Chapter 5: Accounting for Merchandising Operations
DO IT!
1
Merchandising Operations and Inventory Systems
Indicate whether the following statements are true or false.
1. The primary source of revenue for a merchandising company results from performing
services for customers.
2. The operating cycle of a service company is usually shorter than that of a merchandising company.
3. Sales revenue less cost of goods sold equals gross profit.
4. Ending inventory plus the cost of goods purchased equals cost of goods available for
sale.
Action Plan
Solution
1. False. The primary source of revenue for a service company results from
performing services for customers. 2. True. 3. True. 4. False. Beginning inventory plus the cost of goods purchased equals cost of goods available for sale.
Related exercise material: BE5-1, BE5-2, E5-1, and
DO IT!
2
DO IT!
5-1.
✔ Review merchandising
concepts.
✔ Understand the
flow of costs in a
merchandising
company.
Purchase Transactions
On September 5, De La Hoya Company buys merchandise on account from Junot Diaz
Company. The selling price of the goods is $1,500, and the cost to Diaz Company was
$800. On September 8, De La Hoya returns defective goods with a selling price of $200.
Record the transactions on the books of De La Hoya Company.
Solution
Sept. 5
8
Inventory
Accounts Payable
(To record goods purchased on account)
1,500
Accounts Payable
Inventory
(To record return of defective goods)
Related exercise material: BE5-3, BE5-5, E5-2, E5-3, E5-4, and
Action Plan
1,500
goods at cost.
✔ When goods are
200
200
DO IT!
✔ Purchaser records
returned, purchaser
reduces Inventory.
5-2.
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D-2
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DO IT!
3
Sales Transactions
On September 5, De La Hoya Company buys merchandise on account from Junot Diaz
Company. The selling price of the goods is $1,500, and the cost to Diaz Company was
$800. On September 8, De La Hoya returns defective goods with a selling price of $200
and a fair value of $30. Record the transactions on the books of Junot Diaz Company.
Solution
Action Plan
✔ Seller records both the
sale and the cost of
goods sold at the time
of the sale.
✔ When goods are
returned, the seller
records the return in a
contra account, Sales
Returns and Allowances, and reduces
Accounts Receivable.
✔ Any goods returned
increase Inventory and
reduce Cost of Goods
Sold. Defective or
damaged inventory is
recorded at fair value
(scrap value).
DO IT!
4
Sept. 5
5
8
8
Accounts Receivable
Sales Revenue
(To record credit sale)
1,500
1,500
Cost of Goods Sold
Inventory
(To record cost of goods sold on account)
800
Sales Returns and Allowances
Accounts Receivable
(To record credit granted for receipt of
returned goods)
200
Inventory
Cost of Goods Sold
(To record fair value of goods returned)
30
Related exercise material: BE5-3, BE5-4, E5-3, E5-4, E5-5, and
800
200
30
DO IT!
5-3.
Closing Entries
The trial balance of Celine’s Sports Wear Shop at December 31 shows Inventory $25,000,
Sales Revenue $162,400, Sales Returns and Allowances $4,800, Sales Discounts $3,600,
Cost of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out $1,800, Rent Expense
$8,800, and Salaries and Wages Expense $22,000. Prepare the closing entries for the
above accounts.
Solution
Action Plan
✔ Close all temporary
accounts with credit
balances to Income
Summary by debiting
these accounts.
✔ Close all temporary
accounts with debit
balances, except
drawings, to Income
Summary by crediting
these accounts.
The two closing entries are:
Dec. 31
31
Sales Revenue
Rent Revenue
Income Summary
(To close accounts with credit balances)
162,400
6,000
Income Summary
Cost of Goods Sold
Sales Returns and Allowances
Sales Discounts
Freight-Out
Rent Expense
Salaries and Wages Expense
(To close accounts with debit balances)
151,000
Related exercise material: BE5-6, BE5-7, E5-6, E5-7, E5-8, and
DO IT!
168,400
110,000
4,800
3,600
1,800
8,800
22,000
5-4.
DO IT!
DO IT!
5
D-3
Financial Statement Classifications
You are presented with the following list of accounts from the adjusted trial balance for
merchandiser Gorman Company. Indicate in which financial statement and under what
classification each of the following would be reported.
