they are making decisions about the business
d. management that is useful when they are making decisions about the business

2. (LO 1) K Which of the following statements about users of accounting

information is incorrect?
a. Management is an internal user.
b. Taxing authorities are external users.
c. Present creditors are external users.
d. Regulatory authorities are internal users.

3. (LO 2) K The three types of business organization forms are:

a. proprietorships, small businesses, and partnerships.
b. proprietorships, partnerships, and corporations.
c. proprietorships, partnerships, and large businesses.
d. financial, manufacturing, and service companies.

4. (LO 3) K Which of the following statements about International Financial Reporting

Standards (IFRS) is correct?
a. All Vietnamese enterprises must follow IFRS.
b. Under IFRS, companies that operate in more than one country must produce separate
financial statements for each of those countries.
c. All Vietnamese publicly accountable enterprises must use IFRS.
d. Vietnamese private enterprises are not allowed to use IFRS. They must use VAS.

5. (LO 3) C Which of the following statements about the going concern assumption is
correct?
a. The going concern assumption is the assumption that the reporting entity will continue to
operate in the future.
b. Under the going concern assumption, all of the business’s assets must be reported at their
fair value.
c. The financial statements must report whether or not a company is a going concern.
d. The going concern assumption is not followed under VAS.

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II. EXERCISES
BE1.6 (LO 3) C Match each of the following terms with the best description below:
1. Historical cost
2. Revenue recognition
3. Going concern assumption
4. Reporting entity concept
5. Monetary unit concept
a. _______ Transactions are recorded in terms of units of money.
b. _______ Transactions are recorded based on the actual amount received or paid.
c. _______ Indicates that personal and business record keeping should be kept separate.
d. _______ Performance obligation has been satisfied.
e. _______ Businesses are expected to continue operating indefinitely.
BE1.11 (LO 4) K Indicate whether each of the following items is an asset (A), liability (L),
or part of owner’s equity (OE).
_______ 1. Accounts receivable _______ 4. Supplies
_______ 2. Salaries payable _______ 5. Owner’s capital
_______ 3. Equipment _______ 6. Notes payable

E1.1 (LO 1) C 1. The following are users of financial information:

external Customers ______ Store manager
_______ Viet Nam Revenue Agency ______ Supplier
_______ Labour unions ______ Chief Financial Officer
_______ Marketing manager ______ Loan officer
2. The following questions could be asked by an internal user or an external user.
_______ Can the company afford to give our members a pay raise?
_______ How does the company’s profitability compare with other companies in the
industry?
_______ Do we need to borrow money in the near future?
_______ What does it cost to manufacture each unit produced?
_______ Has the company paid all income tax amounts owing?
_______ Which product should we emphasize?

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 CHAPTER 2. EQUATION ACCOUNTING AND TRANSACTION ANALYSIS
1.I. MULTIPLE CHOICES
1. (LO 3) K Which of the following best describes when an event should be recognized in the
accounting records?
a. An event should be recognized in the accounting records if there is a change in assets,
liabilities, or owner’s equity and the change can be measured in monetary terms.
b. An event should be recognized in the accounting records if it involves an interaction
between the company and another external entity.
c. Where there is uncertainty about a future event occurring or not, it should not be
recognized.
d. Accountants use tradition to determine which events to recognize.
2. (LO 4) AP As at December 31, at it’s year end, Bruske Company has assets of $12,500;
revenues of $10,000; expenses of $5,500; beginning owner’s capital of $8,000; and drawings
of $1,500. What are the liabilities for Bruske Company as at December 31?
a. $1,500
b. $2,500
c. $500
d. $3,500

3. (LO 5) AP Performing services on account will have the following effects on the
components of the basic accounting equation:
a. increase assets and decrease owner’s equity.
b. increase assets and increase owner’s equity.
c. increase assets and increase liabilities.
d. increase liabilities and increase owner’s equity.

4. (LO 5) AP Bing Company pays $700 for store rent for the month. The basic analysis of
this transaction on the accounting records is:
a. the asset Cash is increased by $700 and the expense Rent Expense is increased by $700.
b. the asset Cash is decreased by $700 and the expense Rent Expense is increased by $700.
c. the asset Cash is decreased by $700 and the liability Rent Payable is increased by $700.
d. the asset Cash is increased by $700 and the liability Rent Payable is decreased by $700.

5. (LO 6) C Which of the following statements is true?

a. An income statement presents the revenues, expenses, and changes in owner’s equity for a
specific period of time.
b. The income statement shows information as at a specific point in time; the balance sheet
shows information for a specified time period.
c. The statement of cash flows summarizes cash inflows (receipts) and outflows (payments)
as at a specific point in time.
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d. The income statement shows information for a specified time period; the balance sheet
shows information as at a specific point in time
II. EXERCISES
5.BE1.7 (LO 1) C Match the following components with the best description below and
indicate if the component is reported on the balance sheet (BS) or income statement (IS).
1. Assets 4. Revenues
2. Liabilities 5. Expenses
3. Owner’s equity 6. Profit

Description Component Balance Sheet

or Income Statement

a. The increase in assets, or decrease

in liabilities, resulting from business activities --------- ----------------
carried out to earn profit.
b. Resources controlled by a business that
have the potential to produce economic --------- --------------------
benefits.
c. The owner’s claim on the residual assets ----------- -------------------------
of the company.
d. Present obligations that are expected to
result in an outflow of economic resources ----------- -----------------------
as a result of a past transaction.
e. The cost of resources consumed or services ----------- --------------------------
used in the company’s business activities.

N3.BE1.9 (LO 1) AP Use the accounting equation to answer each of the following questions:

a. The liabilities of Weber Company are $120,000 and the owner’s equity is $232,000. What
is the amount of Weber Company’s total assets?

b. The total assets of King Company are $190,000 and its owner’s equity is $91,000. What is
the amount of its total liabilities?

c. The total assets of Smith Company are $800,000 and its liabilities are equal to one half of
its total assets. What is the amount of Smith Company’s owner’s equity?

N2.BE1.10 (LO 1) AP Butler Company is owned by Rachel Butler. The company had total
assets of $850,000 and total liabilities of $550,000 at the beginning of the year. Answer each
of the following independent questions:

a. During the year, total assets increased by $130,000 and total liabilities decreased by
$80,000. What is the amount of owner’s equity at the end of the year?

b. Total liabilities decreased by $95,000 during the year. The company incurred a loss of
$40,000. R. Butler made an additional investment of $100,000 and made no withdrawals.
What is the amount of total assets at the end of the year?

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 c. Total assets increased by $45,000 and total liabilities decreased by $50,000. There were no
additional owner’s investments, and R. Butler withdrew $40,000. What is the amount of
profit or loss for the year?

N4.*BE1.12 (LO 2) AP Presented below are eight business transactions. Indicate whether
the transactions increased (+), decreased (-), or had no effect (NE) on each element of the
accounting equation.

a. Purchased $250 of supplies on account.

b. Performed $500 of services on account.

c. Paid $300 of operating expenses.

d. Paid $250 cash on account for the supplies purchased in item (a) above.

e. Invested $1,000 cash in the business.

f. Owner withdrew $400 cash.

g. Hired an employee to start working the following month.

h. Received $500 from a customer who had been billed previously in item (b) above.

i. Purchased $450 of equipment in exchange for a note payable.

