Exercises - Chapter 9

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1 Exercises - Chapter 9 Complete the following exercises. Assume that all these exercises use the perpetual inventory system. Exercise #1 1. hip top Shirt retailers bought $15,000 worth of shirts from Super Shirt Wholesalers Ltd. on March 15th. payment was due in April. prepare the journal entry at the time of purchase. Mar 15 Inventory 15,000 Accounts Payable 15,000 Record the purchasing of inventory 2. referring to the purchase made in #1 above, prepare the journal entry for hip top Shirt retailers for the payment of $15,000 made to Super Shirt Wholesalers on April 15th. Apr 15 Accounts Payable 15,000 Cash 15,000 Record the payment to Super Shirt Wholesalers 3. JB Supermarkets bought $3,000 worth of groceries on account from a produce supplier on May 10th. On May 11th, JB s bookkeeper was informed that $200 worth of tomatoes were substandard and returned to the supplier. prepare the journal entry to record the purchase return. May 11 Accounts Payable 200 Inventory 200 Record the purchase return 325

2 4. On January 12th, Corner-Mart received a shipment of t-shirts from promo Novelties for an event. the invoice amounted to $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 31st. prepare the journal entry that would be recorded on January 31st. Jan 31 Accounts Payable 5,000 Inventory 5,000 Record the purchase return 5. Signs Unlimited received a shipment of plastic sheets on April 3rd. the value of the plastic was $8,000, plus $100 of freight charges. prepare the journal entry to record the receipt of goods by Signs Unlimited, assuming the payment would be made in May. Apr 3 Inventory 8,100 Accounts Payable 8,100 Record the purchasing of inventory ($8,000 + $100 = $8,100) 6. referring to question #5 above, several of the plastic sheets delivered to Signs Unlimited were in the wrong colour. After some negotiation, the manager agreed to keep the products with a 10% discount. prepare the entry on April 10th to record the purchase allowance. (Assume all plastic sheets were still in inventory.) Apr 10 Accounts Payable 800 Inventory 800 Allowance for goods with wrong colour ($8,000 x 10% = $800) 7. referring to questions #5 and #6 above, journalize the transaction for Signs Unlimited when the payment is made on May 3rd. May 3 Accounts Payable 7,300 Cash 7,300 Payment for the goods 326

3 8. Sporty pants, a manufacturer of sports uniforms, received a $12,000 shipment of material on July 18th from Woven Fabric Suppliers. the payment for the goods is to be made in August. Upon inspection of the goods, it was found that 10% of the fabric was undesirable. rather than taking the goods back, Woven Fabric Suppliers agreed to allow Sporty pants to deduct 10% from the amount owing. record the journal entry for the purchase allowance (assume the goods have not yet been sold). Accounts Payable 1,200 Inventory 1,200 Allowance for undesirable goods ($12,000 x 10% = $1,200) 9. referring to question #8 above, assume that the fabric had already been used and sold in the form of pants. prepare the journal entry to record the purchase allowance. Accounts Payable 1,200 COGS 1,200 Allowance for undesirable goods ($12,000 x 10% = $1,200) 327

4 Exercise #2 1. 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 would apply if paid within 10 days. The net amount owing is due in 30 days. 2. Shoe retailers purchased $10,000 worth of shoes from runnerwear Supplies on March 1st. Since Shoe retailers has good cash reserves, the accountant took advantage of the early payment discount that runnerwear offers. runnerwear s invoice shows terms of 2/10, n/30. What is the latest date that Shoe retailers could pay the bill to take advantage of the discount? March referring to question #2 above, as the bookkeeper for Shoe retailers. prepare the journal entry to record the purchase on March 1st. Mar 1 Inventory 10,000 Accounts Payable 10,000 Record the purchase 4. referring to question #2 above, journalize the transaction for payment of the invoice, assuming the payment was made on March 5th. Mar 5 Accounts Payable 10,000 Cash 9,800 Inventory 200 Paid invoice owing less discount received 5. referring to question #2 above, journalize the transaction for payment of the invoice, assuming the payment was made on March 30th. Mar 30 Accounts Payable 10,000 Cash 10,000 Record the payment to Runnerwear Supplies 328

