Practice Multiple - Choice Questions

1. C 8. D
2. A 9. B
3. C 10. A
4. B 11. D
5. C 12. A
6. C 13. B
7. A
Brief Exercises
BE5.1
a) Cost of goods sold = £48,000 (£78,000 – £30,000).
Operating expenses = £19,200 (£30,000 – £10,800).
b) Gross profit = £53,000 (£108,000 – £55,000).
Operating expenses = £23,500 (£53,000 – £29,500).
c) Sales revenue = £163,500 (£83,900 + £79,600).
Net income = £40,100 (£79,600 – £39,500).

BE5.2
Giovanni Company
Inventory .............................................................. 780
Accounts Payable ........................................ 780
Gordon Company
Accounts Receivable .......................................... 780
Sales Revenue ............................................. 780
Cost of Goods Sold ............................................. 560
Inventory ....................................................... 560
BE5.3
a) Accounts Receivable .......................................... 800,000
Sales Revenue ............................................. 800,000
Cost of Goods Sold ............................................. 620,000
Inventory ....................................................... 620,000

b) Sales Returns and Allowances ........................... 120,000

Accounts Receivable ................................... 120,000
Inventory ............................................................... 90,000
Cost of Goods Sold ...................................... 90,000

c) Cash (£680,000 – £13,600) ................................... 666,400

Sales Discounts (£680,000 X 2%) ....................... 13,600
Accounts Receivable ................................... 680,000
(£800,000 – £120,000)
BE5.4
a) Inventory ............................................................... 800,000
Accounts Payable ........................................ 800,000
b) Accounts Payable ................................................ 120,000
Inventory ....................................................... 120,000
c) Accounts Payable (£800,000 – £120,000) .......... 680,000
Inventory (£680,000 X 2%) ........................................ 13,600
Cash (£680,000 – £13,600) ........................... 666,400

BE5.5
Cost of Goods Sold ..................................................... 1,900
Inventory .............................................................. 1,900

BE5.6
Sales Revenue ............................................................. 192,000
Income Summary ................................................ 192,000
Income Summary ........................................................ 107,000
Cost of Goods Sold ............................................. 105,000
Sales Discounts ................................................... 2,000

BE5.7
Income Statement (Partial)
Sales revenues
Sales revenue (¥280,000 + ¥100,000) ................ ¥380,000
Less: Sales returns and allowances ................ ¥22,000
Sales discounts ....................................... 5,000
27,000
Net sales .............................................................. ¥353,000

BE5.9
(a) Net sales = €506,000 – €13,000 = €493,000.
(b) Gross profit = €493,000 – €342,000 = €151,000.
(c) Income from operations = €151,000 – €110,000 = €41,000.
(d) Gross profit rate = €151,000 ÷ €493,000 = 30.6%.

BE5.11
Purchases ....................................................................... W430,000
Less: Purchase returns and allowances ....................W13,000
Purchase discounts ........................................... 8,000
21,000
Net purchases ................................................................ W409,000
Net purchases ................................................................ W409,000
Add: Freight-in ............................................................... 16,000
Cost of goods purchased .............................................. W425,000
BE5.12
Net sales ......................................................................... W680,000
Beginning inventory ..................................................W 60,000
Add: Cost of goods purchased* .............................… 425,000
Cost of goods available for sale ................................... 485,000
Less: Ending inventory ................................................. 86,000
Cost of goods sold ......................................................... 399,000
Gross profit ..................................................................... W281,000
BE5.13
(a) Purchases .............................................................. 900,000
Accounts Payable .......................................... 900,000
(b) Accounts Payable ................................................. 184,000
Purchase Returns and Allowances .............. 184,000
(c) Accounts Payable (£900,000 – £184,000) ........... 716,000
Purchase Discounts (£716,000 X 2%) .......... 14,320
Cash (£716,000 – £14,320) ..........................… 701,680
BE5.14
Inventory (ending) .......................................................... 30,000
Sales Revenue ............................................................... 180,000
Purchase Returns and Allowances .............................. 30,000
Income Summary .................................................. 240,000

Income Summary ........................................................... 162,000