Use the following format, in which the first one has been done for you as an example:

Owner’s Equity

Transactions Assets Liabilities Capital Drawings Revenues Expenses

Supplies
a. AP+$250 NE NE NE NE
+$250
b.

c.

d.

e.

f.

g.

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h.

i.

BE1.16 (LO 3) AP Prairie Company is owned and operated by Natasha Woods. In

alphabetical order below are the financial statement items for Prairie Company. Using the
appropriate items, prepare an income statement, balance sheet, and statement of owner’s
equity for the month ended October 31, 2021.
N. Woods, capital, October 1, 2021 $36,000
Accounts payable $90,000
N. Woods, drawings $6,000
Accounts receivable $77,500
Rent expense $2,600
Advertising expense $3,600
Service revenue $23,000
Cash $59,300

E1.12 (LO 2) AP At the beginning of March, Brister Software Company had Cash of
$12,000, Accounts Receivable of $18,000, Accounts Payable of $4,000, and G. Brister,
Capital of $26,000. During the month of March, the transactions incurred following :

1. Purchased equipment for $23,000 from Digital Equipment. Paid $3,000 cash and signed a
note payable for the balance.

2. Received $12,000 from customers for contracts billed in February.

3. Paid $3,000 for March rent of office space.

4. Paid $2,500 of the amounts owing to suppliers at the beginning of March.

5. Provided software services to Kwon Construction Company for $7,000 cash.

6. Paid BC Hydro $1,000 for energy used in March.

7. G. Brister withdrew $5,000 cash from the business.

8. Paid Digital Equipment $2,100 on account of the note payable issued for the equipment
purchased in transaction 1. Of this, $100 was for interest expense.

9. Hired an employee to start working in April.

10. Incurred advertising expense on account for March, $1,500

Prepare a tabular analysis of the above transactions, as shown in Illustration 1.24 in the text.
The first row contains the amounts the company had at the beginning of March.

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 CHAPTER 3. FINANCIAL STATEMENTS
P1.3A (LO 4) AP The following selected data are for Carducci Importers for its first three
years of operations:

20X0 20X1 20X2

January 1:
Total assets $ 40,000 $ (f) $ (j)
Total liabilities 0 50,000 (k)
Total owner’s equity (a) 75,000 (l)
December 31:
(b) 140,000 172,000
Total assets
50,000 (g) 65,000
Total liabilities
(c) 97,000 (m)
Total owner’s equity
Changes during the year in owner’s equity:
Investments by the owner during the year 7,000 0 (n)
Drawings by the owner during the year 15,000 (h) 36,000

Profit or loss for the year (d) 40,000 (o)

Total revenues for the year 132,000 (i) 157,000
Total expenses for the year (e) 95,000 126,000
Instructions
Determine the missing amounts.

E1.15 (LO 3) AP Atlantic Cruise Co. is owned by Irina Temelkova. The following
information is an alphabetical listing of financial statement items for the company for the
year ended May 31, 2021:
Accounts payable $ 47,750 Interest expense $ 20,960
Accounts receivable 42,950 Investments by owner 5,847
Advertising expense 3,640 Maintenance expense 82,870
Building 122,570 Notes payable 379,000
Cash 20,080 Other expenses 66,500
Equipment 553,300 Prepaid insurance 1,283
I. Temelkova, capital, June 1, 2020 311,182 Revenue 350,640
Temelkova, drawings 33,950 Salaries expense 126,950
Insurance expense 2,566 Supplies 16,800

Instructions
Prepare an income statement and a statement of owner’s equity for the year.
Prepare the balance sheet.

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E1.17 (LO 3) AP Judy Cumby is the sole owner of Deer Park, public camping ground near
Gros Morne National Park. Judy has gathered the following financial information for the year
ended March 31, 2021:
Revenues—camping fees $150,000
Revenues—general store $ 40,000
Operating expenses 150,000
Cash on hand 9,400
Supplies on hand 2,500
The original cost of equipment 110,000
The fair value of equipment 125,000
Notes payable 70,000
Accounts payable 11,500
J. Cumby, capital, April 1, 2020 17,000
Accounts receivable 21,000
J. Cumby, drawings 5,000
Camping fees collected for April, 2021 10,000
Insurance paid for in advance for April to June 2021 600
Instructions
a. Calculate Deer Park’s profit for the year.
b. Calculate Judy’s owner’s equity for the period as at March 31, 2021.
c. Prepare a balance sheet at March 31, 2021
P1.7A (LO 3, 4, 5, 6) AP The following events concern Anita LeTourneau, a Manitoba law
school graduate, for March 2021:
1. On March 4, she spent $20 on a lottery ticket.
2. On March 7, she won $250,000 in the lottery and immediately quit her job as a junior
lawyer.
3. On March 10, she decided to open her own law practice, and deposited $50,000 of her
winnings in a business chequing account, LeTourneau Legal Services.
4. On March 14, she purchased a new luxury condominium with a down payment of
$150,000
from her personal funds plus a home mortgage of $200,000.
5. On March 15, Anita signed a rental agreement for her law office space for $2,500 a month,
starting March 15. She paid the first month’s rent, as it is due on the 15th of each month.
6. On March 19, she hired a receptionist. He will be paid $500 a week and will begin working
on March 24.
7. On March 20, she purchased equipment for her law practice from a company that had just
declared bankruptcy. The equipment was worth at least $15,000 but Anita was able to buy it
for only $10,000.

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8. On March 21, she purchased $400 of supplies on account.
9. On March 24, she purchased an additional $6,500 of equipment for her law practice for
$3,000 plus a $3,500 note payable due in six months.
10. On March 31, she performed $3,500 of legal services on account.
11. On March 31, she received $2,500 cash for legal services to be provided in April.
12. On March 31, she paid her receptionist $500 for the week.
13. On March 31, she paid $400 for the supplies purchased on account on March 21.
Instructions
a. Prepare a tabular analysis of the effects of the above transactions on the accounting
equation.
b. Calculate profit and owner’s equity for the month ended March 31.
c. Prepare a balance shee!(&*t at March 31.
P1.8A (LO 4, 5, 6) AP Izabela Jach opened a medical office under the name Izabela Jach,
MD, on August 1, 2021. On August 31, the balance sheet showed Cash $3,000; Accounts
Receivable $1,500; Supplies $600; Equipment $7,500; Accounts Payable $5,500; Note
Payable $3,000; and I. Jach, Capital, $4,100. During September, the following transactions
occurred:

Sept.4 Collected $800 of accounts receivable.

5. Provided services of $10,500, of which $7,700 was collected from patients and the
remainder was on account.
7. Paid $2,900 on accounts payable.
12. Purchased additional equipment for $2,300, paying $800 cash and leaving the
balance on account.
15. Paid salaries, $2,800; rent for September, $1,900; and advertising expenses, $275.
18. Collected the balance of the accounts receivable from August 31.
20. Withdrew $1,000 for personal use.
26. Borrowed $3,000 from the Bank of Montreal on a note payable.
28. Signed a contract to provide medical services, not covered under the government
health
plan, to employees of CRS Corp. in October for $5,700. CRS Corp. will pay the amount
owing after the medical services have been provided.
29. Received the telephone bill for September, $325.
30. Billed the government $10,000 for services provided to patients in September.

