SOLUTIONS TO EXERCISES

Ex. 6–1 a. You are at a significant disadvantage if no information is available about how many of
each type of shirt were (1) ordered, (2) sold at full price, (3) sold at the discounted price,
and (4) donated to the orphanage. It would be almost impossible to make optimal
decisions without this sales information.

b. The first step in the process would be to attempt to forecast the sales of shirts for each
concert, both at the concert and on the next school day. To forecast sales, you could
examine the relationship between sales of each type of shirt and attendance at the
concert at which it was sold. By using this relationship in conjunction with the forecasts
of ticket sales this year, you could estimate sales of each type of shirt, both at the concert
and on the next school day.
In making your decisions, consideration would also have to be given to the relationship
between the cost of the shirts and their discounted price. If the cost of the shirts is
greater than their discounted price, the optimal decision is to order only enough to meet
the estimated demand at full price on the night of the concert. On the other hand, if the
cost of the shirts is less than the discounted price, the optimal decision is to order
enough shirts to meet the estimated demand on both the night of the concert and the
next school day.

c. To assist the person performing the task next year, you would want to maintain records
for each concert of (1) the number of each type of shirt purchased, (2) the number of
shirts sold at the concert, (3) the number of shirts sold on the next day on campus, and
(4) the number of shirts donated to the orphanage. In addition, you would want to make
a record of the attendance at each concert.

Ex. 6–2 Income Statement Balance Sheet

Trans- Net  Cost of  All Other = Net Assets = Liabilities + Owners’
action Sales Goods Sold Expenses Income Equity

a. NE NE NE NE I I NE
b. I NE NE I I NE I
c. NE I NE D D NE D
d. NE NE NE NE NE NE NE
e. NE I NE D D NE D

© The McGraw-Hill Companies, Inc., 2002 177

Ex. 6–3 Subsidiary Effect upon Subsidiary
Transaction Ledger Account Balance
a. Inv Increase
AP Increase
b. AP Decrease
c. Inv Decrease
d. AR Increase
Inv Decrease
e. AR Decrease
f. AP Decrease
Inv Decrease
g. Inv Increase
h. Inv Increase
AR Decrease

Ex. 6–4 a. Jan. 2 Inventory........................................................................... 106,000

Accounts Payable (McNamer Supply)................. 106,000
To record purchase of merchandise on credit.
Jan. 3 Cash................................................................................... 98,000
Sales....................................................................... 98,000
Sale of merchandise for cash.
Cost of Goods Sold............................................................ 75,000
Inventory............................................................... 75,000
To reduce inventory by cost of goods sold.

b. The balance of the Inventory account on January 3 was $1,231,000. The starting
balance of $1.2 million on January 1 was increased by the $106,000 cost of merchandise
purchased on January 2 and decreased by the $75,000 cost of goods sold on January 3
($1,200,000 + $106,000  $75,000 = $1,231,000).

Ex. 6–5 a. The change in net sales provides an overall measure of the effectiveness of the company
in generating revenue. A major limitation of this measure is that sales may have
changed largely because of the opening of new stores, the closing of unprofitable ones,
or as a result of a shift to merchandise with significantly different gross profit margins.
Thus, an increase in net sales is not always “good,” and a decrease is not always “bad.”
The change in comparable store sales represents the increase or decrease in the same
stores from one period to the next. This statistic provides a better measure of the
effectiveness of the company’s marketing strategies because it is not affected by changes
in the total number of stores.

© The McGraw-Hill Companies, Inc., 2002 178

 b. Sears’ performance is quite favorable from the standpoint of the overall increase in
revenue and the increase in comparable store sales. It indicates that the company’s
marketing strategies were effective at existing stores and that the company also is
opening new locations.
Broadway’s performance was not as good. Overall, the company’s net sales decreased.
The company, however, was moderately effective in increasing sales at comparable
stores. Taken together, it would appear that Broadway reduced the number of stores,
but was more effective at generating sales at its remaining locations. (Note: Broadway
subsequently was acquired by Macy’s.)