5 6. Suppose that on July 15th Local Drug Mart bought goods from Glasgow & Glasgow for $30,000, with terms of 2/10, n/30. a. if Local Drug Mart took advantage of the early payment discount, how much would they be required to pay Glasgow & Glasgow? $29,400 b. When would payment need to be made to qualify for the discount? By July 25th c. how much would Local Drug Mart need to pay Glasgow & Glasgow to settle the bill on August 15th? $30, referring to question #6 above, suppose that $3,000 worth of the merchandise was water damaged during shipping and Local Drug Mart returned the damaged merchandise to Glasgow & Glasgow on July 18th. a. Journalize the return of the goods ($3,000) on July 18th. Jul 18 Accounts Payable 3,000 Inventory 3,000 Record the purchase return b. After returning the damaged products to Glasgow & Glasgow, Local Drug Mart paid the remaining balance on July 20th. how much did Local Drug Mart have to pay? ($30,000 $3,000) x 98% = $26,

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7 9. On March 20th, Cup-A-Java received a shipment of gift mugs for resale from Cup Makers inc. in the amount of $5,000, plus $200 shipping charges. the terms stated on the invoice from Cup Makers inc. were as follows: 3/15, n/60. Journalize the following scenarios: a. As the bookkeeper for Cup-A-Java, complete the original invoice transaction. Mar 20 Inventory 5,200 Accounts Payable 5,200 Record the purchase of inventory plus freight charges b. if Cup-A-Java decided to take advantage of the early payment cash discount, by when should the payment be made to qualify for the discount? By April 4th c. the payment by Cup-A-Java to Cup Makers inc. was made on March 31st. prepare the journal entry for the payment of goods. May 31 Accounts Payable 5,200 Cash 5,050 Inventory 150 Paid invoice owing less discount received for early payment ($5,000 x 0.03 = $150) d. Journalize the entry if payment was made on May 20th. May 20 Accounts Payable 5,200 Cash 5,200 Record the payment to Cup Makers Inc. e. On March 25th, 20% of the shipment was returned because they were in the wrong colour. Cup Makers inc. agreed to apply the same percentage deduction to the freight charges. the invoice has not been paid. prepare the journal entry to record this transaction Mar 25 Accounts Payable 1,040 Inventory 1,040 Record the purchase return ($5,000 x $200 x 0.02 = $1,040) 331

8 f. Continue from 9(e) on the previous page, journalize the entry if Cup-A-Java took advantage of the early payment cash discount when paying for the balance of the cups on March 31st. round off to the nearest dollar. Mar 31 Accounts Payable 4,160 Cash 4,040 Inventory 120 Paid invoice owing less discount ($4,000 x 0.03 = $120) 10. 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 their supplier? Gross Profit = $14,000 ($10,000 x 98%) = $4,200 Exercise #3 1. On May 1st, Food Wholesalers purchased $3,000 worth of dried fruit inventory on account and paid $100 for freight charges. On May 15th, 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. May 1 Inventory 3,100 Accounts Payable 3,100 Purchased inventory on account May 15 Accounts Receivable 4,000 Revenue 4,000 Made sales on account May 15 COGS 3,100 Inventory 3,100 Record COGS 2. referring to question #1 above, if operating expenses were $500: a. how much was Food Wholesalers gross profit? $900 b. how much was Food Wholesalers net profit? $

9 3. Macks is a maker of cotton garments that sells to various retailers. On June 1st, Cory s retailers sent back a shipment of goods that was unsatisfactory. As a gesture of good will, Macks agreed to the return of the goods. the goods were sold on account for $6,000 originally and cost $4,000. Complete the following: a. As Mack s bookkeeper prepare the journal entries to reflect the return. June 1 Sales Returns and Allowances 6,000 Accounts Receivable 6,000 Record sales returns for unsatisfactory products June 1 Inventory 4,000 COGS 4,000 Restock inventory returned b. Journalize the entry if Cory s only returned half of the shipment. June 1 Sales Returns and Allowances 3,000 Accounts Receivable 3,000 Record sales returns for unsatisfactory products Inventory 2,000 COGS 2,000 Restock inventory returned 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). 333