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Instructions
a. Beginning with the August 31 balances, prepare a tabular analysis of the effects of the
September transactions on the accounting equation.
b. Prepare an income statement and statement of owner’s equity for September, and a balance
sheet at September 30.
CHAPTER 4. THE RECORDING PROCESS
I. MULTIPLE CHOICES
1. (LO 1) K Which of the following statements about an account is true?
a. The left side of an account is the credit or decrease side.
b. An account is an individual accounting record of increases and decreases in specific assets,
liabilities, and owner’s equity items.
c. There are separate accounts for specific assets and liabilities but only one account for
owner’s equity items.
d. The right side of an account is the debit or increase side.
2. (LO 1) K Credits:
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.

3. (LO 1) K Accounts that normally have debit balances are:

a. assets, expenses, and revenues.
b. assets, expenses, and owner’s capital.
c. assets, liabilities, and drawings.
d. assets, expenses, and drawings.

4. (LO 2) K What is the correct sequence of steps in the recording process?

a. Analyzing transactions; preparing a trial balance
b. Analyzing transactions; entering transactions in a journal; posting transactions
c. Entering transactions in a journal; posting transactions; preparing a trial balance
d. Entering transactions in a journal; posting transactions; analyzing transactions

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5. (LO 2) AP Performing services for a customer on account should
result in:
a. a decrease in the liability account Accounts Payable and an increase in the revenue account
Service Revenue.
b. an increase in the asset account Cash and a decrease in the asset account Accounts
Receivable.
c. an increase in the asset account Accounts Receivable and an increase in the liability
account Unearned Revenue.
d. an increase in the asset account Accounts Receivable and an increase in the revenue
account Service Revenue.

6. (LO 2) AP The purchase of equipment on account should result in:

a. a debit to Equipment and a credit to Accounts Payable.
b. a debit to Equipment Expense and a credit to Accounts Payable.
c. a debit to Equipment and a credit to Cash.
d. a debit to Accounts Receivable and a credit to Equipment.

7. (LO 3) K A ledger:
a. contains only asset and liability accounts.
b. should show accounts in alphabetical order.
c. is a collection of the entire group of accounts maintained by a company.
d. is a book of original entry.

8. (LO 3) K Posting:
a. is normally done before journalizing.
b. transfers ledger transaction data to the journal. Brief Exercises 2-31
c. is an optional step in the recording process.
d. transfers journal entries to ledger accounts.

9. (LO 4) K A trial balance:

a. is a list of accounts with their balances at a specific time.
b. proves that journalized transactions are accurate.

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c. will not balance if a correct journal entry is posted twice.
d. proves that all transactions have been recorded.

10. (LO 4) AP A trial balance will not balance if:

a. the collection of an account receivable is posted twice.
b. the purchase of supplies on account is debited to Supplies and credited to Cash.
c. a $100 cash drawing by the owner is debited to Drawings for $1,000 and credited to Cash
for $100.
d. a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash
for $45.

II. EXERCISES
BE2.2 (LO 1) K Identify the normal balance for the followin g accounts:
1. Prepaid Insurance 5. Utilities Expense 9. Supplies
2. Accounts Payable 6. Owner’s Capital 10. Unearned Revenue
3. Land 7. Equipment
4. Service Revenue 8. Salaries Expense

BE2.3 (LO 1) K For each the following accounts, indicate (a) if the account is an asset,
liability, or owner’s equity account; and (b) whether the account would have a normal debit
or credit balance.
1. Accounts Receivable 4. Supplies 7. Prepaid Insurance
2. Rent Expense 5. Unearned Revenue 8. Notes Payable
3. B. Damji, Drawings 6. Service Revenue

BE2.4 (LO 1) K Calculate the account balance for the following accounts:

BE2.5 (LO 1) K For each of the following accounts, indicate (a) the normal balance, (b) the
effect of a debit on the account, and (c) the effect of a credit on the account:
1. Accounts Payable 4. J. Takamoto, Drawings 7. Service Revenue
2. Supplies 5. Prepaid Rent 8. Unearned Revenue

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3. J. Takamoto, Capital 6. Utilities Expense

BE2.6 (LO 2) K For each of the following, indicate (a) if the account is an asset, liability, or
owner’s equity account; and (b) whether you would use a debit or credit to record the change:
1. Increase in D. Parmelee, Capital 5. Increase in D. Parmelee, Drawings
2. Decrease in Cash 6. Increase in Equipment
3. Decrease in Notes Payable 7. Increase in Accounts Payable
4. Increase in Rent Expense 8. Increase in Service Revenue

BE2.7 (LO 2) C Levine Legal Services had the following transactions:

1. Cash is paid for the purchase of $439 of office supplies.
2. Customer is billed $1,020 for services provided that day.
3. Equipment with a cost of $2,230 is purchased on account.
4. The current month’s utility bill of $293 is paid in cash.
5. Cash of $750 is received for services provided that day.
6. Cash of $7,100 is received for services to be provided in the next month.
For each transaction, prepare a basic analysis and a debit/credit analysis. Use the following
format, in which the first one has been done for you as an example:

The asset account Cash is decreased by $439. The asset account

Basic Analysis
Supplies is increased by $439.
Debit/Credit Debits increase assets: debit Supplies $439.
Analysis Credits decrease assets: credit Cash $439.

BE2.8 (LO 2) C Fleming’s Logistics Consulting has the following transactions during
August.
Aug.1 Received $17,970 cash from the company’s owner, Barbara Fleming.
4 Paid rent in advance for three months, $4,720.
5 Purchased $625 of office supplies on account.
6 Received $560 from clients for services provided.
17 Billed clients $1,210 for services provided.
27 Paid secretary $980 salary.
29 Paid the company’s owner, Barbara Fleming, $720 cash for personal use.

For each transaction, indicate (a) the basic type of account to be debited and credited (asset,
liability, owner’s equity); (b) the specific accounts to debit and credit (for example, Cash,
Service Revenue, Accounts Payable); and (c) whether each account is increased (+) or
decreased (-), and by what amount. Use the following format, in which the first one has been
done for you as an example:

4
5
6
17

13
 27
29

BE2.9 (LO 2) AP Pridham Welding Company had the following transactions for June.
June 1 Tyler Pridham invested $8,430 cash in a small welding business.
2 Bought used welding equipment on account for $2,620.
5 Hired an employee to start work on July 15. Agreed on a salary of $3,760 per month.
17 Billed R. Windl $2,500 for welding work done.
27 Received $1,190 cash from R. Windl for work billed on June 17.
For each transaction, prepare a basic analysis and a debit/credit analysis, and journalize the
transaction. Use the following format, in which the first one has been done for you as an
example:
June 1 transaction
The asset account Cash is increased by $8,430. The owner’s equity
Basic Analysis
account T. Pridham, Capital is increased by $8,430.
Debit/Credit Debits increase assets: debit Cash $8,430.
Analysis Credits increase owner’s equity: credit T. Pridham, Capital $8,430.
June 1 Cash 8,430
Journal Entry T. Pridham, Capital 8,430
Invested cash in business.