Ex. 6–6 a. The reason why an actual physical count is likely to indicate a smaller inventory than
does the perpetual inventory records is inventory shrinkage—the normal loss of
inventory through theft, breakage, and spoilage.

b. Cost of Goods Sold............................................................................. 4,000

Inventory................................................................................ 4,000
To reduce inventory to the quantities reflected in the year-end
physical count.

c. Both portions of the preceding entry should be posted to the general ledger. In addition,
the reduction in inventory should be posted to the inventory ledger accounts in which
the shortages were determined to exist.

Ex. 6–7 a. The amounts of beginning and ending inventory were determined by taking complete
physical inventories at (or near) the ends of year 1 and year 2. “Taking a complete
physical inventory” means physically counting the number of units of each product on
hand and then determining the cost of this inventory by reference to per-unit purchase
costs. (The inventory at the end of year 1 serves as the “beginning inventory” for year 2.)

b. Computation of the cost of goods sold during year 2:

Inventory (December 31, year 1).......................................................................... $ 2,800
Add: Purchases...................................................................................................... 30,200
Cost of goods available for sale during year 2..................................................... 33,000
Less: Inventory (December 31, year 2)................................................................ 3,000
Cost of goods sold.................................................................................................. $ 30,000

© The McGraw-Hill Companies, Inc., 2002 179

 c. Year 2
Dec. 31 Cost of Goods Sold............................................................ 33,000
Inventory (Dec. 31, year 1)................................... 2,800
Purchases............................................................... 30,200
To close those temporary accounts that contribute to
the cost of goods sold for the year.
31 Inventory (Dec. 31, year 2)............................................... 3,000
Cost of Goods Sold................................................ 3,000
To remove from the Cost of Goods Sold account the
cost of merchandise still on hand at year-end.

d. BOSTON BAIT SHOP

Partial Income Statement
For the Year Ended December 31, Year 2
Net sales................................................................................................................. $ 79,600
Less: Cost of goods sold........................................................................................ 30,000
Gross profit............................................................................................................ $ 49,600

e. Because the business is small, management probably has decided that the benefits of
maintaining a perpetual inventory system are not worth the cost. Furthermore,
determining a cost of goods sold figure at the point of sale for live bait (e.g., a dozen
minnows) may be difficult, if not impossible.

Ex. 6–8 Cost of Net

Net Beginning Net Ending Goods Gross Income
Sales Inventory Purchases Inventory Sold Profit Expenses or (Loss)
a. 240,000  76,000 104,000  35,200 144,800  95,200  72,000 23,200
b. 480,000  72,000 272,000 80,000 264,000 216,000 196,000 20,000
c. 630,000 207,000 400,500 166,500 441,000 189,000 148,500 40,500
d. 810,000 261,000 450,000 135,000 576,000 234,000 270,000 (36,000)
e. 531,000 156,000 393,000 153,000 396,000 135,000 150,000 (15,000)

Ex. 6–9 We cannot provide a specific answer to Exercise 6–9, as the exercise focuses upon local
business entities selected by the students. However, the following points should be addressed
in students’ answers.
Students favoring perpetual inventory systems should explain (1) management’s need for
timely information about inventory levels and/or sales of specific products, and (2) why it is
practical for the business to maintain such a system.
Students preferring a periodic system should explain why such a system can meet the needs
of the business and/or why it would be impractical for the business to utilize a perpetual
system.

© The McGraw-Hill Companies, Inc., 2002 180

Ex. 6–10 a. Entries in the accounts of Golf World:
Accounts Receivable (Mulligans)...................................................... 10,000
Sales........................................................................................ 10,000
Sold merchandise on account to Mulligans.
Cost of Goods Sold............................................................................. 6,500
Inventory................................................................................ 6,500
To recognize cost of goods sold relating to sale to Mulligans.
Cash.................................................................................................... 9,900
Sales Discounts................................................................................... 100
Accounts Receivable (Mulligans).......................................... 10,000
To record collection of account receivable from Mulligans, less
1% cash discount.

b. Entries in the accounts of Mulligans:

Inventory............................................................................................ 9,900
Accounts Payable (Golf World)............................................ 9,900
Purchased merchandise from Golf World (net cost, $10,000 
99% = $9,900).
Accounts Payable (Golf World)........................................................ 9,900
Cash........................................................................................ 9,900
Paid account payable to Golf World within the discount period.

c. Entry by Mulligans if discount not taken:

Accounts Payable (Golf World)........................................................ 9,900
Purchase Discounts Lost.................................................................... 100
Cash........................................................................................ 10,000
To record payment of account payable to Golf World and loss of
purchase discount for failure to pay within discount period.