Purchases .............................................................. 120,000
Sales Discounts .................................................... 2,000
Inventory (beginning) ............................................ 40,000
Exercises
E5.1
1. True.
2. False. For a merchandiser, sales less cost of goods sold is called
gross profit.
3. True.
4. True.
5. False. The operating cycle of a merchandiser differs from that of a
service company. The operating cycle of a merchandiser is ordinarily
longer.
6. False. In a periodic inventory system, no detailed inventory
records of
goods on hand are maintained.
7. True.
8. False. A perpetual inventory system provides better control over inven-
tories than a periodic system.
E5.2
a)
(1) April 5 Inventory ............................................ 25,000
Accounts Payable ..................... 25,000
(2) April 6 Inventory ............................................ 900
Cash ........................................... 900
(3) April 7 Equipment ......................................... 26,000
Accounts Payable ..................... 26,000
(4) April 8 Accounts Payable ............................. 2,600
Inventory .................................... 2,600
(5) April 15 Accounts Payable ............................ 22,400
(£25,000 – £2,600)
Inventory [(£25,000 – £2,600) X 2%] ................................. 448
Cash (£22,400 – £448) ...........….........................… 21,952
b) May 4 Accounts Payable ..................................... 22,400
Cash .................................................... 22,400
E5.4
a) June 10 Inventory .................................................. 7,600
Accounts Payable ............................ 7,600
11 Inventory .................................................. 400
Cash .................................................. 400
12 Accounts Payable ................................... 300
Inventory ........................................... 300
19 Accounts Payable (£7,600 – £300) ......... 7,300
Inventory (£7,300 X 2%) ................................ 146
Cash (£7,300 – £146) ........................ 7,154
b) June 10 Accounts Receivable .............................. 7,600
Sales Revenue ................................. 7,600
Cost of Goods Sold .............................4,300
Inventory .......................................... 4,300
12 Sales Returns and Allowances .............. 300
Accounts Receivable ...................... 300
Inventory ...............................................70
Cost of Goods Sold......................... 70
19 Cash (£7,300 – £146) ............................... 7,154
Sales Discounts (£7,300 X 2%) .............. 146
Accounts Receivable (£7,600 – £300) .................7,300
E5.5
a) 1. Dec. 3 Accounts Receivable ....................... 580,000
Sales Revenue .......................... 580,000
 Cost of Goods Sold .......................... 364,800
Inventory ................................... 364,800
2. Dec. 8 Sales Returns and Allowances ....... 28,000
Accounts Receivable ............... 28,000
3. Dec. 13 Cash (HK$552,000 – HK$5,520) ....……546,480
Sales Discounts [(HK$580,000 – HK$28,000) X 1%]…………..5,520
Accounts Receivable (HK$580,000 – HK$28,000)..………. 552,000
b) Cash ........................................................................... 552,000
Accounts Receivable ( HK$580,000 – HK$28,000)............. 552,000
E5.6
a)
Income Statement (Partial)
Sales revenues
Sales revenue.................................................. €820,000
Less: Sales returns and allowances ............ €28,000
Sales discounts ................................... 13,000
41,000
Netsales .......................................................... €779,000
b) (1) Oct. 31 Sales Revenue ............................... 820,000
Income Summary .................. 820,000
(2) 31 Income Summary .......................... 41,000
Sales Returns and Allowances ......................... 28,000
Sales Discounts ..................... 13,000
E5.7
a) Cost of Goods Sold ................................................ 800
Inventory .......................................................... 800
b) Sales Revenue ........................................................ 117,000
Income Summary ............................................ 117,000

Income Summary ................................................... 92,800

Cost of Goods Sold ( 60,000 + 800) ........... 60,800
Operating Expenses ....................................... 29,000
Sales Returns and Allowances ..................… 1,700
Sales Discounts ...........................................… 1,300

Income Summary ( 117,000 – 92,800) ............... 24,200

Retained Earnings .......................................... 24,200

E5.8
a) Cost of Goods Sold ................................................ 600
Inventory .......................................................... 600
b)
Sales Revenue ........................................................ 378,000
Income Summary ............................................ 378,000

Income Summary ................................................... 327,600

Cost of Goods Sold (€208,000 + €600) ......... 208,600
Freight-Out ...................................................... 7,000
Insurance Expense ......................................... 12,000
Rent Expense .................................................. 20,000
Salaries and Wages Expense ........................ 59,000
Sales Discounts .............................................. 8,000
Sales Returns and Allowances ..................... 13,000