BE2.10 (LO 2) AP Presented below is information related to Berge Real Estate Agency:
Oct. 1 Lia Berge begins business as a real estate agent with a cash investment of $30,000.
2 Pays rent, $700, on office space.
3 Purchases office equipment for $2,800, on account.
6 Sells a house and lot for Hal Smith; bills Hal Smith $4,400 for realty services
performed.
27 Pays $1,100 on the balance related to the transaction of October 3.
30 Receives bill for October utilities, $130 (not paid at this time).
Journalize the transactions. (You may omit explanations.)

BE2.11 (LO 2) AP Using the data in BE2.7 for Levine Legal Services, journalize the
transactions. Assume all of the transactions occurred on August 31.

BE2.12 (LO 2) AP Using the data in BE2.8 for Fleming’s Logistics Consulting, journalize
the transactions.

BE2.13 (LO 2) AP Prepared Journalize, T accounts, Trial balance, financial statement

(Income statement; Statement of Owner’s Equity and Balance Sheet) the following
transactions of M. Acosta, interior designer, in her first month of business.
Jan. 2 Invested $10,000 cash in business.
3 Purchased a used car for $3,000 cash for use in the business.
9 Purchased supplies on account for $600.
11 Billed customers $2,400 for services performed.
16 Paid $350 cash for advertising.
20 Received $900 cash from customers billed on January 11.
28 Withdrew $1,000 cash for personal use by owner.

BE2.14 (LO 3) AP Tom Rast recorded the following transactions during the month of April:
April 3 Cash 3,400

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 Service Revenue 3,400
16 Rent Expense 700
Cash 700
20 Salaries Expense 250
Cash 250
Post these entries to the Cash T account of the general ledger to determine the ending balance
in cash. The beginning balance in cash on April 1 was $1,600.

BE2.15 (LO 3) AP Using T accounts, post the following journal entries to the general ledger
and calculate ending balances.

General Journal

Date Account titles Debit Credit

Sept. 2 Accounts Receivable 4,400

Service Revenue 4,400

4 Cash 2,400

Accounts Receivable 2,400

10 Cash 3,000

Service Revenue 3,000

28 Cash 1,325

Accounts Receivable 1,325

BE2.16 (LO 4) AP From the ledger balances given below, prepare a trial balance for Amaro
Company at June 30, 2021. All account balances are normal.
Accounts Payable $8,100, Cash $5,800, Owner’s Capital $15,000, Owner’s Drawings $1,200,
Equipment $17,000, Service Revenue $10,000, Accounts Receivable $3,000, Salaries
Expense $5,100, and Rent Expense $1,000.

BE2.17 (LO 4) AP Use the ledger balances that follow to prepare a trial balance for Pettipas
Company at April 30, 2021. All account balances are normal.
Accounts payable $ 3,300 Prepaid rent $ 800
Accounts receivable 5,000 Rent expense 4,500
C. Pettipas, capital 22,500 Salaries expense 1,000
C. Pettipas, drawings 1,100 Service revenue 8,000
Cash 6,400 Supplies 650
Equipment 14,600 Unearned revenue 250

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P2.8B (LO 2, 3, 4) AP Lena Kuznetsova provides coaching and mentoring services to
individuals and companies. She operates the business as a proprietorship, under the name
LVK Coaching Services, which has a December 31 year end. On November 30, 2021, the
company’s general ledger included the following accounts (all accounts have normal
balances):
Accounts payable $4,245
L. Kuznetsova, drawings $31,190
Accounts receivable 2,110
Rent expense 5,775
Advertising expense 1,265
Salaries expense 6,310
Cash 3,165
Service revenue 47,963
Equipment 17,730
Supplies 1,340
Insurance expense 3,388
Unearned revenue 765
L. Kuznetsova, capital 19,300

December transactions were as follows:

Dec.1 Paid December rent on her office space, $525.
1 Purchased additional equipment with a manufacturer’s suggested price of $3,270.
After negotiations with the retailer, paid $1,270 cash and signed a note payable for
$2,000.
4 Collected $1,880 from customers in payment of their accounts.
7 Paid the $308 monthly insurance premium.
8 Purchased $135 of supplies on account.

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 10 Paid $2,140 of the accounts payable from November.
12 Finished a coaching contract with a client for $765. The client had paid her in
November.
(Hint: In November, Lena had recorded the $765 as a liability, Unearned Revenue. By
finishing the coaching contract, she has “paid” this obligation.)
20 Received $3,480 cash from clients for services provided in December.
21 Paid office expenses of $115.
24 Withdrew $2,860 for personal use.
28 Billed clients $2,280 for coaching services provided in December. These clients will
pay
in January.
29 Received $560 cash advance from a client for a coaching contract that will start in
January.
30 Paid part-time office assistant $655 cash.
31 Made a $170 payment on the note payable. Of this amount, $10 is interest and the
remainder is a principal payment on the note payable.
Instructions
a. Using T accounts, enter the November 30 balances in the ledger accounts.
b. Journalize the December transactions.
c. Post the December journal entries to the T accounts. Add new accounts if needed.
d. Prepare a trial balance at December 31, 2021.
e. Prepare an income statement for the month.
f. Prepare a statement of owner’s equity for the month.
g. Prepare a balance sheet as at December 31, 2021.

P2.11B (LO 2, 3, 4) AP Hobson Nolan is a human resources professional who operates a

consulting practice under the name HN Consulting. The company had the following balances
in its general ledger at February 28, 2021:
Cash $3,500,
Accounts Receivable $14,450,
Equipment $15,100,
Accounts Payable $18,750, and
H. Nolan, Capital $14,300.
The following events and transactions occurred during March 2021.

17
Mar.1 Borrowed $12,000 cash from the bank, signing a note payable.
2 Paid $13,000 to creditors on account.
3 Paid the monthly insurance premium of $145.
10 Paid the monthly utilities of $550.
16 Collected accounts receivable of $8,000.
18 Paid an additional $5,000 to creditors on account.
30 Office expenses were paid in cash, $580.
31 Consulting services provided in March were for $2,000 cash and $5,000 on account.
31 Paid salaries, $1,650.
31 Paid the bank $555 on the note payable, of which $55 is interest and $500 is a partial
payment of the note.
31 Paid March and April’s rent, which totaled $1,900 ($950 per month).
31 Withdrew $1,000 cash for personal use.
Instructions
a. Prepare journal entries to record each of the March transactions.
b. Using T accounts, open the required ledger accounts for the transactions that were
journalized, and enter February 28, 2021, balances.
c. Post the journal entries to the accounts in the ledger.
d. Prepare a trial balance as at the end of March.
e. Prepare an income statement for the month.
f. Prepare a statement of owner’s equity for the month.
g. Prepare a balance sheet as at March 31, 2021.