© The McGraw-Hill Companies, Inc., 2002 181

Ex. 6–11 a. Kmart Nordstrom Toys “R” Us
c
Net sales $31,437 $4,453 $9,232
Cost of goods sold 24,390  3,082  6,407f
Gross profit 7,047a  1,371  2,825e
Gross profit rate 22.4%b 30.8%d 30.6%

Computations:
a
$31,437  $24,390 = $7,047
b
$7,047 (from a)  $31,437 = 22.4%
c
$3,082 + $1,371 = $4,453
d
$1,371  $4,453 (from c) = 30.8%
e
$9,232  30.6% = $2,825
f
$9,232  $2,825 (from e) = $6,407

b. The relative sales volumes and profit margins of Kmart and Toys “R” Us are what one
might expect. Kmart is one of the nation’s largest mass merchandisers. It sells many
types of everyday merchandise (including toys). Thus, it must compete on a basis of
price with other mass merchandisers such as Wal-Mart, Sears, and J.C. Penney. Its
gross profit is developed by selling a high volume of merchandise at minimal margins.
Toys “R” Us is a big company, but it sells only toys. It logically has a much lower sales
volume than one of the country’s largest sellers of general merchandise. Toys “R” Us
also has very few large-scale competitors. Most of the competition comes from small toy
stores which, because of their low sales volumes, need high margins to survive.
Therefore, Toys “R” Us faces less price competition than Kmart. It competes effectively
with its smaller competitors by offering a bigger selection and having greater name
recognition. In purchasing merchandise, Toys “R” Us also may receive larger volume
discounts than its competitors. Lower purchase costs contribute to higher gross profit
margins.

© The McGraw-Hill Companies, Inc., 2002 182

Ex. 6–12 a.
Cash.................................................................................................... 117,000
Sales........................................................................................ 117,000
To record sale of telescope to Central State University for cash.
Cost of Goods Sold............................................................................. 90,000
Inventory................................................................................ 90,000
To record cost of telescope sold to Central State University.
Inventory............................................................................................ 50,000
Accounts Payable (Lunar Optics)......................................... 50,000
To record purchase of merchandise on account from Lunar
Optics, net 30 days.

b. Computation of inventory at January 7:

Inventory at Dec. 31........................................................................ $250,000
Deduct: Cost of goods sold............................................................. (90,000)
Add: Cost of merchandise purchased............................................ 50,000
Inventory at Jan. 7.......................................................................... $210,000

c. Cash.................................................................................................... 117,000
Sales........................................................................................ 117,000
To record sale of telescope to Central State University for cash.

Purchases............................................................................................ 50,000
Accounts Payable (Lunar Optics)......................................... 50,000
To record purchase of merchandise on account from Lunar
Optics. Terms, net 30 days.

d. Cost of goods sold:

Inventory, Jan. 1............................................................................. $250,000
Purchases......................................................................................... 50,000
Cost of goods available for sale...................................................... $300,000
Less: Inventory, Jan. 7 (per part b)............................................... 210,000
Cost of goods sold......................................................................... $ 90,000

e. The company would probably use a perpetual inventory system because it sells
merchandise with a high unit cost and has a relatively small number of sales
transactions.