Income Summary (€378,000 – €327,600) .............. 50,400

Retained Earnings .......................................... 50,400
E5.9
a)
Income Statement
Sales revenues
Sales revenue ................................................... £380,000
Less: Sales returns and allowances .............. £13,000
Sales discounts..................................... 7,400
20,400
Net sales ............................................................ 359,600
Cost of goods sold ................................................ 212,000
Gross profit .........................................................… 147,600
Operating expenses
Salaries and wages expense ........................... 58,000
Rent expense .................................................... 32,000
Freight-out ......................................................... 9,000
Insurance expense ........................................... 7,000
Total operating expenses .................... 106,000
Net income ......................................................... £ 41,600
b)
Comprehensive Income Statement
Net income ........................................... £41,600
Other comprehensive income ........... 2,200
Comprehensive income ..................... £43,800
c) Gross profit rate = £147,600 ÷ £359,600 = 41.05%.
E5.10
a)
Income Statement
Net sales .............................................. €2,200,000
Cost of goods sold ............................. 1,256,000
Gross profit ......................................... 944,000
Operating expenses ............................ 725,000
Income from operations ..................... 219,000
Other income and expense
Interest revenue .......................… € 33,000
Loss on disposal of plant assets ................... 17,000
16,000
Interest expense .................................. 70,000
Net income ........................................... € 165,000
b)
Comprehensive Income Statement
Net income ........................................... €165,000
Other comprehensive income ............ 8,300
Comprehensive income ...................... €173,300
E5.11
1. Sales Returns and Allowances ......................................... 1,750
Sales Revenue ............................................................ 1,750
2. Supplies .............................................................................1,400
Cash ...................................................................................1,400
Accounts Payable ...................................................... 1,400
Inventory ..................................................................... 1,400
3. Sales Discounts ................................................................. 2,150
Sales Revenue ............................................................ 2,150
4. Inventory ............................................................................. 200
Cash .................................................................................... 1,800
Freight-Out .................................................................. 2,000
E5.12
a) £860,000 – £533,200 = £326,800.
b) £326,800/£860,000 = 38%. The gross profit rate is generally
considered to
be more useful than the gross profit amount. The rate expresses a more
meaningful (qualitative) relationship between net sales and gross profit.
The gross profit rate indicates what portion of each sales dollar goes to
gross profit. The trend of the gross profit rate is closely watched by
financial statement users, and is compared with rates of competitors
and with industry averages. Such comparisons provide information about
the effectiveness of a company’s purchasing function and the soundness
of its pricing policies.
c) Income from operations is £105,800 (£326,800 – £221,000), and net
income
is £98,800 (£105,800 – £7,000).
d) Inventory is reported as a current asset immediately below prepaid
expenses.
E5.14
(a) Sales revenue ......................................................... € 90,000
Sales returns and allowances ............................... (4,000)*
Net sales.................................................................. € 86,000
(b) Net sales.................................................................. € 86,000
Cost of goods sold ................................................. (56,000)
Gross profit ............................................................. € 30,000*
(c) and (d)
Gross profit ............................................................. € 30,000
Operating expenses ............................................... (15,000)
Income from operations (c) ................................... € 15,000*
Other income and expense ................................... (4,000)
Net income (d) ........................................................ € 11,000*
(e) Sales revenue ......................................................... €100,000*