CHAPTER 5. INVENTORY COSTING

I. MULTIPLE CHOICES
1. (LO 1) K Which of the following should not be included in a company’s physical
inventory?
a. Goods held on consignment from another company
b. Goods shipped on consignment to another company
c. Goods in transit that were purchased from a supplier and shipped FOB shipping point
d. Goods in transit that were sold to a customer and shipped FOB destination.

2. (LO 1) AP As a result of a physical inventory count, Atlantic Company determined

that it had inventory worth $180,000 at December 31, 2021. This count did not take into
consideration the following: Rogers Consignment store currently has goods that cost

18
$35,000 on its sales floor that belong to Atlantic but are being sold on consignment by
Rogers. The selling price of these goods is $50,000. Atlantic purchased $13,000 of goods
that were shipped on December 27, FOB destination, and they were received by Atlantic
on January 3. Determine the correct amount of inventory that Atlantic should report.
a. $230,000
b. $215,000
c. $228,000
d. $193,000

3. (LO 2) AP Peg City Brews uses a perpetual inventory system and has the following
beginning inventory, purchases, and sales of inventory in April:
Unit Total
Units cost cost
Inventory, Apr. 1 6,000 $9 $ 54,000
Purchase, Apr. 9 18,000 10 180,000
Sale, Apr. 12 (20,000)
Purchase, Apr. 18 16,000 11 176,000

What was the moving weighted average unit cost after the last purchase on April 18?
a. $9.75
b. $10.75
c. $11.00
d. $10.00

4. (LO 2) AP Using the data in question 3, the cost of goods sold in a perpetual inventory
system under FIFO is:
a. $174,000.
b. $180,000.
c. $195,000.
d. $194,000.

5. (LO 3) K Using FIFO, the current asset Merchandise Inventory will report:
a. the most recent cost of purchases.
b. the oldest cost of purchases.
c. the average cost of all purchases.
d. the exact amount of each inventory unit on hand.

6. (LO 4) C In Fran Company, ending inventory is overstated by $4,000. The effects of

this error on the current year’s cost of goods sold and profit, respectively, are:
a. understated, overstated.
b. overstated, understated.
c. overstated, overstated.
d. understated, understated.

7. (LO 5) C Rickety Company purchased 1,000 units of inventory at a cost of $15 each.
There are 200 units left in ending inventory. The net realizable value of these units is $12
each. The ending inventory under the lower of cost and net realizable value rule is:
a. $2,400.
b. $3,000.
c. $600.

19
d. $12,000.

8. (LO 5) K The inventory turnover ratio provides an indication of:

a. how much profi t the company has per dollar of sales.
b. whether the company consistently has too much or too little inventory.
c. the number of days inventory is held in stock.
d. the company’s cash flow position.

9. (LO 6) AP If a company’s cost of goods sold is $240,000, its beginning inventory is

$50,000, and its ending inventory is $30,000, what are its inventory turnover and days
sales in inventory?
a. 3 times and 122 days
b. 6 times and 61 days
c. 4.8 times and 76 days
d. 8 times and 46 days

*10. (LO 7) AP Kam Company uses a periodic inventory system and has the following:
Unit
Units Cost

Inventory, Jan. 1 8,000 $11

Purchase, June 19 13,000 12
Purchase, Nov. 8 5,000 13
26.000
If 9,000 units are on hand at December 31, what is the cost of the goods sold using
weighted average?
a. $106,962
b. $108,000
c. $180,000
d. $202,038
*11. (LO 7) AP Using the data in question 10, the ending inventory using a periodic
inventory system and FIFO is:
a. $100,000.
b. $108,000.
c. $113,000.
d. $117,000.

*12. (LO 8) AP Filman Company has net sales of $200,000 and a cost of goods available
for sale of $156,000. If the gross profit margin is 30%, the estimated cost of the ending
inventory under the gross profit method is:
a. $16,000.
b. $60,000.
c. $37,200.
d. $76,000.

*13. (LO 8) AP Deko Company reports the following selected information: cost of goods
vailable for sale at cost, $60,000; at retail, $100,000; and net sales at retail, $70,000. What
is the estimated cost of Deko Company’s ending inventory under the retail method?

20
 a. $18,000
b. $21,000
c. $30,000
d. $42,000

II. EXERCISES

E6.4 (LO 2) AP On May 1, Black Bear Company had 400 units of inventory on hand, at a
cost of $4.00 each. The company uses a perpetual inventory system. All purchases and sales
are on account. A record of inventory transactions for the month of May for the company is
as follows:

Date Purchases Date Sales

May 4 1,300 @ $4.10 May 3 300 @ $7.00
14 700 @ $4.40 16 1,000 @ $7.00
29 500 @ $4.75 18 400 @ $7.50

Instructions
a. Calculate the cost of goods sold and ending inventory using FIFO.
b. Prepare journal entries to record the transactions.
c. Calculate gross profit for May.

E6.5 (LO 2) AP Top Light Company uses a perpetual inventory system. The company began
2021 with 1,000 lamps in inventory at a cost of $12 per unit. During 2021, Top Light had the
following purchases and sales of lamps:
February 15 Purchased 2,000 units @ $18 per unit
April 24 Sold 2,500 units @ $30 per unit
June 6 Purchased 3,500 units @ $23 per unit
October 18 Sold 2,000 units @ $33 per unit
December 4 Purchased 1,400 units @ $26 per unit
All purchases and sales are on account.

Instructions
a. Calculate the cost of goods sold and ending inventory using weighted average. (Hint:
Round the weighted average cost per unit to two decimal places.)
b. Prepare journal entries to record the transactions.
c. Calculate gross profit for the year.

21
E6.6 (LO 2, 3) AP Dene Company uses a perpetual inventory system and reports the
following inventory transactions for the month of July:
Units Unit Cost Total Cost
July 1 Inventory 150 $5 $ 750
12 Purchases 230 $6.75 $1,552.5
20 Sale (250)
28 Purchases 490 $7 $3,430
Instructions
a. Calculate the cost of goods sold and ending inventory under (1) FIFO and (2) weighted
average and (3) Cumulative weighted average (Round the weighted average cost per unit to
two decimal places).
b. Which cost formula gives the higher ending inventory? Why?
c. Which cost formula results in the higher cost of goods sold? Why?

*E6.13 (LO 7) AP Lombart Company uses a periodic inventory system. Its records show the
following for the month of April, with 25 units on hand at April 30:

Unit Total
Units
Cost Cost
April 1 Inventory 30 $8 $240
12 Purchases 45 11 495
16 Purchases 15 12 180
Total 90 $915

Instructions
a. Calculate the ending inventory and cost of goods sold at April 30 using the FIFO and
weighted average cost formulas.
b. Prove the cost of goods sold calculations.

*E6.15 (LO 2, 7) AP Xpert Snowboards sells an ultra-lightweight snowboard that is

considered to be one of the best on the market. Information follows for Xpert’s purchases and
sales of the ultra-lightweight snowboard in October:
Instructions

a. Calculate the cost of goods sold and the ending inventory using FIFO and weighted
average, assuming Xpert uses a perpetual inventory system. (Round the weighted average
cost per unit to two decimal places.)
b. Prepare journal entries to record the transactions.
c. Calculate gross profit for the year.