© The McGraw-Hill Companies, Inc., 2002 183

Ex. 6–13

a. Computation of the cost of goods sold:

Beginning inventory........................................................................................................... $ 6,240
Add: Purchases................................................................................................................... 74,400
Cost of goods available for sale......................................................................................... $80,640
Less: Ending inventory...................................................................................................... 4,560
Cost of goods sold............................................................................................................... $ 76,080

b. Mountain Mabel’s appears to be a very small business that probably has no external reporting
obligations (other than in the owners’ annual income tax return). Also, “management” seems to
consist of the owners, who may be in the store every day and therefore do not need an inventory
ledger to know what merchandise is in inventory. In a situation such as this, the additional record
—keeping required to maintain a perpetual inventory system simply may not be worthwhile.

c. A larger business, such as a Sears store, needs to have up-to-date information as to the cost and
quantity of merchandise in inventory and also the cost of goods sold. This information is used in
quarterly reports to stockholders, reports to corporate management, and monthly reports
measuring the profitability of the individual sales departments. In addition, information about the
quantities of specific products sold and the quantities currently on hand is needed for such daily
decisions as: (1) when to reorder specific products, (2) how much merchandise to order, and (3)
which products to advertise in special sales.
Also, a store such as Sears uses point-of-sale terminals to simplify the processing of sales
transactions. These terminals permit the maintenance of perpetual inventory records at very little
cost and with no special effort required of accounting personnel.

Ex. 6–14

a. All of the following figures are shown in 000’s:

1999 1998 1997
(1) Net sales $396,750 $388,659 $375,594
(2) Gross profit (margin) 204,189 201,042 187,281

Gross profit percentage (2)  (1) 51.5% 51.7% 49.9%

b. Trends in sales and gross profit include:

1. The company reported its twenty-third consecutive year of record sales.
2. Gross profit increased by 7.3% from 1997 to 1998, and by 1.6% from 1998 to 1999.

c. Management seems somewhat optimistic about trends in the company’s sales and gross
profit statistics. In Management’s Letter to the Shareholders, the following points are made:
1. The company is encouraged by the continued growth in its niche brands.
2. The company has reported its twenty-third year of record sales.
3. The company’s cost of goods sold increased only slightly in 1999 due to slight inflationary
pressures on major ingredient costs. The cost of minor ingredients and packaging remained
stable throughout the year.

© The McGraw-Hill Companies, Inc., 2002 184

 SOLUTIONS TO PROBLEMS
35 Minutes, Medium PROBLEM 6–1
CLAYPOOL HARDWARE
a.
General Journal

Nov 5 Accounts Receivable (Bemidji Construction) 13390

Sales 13390
Sold merchandise on account.

5 Cost of Goods Sold 9105

Inventory 9105
To record the cost of goods sold relating to the sales
of merchandise to Bemidji Construction.

9 Inventory 3800
Accounts Payable (Owatonna Tool Co.) 3800
Purchased merchandise on account.

Dec 5 Cash 13390

Accounts Receivable (Bemidji Construction) 13390
Collected account receivable.

9 Accounts Payable (Owatonna Tool Co.) 3800

Cash 3800
Paid account payable to supplier.

31 Cost of Goods Sold 1710

Inventory 1710
To adjust inventory records to reflect the results of
the year-end physical count.
Inventory per accounting records 183,790
$
Inventory per physical count 182,080
Adjustment for inventory shrinkage $ 1,710

b. CLAYPOOL HARDWARE
Partial Income Statement
For the Year Ended December 31, 20__
Net sales $1 0 2 4 9 0 0
Cost of goods sold (1) 696932
Gross profit $ 327968

(1) Cost of goods sold prior to adjustment at Dec. 31 $ 695222

Add: Shrinkage adjustment at Dec. 31 1710
Cost of goods sold (adjusted balance) $ 696932

© The McGraw-Hill Companies, Inc., 2002 185

 PROBLEM 6–1
CLAYPOOL HARDWARE (concluded)

c. Claypool seems quite able to pass its extra transportation costs on to its customers and, in fact,
enjoys a significant financial benefit from its remote mountain location. The following data
support these conclusions:

Claypool Industry
Hardware Average Difference
Annual sales.......................................................... $1,024,900 $1,000,000 $24,900
Gross profit.......................................................... 327,968 250,000 (1) 77,968
Gross profit rate................................................... 32% (2) 25% +7%