Sales returns and allowances ............................... (5,000)
Net sales.................................................................. € 95,000
(f) Net sales.................................................................. € 95,000
Cost of goods sold ................................................. (73,000)*
Gross profit ............................................................. € 22,000
(g) and (h)
Gross profit ............................................................. € 22,000
Operating expenses (g) ......................................... (8,000)*
Income from operations (h) ................................... € 14,000*
Other income and expense ................................... (3,000)
Net income .............................................................. € 11,000
(i) Sales revenue ......................................................... €122,000
Sales returns and allowances ............................... (12,000)
Net sales.................................................................. €110,000*
(j) Net sales.................................................................. €110,000
Cost of goods sold ................................................. (86,000)*
Gross profit ............................................................. € 24,000
(k) and (l)
Gross profit ............................................................ €24,000
Operating expenses .............................................. 18,000
Income from operations (k) .................................. € 6,000*
Other income and expense (l) .............................. 1,000*
Net income .............................................................€ 5,000
E5.18
a)Sales revenue ........................................ £840,000
Less: Sales returns and allowances .... £ 11,000
Sales discounts ......................... 7,000
 18,000
Net sales ................................................ 822,000
Cost of goods sold
Inventory, January 1 ....................... 50,000
Purchases ...................………….. £509,000
Less: Purch. rets. and alls. £8,000
Purch. discounts 6,000
14,000
Net purchases ................................. 495,000
Add: Freight-in ................................ 4,000
Cost of goods available for sale .... 549,000
Less: Inventory, December 31 ....... 60,000
Cost of goods sold................... 489,000
Gross profit...................................... £333,000
b) Gross profit £333,000 – Operating expenses = Net income £130,000.
Operating expenses = £203,000.
E5.19
(a) €1,580 (€1,620 – €40)
(b) €1,675 (€1,580 + €95)
(c) €1,530 (€1,840 – €310)
(d) €30 (€1,060 – €1,030)
(e) €250 (€1,280 – €1,030)
(f) €90 (€1,350 – €1,260)
(g) €6,500 (€290 + €6,210)
(h) €1,730 (€7,940 – €6,210)
(i) €8,940 (€1,000 + €7,940)
(j) €6,200 (€49,530 – €43,330 from (I))
(k) €2,720 (€43,810 – €41,090)
(l) €43,330 (€41,090 + €2,240)
E5.20
a)1. April 5 Purchases ........................................ 18,000
Accounts Payable ..................... 18,000
2. April 6 Freight-In .......................................... 820
Cash ............................................ 820
3. April 7 Equipment........................................ 30,000
Accounts Payable ..................... 30,000
4. April 8 Accounts Payable ........................... 2,800
Purchase Returns and Allowances ............................. 2,800
5. April 15 Accounts Payable (€18,000 – €2,800)=15,200
Purchase Discounts [(€18,000 – €2,800) X 2%)] ..... 304
Cash (€15,200 – €304) ............... 14,896
Problem
 P5.2
a)
General Journal
Date Account Titles Ref Debit Credit
Inventory 120 6,200
Apr 2
Account Payable 201 6,200
Accounts Receivable 112 5,500
Sales Revenue 401 5,500
Apr 4
Cost of Goods Sold 505 3,400
Inventory 120 3,400
Freight-Out 664 204
Apr 5
Cash 101 204
Account Payable 201 500
Apr 6
Inventory 120 500
Accounts Payable (€6,200 – €500) 201 5,700
Apr 11 Inventory (€5,700 X 1%) 120 57
Cash 101 5,643
Cash 101 5,445
Apr 13 Sales Discounts (€5,500 X 1%) 414 55
Accounts Receivable 112 5,500
Inventory 120 3,800
Apr 14
Cash 101 3,800
Cash 101 500
Apr 16
Inventory 120 500
Inventory 120 4,500
Apr 18
Account Payable 201 4,500
Inventory 120 160
Apr 20
Cash 101 160
Cash 101 7,400
Sales Revenue 401 7,400
Apr 23
Cost of Goods Sold 505 4,120
Inventory 120 4,120
Inventory 120 2,300
Apr 26
Cash 101 2,300
Account Payable 201 4,500
Apr 27 Inventory (€4,500 X 2%) 120 90
Cash 101 4,410
Sales Returns and Allowances 412 90
Cash 101 90
Apr 29
Inventory 120 30
Cost of Goods Sold 505 30
Apr 30 Accounts Receivable 112 3,400
 Sales Revenue 401 3,400
Cost of Goods Sold 505 1,900
Inventory 120 1,900
b)
Cash 101
Date Explanation Ref Debit Credit Balance
Apr 1 Balance 8,000
5 J1 240 7,760
11 J1 5,643 2,117
13 J1 5,445 7,562
14 J1 3,800 3,762
16 J1 500 4,262
20 J1 160 4,102
23 J1 500 11,502
26 J1 2,300 9,202
27 J1 4,410 4,792
29 J1 90 4,702