22
BE6.6 (LO 2) AP Average Joe Company uses the FIFO method; weighted average cost; and
cumulative weighted average cost formula in a perpetual inventory system. Fill in the missing
amounts for items (a) through (k) in the following perpetual inventory record (round the
weighted average cost to two decimal places):

BE6.7 (LO 2) AP Jordy & Company uses a perpetual inventory system. The following
information is available for November:

(a)Calculate the cost of goods sold and ending inventory under (1) FIFO and (2) weighted
average cost formula; and (3) cumulative weighted average cost formula. (Round the
weighted average cost per unit to two decimal places.)
(b) Prepare journal entries to record the transactions using the FIFO method. Assume all sales
and purchases are on credit.
(c) Which formula will result in a higher ending inventory? Why?
(d) Which formula will result in a higher cost of goods sold? Why?
BE6.11 (LO 4) AN Collie Company incorrectly included $23,000 of goods held on
consignment for Retriever Company in Collie’s beginning inventory for the year ended
December 31, 2020. The ending inventory for 2020 and 2021 was correctly counted.
(a) What is the impact on the 2020 financial statements?
(b) What is the impact on the 2021 financial statements?
BE6.12 (LO 4) AN Firstin Company reported profit of $90,000 in 2020. When counting its
inventory on December 31, 2020, the company forgot to include items stored in a separate
room in the warehouse. As a result, ending inventory was understated by $7,000.
a. What is the correct profit for 2020?

23
b. What effect, if any, will this error have on total assets and owner’s equity reported on the
balance sheet at December 31, 2020?
c. Assuming the inventory is correctly counted on December 31, 2021, what effect, if any,
will this error have on the 2021 financial statements?.

CHAPTER 6. LONG-LIVED ASSETS

I. MULTIPLE CHOICES
1. Additions to property, plant, and equipment are:
a. operating expenditures.
b. debited to the Repairs Expense account.
c. debited to the Inventory account.
d. capital expenditures.
2. Bulyea Company purchased equipment and incurred the following costs:
Cash price $36,000
Freight—FOB shipping point 1,000
Insurance during transit 200
Annual insurance policy 500
Installation and testing 400
What amount should be recorded as the cost of the equipment?
a. $36,000 c. $37,600
b. $36,200 d. $38,100
3. Asura Company purchased land, a building, and equipment for a package price of
$190,000. The land’s fair value at the time of acquisition was $75,000. The building’s fair
value was $80,000. The equipment’s fair value was $50,000. What costs should be debited to
the Land account?
a. $74,146 c. $46,341
b. $69,512 d. $75,000
4. Cuso Company purchased equipment on January 2, 2020, at a cost of $40,000. The
equipment has an estimated residual value of $10,000 and an estimated useful life of five
years. If the straight-line method of depreciation is used, what is depreciation expense on
December 31, 2021?
a. $6,000 c. $18,000
b. $12,000 d. $24,000
5. When depreciation is revised:
a. previous depreciation should be corrected.
b. current and future years’ depreciation should be revised.

24
c. only future years’ depreciation should be revised.
d. None of the above.
6. Oviatt Company sold equipment for $10,000. At that time, the equipment had a cost of
$45,000 and accumulated depreciation of $30,000. Oviatt should record a:
a. $5,000 loss on disposal.
b. $5,000 gain on disposal.
c. $15,000 loss on disposal.
d. $15,000 gain on disposal.
7. St. Laurent Company exchanged an old machine with a carrying amount of $10,000 and a
fair value of $6,000 for a new machine. The new machine had a list price of 53,000. St.
Laurent paid $42,000 cash and was off ered $11,000 as a trade-in allowance in the
exchange. At what amount should the new machine be recorded on St. Laurent’s books?
a. $42,000 c. $52,000
b. $48,000 d. $53,000
8. Titus Proudfoot Company expects to extract 20 million tonnes of coal from a mine that
cost $12 million. If no residual value is expected and 2 million tonnes are mined in the first
year, the entry to record depletion will include a:
a. debit to Accumulated Depletion for $2,000,000.
b. credit to Depletion Expense of $1,200,000.
c. debit to Inventory of $1,200,000.
d. credit to Accumulated Depletion of $2,000,000.
9. Which of the following statements about intangible assets are false?
a. If an intangible asset has a finite life, it should be amortized.
b. The amortization period should never be less than 20 years.
c. Goodwill is recorded only when a business is purchased.
d. Research costs should always be expensed.
10. Cross Continental Rail Services reported net sales of $2,550 million, profi t of $178
million, and average total assets of $3,132 million in 2021. What are the company’s return on
assets and asset turnover?
a. 0.81% and 5.7 times
b. 5.7% and 1.2 times
c. 7.0% and 5.7 times
d. 5.7% and 0.81 time

25
II. EXERCISES
1. BE9.1 (LO 1) AP The following costs were incurred by Shumway Company in
purchasing land: cash price, $85,000; legal fees, $1,500; removal of old building,
$5,000; clearing and grading, $3,500; installation of a parking lot, $5,000. (a) What is
the cost of the land? (b) What is the cost of the land improvements?

2. BE9.2 (LO 1) AP Surkis Company incurs the following costs in purchasing

equipment: invoice price, $40,375; shipping, $625; installation and testing, $1,000;
one-year insurance policy, $1,750. What is the cost of the equipment?.

3. BE9.4 (LO 1) AP Rainbow Company purchased land, a building, and equipment on

January 2, 2021, for $850,000. The company paid $170,000 cash and signed a
mortgage note payable for the remainder. Management’s best estimate of the value of
the land was $352,000; of the building, $396,000; and of the equipment, $132,000.
Record the purchase. Do not round intermediate calculations for the percentage
allocation between the assets.

4. BE9.5 (LO 2) AP Surkis Company acquires equipment at a cost of $42,000 on

January 1, 2021. Management estimates the equipment will have a residual value of
$6,000 at the end of its four-year useful life. Assume the company uses the straight-
line method of depreciation. Calculate the depreciation expense for each year of the
equipment’s life. Record journal entry for the depreciation expense. Surkis has a
December 31 fiscal year end.

5. BE9.8 (LO 2) AP Pandora Pants Company acquires a delivery truck on April 1, 2021,
at a cost of $38,000. The truck is expected to have a residual value of $6,000 at the
end of its four-year life. Pandora uses the nearest month method to pro-rate
depreciation expense. Calculate annual depreciation expense for the first and second
years using straight-line depreciation, assuming Pandora has a calendar year end.

6. BE9.10 (LO 3) AP Cherry Technology purchased equipment on January 4, 2019, for

$250,000. The equipment had an estimated useful life of six years and a residual value
of $10,000. The company has a December 31 year end and uses straight-line
depreciation. On December 31, 2021, the company tests for impairment and
determines that the equipment’s recoverable amount is $100,000. (a) Calculate the
equipment’s carrying amount at December 31, 2021 (after recording the annual
depreciation). (b) Record the impairment loss.

7. BE9.16 (LO 6) AP Mabasa Company purchases a patent for $150,000 cash on

January 2, 2021. Its legal life is 20 years and its estimated useful life is 8 years.
a. Record the purchase of the patent on January 2, 2021.
b. Record amortization expense for the year ended December 31, 2021.