(1) $1,000,000 sales  25% = $250,000

(2) $327,968 gross profit  $1,024,900 net sales = 32%

Claypool earned a gross profit rate of 32%, which is significantly higher than the industry
average. Claypool’s sales were almost equal to the industry average, but it earned $77,968 more
gross profit than the “average” store of its size. This higher gross profit was earned even though
its cost of goods sold was $18,000 to $20,000 higher than the industry average because of the
additional transportation charges.
To have a higher-than-average cost of goods sold and still earn a much larger-than-average
amount of gross profit, Claypool must be able to charge substantially higher sales prices than
most hardware stores. Presumably, the company could not charge such prices in a highly
competitive environment. Thus, the remote location appears to insulate it from competition and
allow it to operate more profitably than hardware stores with nearby competitors.
The key question in the company’s future is whether there is enough growth in the area to support
another store. If a second store opens, Claypool may face competition and have to cut its prices. If
there is not sufficient business to support two stores, however, Claypool has a “captive market,”
which will enable it to continue charging premium prices and earning high (gross) profits. (No
information is provided in the problem about operating expenses, but with nearly $78,000 more
gross profit than the average store of its size, Claypool should be able to earn a net income that is
well above average.)

© The McGraw-Hill Companies, Inc., 2002 186

35 Minutes, Medium PROBLEM 6–2
OFFICE SOLUTIONS
a.
General Journal

May 10 Inventory 1500

Accounts Payable (Mitsui Corporation) 1500
Purchased five P-500 fax machines @ $300; payment
due in 30 days.

23 Accounts Receivable (Foster & Cole) 2000

Sales 2000
Sold four Mitsui P-500 fax machines on account. Sales price
$500 per machine; payment due in 30 days.

23 Cost of Goods Sold 1200

Inventory 1200
To adjust inventory records for the cost of four P-500 fax
machines sold to Foster & Cole ($300 x 4 = $1,200).

24 Inventory 2100
Accounts Payable (Mitsui Corporation) 2100
Purchased seven P-500 fax machines @ $300; payment due
in 30 days.

June 9 Accounts Payable (Mitsui Corporation) 1500

Cash 1500
Paid Mitsui Corporation for purchase on May 10.

19 Cash 1050
Sales 1050
Sold two P-500 fax machines for cash; sales price,
$525 each.

19 Cost of Goods Sold 600

Inventory 600
To record cost of two P-500 fax machines sold
($300 x 2 = $600).

22 Cash 2000
Accounts Receivable (Foster & Cole) 2000
Collected account receivable from sale on May 23.

© The McGraw-Hill Companies, Inc., 2002 187

 PROBLEM 6–2
OFFICE SOLUTIONS (continued)
b.

Item
Item Mitsui P-500 fax machine Primary supplier Mitsui Corporation

Description
Description Plain paper fax machine Secondary supplier None

Location1 in showroom, remainder in warehouse Inventory level: Minimum 1 Maximum

10

PURCHASED SOLD BALANCE

Unit Unit Unit
Date Units Cost Total Units Cost Total Units Cost Balance
May 10 5 $300 $1,500 5 $300 $1,500
23 4 $300 $1,200 1 300 300
24 7 300 2,100 8 300 2,400
June 19 2 300 600 6 300 1,800

© The McGraw-Hill Companies, Inc., 2002

 PROBLEM 6–2
OFFICE SOLUTIONS (concluded)

c. Eight. The quantity of units on hand at any date may be determined from the inventory subsidiary
ledger.

d. An inventory subsidiary ledger indicates the quantities, unit costs, and total costs of the units of
product purchased, sold, and currently on hand. In addition, the subsidiary ledger accounts
usually indicate the location of units in stock, the minimum and maximum quantities desired in
inventory, and the names of the major suppliers. Management uses this information to determine
which products are selling quickly and which are selling slowly and in setting sales prices.
Accounting personnel use the unit cost data in recording the cost of goods sold. Sales personnel
refer to this ledger to determine the quantities and location of goods on hand. Employees
responsible for purchasing merchandise use the data in this ledger to determine when specific
products should be reordered, the quantities to order, and the names of the principal suppliers.