Account Receivable 112

Date Explanation Ref Debit Credit Balance
Apr 4 J1 5,500 5,500
13 J1 5,500 0
30 J1 3,400 3,400

Inventory 120
Date Explanation Ref Debit Credit Balance
Apr 2 J1 6,200 6,200
4 J1 3,400 2,800
6 J1 500 2,300
11 J1 57 2,243
14 J1 3,800 6,043
16 J1 500 5,043
18 J1 4,500 10,043
20 J1 160 10,203
23 J1 4,120 6,083
26 J1 2,300 8,383
27 J1 90 8,293
29 J1 30 8,323
30 J1 1,900 6,423

Account Payable 201

Date Explanation Ref Debit Credit Balance
 Apr 2 J1 6,200 6,200
6 J1 500 5,700
11 J1 5,700 0
18 J1 4,500 4,500
27 J1 4,500 0

Share Capital - Ordinary 311

Date Explanation Ref Debit Credit Balance
Apr 1 Balance J1 8,000

Sales Revenue 401

Date Explanation Ref Debit Credit Balance
Apr 4 J1 5,500 5,500
23 J1 7,400 12,900
30 J1 3,400 16,300

Sales Returns and Allowances 412

Date Explanation Ref Debit Credit Balance
Apr 29 J1 90 90

Sales Discounts 414

Date Explanation Ref Debit Credit Balance
Apr 13 J1 55 55

Freight - Out 644

Date Explanation Ref Debit Credit Balance
Apr 5 J1 240 240

Cost of Goods Sold 505

Date Explanation Ref Debit Credit Balance
Apr 4 J1 3,400 3,400
23 J1 4,120 7,520
29 J1 30 7,490
30 J1 1,900 9,390

c)
Income Statement (Partial)
Sales
Sales revenue................................. €16,300
Less: Sales returns and allowances ................ €90
Sales discounts..................................... 55
145
 Net sales .............................................................. 16,155
Cost of goods sold ..................................................... 9,390
Gross profit ................................................................. € 6,765
P5.4
a)
General Journal
Date Account Titles Ref Debit Credit
Inventory 120 760
Apr 4
Account Payable 201 760
Inventory 120 40
Apr 6
Cash 101 40
Accounts Receivable 112 1,150
Sales Revenue 401 1,150
Apr 8
Cost of Goods Sold 505 790
Inventory 120 790
Account Payable 201 60
Apr 10
Inventory 120 60
Inventory 120 420
Apr 11
Cash 101 420
Apr 13 Accounts Payable (¥760 – ¥60) 101 700
Inventory (¥700 X 2%) 201 14
Cash 101 686
Inventory 120 800
Apr 14
Accounts Payable 201 800
Cash 101 50
Apr 15
Inventory 120 50
Inventory 120 30
Apr 17
Account Payable 201 30
Accounts Receivable 112 980
Sales Revenue 401 980
Apr 18
Cost of Goods Sold 505 520
Inventory 120 520
Cash 101 600
Apr 20
Accounts Receivable 112 600
Account Payable 201 800
Apr 21 Inventory (¥800 X 3%) 120 24
Cash 101 776
Sales Returns and Allowances 41 40
Apr 27
Accounts Receivable 112 40
Apr 30 Cash 101 820
Accounts Receivable 112 820
b)
Cash 101
Date Explanation Ref Debit Credit Balance
Apr 1 Balance 2,200
6 J1 40 2,160
11 J1 420 1,740
13 J1 686 1,054
15 J1 50 1,104
17 J1 30 1,074
20 J1 600 1,674
21 J1 776 898
30 J1 820 1,718

Account Receivable 112

Date Explanation Ref Debit Credit Balance
Apr 8 J1 1,150 1,150
18 J1 980 2,130
20 J1 600 1,530
27 J1 40 1,490
30 J1 820 670

Inventory 120
Date Explanation Ref Debit Credit Balance
Apr 1 Balance 1,800
4 J1 760 2,560
6 J1 40 2,600
8 J1 790 1,810
10 J1 60 1,750
11 J1 420 2,170
13 J1 14 2,156
14 J1 800 2,956
15 J1 50 2,906
17 J1 30 2,936
18 J1 520 2,416
21 J1 24 2,392

Account Payable 201

Date Explanation Ref Debit Credit Balance
Apr 4 J1 760 760
10 J1 60 700
13 J1 700 0
14 J1 800 800
21 J1 800 0
Share Capital - Ordinary 311
Date Explanation Ref Debit Credit Balance
Apr 1 Balance J1 4,000

Sales Revenue 401

Date Explanation Ref Debit Credit Balance
Apr 8 J1 1,150 1,150
18 J1 980 2,130

Sales Returns and Allowances 412

Date Explanation Ref Debit Credit Balance
Apr 27 J1 40 40

Cost of Goods Sold 505

Date Explanation Ref Debit Credit Balance
Apr 8 J1 790 790
18 J1 520 1,310

c)
Trial Balance
Account Titles Debit Credit
Cash ¥1,718
Accounts Receivable 670
Inventory 2,392
Share Capital - Ordinary ¥4,000
Sales Revenue 2,130
Sales Returns and Allowances 40
Cost of Goods Sold 1,310
Total ¥6,130 ¥6,130