8. BE9.18 (LO 7) AP Information related to property, plant, and equipment; natural

resources; and goodwill on December 31, 2021, for H. Dent Company is as follows:
land $400,000, building $1,100,000, accumulated depreciation—building $600,000,
goodwill $410,000, nickel mine $500,000, and accumulated depletion—nickel mine
$108,000. Prepare a partial balance sheet for H. Dent Company.

26
 9. BE9.19 (LO 7) AN Agrium Inc., a global agricultural nutrients producer
headquartered in Calgary, reports the following in its 2017 financial statements (in
millions of US$):

2017 2016

Sales
$13,766 $13,457
Net
315 596
earnings
Total assets 17,942 16,963
Note: “Sales” can be used in place of “Net sales” and “Net earnings” can be used in
place of “Profit” in your ratio calculations.
Calculate Agrium’s return on assets and asset turnover for 2017.

CHAPTER 7. ACCOUNTING FOR MERCHANDISING

I. MULTIPLE CHOICES
1. (LO 1) Gross profit will result when:
a. Operating expenses are less than profit.
b. Sales revenues are greater than operating expenses.
c. Sales revenues are greater than cost of goods sold.
d. Operating expenses are greater than cost of goods sold.

2. (LO 1) K Which of the following statements is an advantage of a perpetual inventory

system?
a. It is not necessary to calculate and record the cost of goods sold with each sale with a
perpetual inventory system.
b. The perpetual inventory system provides better control over inventory because
inventory shortages can be more easily identified.
c. It is not necessary to do a physical count of the inventory in a perpetual inventory
system.
d. A perpetual inventory system results in less clerical work and is less costly than a
periodic inventory system.

3. (LO 2) AP A $750 purchase of merchandise inventory is made on June 13, terms 2/10,
n/30. On June 16, merchandise costing $50 is returned. What amount will be the payment in
full on June 22?
a. $686
b. $700
c. $735
d. $750

4. (LO 2, 3) K When goods are shipped with the freight terms FOB shipping point in a
perpetual inventory system:

27
 a. the buyer pays the freight costs and debits Merchandise Inventory.
b. the buyer pays the freight costs and debits Freight In.
c. the seller pays the freight costs and debits Freight Out.
d. the seller pays the freight costs and debits Cost of Goods Sold.

5. (LO 2, 3) C Using the earnings approach to revenue recognition, discounts offered to

customers for early payment of the balance due:
a. will reduce the cost of the merchandise for the purchaser and increase the cost of
goods sold for the seller.
b. reduce the cash paid by the purchaser, and the cash received by the seller, by the same
amount.
c. are required by provincial law.
d. benefit the seller but generally do not benefit the purchaser.

6. (LO 3) K Using the earnings approach to revenue recognition, to record the sale of goods
for cash in a perpetual inventory system:
a. only one journal entry is necessary, to record the cost of goods sold and reduction of
inventory.
b. only one journal entry is necessary, to record the receipt of cash and the sales revenue.
c. two journal entries are necessary: one to record the receipt of cash and sales revenue,
and one to record the cost of the goods sold and reduction of inventory.
d. two journal entries are necessary: one to record the receipt of cash and reduction of
inventory, and one to record the cost of the goods sold and sales revenue.

7. (LO 3) AP The adjusted trial balance of White Company reports a balance in Sales of
$18,000, Sales Discounts has a balance of $400, and Sales Returns and Allowances has a
balance of $1,500. White Company’s net sales will be equal to:
a. $18,000
b. $17,600
c. $16,100
d. $16,500

8. (LO 4, 5) K The steps in the accounting cycle for a merchandising company using the
perpetual inventory system are the same as those for a service company except:
a. closing journal entries are not required for a merchandising company.
b. a post-closing trial balance is not required for a merchandising company.
c. an additional adjusting journal entry in the case of any inventory shortages may be
needed in a merchandising company.
d. a multiple-step income statement is required for a merchandising company.

9. (LO 5) K Which of the following appears on both a single-step and a multiple-step income
statement for a merchandising company?
a. Merchandise inventory
b. Gross profit

28
 c. Profi t from operations
d. Cost of goods sold

10. (LO 6) AP Net sales are $400,000, cost of goods sold is $310,000, operating expenses are
$60,000, and other revenues are $5,000. What are the gross profi t margin and profit margin?
a. 7.5% and 8.8%
b. 22.5% and 7.4%
c. 22.5% and 8.8%
d. 77.5% and 8.8%

11. * (LO 7) K Under a periodic inventory system, when goods are purchased for resale by a
company:
a. purchases are debited to Merchandise Inventory.
b. purchases are debited to Purchases.
c. purchase returns are debited to Merchandise Inventory.
d. freight costs are debited to Cost of Goods Sold.

*12. (LO 7) AP If beginning inventory is $60,000, purchases are $400,000, purchase returns
and allowances are $25,000, freight in is $5,000, and ending inventory is $50,000, what is the
cost of goods sold?
a. $385,000
b. $390,000
c. $410,000
d. $430,000

**13. (LO 8) C To record a contract with a customer for the sale of goods with a selling price
of $5,000, a cost of $3,000, terms n/30 and expected returns of 5% using the contract-based
approach, the journal entries will include:
a. a debit to Accounts Receivable for $5,000 and a credit to Sales for $5,000.
b. a debit to Cost of Goods Sold for $3,000 and a debit to Estimated Inventory Returns
for $150.
c. a debit to Estimated Inventory Returns for $150 and a credit to Refund Liability for
$250.
d. a debit to Accounts Receivable for $4,750 and a credit to Sales for $4,750.

**14. (LO 8) AP Black Company sells goods to Ryder Company for $2,000, terms 2/10,
n/30. Black Company expects Ryder to take advantage of the cash discount when paying
the amount owing. If Black Company follows IFRS, the correct entry to record the sale
transaction would include:
a. a debit to Accounts Receivable for $1,960 and a credit to Sales for $1,960
b. a debit to Accounts Receivable for $2,000 and a credit to Sales for $2,000
c. a debit to Cash for $1,960 and a credit to Sales for $1,960
d. a debit to Cash for $1,960, a debit to Sales Discounts for $40, and a credit to Accounts
Receivable for $2,000.

29
II. EXERCISES
BE5.4 (LO 3) Prepare the journal entries to record the following transactions on Novy
Company’s books using a perpetual inventory system.
a. On March 2, Novy Company sold $900,000 of merchandise on account to Opps Company,
terms 2/10, n/30. The cost of the merchandise sold was $590,000.
b. On March 6, Opps Company returned $90,000 of the merchandise purchased on March 2.
The cost of the returned merchandise was $62,000.
c. On March 12, Novy Company received the balance due from Opps Company.
E5.2 (LO 2) Information related to Kerber Co. is presented below.
1. On April 5, purchased merchandise on account from Wilkes Company for $23,000, terms
2/10, n/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from Wilkes.
3. On April 7, purchased equipment on account for $26,000.
4. On April 8, returned damaged merchandise to Wilkes Company and was granted a $3,000
credit for returned merchandise.
5. On April 15, paid the amount due to Wilkes Company in full.
Instructions
a. Prepare the journal entries to record these transactions on the books of Kerber Co. under a
perpetual inventory system.
b. Assume that Kerber Co. paid the balance due to Wilkes Company on May 4 instead of
April 15.