20 Minutes, Medium PROBLEM 6–3

KNAUSS SUPERMARKETS

2001–2002 2000–2001
a. 1. Change in net sales.................................................... 6% (1) 8% (2)
2. Change in net sales per square foot.......................... (1%) (3) (2.7%) (4)
3. Change in comparable store sales............................ (1.8%) (5) (3.5%) (6)
(1) ($5,495  $5,194)  $5,184 = 6%
(2) ($5,184  $4,800)  $4,800 = 8%
(3) [($5,495  11.9)  ($5,184  11.1)]  ($5,184  11.1) = (1%)
(4) [($5,184  11.1)  ($4,800  10.0)]  ($4,800  10.0) = (2.7%)
(5) ($10.8  $11.0)  $11.0 = (1.8%)
(6) ($11.0  $11.4)  $11.4 = (3.5%)

b. While Knauss has increased its overall revenue from sales, several of the statistics indicate
problems. Both sales per square foot of selling space and comparable store sales have declined for
the last two years. This indicates a downward trend in sales at existing stores. It is apparent that
the increase in overall net sales must have resulted from adding new stores. As a result,
management should reevaluate its marketing strategies.
30 Minutes, Medium PROBLEM 6–4
LAMPRINO APPLIANCE
a.
General Journal
Date
(1)
June 10 Inventory 2940
Accounts Payable (Mitsu Industries) 2940
To record purchase of 10 TVs at net cost of $294 per unit
($300, less 2%).

15 Cash 450
Sales 450
Sold 1 Mitsu TV for cash.

15 Cost of Goods Sold 294

Inventory 294
To record cost of TV sold.

20 Accounts Payable (Mitsu Industries) 2940

Cash 2940
Paid account within discount period.

(2)
June 10 Inventory 3000
Accounts Payable (Mitsu Industries) 3000
To record purchase of 10 TVs at gross invoice price
($300 per unit).

15 Cash 450
Sales 450
Sold 1 Mitsu TV for cash.

15 Cost of Goods Sold 300

Inventory 300
To record cost of TV sold.

20 Accounts Payable (Mitsu Industries) 3000

Cash 2940
Purchase Discounts Taken 60
Paid account payable, less 2%.
b.
(1)
July 10 Accounts Payable (Mitsu Industries) 2940
Purchase Discounts Lost 60
Cash 3000
Made payment after discount period had expired.
(2)
July 10 Accounts Payable (Mitsu Industries) 3000
Cash 3000
Made payment after discount period had expired.
 PROBLEM 6–4
LAMPRINO APPLIANCE (concluded)

c. The net cost method provides more useful information for evaluating the company’s efficiency in
paying its bills. This method clearly indicates the lowest price that the company may pay, and
separately records any additional costs incurred as purchase discounts lost.
Under the gross price method, the liability is not recorded at the lowest price at which it can be
settled. Hence, management is not made aware of available discounts that were not taken.
30 Minutes, Strong PROBLEM 6–5
SIOGO SHOES AND SOLE MATES
General Journal

a. Journal entries by Siogo Shoes:

Feb 9 Accounts Receivable (Sole Mates) 10000

Sales 10000
Sold merchandise on account; terms, 1/10, n/30.

9 Cost of Goods Sold 6000

Inventory 6000
To record cost of merchandise sold (100 pr. x $60/pr.).

12 Delivery Expense 40
Cash 40
Paid delivery charges on outbound shipment.

13 Sales Returns & Allowances 1000

Accounts Receivable (Sole Mates) 1000
Customer returned merchandise (10 pr. x $100/pr.).

13 Inventory 600
Cost of Goods Sold 600
Reduce cost of goods sold for cost of merchandise
returned (10 pr. x $60/pr.).

19 Cash 8910
Sales Discount 90
Accounts Receivable (Sole Mates) 9000
Collected amount due, less $1,000 return and less 1%
cash discount on remaining $9,000 balance
($9,000 x 1% = $90).

b. Journal entries by Sole Mates:

Feb 9 Inventory 9900

Accounts Payable (Siogo Shoes) 9900
Purchased 100 pairs of boots; terms, 1/10, n/30. Net cost,
$99 per pair ($100, less 1%).