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Buildings
Accumulated Depreciation—Equipment
Advertising Expense
Buildings
Cash
Depreciation Expense
Equipment
Freight-Out
Gain on Disposal of Plant Assets
Insurance Expense
Interest Expense
Interest Payable
Inventory
Land
Notes Payable (due in 3 years)
Owner’s Capital (beginning balance)
Owner’s Drawings
Property Taxes Payable
Salaries and Wages Expense
Salaries and Wages Payable
Sales Returns and Allowances
Sales Revenue
Utilities Expense
Solution
Account
Financial
Statement
Accounts Payable
Accounts Receivable
Accumulated Depreciation—
Buildings
Accumulated Depreciation—
Equipment
Advertising Expense
Buildings
Income statement
Balance sheet
Cash
Depreciation Expense
Equipment
Balance sheet
Income statement
Balance sheet
Freight-Out
Gain on Disposal of Plant
Assets
Insurance Expense
Interest Expense
Income statement
Income statement
Interest Payable
Inventory
Land
Balance sheet
Balance sheet
Balance sheet
Notes Payable (due in 3 years)
Owner’s Capital
Balance sheet
Owner’s equity
statement
Owner’s equity
statement
Balance sheet
Income statement
Balance sheet
Income statement
Income statement
Income statement
Owner’s Drawings
Property Taxes Payable
Salaries and Wages Expense
Salaries and Wages Payable
Sales Returns and Allowances
Sales Revenue
Utilities Expense
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Income statement
Income statement
Action Plan
Classification
Current liabilities
Current assets
Property, plant, and
equipment
Property, plant, and
equipment
Operating expenses
Property, plant, and
equipment
Current assets
Operating expenses
Property, plant, and
equipment
Operating expenses
Other revenues and
gains
Operating expenses
Other expenses and
losses
Current liabilities
Current assets
Property, plant, and
equipment
Long-term liabilities
Beginning balance
Deduction section
Current liabilities
Operating expenses
Current liabilities
Sales
Sales
Operating expenses
Related exercise material: BE5-8, BE5-9, E5-9, E5-10, E5-12, E5-13, E5-14,
and DO IT! 5-5.
✔ Review the major
sections of the income
statement: sales, cost
of goods sold,
operating expenses,
other revenues and
gains, and other
expenses and losses.
✔ Add net income and
investments to
beginning capital and
deduct drawings to
arrive at ending
capital in the owner’s
equity statement.
✔ Review the major
sections of the
balance sheet, income
statement, and
owner’s equity
statement.
D-4
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DO IT!
Exercises
Answer general questions
about merchandisers.
(LO 1)
Record transactions of
purchasing company.
(LO 2)
Record transactions of selling
company.
(LO 3)
Prepare closing entries for a
merchandising company.
(LO 4)
Classify financial statement
accounts.
(LO 5)
DO IT! 5-1
Indicate whether the following statements are true or false.
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 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
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 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
Expense $7,700, and Salaries and Wages Expense $19,500. Prepare the closing entries for
Beads and Bangles for these accounts.
DO IT! 5-5 Pfannes Company is preparing its multiple-step income statement, owner’s
equity statement, and classified balance sheet. Using the column headings Account,
Financial Statement, and Classification, indicate in which financial statement and
under what classification each of the following would be reported.
Account
Accounts Payable
Accounts Receivable
Accumulated Depreciation—Buildings
Cash
Casualty Loss From Vandalism
Cost of Goods Sold
Depreciation Expense
Equipment
Freight-Out
Insurance Expense
Interest Payable
Inventory
Land
Notes Payable (due in 5 years)
Owner’s Capital (beginning balance)
Owner’s Drawings
Property Taxes Payable
Salaries and Wages Expense
Salaries and Wages Payable
Sales Returns and Allowances
Sales Revenue
Unearned Rent Revenue
Utilities Expense
Financial Statement
Classification
DO IT!
CONTINUING PROBLEM
COOKIE CREATIONS: AN ENTREPRENEURIAL JOURNEY
(Note: This is a continuation of the Cookie Creations problem from Chapters 1 through 4.)
CC5 Because Natalie has had such a successful first few months, she is considering other opportunities to develop her business. One opportunity is the sale of fine European mixers. The owner of
Kzinski Supply Company has approached Natalie to become the exclusive U.S. distributor of these
fine mixers. The current cost of a mixer is approximately $525 (U.S.), and Natalie would sell each one
for $1,050. Natalie comes to you for advice on how to account for these mixers.
Go to the book’s companion website, www.wiley.com/college/weygandt, to see the completion of this
problem.
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D-5