DO IT! 5.1 (LO 1) Indicate whether the following statements are true or false. If false,
indicate how to correct the statement.
1. A merchandising company reports gross profit but a service company does not.
2. Under a periodic inventory system, a company determines the cost of goods sold each time
a sale occurs.
3. A service company is likely to use accounts receivable but a merchandising company is not
likely to do so.
4. Under a periodic inventory system, the cost of goods on hand at the beginning of the
accounting period plus the cost of goods purchased less the cost of goods on hand at the end
of the accounting period equals cost of goods sold.

DO IT! 5.2 (LO 2) On October 5, Wang Company buys merchandise on account from Davis
Company. The selling price of the goods is $4,800, and the cost to Davis Company is $3,100.
On October 8, Wang returns defective goods with a selling price of $650 and a fair value of
$100. Record the transactions on the books of Wang Company.

DO IT! 5.3 (LO 3) Assume information similar to that in DO IT! 5.2. On October 5, Wang
Company buys merchandise on account from Davis Company. The selling price of the goods
is $4,800, and the cost to Davis Company is $3,100. On October 8, Wang returns defective
goods with a selling price of $650 and a fair value of $100. Record the transactions on the
books of Davis Company.

DO IT! 5.4 (LO 4) The trial balance of Beads and Bangles at December 31 shows Inventory
$21,000, Sales Revenue $156,000, Sales Returns and Allowances $4,000, Sales Discounts
$3,000, Cost of Goods Sold $92,400, Interest Revenue $5,000, Freight-Out $1,800, Utilities
30
Expense $7,700, and Salaries and Wages Expense $19,500. Prepare the closing entries for
Beads and Bangles for these accounts.

E5.2 (LO 2) Information related to Kerber Co. is presented below.

1. On April 5, purchased merchandise on account from Wilkes Company for $23,000,
terms 2/10, net/30, FOB shipping point.
2. On April 6, paid freight costs of $900 on merchandise purchased from Wilkes.
3. On April 7, purchased equipment on account for $26,000.
4. On April 8, returned damaged merchandise to Wilkes Company and was granted a
$3,000 credit for returned merchandise.
5. On April 15, paid the amount due to Wilkes Company in full.

Instructions
a. Prepare the journal entries to record these transactions on the books of Kerber Co. under a
perpetual inventory system.
b. Assume that Kerber Co. paid the balance due to Wilkes Company on May 4 instead of
April 15. Prepare the journal entry to record this payment.

E5.3 (LO 2, 3) On September 1, Nixa Office Supply had an inventory of 30 calculators at a

cost of $18 each. The company uses a perpetual inventory system. During September, the
following transactions occurred.
Sept. 6 Purchased 90 calculators at $22 each from York.
9. Paid freight of $90 on calculators purchased from York Co.
10 Returned 3 calculators to York Co. for $69 cash (including freight) because they did not
meet specifications.
12 Sold 26 calculators costing $23 (including freight) for $31 each on account to Sura
Book Store, terms n/30.
14 Granted credit of $31 to Sura Book Store for the return of one calculator that was not
ordered.
20 Sold 30 calculators costing $23 for $32 each on account to Davis Card Shop,
terms n/30.
Instructions
Journalize the September transactions
E5.4 (LO 2, 3) On June 10, Diaz Company purchased $8,000 of merchandise on account
from Taylor Company, FOB shipping point, terms 2/10, n/30. Diaz pays the freight costs of
$400 on June 11. Damaged goods totaling $300 are returned to Taylor for credit on June 12.
The fair value of these goods is $70. On June 19, Diaz pays Taylor Company in full, less the
purchase discount. Both companies use a perpetual inventory system.
Instructions
a. Prepare separate entries for each transaction on the books of Diaz Company.
b. Prepare separate entries for each transaction for Taylor Company. The merchandise
purchased by Diaz on June 10 had cost Taylor $4,800.

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E5.5 (LO 3) Presented below are transactions related to R. Humphrey Company.
1. On December 3, R. Humphrey Company sold $570,000 of merchandise on account to
Frazier Co., terms 1/10, n/30, FOB destination. R. Humphrey paid $400 for freight charges.
The cost of the merchandise sold was $350,000.
2. On December 8, Frazier Co. was granted an allowance of $20,000 for merchandise
purchased on December 3.
3. On December 13, R. Humphrey Company received the balance due from Frazier Co.
Instructions
a. Prepare the journal entries to record these transactions on the books of R. Humphrey
Company using a perpetual inventory system.
b. Assume that R. Humphrey Company received the balance due from Frazier Co. on January
2 of the following year instead of December 13. Prepare the journal entry to record the
receipt of payment on January 2.
E5.6 (LO 4, 5) The adjusted trial balance of Sang Company shows the following data
pertaining to sales at the end of its fiscal year October 31, 2020: Sales Revenue $820,000,
Freight-Out $16,000, Sales Returns and Allowances $25,000, and Sales Discounts $13,000.
Instructions
a. Prepare the sales section of the income statement.
b. Prepare separate closing entries for (1) sales revenue, and (2) the contra accounts to sales
revenue.
P5.4A (LO 2, 3, 4) Financi
al Statement
Yolanda Hagen, a former disc golf star, operates Yolanda’s Discorama. At the beginning of
the current season on April 1, the ledger of Yolanda’s Discorama showed Cash $1,800,
Inventory $2,500, and Owner’s Capital $4,300. The following transactions were completed
during April.
Apr 5 Purchased golf discs, bags, and other inventory on account from Mumford Co. $1,200,
FOB shipping point, terms 2/10, n/60.

7 Paid freight on the Mumford purchase $50.

9 Received credit from Mumford Co. for merchandise returned $100.
10 Sold merchandise on account for $900, terms n/30. The merchandise sold had a cost of
$540.
12 Purchased disc golf shirts and other accessories on account from Saucer Sportswear $670,
terms 1/10, n/30.
14 Paid Mumford Co. in full, less discount.
17 Received credit from Saucer Sportswear for merchandise returned $70.
20 Made sales on account for $610, terms n/30. The cost of the merchandise sold was $370.
21 Paid Saucer Sportswear in full, less discount.

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27 Granted an allowance to customers for clothing that was flawed $20.
30 Received payments on account from customers $900.
The chart of accounts for the store includes the following: No. 101 Cash, No. 112 Accounts
Receivable, No. 120 Inventory, No. 201 Accounts Payable, No. 301 Owner’s Capital, No.
401 Sales Revenue, No. 412
Sales Returns and Allowances, and No. 505 Cost of Goods Sold.
Instructions
a. Journalize the April transactions using a perpetual inventory system.
b. Enter the beginning balances in the ledger accounts and post the April transactions. (Use
J1 for the journal reference.)
c. Prepare a trial balance on April 30, 2020

THE END./.

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