12 Transportation-in 40
Cash 40
Paid transportation charge on inbound shipment.

13 Accounts Payable (Siogo Shoes) 990

Inventory 990
Returned 10 pairs of boots to supplier. (Net cost,
$99 per pair x 10 pairs = $990.)
 PROBLEM 6–5
SIOGO SHOES AND SOLE MATES (concluded)
General Journal

Feb 19 Accounts Payable (Siogo Shoes) 8910

Cash 8910
Paid within discount period balance owed to Siogo Shoes
($9,900 - $990 = $8,910).

c. Yes. Sole Mates should take advantage of 1/10, n/30 purchase discounts, even if it must borrow
money for a short period of time at an annual rate of 11%. By taking advantage of the discount,
the company saves 1% by making payment 20 days early. At an interest rate of 11% per year, the
bank charges only 0.6% interest over a 20-day period (11%  20365 = 0.6%). Thus, the cost of
passing up the discount is greater than the cost of short-term borrowing.
40 Minutes, Strong PROBLEM 6–6
CPI

Parts a, c, g, and h follow; parts b, d, e, and f are on the next page.

a. The operating cycle of a merchandising company consists of purchasing merchandise, selling that
merchandise to customers (often on account), and collecting the sales proceeds from these
customers. The assets and liabilities involved in this cycle include cash, accounts receivable,
inventory, and accounts payable.

c. In the January 2 entry, the $24,250 debit to the Inventory controlling account should be allocated
among—and posted to—the appropriate product accounts in the inventory subsidiary ledger. The
information posted should include the cost and quantities of each type of merchandise purchased.
In addition, the credit portion of this entry should be posted to the Sharp account in CPI’s
accounts payable subsidiary ledger.
In the first entry on January 6, the debit to the Accounts Receivable controlling account should be
posted to the Pace Corporation account in CPI’s accounts receivable ledger.
In the final entry, the credit to the Inventory controlling account should be allocated among the
thirty products sold and posted to the appropriate accounts in the inventory ledger.

g. CPI probably would use a perpetual inventory system. The items in its inventory have a high per-
unit cost. Therefore, management will want to know the costs of the individual products included
in specific sales transactions, and also will want to keep track of the items in stock. The company
also has a computer-based accounting system, a full-time accountant, and a low volume of
transactions. This combination of factors eliminates the potential difficulties of maintaining a
perpetual system.

h. Computation of profit margin on January 6 sales transaction:

Gross profit = Sales price - Cost of goods sold

= $10,000  $6,100
= $3,900

Gross profit margin = Dollar gross profit  Sales revenue

= $3,900  $10,000
= 39%
 PROBLEM 6–6
CPI (concluded)
b.
General Journal

2002
Jan 2 Inventory 24250
Accounts Payable (Sharp) 24250
Purchased merchandise on account; terms, 3/10, n/60.
Net cost, $25,000, less 3%.

6 Accounts Receivable (Pace Corporation) 10000

Sales 10000
Sale on account; terms, 5/10, n/90.

6 Cost of Goods Sold 6100

Inventory 6100
To record the cost of merchandise sold to Pace Corporation.

d. Computation of inventory at January 6:

Inventory at Dec. 31, 2001 $500000
Add: Merchandise purchased on Jan. 2 24250
Less: Cost of goods sold on Jan. 6 ( 6100)
Inventory at close of business on Jan. 6 $518150

e. Journal entries assuming use of a periodic system:

2002
Jan 2 Purchases 24250
Accounts Payable (Sharp) 24250
Purchased merchandise on account; terms, 3/10, n/60.
Net cost, $25,000, less 3%.

6 Accounts Receivable (Pace Corporation) 10000

Sales 10000
Sale on account; terms, 5/10, n/90.

f. Computation of cost of goods sold:

Inventory (Dec. 31, 2001) $500000
Add: Purchases 24250
Cost of goods available for sale $524250
Less: Inventory (Jan. 6—per part d ) 518150
Cost of goods sold $ 6100