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11 c. Suppose that ted s shipped back half the goods on August 15th and kept the other half with 10% discount. Journalize the transactions. Aug 15 Sales Return and Allowances 825 Accounts Receivable 825 Record sales returns from Ted s Retailers Inventory 500 COGS 500 Restock inventory returned Note to the instructor: only transactions took place on August 15 should be journalized in part c. d. Continue from question 4(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 $1,500 when goods were sold and decreased by the same amount when goods were returned. 5. pete s Wholesalers imports and distributes towels. they sell their products to various retailers throughout the country and offer payments terms of 2/10, n/30. On October 1, pete s made a large sale to Ernie s Bathroom retailers in the amount of $15,000, which cost pete s $9,000. pete s uses a perpetual inventory system. Complete the following: a. Journalize the sale that was made on account. Oct 1 Accounts Receivable 15,000 Revenue 15,000 Made sales on account COGS 9,000 Inventory 9,000 Record COGS 335

12 b. By what date must Ernie s pay the invoice to qualify for the early cash payment discount? By October 11 c. Assume Ernie s paid the bill on October 5th. record the journal entries. Oct 5 Cash 14,700 Sales Discount 300 Accounts Receivable 15,000 Collected Accounts Receivable less discount allowed d. if Ernie s had returned half the shipment and paid for the balance owing on October 5th, how would the transaction be journalized? Oct 5 Sales Return and Allowance 7,500 Accounts Receivable 7,500 Record sales returns from Ernie s Inventory 4,500 COGS 4,500 Restock inventory returned Cash 7,350 Sales Discount 150 Accounts Receivable 7,500 Collected accounts receivable less discount allowed 336

13 e. Suppose Ernie s found the goods unsatisfactory and agreed to keep the goods with a 10% discount. prepare the journal entry to record the sales allowance and Ernie s payment on October 20th. Oct 20 Sales Return and Allowance 1,500 Accounts Receivable 1,500 Allowance provided to Ernie s for unsatisfactory goods Oct 20 Cash 13,500 Accounts Receivable 13,500 Collected outstanding Accounts Receivable f. referring to scenario 5(a) - Ernie s kept the entire shipment and paid the invoice on October 10th to take advantage of the early payment discount. record the journal entries for the payment to pete s. Oct 10 Cash 14,700 Sales Discount 300 Accounts Receivable 15,000 Collected Accounts Receivable less discount allowed 6. Assume you are the bookkeeper for Joe the printer. the company bought ink cartridges from various suppliers, refilled them and sold them to both retailers and customers. All purchases and sales are made on account. Complete the following for Joe the printer. a. record the purchase on December 15th of $3,000 ink cartridges from inkster Supplies, whose payment terms are 3/10, n/45. Dec 15 Inventory 3,000 Accounts Payable 3,000 Purchased inventory, term 3/10, n/45 337

14 By Dec 25th b. When must Joe s pay the account to qualify for the discount? c. prepare the journal entry to record Joe s payment on December 20th. Dec 20 Accounts Payable 3,000 Inventory 90 Cash 2,910 Paid invoice owing less discount ($3,000 x 0.03 = $90) d. if Joe s printer made the payment on December 31st instead, jouralize the transaction. Dec 31 Accounts Payable 3,000 Cash 3,000 Paid invoice owing e. if Joe s returned 1/3rd of the products and paid the balance, how would both of these transactions be journalized? Assume both transactions occurred on December 20th. Dec 20 Accounts Payable 1,000 Inventory 1,000 Record purchase returns Accounts Payable 2,000 Inventory 60 Cash 1,940 Paid invoice owing less discount ($2,000 x 0.03 = $60) 338

15 f. if on January 5th, Joe s sold all $3,000 worth of inventory for $5,000 to Smith printers on account, how would the transactions be journalized? Jan 5 Accounts Receivable 5,000 Sales 5,000 Made sales on account COGS 3,000 Inventory 3,000 Record COGS g. Continue from the previous question. if Joe s selling terms were 4/7, n/30. prepare the journal entry to record receipt of payment on January 12th. Jan 12 Cash 4,800 Sales Discount 200 Accounts Receivable 5,000 Collected Accounts Receivable less discounts allowed 339

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